SARATOGA RESOURCES INC, 10KSB, 1997-03-26

SARATOGA RESOURCES INC
10KSB, 1997-03-26
CRUDE PETROLEUM & NATURAL GAS

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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-KSB

[X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

Commission file number 0-11498
SARATOGA RESOURCES, INC.
(Name of small business issuer in its charter)

Delaware 76-0453392
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

2000 Dairy Ashford S., Suite 410
Houston, Texas 77077
(Address of principal executive offices) (Zip Code)

Issuer's Telephone number (713) 531-0022

Securities registered under Section 12(b) of the Exchange Act: None

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

Common stock, $.001 par value
(Title of class)

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

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

The Registrant's revenues for the calendar year ended December 31, 1996 were
$705,000.

As of March 25, 1997, the aggregate market value of the voting stock of the
registrant held by non-affiliates was not ascertainable as there was no
established trading market at such date.

As of December 31, 1996 there were outstanding 6,809,400 shares of Common
Stock, $.001 par value per share, of the registrant. As of March 10, 1997 there
were 4,336,029 shares outstanding (See Part II, Item 5, INFRA).

Transitional Small Business Disclosure Format (check one). Yes [ ] No [X]

DOCUMENTS INCORPORATED BY REFERENCE - None
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PART I

SARATOGA RESOURCES, INC. FORM 10-KSB

ITEM 1. DESCRIPTION OF BUSINESS.

GENERAL

Saratoga Resources, Inc., a Delaware corporation, herein called
"Saratoga", "Company" or "Registrant", has historically been an oil and gas
company whose main focus has until recently been the development of and
exploration for oil and natural gas reserves, primarily in the Gulf Coast area
of the United States. As of December 31, 1996, the Company has no material
assets other than $1,350,000 remaining in cash as a result of the "Agreement"
discussed hereinbelow under RECENT DEVELOPMENTS.

RECENT DEVELOPMENTS

FORECLOSURE OF ASSETS. On May 7, 1996, the Company entered into an
Agreement and related documents (the "Agreement") by and among the Company,
Saratoga Resources, Inc., a Texas corporation ("Saratoga-Texas"), Lobo
Operating, Inc., a Texas corporation ("LOI"), Lobo Energy, Inc., a Texas
corporation ("LEI"), (the Company and Saratoga-Texas, LOI and LEI, its direct or
indirect subsidiaries being sometimes collectively referred to herein as the
"Saratoga Companies"), Thomas F. Cooke ("Cooke"), Joseph T. Kaminski
("Kaminski"), Randall F. Dryer ("Dryer"), the Saratoga Companies, Cooke,
Kaminski and Dryer sometimes referred to herein as the "Saratoga Parties",
PrimeEnergy Corporation, a Delaware corporation ("PrimeEnergy"), and
Internationale Nederlanden (U.S.) Capital Corporation, a Delaware corporation
("ING").

The Agreement provided for a Foreclosure Sale of virtually all of the
assets (the "Interests") of Saratoga-Texas, LOI and LEI (Saratoga-Texas, LOI and
LEI sometimes collectively referred to herein as the "Saratoga Entities") to ING
pursuant to ING's rights under that certain Credit Agreement and related
documents (collectively the "Credit Agreement") dated March 30, 1995, by and
among the Company, Saratoga-Texas, LEI and ING. Upon completion of the
Foreclosure Sale on May 7, 1996, at which ING was the highest bidder, ING
concurrently sold the Interests to PrimeEnergy for cash consideration of
$7,180,000 and additional consideration as provided in that certain Purchase and
Sale Agreement dated May 7, 1996, by and between ING and PrimeEnergy.

Upon receipt of the cash proceeds from the sale of the Interests by ING to
PrimeEnergy, ING deposited approximately $5,500,000 with the Trustee under that
certain Disbursement Agreement dated May 7, 1996 (the "Disbursement Agreement"),
of which approximately $4,000,000 was set aside for the settlement of
outstanding vendor debt and other related liabilities of the Saratoga Companies,
and $1,500,000 was paid to the Company. As a result of the settlement of all
such liabilities, the Company had no material liabilities going forward. Its
principal asset at that time consisted of approximately $1,500,000 in cash which
has been available for the pursuit of new business opportunities or for other
proper corporate purposes.

BACKGROUND OF FORECLOSURE. The Company, Saratoga-Texas, LEI and ING
entered into the Credit Agreement to facilitate the acquisition by
Saratoga-Texas of the LEI assets previously owned by Peter P. Pickup ("Pickup").
Under the terms of the Credit Agreement, ING established two credit facilities
in favor of Saratoga-Texas in the combined maximum principal amount of
$19,000,000,
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Page 3 of 36

subject to the borrowing base limitations set forth therein. All oil and gas
properties (the "Properties") owned by the Saratoga Entities were pledged as
collateral under the Credit Agreement and all obligations to ING were also
guaranteed by the Company and all of its subsidiaries. Funds obtained from these
credit facilities were anticipated to be used for the development of the
Properties by the Company.

Subsequent to entering into the Credit Agreement, the Company engaged
Internationale Nederlanden (U.S.) Securities Corporation ("ING Securities"), a
subsidiary of ING, to assist the Company in a private placement of Company
stock. It was anticipated that funds raised from such private placement would
enable the Company to meet its financial obligations under the Credit Agreement,
develop the Properties and potentially acquire additional properties. The
private placement efforts were not successful. Additionally, funds necessary for
the development of the Properties were not provided by ING under the Credit
Agreement.

The failure of the private placement efforts combined with the lack of
availability of funds necessary for the development of its Properties placed the
Company in a severe financial crisis. In an attempt to salvage the maximum value
of the Saratoga Companies for the benefit of the other creditors (the "Other
Creditors") and the Company and its shareholders, the Saratoga Companies spent
several months examining and pursuing various alternatives with respect to (i)
the possible refinancing and/or restructuring of the debt of the Saratoga
Companies, (ii) the sale of the Saratoga Companies or their underlying assets,
and (iii) the prosecution or settlement of certain potential claims against ING.

Unable to meet its financial obligations under the Credit Agreement, the
Company regularly received notices of default from ING during the period from
approximately October 1995 to April 1996, whereupon ING threatened to foreclose
its perfected first lien security interests in the Properties and Interests. At
the same time the Company was receiving notices of default from ING, the Company
was attempting to negotiate a transaction with PrimeEnergy involving either a
merger of the two entities or a sale of the assets of the Saratoga Entities to
PrimeEnergy. The situation with ING complicated the Company's efforts with
PrimeEnergy, as it had with other companies with which the Company had been
involved in similar negotiations.

Facing what the Company believed to be an eminent foreclosure action by
ING which would restrict the Company's objectives and its ability to consummate
negotiations with PrimeEnergy, in April of 1996, the Saratoga Companies filed a
lawsuit against ING and ING Securities, the principal relief sought therein
being injunctive relief from the threatened foreclosure. Subsequently , the
Company and ING entered into discussions in an attempt to reach a final
resolution of ING's rights under the Credit Agreement and the Company's asserted
claims.

In reviewing its options, the Company believed that the proceeds from a
contested foreclosure by ING would be substantially less than the debt owed ING
under the Credit Agreement, and that the Saratoga Companies would have no, or
virtually no, assets, the Other Creditors of the Saratoga Companies would not be
paid, and the stock of the Company would be worthless. Accordingly, exercising
its best business judgment, the Company determined that the best (and in all
probability the only) alternative available to the Saratoga Companies to
preserve value for the Other Creditors, the Company and its shareholders was to
consent, on its own behalf and as sole shareholder (directly or indirectly) of
the Saratoga Entities, to the compromise and settlement of the
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claims against ING and ING Securities, and in connection therewith, the
foreclosure by ING with respect to all of the assets of the Saratoga Entities,
all in accordance with the terms and provisions of the Agreement.

PLAN OF BUSINESS. On September 14, 1996, the Company held its 1996 Annual
Meeting of the shareholders in Austin, Texas. In addition to the election of
Directors, a number of proposals were submitted to the shareholders for a vote
and approval, one of which was the proposal to ratify and confirm the May 7,
1996 Agreements by and among the Company (and its subsidiaries), ING, and
PrimeEnergy, as previously discussed herein (See RECENT DEVELOPMENTS, SUPRA). As
previously reported in the Company's 10-QSB for the period ended September 30,
1996, this proposal passed by a majority vote of the shareholders.

One of the other proposals submitted to and approved by a majority vote of
the shareholders at the 1996 Annual Meeting of shareholders was to authorize the
Board of Directors to evaluate and decide on a business plan going forward, to
include any of the possible alternatives: (i) rebuilding the management team and
continuing in the oil and gas business; (ii) entering into a business
combination with one or more businesses which may or may not include oil and gas
operations at the discretion of the Board of Directors; or (iii) any other
potential alternative which the Board of Directors may deem to be in the best
interest of the Company and its shareholders, including but not limited to the
sale and liquidation of all or substantially all of the assets of the Company
and disposition to the shareholders; and to take such proper actions as may be
necessary to accomplish same.

While the Company has received some preliminary proposals regarding
potential business opportunities, the pending litigation involving the Company
and its then current directors (See Item 3. LEGAL PROCEEDINGS, INFRA) has made
it difficult to pursue any of the proposals until resolution of such litigation.
Now that such litigation has been successfully resolved, the Board is reviewing
and attempting to determine whether the pursuit of any of such proposals is in
the best interest of the Company and its shareholders. At such time as the Board
has completed its evaluation process and has made a determination on a business
plan going forward, it is likely that any material transaction will require the
approval by the shareholders pursuant to Delaware law and, in such event
(shareholder approval is necessary), the Board will call for a Special Meeting
of the shareholders to obtain such approval.

HISTORY

On September 8, 1993, the Company (which was then known as "Sterling
Resources Corporation") underwent a comprehensive change in management and was
recapitalized through the acquisition of Saratoga Resources, Inc., a Texas
corporation ("Saratoga-Texas"). Through this transaction, the then existing five
stockholders of Saratoga-Texas, exchanged 100% of SaratogaTexas stock for over
90% of the outstanding voting rights of Sterling and provided new management for
the Company. Prior to this date, the Company was a "shell" with virtually no
business assets or capital. In January 1994, the Company changed its domicile
from Utah to Delaware and changed its name to Saratoga Resources, Inc.

On November 12, 1993, the Company entered into a Purchase and Sale
Agreement (the "Hunter Agreement") with Hunter Petroleum, Inc. ("Hunter")
pursuant to which the Company
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Page 5 of 36

acquired certain oil and gas interests in South Texas (the "Hunter Properties").
Financing for this acquisition was provided pursuant to a Loan Agreement with
BankOne Texas, N.A. ("BankOne") under which the bank agreed to provide Saratoga
with a $20 million revolving credit facility.

On May 25, 1994, the Company established a new lending relationship with
ING, by executing a credit agreement and related documents (the "Pre-existing
Credit Agreement"). As of that date, the various credit facilities that were
provided by ING were used to acquire 57.15% of the outstanding common stock of
LEI, pay off all debt associated with those properties at the time of
acquisition, retire all credit facilities at BankOne, develop existing oil and
gas properties and provide general working capital. A new credit agreement, the
"Credit Agreement" with ING, was executed on March 30, 1995 to refinance the
existing debt to ING, to purchase the remaining LEI common stock and provide
additional money for acquisitions of additional properties. Additional
disclosures related to this credit relationship with ING are described in detail
in the Notes to the Consolidated Financial Statements of the Company.

On May 25, 1994, Saratoga-Texas executed a Stock Purchase Agreement and
related documents ("Lobo Purchase Agreement"). Under the terms of the Lobo
Purchase Agreement, Saratoga-Texas acquired 57.15% of the outstanding common
stock of LEI which owned oil and gas properties located in South Texas ("Lobo
Properties") formerly owned by Lobo Resources, Ltd., a Texas limited
partnership. Saratoga-Texas paid a purchase price of $6,000,375 for the LEI
common stock.

On March 31, 1995 the Company acquired the remaining 42.85% of the common
stock of LEI from Pickup. As a result of this acquisition, Saratoga-Texas owned
and controlled 100% of the common stock outstanding of LEI. Concurrently with
the purchase of the LEI common stock, LEI assigned to Saratoga-Texas all of
LEI's oil and gas assets. The total purchase price paid by Saratoga-Texas was
$5,401,000. The Company also refinanced $2,411,000 in debt due ING allocable to
LEI and its properties.

As discussed under RECENT DEVELOPMENTS, SUPRA, the May 7, 1996 Agreement
by and among the Company, ING and PrimeEnergy provided for a Foreclosure Sale of
the Interests, and a concurrent sale by ING of the Interests to PrimeEnergy. As
a result, the Company no longer owns any material assets other than cash paid to
the Company by ING.

MARKETING

The Company's oil and gas production has been traditionally marketed to
third parties consistent with industry practices. Typically, oil is sold at the
wellhead at field posted prices and gas is sold under spot or short-term
contracts at negotiated prices. See Notes to the Consolidated Financial
Statements of the Company for information as to principal customers.

MARKET FOR NATURAL GAS

The Company has historically placed emphasis on the development of natural
gas reserves due, in part, to management's belief that the demand for natural
gas in the United States will increase in the future.
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Page 6 of 36

The long term U.S. market potential for natural gas production is affected
by federal and state governmental regulations, access to the U.S. market by
exports from Canada and Mexico, and prices. The price at which natural gas may
be sold will continue to be affected by a number of factors, including 1) the
price of alternative fuels such as oil and coal, 2) the competition among
various gas producing regions, and 3) various factors that affect the
consumption of gas, such as weather patterns.

Various factors beyond the Company's control continue to affect oil and
gas prices. Such factors include, among other things, the domestic supplies of
oil and gas, the cost of imported international production, the level of
consumer demand, the cost and availability of transportation, and changes in
federal and state regulations. Government regulations may reduce the benefit of
price increases by, among other things, fixing rates of production. To stabilize
the uncertainty of what future prices the Company received for its production,
in the past the Company has entered into several swap agreements which
established a set price on a portion of the Company's production for a specified
period of time. See Note 1 of the Consolidated Financial Statements for a more
detailed discussion of these swap agreements.

COMPETITION

The oil and gas industry is highly competitive in all of its phases. The
Company's competition in the areas of exploration, development, production and
acquisition of oil and gas reserves has historically included numerous major and
independent oil and gas companies, individual proprietors, drilling and income
programs and partnerships. Most of these competitors possess financial and
personnel resources substantially in excess of those available to the Company
and may, therefore, restrict the Company's ability to define, evaluate, bid,
purchase and develop oil and gas properties.

GOVERNMENT REGULATION

The Company feels that its daily operations have been in material
compliance with all applicable laws, rules and regulations (collectively
"Regulations") promulgated by various government regulatory agencies. The
failure to comply with Regulations can result in the assessment of substantial
civil or criminal penalties, fines and damages. Accordingly, the Company's
management monitors the applicable Regulations and any proposals to amend them
to assure the Company's compliance with all such Regulations. The Regulations
which the Company must observe relate to, among other things, drilling and
spacing of wells, production rates, prevention of waste, conservation, and
pollution control.

PRICE REGULATION

The federal government has at various times in the past regulated the
prices at which gas and oil could be sold. However, oil and gas pricing has been
deregulated. There can be no assurances, however, that price regulations will
not again be imposed.
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Page 7 of 36

STATE REGULATION

State regulatory authorities have established rules and regulations
requiring permits for drilling operations, drilling and operating bonds and
reports concerning operations and other matters. Texas and Louisiana, in which
Saratoga has historically focused its operations, have regulations governing all
phases of exploration and production activities. The states may, in addition,
move to restrict the amount of production reaching the market through control of
well output or transportation. Allowable rates of production are assigned by the
state to each well or proration unit.

ENVIRONMENTAL REGULATION

The Company's operations have historically been subject to regulations
governing the discharge of materials into the environment, and any other
operational impact on the quality of water, air and soil. These regulations are
especially sensitive to any potential adverse impact on certain lands lying
within wetlands, wilderness and other protected areas. Most wastes produced from
oil and gas operations are managed under state regulatory programs and are not
covered by hazardous waste management requirements under the federal Resource
Conservation and Recovery Act. Environmental regulations continue to be proposed
and are under consideration by the various federal agencies and Congress. Many
of these proposed regulations could have the effect of imposing additional
regulatory requirements on the oil and gas industry.

TRANSPORTATION REGULATION

Due to the physical attributes of natural gas, companies which explore for
and produce gas are largely dependent upon pipelines for transportation. Until
recently, the profitability of a gas well was, in large part, dependent upon
proximity to a pipeline, the rates charged by the pipeline company and the
allocation of capacity to the operator by the pipeline company. Due to the
adoption of FERC Order No. 500 and FERC Order No. 636 the Company's dependency
on a pipeline company's purchase of the Company's gas production has been
lessened, but the availability of pipeline transportation has historically been
one of the most crucial problems for the Company after a successful gas well has
been completed.

FEDERAL INCOME TAXATION

The Company is currently subject to regular income tax rates up to a
maximum 34% rate on its taxable income. The Internal Revenue Code ("IRC")
provides for certain tax preference items which could subject the Company to an
"Alternative Minimum Tax". These preferences include but are not limited to
certain intangible drilling cost ("IDC") deductions and the amount of
accelerated depreciation that is in excess of straight line depreciation.

There are tax regulations, under the IRC, which are unique to resource
extraction firms such as the Company. The IRC permits the Company to deduct
depletion and IDC from taxable income. Depletion may be calculated as the
greater of "cost" or "percentage" depletion with some limitations. Cost
depletion is computed by writing off the capital costs over the productive life
of the well. Independent producers such as the Company are allowed to use a
percentage depletion calculation which takes 15% of the gross revenue as an
expense in lieu of writing off actual capital costs. Percentage depletion can
not cause a net tax loss when calculated on a well by well basis. The
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Company does qualify for use of the percentage depletion method. In addition,
under the IRC, the Company can expense for tax purposes its IDC rather than
having to capitalize and depreciate it over the life of the well. IDC generally
includes all costs of drilling a well, except for tangible equipment.

EMPLOYEES

At December 31, 1996, the Company employed a total of two full time
employees consisting of one executive officer (the Chief Executive Officer) and
an office manager.

ITEM 2. DESCRIPTION OF PROPERTY.

RESERVES REPORTED TO FEDERAL AGENCIES

The Company did not provide an estimate of total proved net oil and gas
reserves to any Federal authority or agency during the year ended December 31,
1996. Below is a summary of Saratoga's net share of oil and gas reserves as of
December 31, 1996, 1995, and 1994. EFFECTIVE WITH THE FORECLOSURE SALE DATED MAY
7, 1996, THE COMPANY NO LONGER OWNED ANY SIGNIFICANT OIL AND GAS PROPERTIES.

SARATOGA'S NET RESERVES

DECEMBER 31,
1996 1995 1994
---- ---- ----
Proven reserves oil (Mbbls) ................... 0 601 994

Proven reserves gas (Mmcf) .................... 0 5,305 7,026

Proven reserves total (MBOE) .................. 0 1,415 2,165

Future net cash flows* (millions $) ........... $0 $12.8 $12.2

Discounted future net cash
flows* (millions $) ......................... $0 $ 9.1 $ 8.8

*SEC Case
Mbbls - thousand barrels
Mmcf - millions of cubic feet
MBOE - thousands of barrels of oil equivalent
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Production

THE COMPANY DOES NOT PRESENTLY OWN ANY SIGNIFICANT OIL AND GAS PRODUCING
PROPERTIES EFFECTIVE WITH THE FORECLOSURE SALE DATED MAY 7, 1996.

PRODUCTIVE WELLS AND ACREAGE (PRIOR TO THE MAY 7, 1996 FORECLOSURE SALE)

SARATOGA'S PRODUCTIVE WELLS

GROSS NET
Oil Wells 117 41

Gas Wells 47 21

Total Wells 164 62

As of March 15, 1996, Saratoga had an inventory of developed mineral
leases consisting of approximately 22,000 gross acres which were held by
production, with approximately 7,000 acres net to Saratoga. The chart shows the
number of Saratoga's productive wells. As of March 15, 1996 Saratoga's wholly
owned subsidiary, LOI, operated 164 wells in 15 fields.

UNDEVELOPED LEASE ACREAGE (PRIOR TO THE MAY 7, 1996 FORECLOSURE SALE)

In addition to the productive wells and acreage described above, as of
March 15, 1996, the Company had onshore Texas Gulf Coast mineral leases on
approximately 10,000 gross undeveloped acres, of which approximately 4,000 acres
were net to the Company. The leases were both private and public leases with an
average term of 3-5 years.

DRILLING ACTIVITY

During 1996 the Company has conducted no drilling activity.

PRESENT ACTIVITIES

The Board of Directors of the Company is in the process of re-evaluating
its business plan going forward. Among the alternatives being considered are:
(i) rebuilding the management team and continuing in the oil and gas business;
(ii) entering into a business combination with one or more businesses which may
or may not include oil and gas operations at the discretion of the Board of
Directors; or (iii) any other potential alternative which the Board of Directors
may deem to be in the best interest of the Company and its shareholders,
including but not limited to the sale and liquidation of all or substantially
all of the assets of the Company and disposition to the shareholders; and to
take such proper actions as may be necessary to accomplish same.

has made a determination on a business plan going forward, it is likely that any
material transaction will require the approval by the shareholders pursuant to
Delaware law, and in such event (shareholder approval is required), the Board
will call for a Special Meeting of the shareholders to obtain such approval.

ITEM 3. LEGAL PROCEEDINGS.

THE COMPANY IS NOT A PARTY TO ANY PENDING LEGAL PROCEEDINGS. ADDITIONALLY,
THE COMPANY'S PROPERTY IS NOT THE SUBJECT OF ANY PENDING LEGAL PROCEEDINGS.

All lawsuits relating to vendor claims previously filed against the
Company, as reported in the Company's Annual Report for the fiscal year ended
December 31, 1995, have been paid and settled in accordance with the terms of
the Disbursement Agreement (See RECENT DEVELOPMENTS, SUPRA).

PRIOR LEGAL PROCEEDINGS. The Company has previously reported certain
information regarding its involvement in certain litigation (the "Company
Federal Lawsuit" and the "Kaminski Lawsuit") with Joseph T. Kaminski, a former
director of the Company, in the following reports and matters filed with the
Securities and Exchange Commission: (i) Form 8-K (filed July 16, 1996), (ii)
Form 10-KSB (filed July 31, 1996), (iii) Form 10-QSB (filed August 1, 1996),
(iv) Form 10-QSB (filed August 26, 1996), (v) Proxy Statement (filed August 30,
1996), (vi) Form 10-QSB (filed November 13, 1996), and (vii) Form 8-K (filed
March 14, 1997).

On January 6, 1997, the "Company Federal Lawsuit" proceeded to trial,
whereupon the Company, Cooke, Dryer and Dryer, Ltd. received an overall
favorable outcome as set forth in the "Settlement Agreement", a copy of which is
filed as Exhibit 10.4 to this Form 10-KSB. Prior to the final judgment being
entered, Kaminski indicated his intention to appeal any final judgment which may
be entered. The Board of Directors, being aware of the risks, uncertainties, and
costs of continued litigation determined that it would be in the best interest
of the Company and its shareholders to attempt to compromise and settle all
matters in dispute of whatever kind or character concerning both the "Company
Federal Lawsuit" and the "Kaminski Lawsuit". Accordingly, on March 10, 1997, the
Company, Cooke, Dryer, Dryer, Ltd. and Kaminski entered into a Settlement
Agreement and Full and Final Release (the "Settlement Agreement").

Pursuant to the terms of the Settlement Agreement (i) Kaminski assigned to
the Company all of his stock, warrants, stock options, or other rights to
purchase any debt or equity interest in the Company or its affiliates, under his
actual or constructive control, currently or within a period of three years from
the date of the Settlement Agreement [which Kaminski represented to be 2,465,371
shares of common stock ("shares") and warrants to purchase 100,000 shares], and
further Kaminski assigned an additional 8,000 shares to the Company which he had
held as "Trustee", (ii) Kaminski released the Company, Cooke, Dryer and Dryer,
Ltd. from any and all claims and causes of action, (iii) the Company, Cooke,
Dryer and Dryer, Ltd. released Kaminski from any and all claims and causes of
action, and (iv) the Company, Cooke, Dryer, Dryer, Ltd. and Kaminski filed
motions to dismiss with prejudice the "Company Federal Lawsuit" and the
"Kaminski Lawsuit".

Accordingly, all claims and counterclaims by and against the Company and
its two directors (Cooke and Dryer) have been, or will be, dismissed, and there
is no other pending litigation against the Company or its directors.
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Additionally, and as a result of the Settlement Agreement the total number
of shares of common stock of the Company issued and outstanding has been reduced
from 6,809,400 to 4,336,029, and 2,473,371 shares are now held in treasury.

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

There were no matters submitted to a vote of the security holders of the
Company through the solicitation of proxies or otherwise during the fourth
quarter of the fiscal year ended December 31, 1996.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

The Company's common stock is not listed on any stock exchange but from
time to time has been included in the "Pink Sheets" basis, with transactions
being reported by the NASD on the OTC Bulletin Board under the symbol "SRIK".
According to quotations from the "Pink Sheets" and the OTC Bulletin Board
(represents prices between dealers and does not include retail markup, markdown
or commission, and may not represent actual transactions), the range of high and
low bid information of the shares of the Company's common stock for the periods
indicated, were as follows:

COMMON STOCK
HIGH LOW
YEAR ENDED DECEMBER 31, 1995
First Quarter 1-1/4 1/4
Second Quarter 1-1/4 1/20
Third Quarter 1-3/4 1/20
Fourth Quarter 1-3/8 3/8

YEAR ENDED DECEMBER 31, 1996
First Quarter 3/4 1/8
Second Quarter 5/8 1/8
Third Quarter 1/2 1/16
Fourth Quarter 3/8 1/16

As of December 31, 1996, 6,809,400 shares of the Company's common stock
were issued and outstanding and held by 1,382 holders of record. As a result of
the Settlement Agreement (See Item 3. LEGAL PROCEEDINGS, SUPRA), the total
number of shares of common stock of the Company issued and outstanding has been
reduced from 6,809,400 to 4,336,029, and 2,473,371 shares are now held in
treasury.

The Company has never paid dividends. The Company does not intend to pay
dividends for the foreseeable future, but rather expects to retain future
earnings, if any, to support the Company's growth. Any future determination as
to the payment of dividends on the Common Stock will be at
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Page 12 of 36

the discretion of the Board of Directors and will depend upon the Company's
operating results, financial condition, capital requirements, restrictions
imposed by lenders and such other factors as the Board of Directors may deem
relevant.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

As discussed under Item 1. DESCRIPTION OF BUSINESS - RECENT DEVELOPMENTS,
SUPRA, the Company is not currently conducting historical oil and gas
operations. The Board of Directors of the Company is, however, in the process of
re-evaluating its business plan going forward.

RESULTS OF OPERATIONS

REVENUES. As a result of the Foreclosure Sale of the Interests, revenues
historically obtained from oil and gas operations declined in 1996. Revenues for
fiscal 1996 were $705,000 as compared to $2,878,000 for fiscal 1995.

COSTS AND EXPENSES. Cost and expenses were significantly reduced in 1996.
Costs and expenses for fiscal 1996 totaled $2,174,000 as compared to $14,252,000
in costs and expenses for fiscal 1995.

NET INCOME. Net income saw a significant increase in 1996. As a result of
the Foreclosure Sale and the forgiveness of debt by ING, net income for fiscal
1996 was $10,622,000 as compared to a net loss of ($11,175,000) for fiscal 1995.
Net income per share for fiscal 1996 was $1.57 per share as compared to a net
loss per share of ($1.67) for fiscal 1995.

TAXES. As a result of the Foreclosure Sale and the forgiveness of debt by
ING, the Company recorded an extraordinary gain of $12,066,000 with no attendant
tax liability in 1996 (See Note 10, INFRA).

LIQUIDITY AND CAPITAL RESOURCES

The Company's assets at December 31, 1996 consist almost entirely of cash
in the amount of $1,350,000, and $1,200,000 in cash at March 25, 1997. The
Company believes that its current cash balance will be sufficient to conduct its
business for the foreseeable future.
<PAGE>
Page 13 of 36

ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

INDEX TO FINANCIAL STATEMENTS

PAGE

Independent Auditor's Report - 14

Consolidated Balance Sheet - December 31, 1996 15

Consolidated Statements of Operations 16
-For the years ended December 31, 1995 and 1996

Consolidated Statements of Changes in Stockholders' Equity (Deficit) 17
-For the years ended December 31, 1995 and 1996

Consolidated Statements of Cash Flows 18
-For the years ended December 31, 1995 and 1996

Notes to Consolidated Financial Statements 20

Supplemental Oil and Gas Properties and Related Reserves Data (Unaudited) 27
<PAGE>
Page 14 of 36

INDEPENDENT AUDITOR'S REPORT

Board of Directors and Stockholders
Saratoga Resources, Inc. and Subsidiaries
Houston, Texas

We have audited the accompanying consolidated balance sheet of Saratoga
Resources, Inc. and subsidiaries as of December 31, 1996 and the related
consolidated statements of operations, changes in stockholders' equity
(deficit), and cash flows for the years ended December 31, 1995 and 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based upon
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Saratoga Resources, Inc. and
subsidiaries as of December 31, 1996 and the results of their operations and
their cash flows for years ended December 31, 1995 and 1996, in conformity with
generally accepted accounting principles.

As discussed in Note 10, in connection with a Foreclosure Sale and Compromise
and Settlement Agreement dated May 7, 1996, a majority of the assets of Saratoga
Texas, Lobo Operating, Inc. and Lobo Energy, Inc. were sold to a lender in
exchange for forgiveness of certain debt obligations and other consideration .

Hein + Associates LLP
Certified Public Accountants

/s/

Houston, Texas
February 24, 1997
<PAGE>
Page 15 of 36

SARATOGA RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
(in thousands)

ASSETS
Current assets - cash .......................................... $ 1,350

Receivables:
Trade .................................................... 50
Other .................................................... 25
-------
75
Equipment, net of accumulated depreciation ..................... 20
-------
Total Assets ................................................... $ 1,445
=======
LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable and accrued liabilities ................. $ 218
Legal suspense ........................................... 19
-------
Total current liabilities ...................................... $ 237

Commitments and contingencies (Notes 5, 8 and 10)

Stockholders' Equity
Preferred stock, $.001 par value; 5,000,000
shares authorized ..................................... --
Common Stock, $.001 par value; 50,000,000
shares authorized, 6,809,400 shares
issued and outstanding ................................ 7
Additional paid-in capital ............................... 2,909
Accumulated deficit ...................................... (1,706)
Treasury stock, at cost .................................. (2)
-------
Total stockholders' equity ..................................... 1,208
-------
Total Liabilities and Stockholders's Equity .................... $ 1,445
=======

See Notes to Consolidated Financial Statements
<PAGE>
Page 16 of 36

SARATOGA RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)

YEAR ENDED YEAR ENDED
DECEMBER 31,1995 DECEMBER 31, 1996
Revenues:
Oil and gas ......................... $ 2,856 $ 684
Other ............................... 22 21
-------- --------
2,878 705
Costs and expenses:
Production .......................... 1,437 236
Severance tax ....................... 156 43
Depletion, depreciation, amortization
and provision for impairment ...... 9,988 362
General and administrative .......... 1,079 1,109
Interest expense .................... 1,592 424
-------- --------
14,252 2,174
-------- --------
Loss before income taxes and
extraordinary item ....................... (11,374) (1,469)

Income tax benefit ........................ 199 25
-------- --------
Loss before extraordinary item ............ (11,175) (1,444)

Extraordinary item - gain arising from
forgiveness of debt ...................... -- 12,066
-------- --------
Net income (loss) ......................... $(11,175) $ 10,622
======== ========
Net income (loss) per share ............... $ (1.67) $ 1.57
======== ========
Weighted average number of common
shares outstanding ...................... 6,700 6,782
======== ========

See Notes to Consolidated Financial Statements
<PAGE>
Page 17 of 36

SARATOGA RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands)
<TABLE>
<CAPTION>
Additional
Common Stock Paid-In Accumulated Treasury Total Stockholders'
Shares Par Capital Def icit Stock Equity (Deficit)
------ ---- ------- -------- ----- ----------------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1994 ........................ 6,680 $7 $2,755 $ (1,153) $-- $ 1,609

Issuance of stock warrants for commitment fee -- - 114 -- -- 114
Issuance of stock in lieu of compensation ... 20 - 40 -- -- 40
Purchase of treasury stock .................. (1) - -- -- (2) (2)
Net loss .................................... -- - -- (11,175) -- (11,175)
----- ---- ------ -------- --- --------
Balances, December 31, 1995 ................. 6,699 $7 $2,909 $(12,328) $(2) $ (9,414)

Common stock issued for services ............ 110 - -- -- -- --
Net income .................................. -- - -- $ 10,622 -- 10,622
----- ---- ------ -------- --- --------
Balances, December 31, 1996 ................. 6,809 $7 $2,909 $ (1,706) $(2) $ 1,208
===== ==== ====== ======== === ========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
Page 18 of 36

SARATOGA RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

YEAR ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1996
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income ......................... $(11,175) $ 10,622
Adjustments to reconcile net income(loss)
to net cash provided by operating
activities:
Depletion, depreciation, amortization 9,988 362
for impairment
Amortization of debt discount ........ 106 24
Provision for doubtful accounts ..... 266 --
Deferred income taxes ................ (199) --
Write off of organization costs ...... -- 236
Gain arising from forgiveness of debt -- (12,066)
Changes in operating assets and
liabilities:
Accounts receivable ................. 66 971
Prepaids ............................ (73) 104
Other assets ........................ -- 15
Trade payables ...................... 1,735 (92)
Other, net .......................... (56) --
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVIES ... 658 176
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions .......... (1,283) (37)
Net proceeds from sale of assets .......... 13 686
Acquisition of oil and gas properties ..... (2,240) --
Organization cost additions ............... (105) --
-------- --------
NET CASH (USED IN) PROVIDED BY
INVESTING ACTIVITIES ................. (3,615) 649
-------- --------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings .................. 2,954 --
Payments on borrowings .................... (63) (79)
-------- --------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES ................. 2,891 (79)
-------- --------

NET (DECREASE) INCREASE IN CASH ........... (66) 746

CASH AT BEGINNING OF YEAR ................. 670 604
-------- --------
CASH AT END OF YEAR ....................... $ 604 $ 1,350
======== ========

See Notes to Consolidated Financial Statements
<PAGE>
Page 19 of 36
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1996
----------------- -----------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest Paid ..................................... $ 806 $ --

SUPPLEMENTAL DISCLOSURES OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Issuance of stock warrants for commitment fee ....... 114 --
Issuance of common stock for
consulting fees and compensation .................. 40 --
Acquisition of oil and gas properties in exchange for
debt and other consideration ...................... $3,148 $ --
====== ======
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
Page 20 of 36

NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES

ORGANIZATION

Saratoga Resources, Inc., a Delaware corporation, (the "Company",
"Saratoga", or the "Registrant") was merged with Sterling Resources Corporation
("Sterling") in February 1994. Sterling, formerly Primo Corporation, had been
incorporated in Utah on September 21, 1972.

The Company has been engaged in oil and gas exploration and development of
properties located in far southwest and east Texas and in Louisiana. Sterling
had been a passive organization with no assets nor liabilities until September
8, 1993. At that time, Sterling acquired all of the outstanding shares of
Saratoga Resources, Inc., a Texas corporation ("Saratoga-Texas"). The
stockholders of Saratoga-Texas received 1,000,000 shares of Sterling preferred
stock and 100,000 shares of Sterling common stock. Shares belonging to various
Sterling stockholders were placed in a voting trust which, along with voting
rights of the stock issued to former Saratoga-Texas stockholders, resulted in
the former Saratoga-Texas stockholders exercising voting control over 90% of the
votes of Sterling's security holders. The acquisition resulted in a complete
reorganization of the Company and a change in management. On January 22, 1994
the stockholders of the Company voted to 1) change the name of the Company to
Saratoga Resources, Inc.; 2) relocate the domicile of the Company from Utah to
Delaware; and, 3) institute a 1 for 30 reverse stock split on the Company's
common stock. In addition, the preferred stock of Sterling was converted into
common stock.

The consolidated financial statements included herein are those of the
Company and its subsidiaries, all of which are wholly owned. All significant
intercompany accounts and transactions have been eliminated in consolidation.

CASH AND CASH EQUIVALENTS: The Company considers cash equivalents to
include all cash items, such as time deposits and short term investments, with
maturities of three months or less upon acquisition.

EQUIPMENT: Depreciation of equipment is generally provided on the
straight-line basis over the estimated useful lives of the assets as follows:

Office equipment 5 - 10 years
Leasehold improvements 3 - 5 years
Automobiles 5 years

Ordinary maintenance and repairs are charged to expense, and expenditures
which extend the physical or economic life of the assets are capitalized. Gains
or losses on disposition of assets are recognized in income and the related
assets and accumulated depreciation accounts are adjusted accordingly.
<PAGE>
Page 21 of 36

INCOME TAXES: The Company accounts for income taxes in accordance with the
asset and liability method of accounting for income taxes. Under the asset and
liability method, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates during the periods they are expected to be recovered or
settled.

DERIVATIVE FINANCIAL INSTRUMENTS: To reduce price sensitivity of the cash
flows for periods subsequent to June 30, 1994, the Company entered into a Swap
Agreement with Internationale Nederlanden (U.S.) Securities Corporation ("ING
Securities"), an affiliate of Internationale Nederlanden (U.S.) Capital
Corporation ("ING"). This Swap Agreement hedged 4,400 barrels of oil per month
from July to December 1994 and 3,400 barrels of oil per month from January to
December 1995 at $18.15 per barrel. On April 11, 1995, two new transactions were
entered into under the Swap Agreement. Under the terms, the Company agreed to
sell 2,000 barrels of oil per month from May 1, 1995 to October 31, 1996, at a
price of $18.47 per barrel, and agreed to sell 3,000 barrels of oil per month
from June 1, 1995 to May 31, 1996, at a price of $18.40 per barrel. In addition,
on April 20, 1995, the Company agreed to sell 60,000 MMBtu's of natural gas per
month from July 1, 1995 to March 31, 1997, at a price of $1.85 per MMBtu.

As discussed in Note 11, pursuant to the Disbursement Agreement dated May
7, 1996, all Swap Agreements of the Company were settled by the Trustee from
cash proceeds from the Foreclosure Sale.

The hedged volumes represented approximately 93% and 94% of the Company's
December 1995 equivalent mcf production. The price differential (gain or loss)
is included in oil revenues and was immaterial.

OIL AND GAS REVENUES: The Company historically recognized oil and gas
revenues as the sales occurred. The Company currently has no oil and gas
production .

FAIR VALUE OF FINANCIAL INSTRUMENTS: The Company's financial instruments
consist of trade liabilities . The Company believes the carrying value of these
financial instruments approximate their estimated fair value.

NET INCOME (LOSS) PER SHARE: Net income (loss) per share was computed by
dividing net income (loss) by the weighted average common shares outstanding as
of December 31, 1996.

USE OF ESTIMATES: The preparation of the Company's consolidated financial
statements in conformity with generally accepted accounting principles requires
the Company's management to make estimates and assumptions that affect the
amounts reported in these financial statements and accompanying notes. Actual
amounts could differ from those estimates.

RECLASSIFICATIONS: Certain reclassifications have been made to prior year
amounts to conform to the current year's presentation.
<PAGE>
Page 22 of 36

NOTE 2 - ACQUISITIONS

LOBO ENERGY , INC. ACQUISITION

On May 25, 1994 Saratoga-Texas and Roberto R. Salinas, Thermo Resources
Corporation, the Raymundo O. Salinas, Jr. Trust, the Rogelio Salinas, Jr. Trust,
the Ismael O. Salinas Trust, the Octavio Salinas, II Trust, the Yvonne Salinas
Gonzalez Trust and the Sandra Salinas Garcia Trust, (collectively "Salinas")
executed a Stock Purchase Agreement and related documents ("Purchase Agreement")
effective as of May 25, 1994.

Under the terms of the Purchase Agreement, Saratoga-Texas acquired 5,715
shares of common stock of LEI, Inc. ("LEI"). The shares acquired by
Saratoga-Texas gave the Company 57.15% of the common stock of LEI in exchange
for a purchase price of $6,000,375 cash which was used to pay Salinas and LEI's
lenders at closing. Saratoga-Texas was indemnified for accrued liabilities
exceeding $1,500,000.

Prior to the change in ownership and a resultant change in management, LEI
sold all of its rights to operate its oil and gas properties to a newly formed
Texas corporation, Lobo Operating, Inc. ("LOI"), which is wholly owned by the
Company. LOI was capitalized by the Company with the issuance of 150,000 shares
of the Company's common stock, which LOI in turn transferred to LEI as
compensation for the operating rights of the properties. At the time, LOI
functioned as the Operator for all of the Company's properties, including the
LEI properties.

On March 31, 1995, Saratoga-Texas acquired 4,285 shares of common stock of
LEI from Peter P. Pickup ("Pickup"). As a result of this acquisition,
Saratoga-Texas controlled 100% of the common stock outstanding of LEI.
Concurrent with the purchase of the LEI common stock, LEI assigned to
Saratoga-Texas all of LEI's oil and gas assets. The total price paid by
Saratoga-Texas for the purchase was approximately $5,406,000 and was comprised
of the following (the "Purchase Price").

1) A cash payment of $2,180,000 made by Saratoga-Texas on March 31, 1995
(reduced to $2,085,000 by reason of a concurrent payment of a note payable
by Pickup to Saratoga-Texas of $95,000.)

2) A promissory note in the sum of $346,458 issued to Pickup by
Saratoga-Texas and guaranteed by the Company and its subsidiaries (the
"Note"). The Note bore interest at the rate of 9.375% per annum. Interest
on the unpaid principal balance was paid on the last day of each month
beginning April 30, 1995 to and including September 30, 1995. On the last
day of each month beginning October 31, 1995 the Note's principal balance
was to be paid, along with accrued interest, in eighteen equal monthly
installments. The Note was secured by 57.15% of LEI's then current portion
of a potential increase in production which was attributable to a
waterflood program on the Moore's Orchard Field in Fort Bend County,
Texas. At December 31, 1995, the outstanding balance of the note was
approximately $289,000.
<PAGE>
Page 23 of 36

3) The agreement of Saratoga-Texas to pay up to a maximum of $468,542 from
the net profits from any production attributable to 42.85% of LEI's then
current portion of increased production which was attributable to a
waterflood program on the Moore's Orchard Field (the "Net Profits
Production Payment"). This liability was to be recorded as the increased
production to which it related occurred and gave rise to a liability.

4) At the Closing, the Registrant also refinanced approximately $2,411,000
in debt due ING allocable to LEI and its properties.

These LEI acquisitions were accounted for on the purchase method of
accounting. The Company's consolidated statements of operations for the period
from January 1, 1995 to March 31, 1995 reflect Saratoga-Texas' proportional
consolidation of LEI's assets, liabilities, revenues and costs. With the
acquisition of the remaining 42.85% of the common stock of LEI, the Company's
consolidated statement of operations for the year ended December 31, 1995
reflects 100% of LEI's revenues and costs from April 1, 1995 to December 31,
1995.

NOTE 3 - DEBT

ING CREDIT AGREEMENT

On March 30, 1995 Saratoga-Texas executed a Credit Agreement ("Credit
Agreement") with ING which refinanced the existing debt to ING. The cash portion
of the purchase price for the acquisition of LEI described in Note 2 was paid
out of the proceeds of the loan evidenced by the Credit Agreement. In the Credit
Agreement, ING established two credit facilities in favor of Saratoga-Texas in
the combined maximum principal amount of $19,000,000, subject to the borrowing
base limitations set forth therein. At December 31, 1995 an aggregate of
$15,500,000 was available under these facilities; $13,765,721 was advanced; and
$13,397,410 was outstanding, net of unamortized loan commitment fees of
$368,311. All oil and gas properties owned by the Company were pledged as
collateral under the Credit Agreement and all obligations to ING were also
guaranteed by the Company and all of its subsidiaries.

As discussed in Note 10, on May 7, 1996, in connection with a Foreclosure
Sale and Compromise and Settlement Agreement, a majority of the assets (the
"Interests") of Saratoga-Texas, LOI and LEI were sold to ING in exchange for
ING's forgiveness of all debt owed by the Company to ING.

NOTE 4 - TRANSACTIONS WITH RELATED PARTIES

Consulting fees for engineering services were paid to Capital Resource
Management, Inc., a stockholder in the Company, in the amount of $54,000 for the
year ended December 31, 1995.

As of December 31, 1995, the Company had a payable due the former
President of the Company for unpaid compensation and travel expenses of $50,000
for services provided from January 1, 1995 through April 30, 1995, plus interest
at 10% from July 15, 1995.
<PAGE>
Page 24 of 36

As of December 31, 1994, the Company had an account receivable due from
Kaminski 90-1 Joint Venture ("Kaminski 90-1"), of which Joseph T. Kaminski, a
stockholder of Saratoga, was the joint venture manager. At December 31, 1995,
the outstanding balance of $107,240 was written off as uncollectible.

On March 31, 1995, the Company's note receivable due from Peter P. Pickup
of $95,000 was applied as additional purchase price consideration for the
remaining 4,285 shares of common stock of LEI acquired from Pickup (see Note 2,
SUPRA).

During 1995 and 1996 , the Company issued 20,000 shares and 110,000 shares
of common stock to employees as compensation for services rendered to the
Company.

In July of 1996, the Company entered into a month to month lease for the
current Houston office space with Kevin M. Smith, a director of the Company, at
no charge.

NOTE 5 - LEASE OBLIGATIONS

The Company leased office space in Houston, Texas for its corporate
office; in Austin, Texas for its operations office; and in Hemphill, Texas for
its East Texas field office during 1995 and 1996. On May 12, 1994 the Company
entered into a four-year operating lease with a primary term ending in January
1998, with renewal options and escalation clauses, related to its Houston
office. In 1996, the Hemphill office was closed.

Rental expense was $111,000 and $43,000 for the years ended December, 31,
1995 and 1996, respectively .

As discussed in Note 10, pursuant to the Disbursement Agreement dated May
7, 1996, all lease obligations of the Company were settled by the Trustee from
cash proceeds from the Foreclosure Sale.

In July 1996, the Company entered into a month to month lease for the
current Houston office space with Kevin M. Smith, a director of the Company, at
no charge. Additionally, the Company maintains an office in Austin, Texas
located at 301 Congress Avenue on a month to month basis at a current rate of
$2,175 per month.

NOTE 6 - INCOME TAXES

Deferred income taxes result from timing differences in the recognition of
income and expense items for income tax and financial reporting purposes. For
the year ended December 31, 1995, the timing differences consisted primarily of
the difference in capitalization and depletion of oil and gas properties. As of
December 31, 1996, the Company had no material deferred tax assets and deferred
tax liabilities.

The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1995 are presented below (in thousands):
<PAGE>
Page 25 of 36
Deferred Tax Assets:
Net Operating loss carry forwards $ 647
Oil and gas properties, principally
due to differences in capitalized
drilling costs and depletion 2,176
-------
Total gross deferred tax assets 2,823
Less valuation allowance (2,823)
Net deferred tax assets $ -
=======

As of December 31, 1996, the Company has no net operating loss carry
forwards. Accordingly, the valuation allowance has been reduced to zero at that
date.

NOTE 7 - MAJOR CUSTOMERS

For the year ended December 31, 1995, the Company's revenue from customers
accounting for at least 10% of the Company's total revenues were as follows:

CUSTOMER
Gulfmark Energy, Inc. 26%
HPL Resources Company 24%
Scurlock Permian Corporation 19%

According to the terms and provisions of the May 7, 1996 Settlement
Agreement previously discussed, the effective date of the transfer of the
Company's properties was January 1, 1996. Accordingly, for all practical
purposes, the Company had no major customers during 1996.

NOTE 8 - LITIGATION

The Company has previously reported certain information regarding its
involvement in certain litigation (the "Company Federal Lawsuit" and the
"Kaminski Lawsuit") with Joseph T. Kaminski, a former director of the Company,
in the following reports and matters filed with the Securities and Exchange
Commission: (i) Form 8-K (filed July 16, 1996), (ii) Form 10-KSB (filed July 31,
1996), (iii) Form 10-QSB (filed August 1, 1996), (iv) Form 10-QSB (filed August
26, 1996), (v) Proxy Statement (filed August 30, 1996), (vi) Form 10-QSB
(filed November 13, 1996) and (vii) Form 8-K (filed March 14, 1997.

On January 6, 1997, the "Company Federal Lawsuit" proceeded to trial,
whereupon the Company, Cooke, Dryer and Dryer, Ltd. received an overall
favorable outcome as set forth in the "Settlement Agreement", a copy of which is
attached hereto as Exhibit "10.4". Prior to the final judgment being entered,
Kaminski indicated his intention to appeal any final judgment which may be
entered. The Board of Directors, being aware of the risks, uncertainties, and
costs of continued litigation determined that it would be in the best interest
of the Company and its shareholders to attempt to compromise and settle all
matters in dispute of whatever kind or character concerning both the "Company
Federal Lawsuit" and the "Kaminski Lawsuit". Accordingly, on March 10, 1997,
<PAGE>
Page 26 of 36

the Company, Cooke, Dryer, Dryer, Ltd. and Kaminski entered into a Settlement
Agreement and Full and Final Release (the "Settlement Agreement").

Pursuant to the terms of the Settlement Agreement, Kaminski transferred
all of his equity interests in the Company, consisting of 2,465,371 shares of
common stock and 100,000 stock warrants, to the Company, and forgave debt owed
him by the Company of $50,000 plus interest. Kaminski also agreed to sell to the
Company 8,000 shares of the Company's common stock held in trust. Both the
Company and Kaminski agreed to release and discharge any and all claims or
causes of action of every nature existing between the parties.

NOTE 9 - STOCKHOLDERS' EQUITY

Preferred stock may be issued from time to time in one or more series.
Prior to each issuance, the Board of Directors is authorized to determine the
number of shares, relative powers, preferences, rights and qualifications,
limitations or restrictions of all shares of such series. Shares of any series
of preferred stock which have been acquired by the Company or which, if
convertible or exchangeable, have been converted into or exchanged for shares of
stock of another class, would have the status of authorized and unissued shares
of preferred stock, subject to the conditions adopted by the Board of Directors.

During 1995, the Company purchased 1,000 small lot shares for $2.00 per
share from stockholders.

NOTE 10 - FORECLOSURE SALE

As of May 7, 1996, the Company owed $13,765,721 plus accrued interest to
ING under the Credit Agreement described in Note 3. The Company was in default
under the Credit Agreement and all obligations were due and payable in full.

In connection with a Foreclosure Sale and pursuant to the terms and
provisions of a Compromise and Settlement Agreement dated May 7, 1996, a
majority of the assets (the "Interests") of Saratoga-Texas, LOI and LEI were
sold to ING in exchange for ING's forgiveness of all amounts owed under the
Credit Agreement.

Upon completion of the Foreclosure Sale on May 7, 1996, at which ING was
the highest bidder, ING concurrently sold the Interests to PrimeEnergy for cash
consideration in the amount of $7,180,000 less an adjustment for net revenue due
the purchaser from the effective date of the
<PAGE>
Page 27 of 36

purchase (January 1, 1996) through May 7, 1996, not to exceed $372,000, plus
additional consideration as provided in that certain Purchase and Sale Agreement
dated May 7, 1996, by and between ING and PrimeEnergy.

Upon receipt of the cash proceeds from the sale of the Interests by ING to
PrimeEnergy, ING deposited approximately $5,500,000 with the Trustee, of which
approximately $4,000,000 was set aside under that certain Disbursement Agreement
dated May 7, 1996, for the settlement of outstanding vendor claims and other
related liabilities of the Saratoga Companies. The remaining $1,500,000 was paid
to the Company and has been available for the Company to pursue other business
opportunities.

As a result of the forgiveness of debt, the Company recorded an
extraordinary gain of $12,066,000 with no attendant tax liability.

SUPPLEMENTAL OIL AND GAS PROPERTIES AND RELATED RESERVES DATA
(UNAUDITED)

CAPITALIZED COSTS RELATING TO OIL AND GAS PRODUCING ACTIVITIES -

An analysis of the capitalized oil and gas property costs and related
accumulated depletion and depreciation at December 31, 1995 (in thousands):

Proved oil and gas properties $17,582
Equipment 255
17,837
Less:
Accumulated depletion and depreciation (10,847)

Net capitalized costs $ 6,990
=======

COSTS INCURRED IN OIL AND GAS PROPERTY ACQUISITION, EXPLORATION AND DEVELOPMENT
ACTIVITIES -

The following costs, whether capitalized or expensed, were incurred in oil and
gas activities (in thousands):
YEAR ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1996
Acquisition of proved properties $ 5,377 $ 37
Development 1,294 -
------- -------
$ 6,671 $ 37
======= ========

RESULTS OF OPERATIONS -

Oil and gas activities have historically represented substantially all of
the business activities of the Company and these activities have been located
substantially in a single geographic area;
<PAGE>
Page 28 of 36

therefore, reference should be made to the Consolidated Statements of Operations
for the Company's results of operations.

ESTIMATED QUANTITIES OF OIL AND GAS RESERVES -

The following table summarizes the Company's net interest in estimated
proved oil and gas reserve quantities, all of which were located within the
United States. These estimates were based on geological and engineering data
which demonstrated with reasonable certainty oil and gas expected to be
recovered in future years from known reservoirs under existing economic and
operating conditions.

PROVED DEVELOPED AND UNDEVELOPED RESERVES:

OIL (BBLS) GAS (MCF)

Balance at December 31, 1994 994,161 7,025,869

Production (92,209) (928,475)
Revisions (580,950) (2,949,185)
Purchase of minerals in place, net 280,029 2,156,791
-------- ---------

Balance at December 31, 1995 601,031 5,305,000
======== =========

Balance at December 31, 1996 - *** - ***
======== ==========

PROVED DEVELOPED RESERVES:

At December 31, 1995 473,567 3,951,300
At December 31, 1996 - *** - ***
======== =========

***As discussed in Note 10 to the financial statements, on May 7, 1996, in
connection with a Foreclosure Sale and Compromise and Settlement Agreement, a
majority of the assets (the "Interests") of Saratoga-Texas, LOI and LEI were
sold to ING in exchange for ING's forgiveness of all amounts owed under the
Credit Agreement. Accordingly, for the period ended December 31, 1996, the
Company no longer owned any oil and gas reserves.

DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL AND GAS RESERVES -

Standardized measure of discounted future net cash flows and changes
therein relating to proved oil and gas reserves is as follows (in thousands):
<PAGE>
Page 29 of 36

DECEMBER 31, 1995

Future cash inflows ................ $ 21,427
Future production costs ............ (5,762)
Future development costs ........... (2,081)
Future income taxes ................ (809)
--------
Future net cash flows .............. 12,775

Less: 10% annual discount
for estimated timing of cash flows 3,629
Standardized measure of discounted
future net cash flows ............ $ 9,146 ***
========

In accordance with regulations prescribed by the Securities and Exchange
Commission, future cash flows are computed using year-end costs and prices
adjusted for contractual increases and other fixed and determinable escalations
discounted at 10%. Product prices actually received at the leases as of December
31, 1995, were used in the estimates of cash flows. The standardized measure of
discounted future cash flows does not purport to represent the fair market value
of the Company's oil and gas properties (See Note 10).

Future income tax expenses are computed using year-end statutory tax rates
(adjusted for permanent differences that relate to existing proved oil and gas
reserves in which the enterprise has mineral interests). The following are the
principal changes in the standardized measure of discounted future net cash
flows (in thousands):

Year Ended
December 31,
1995
Balance at beginning of period .............. $ 8,837
Sales and transfers of oil and gas
produced, net of production costs ....... (1,263)
Net change in prices ........................ 4,276
Revisions to previous quantity estimates .... (8,098)
Extensions, discoveries, and improved
recovery less related costs
Changes in estimated future development costs (407)
Development costs incurred .................. 1,294
Changes in estimated future income taxes .... (566)
Purchases of reserves ....................... 3,955
Accretion of discount ....................... 884
Other, including changes in timing .......... 234
-------
Balance at end of period .................... $ 9,146 ***
=======

"Interests") of Saratoga-Texas, Lobo Operating, Inc. and LEI, Inc. , including
all related reserves, were sold to ING in exchange for ING's forgiveness of all
amounts owed under the Credit Agreement. Accordingly, for the period ended
December 31, 1996, the Company no longer owned any oil and gas reserves.

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

By approval of the Board of Directors effective as of June 10, 1996, the
Company (i) retained the services of Hein + Associates LLP, 5075 Westheimer,
Suite 970, Houston, Texas 77056, as principal accountant and auditor for the
purpose of auditing the Company's financial statements and (ii) dismissed Ernst
& Young LLP. Previously, Ernst & Young LLP served as the Company's principal
accountant and auditor. This change was occasioned after careful consideration
by the Company, and as further explained under "BACKGROUND" hereinbelow.

A copy of the "Independent Auditor's Report" (the "Report") dated May 2,
1995, which was prepared by Ernst & Young LLP, was included in the Company's
Form 10-KSB for the fiscal period from October 1, 1994 to December 31, 1994. The
Report expressed doubt about the Company's ability to continue as a going
concern based upon several factors as outlined in the Report: (i) the Company
had incurred an operating loss for the transition period October 1 to December
31, 1994 and the year ended September 30, 1994 (ii) the Company had a working
capital deficiency for said periods (iii) the Company projected an operating
loss for the twelve months ending December 31, 1995, and (iv) the Company was
not in compliance with certain covenants under a Credit Agreement with its
principal lender.

For the prior audited periods and subsequent unaudited periods, the
Company is not aware of any material disagreements or reportable events with
Ernst & Young LLP regarding accounting principles or practices, financial
statement disclosure, or auditing scope or procedure.

BACKGROUND. As set forth in Item 2 hereof, under the terms and provisions
of the Agreement, a majority of the assets of the Saratoga Entities were
ultimately acquired by PrimeEnergy on May 7, 1996. As a result, the Company had
no, or virtually no, assets other than approximately $1,500,000 out of the
$5,500,000 originally deposited by ING into Escrow. This represents a
significant change for the Company. Previously, the Company had been actively
engaged in the production and development of oil and gas properties. As such,
the Company had been able to financially support the retention of Ernst & Young
LLP as its principal accountant and auditor. Hein + Associates LLP had agreed to
perform the audit for substantially lower fees than Ernst & Young LLP.
Presently, the Company is in a position which requires it to make efficient use
of its reduced financial resources in an attempt to maintain the Company as a
viable business entity going forward.

Accordingly, the Company determined that the cost required to continue to
retain the services of such a large public accounting firm as Ernst & Young LLP
as the Company's principal accountant and auditor, giving due consideration to
the Company's current financial and business affairs, did not make the most
prudent use of Company assets.
<PAGE>
Page 31 of 36

PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS

Executive Officers of the Company and its wholly owned subsidiaries serve
at the pleasure of the Board of Directors and are elected annually at a meeting
of the Board of Directors. Set forth are the directors and executive officers at
December 31, 1996:

NAME POSITION AGE
- ---- -------- ---
Thomas F. Cooke Chairman, Chief Executive Officer and 47
Chief Operating Officer

Dr. Randall F. Dryer Director 43

Kevin M. Smith Director 51

BIOGRAPHICAL INFORMATION

As of December 31, 1996, the following provides information as to each
executive officer and director of the Company, including age, principal
occupation and business experience during the last five years:

THOMAS F. COOKE, CHAIRMAN, CHIEF EXECUTIVE OFFICER AND CHIEF OPERATING OFFICER,
age 47, was one of the co-founders of Saratoga Resources, Inc. in 1990. Mr.
Cooke has been a self employed independent oil and gas producer for the last 16
years. Sterling acquired Saratoga-Texas in September 1993, at which time Mr.
Cooke was elected Chairman of the Board and Chief Operating Officer of Sterling.
Mr. Cooke is an Explorer Member of the Texas Independent Producer and Royalty
Owner Association and serves as Director and Chairman of the North American
Energy Issues Committee. Mr. Cooke replaced Joseph T. Kaminski as Chief
Executive Officer on April 3, 1996.

DR. RANDALL F. DRYER, DIRECTOR, age 43, became a member of the Board of
Directors of the Company on January 22, 1994. Dr. Dryer has been in the private
medical practice of Spinal Surgery for over ten years and serves on the Medical
Advisory Board of a publicly traded company, U.S. Medical, Inc. He is actively
involved with The Texas Independent Producers and Royalty Owners Association.

KEVIN M. SMITH, DIRECTOR, age 51, has over 20 years of experience in the oil and
gas industry as an exploration geophysicist. Mr. Smith was with Amoco Production
Company for 10 years, and in 1984 formed his own geophysical consulting firm,
Kevin M. Smith, Inc. Mr. Smith is a member of the Society of Geophysicists,
American Association of Geologists, Houston Geophysical Society, and the Texas
Independent Producers and Royalty Owners Association. In July
<PAGE>
Page 32 of 36

of 1990, he joined the Company as Vice President of Exploration. Mr. Smith
continues to operate his geophysical consulting firm.

COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT. In compliance with the
provisions of Section 16(a) of the Exchange Act, the Company reports the
following delinquent filings which were completed during the past fiscal year by
directors, officers, or beneficial owners of more than ten percent (10%) of the
common stock of the Company. On September 30, 1996, Thomas F. Cooke filed a Form
4 disclosing four separate transactions which took place on July 15, 1994
involving the disposition of 17,500 shares of common stock of the Company. Two
transactions involved gifts to third parties totaling 10,000 shares. The
remaining two transactions involved the disposition by private sale to third
parties totaling 7,500 shares. On September 30, 1996, Thomas F. Cooke filed a
Form 4 disclosing a disposition of 74,667 shares which occurred on May 28, 1996.
On October 7, 1996, Randall F. Dryer, acting as General Partner for Dryer, Ltd.,
a Texas Family Partnership, filed a Form 4 disclosing two transactions which
took place on February 2, 1995 involving the acquisition of a total of 3,650
shares of common stock of the Company. On October 7, 1996, Randall F. Dryer,
acting as General Partner for Dryer, Ltd., a Texas Family Partnership, filed a
Form 4 disclosing a transaction which took place on May 15, 1996 involving the
acquisition of 74,667 shares. On October 7, 1996, Randall F. Dryer, acting as
General Partner for Dryer, Ltd., a Texas Family Partnership, filed a Form 4
disclosing a transaction which took place on December 1, 1994 involving the
acquisition of 9,000 shares.

ITEM 10. EXECUTIVE COMPENSATION.

The following Summary Compensation Table sets forth all cash compensation
paid, distributed or accrued for services, including salary and bonus amounts
rendered in all capacities for the Company during the fiscal years ended
December 31, 1996 and 1995. All other tables required to be reported have been
omitted as there has been no compensation awarded to, earned by or paid to any
of the Company's executives in any fiscal year covered by the tables.

SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
ANNUAL COMPENSATION AWARDS PAYOUTS
OTHER
NAME ANNUAL RESTRICTED ALL OTHER
AND FISCAL COMPEN- STOCK LTIP COMPEN-
PRINCIPAL YEAR SATION AWARD(S) OPTIONS/ PAYOUTS SATION
POSITION ENDED SALARY($) BONUS($) ($) ($) SARS(#) ($) ($)
- -------- ----- --------- -------- -------- ------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Kaminski,
Joseph (1)
Dec. 31 1996 $ 21,500 None None None None None None
Dec. 31(2) 1995 $107,100 None None None None None None

CEO
Cooke,
Thomas
Dec. 31 1996 $ 56,500 None None None None None None
Dec. 31 (3) 1995 $106,000 None None None None None None
</TABLE>
<PAGE>
Page 33 of 36

(1) During the second quarter of 1996 Mr. Kaminski's employment as CEO and
President was terminated and Mr. Cooke was appointed CEO.

(2) This table does not include 100,000 stock warrants nor $50,000 plus interest
in deferred compensation and expenses. Pursuant to the Settlement Agreement
dated March 10, 1997, Mr. Kaminski transferred all of his equity interests in
the Company to the Company and released the Company from his claim for deferred
compensation and expenses as set forth above.

(3) This table does not include 100,000 stock warrants at an exercisable price
of $1.60 per share, exercisable immediately and expiring May 11, 1999. These
warrants were granted in connection with the guarantee of the Company's debt to
Hunter Petroleum, Inc. and not in connection with his services as an officer.

DIRECTOR COMPENSATION

Directors of the Company currently serve without any compensation for
their services, either in the form of monetary compensation, stock or stock
options.

ITEM 11. SECURITY OWNERSHIP AND CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The following table sets forth information concerning the shares of the
Company's common stock beneficially owned by each director of the Company and
all directors and officers as a group and each holder of over five percent of
the outstanding common stock as of March 10, 1997. The mailing address for all
officers and directors is Saratoga Resources, Inc., 2000 Dairy Ashford South,
Suite 410 , Houston, Texas 77077.

NUMBER
NAME OF BENEFICIAL OWNER SHARES(1) PERCENT*

Thomas F. Cooke (1) 2,211,274 51.00%
Dryer Family Partnership (1) 920,737 21.23%
Kevin M. Smith 218,295 5.03%
-----
All executive officers and
directors as a group (3 persons) 3,350,306 77.26%

(1) Includes shares purchasable under warrants exercisable by May 11, 1999:

Thomas F. Cooke 100,000
Randall F. Dryer, M.D. 50,000
-------
Total 150,000

*As previously discussed, as a result of the Settlement Agreement dated March
10, 1997, the total number of shares of common stock of the Company issued and
outstanding has been reduced from 6,809,400 to 4,336,029 shares, and 2,473,371
shares are now held in treasury.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

Cooke, Kaminski and Dryer acted as individual guarantors of $500,000 of
the Company's debt associated with the Hunter acquisition (See Item 1.
DESCRIPTION OF BUSINESS - HISTORY, SUPRA). In consideration for the
stockholders' guarantee, the Board of Directors of the Company granted Dryer,
Kaminski and Cooke options to purchase the Company's common stock
<PAGE>
Page 34 of 36

of 50,000, 100,000, and 100,000 shares, respectively, at $1.60 per share. These
options were exercisable May 11, 1995 and expire five years thereafter. Mr.
Kaminski assigned his options (warrants) back to the Company as part of the
Settlement Agreement dated March 10, 1997 as further discussed in Item 3. LEGAL
PROCEEDINGS, SUPRA.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.

(A) EXHIBITS.

NO. EXHIBIT DESCRIPTION

(3) ARTICLES OF INCORPORATION AND BY-LAWS:

3.1 Certificate of Incorporation of Registrant, Saratoga
Resources, Inc., filed with the Office of the Secretary of the
State of Delaware on January 19, 1994. Incorporated by
reference to the Form 10-KSB filed February 3, 1995, filed as
Exhibit 3.1 thereto.

3.2 By-Laws of Registrant, Saratoga Resources, Inc., a Delaware
Corporation, adopted January 20, 1994, as amended September
14, 1996. Incorporated by reference to the Form 10-QSB filed
November 13, 1996 and filed as Exhibit 3.2 thereto.

(10) MATERIAL CONTRACTS:

10.1 Compromise and Settlement Agreement dated May 7, 1996, by and
between Saratoga Resources, Inc. a Delaware corporation,
Saratoga Resources, Inc., a Texas corporation, Lobo Operating,
Inc., a Texas corporation, LEI, Inc., a Texas corporation,
Thomas F. Cooke, Joseph T. Kaminski, Randall F. Dryer, and
Internationale Nederlanden (U.S.) Capital Corporation, filed
as Exhibit 1 to the Company's Report on 8-K dated May 7, 1996.

10.2 Purchase and Sale Agreement dated May 7, 1996, by and between
Internationale Nederlanden (U.S.) Capital Corporation and
PrimeEnergy Corporation, filed as Exhibit 2 to the Company's
Report on 8-K dated May 7, 1996.

10.3 Assignment and Bill of Sale dated May 7, 1996, by and between
Saratoga Resources, Inc., a Delaware corporation and
PrimeEnergy Corporation, filed as Exhibit 3 to the Company's
Report on 8-K dated May 7, 1996.
<PAGE>
Page 35 of 36

10.4 Settlement Agreement and Full and Final Release dated March
10, 1997, by and between Saratoga Resources, Inc., a Delaware
corporation, Thomas F. Cooke, Randall F. Dryer, Dryer, Ltd., a
Texas Family Partnership and Joseph T. Kaminski, filed as
Exhibit 1 to the Company's Report on Form 8-K dated March 12,
1997.

(21) SUBSIDIARIES

(27) FINANCIAL DATA SCHEDULE

(B) REPORTS ON FORM 8-K: None

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.

SARATOGA RESOURCES, INC.

By: /s/ Date: 3/25/97
Thomas F. Cooke, Chairman and Chief Executive Officer

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1934, AS AMENDED, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON
THE DATES INDICATED.

By: /s/ Date: 3/25/97
Thomas F. Cooke, Chairman, Chief Executive Officer
and Principal Accounting and Financial Officer
<PAGE>
Page 36 of 36

By: Date:
Randall F. Dryer, Director

By: /s/ Date: 3/25/97
Kevin M. Smith, Director

EXHIBIT 10.4

IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION

SETTLEMENT AGREEMENT
AND FULL AND FINAL RELEASE

RECITALS AND BACKGROUND

WHEREAS, there now exist disputes and litigation between Saratoga
Resources, Inc., Thomas F. Cooke, Randall F. Dryer, Dryer, Ltd., and Joseph T.
Kaminski (hereinafter referred

<PAGE>
to jointly as the "Parties" or individually as a "Party"), including, but
not limited to, all matters set out in the above-referenced cause number filed
in the United States District Court for the Southern District of Texas
(hereinafter "Federal Court Claims") and the state court proceeding pending in
Harris County, Texas, in a case styled JOSEPH T. KAMINSKI V. THOMAS F. COOKE,
RANDALL F. DRYER, SARATOGA RESOURCES, INC., AND DRYER, LTD., Cause No. 96-24469
(hereinafter "State Court Claims").

WHEREAS, on or about October 1, 1996, the Court in the State Court Claims
entered an Agreed Order where Joseph Kaminski was ordered to dismiss the
derivative action against Thomas Cooke, Randall Dryer, and Dryer, Ltd. on or
before December 6, 1996, unless a shareholder of Saratoga Resources, Inc. other
than Joseph Kaminski was allowed to appear with the Court's permission as a
proper derivative plaintiff by December 6, 1996. After notice, no other
shareholder timely appeared.

WHEREAS, on January 6, 1997, the Federal Court Claims proceeded to trial.
Following the close of all the evidence, on January 10, 1997, the Court granted
judgment as a matter of law in favor of Saratoga Resources, Inc., Thomas F.
Cooke, Randall F. Dryer, and Dryer, Ltd., as to each and every of the following
counterclaims and causes of action asserted against them by Joseph Kaminski:
breach of fiduciary duty; negligent misrepresentation; fraud; breach of
contract; violation of the securities laws of the United States; violation of
the securities laws of the State of Texas; fraud in the inducement; interference
with contract; and shareholder oppression. Further, Saratoga Resources, Inc. did
not contest as a factual matter that the company

<PAGE>
owed Joseph Kaminski $52,000.00 plus interest for back salary, but instead
claimed that the amount was offset by greater amounts owed to Saratoga
Resources, Inc. by Kaminski 90-1. The Court decided to reserve this issue, as
well as all claims for attorney's fees and interest, until after the jury
verdict. The Court then submitted the remaining claims to the jury.

WHEREAS, on January 15, 1997, a duly-empaneled jury returned its verdict in
favor of Saratoga Resources, Inc., Thomas F. Cooke, and Randall F. Dryer, and
against Kaminski. Specifically, the jury found Joseph Kaminski liable to
Saratoga Resources, Inc. for breach of fiduciary duty, breach of contract,
fraud, statutory fraud, negligent misrepresentation, Texas securities
violations, Federal securities violations. The jury awarded Saratoga Resources,
Inc. compensatory damages in the amount of $370,000.00 for the breach of
fiduciary claim, $370,000.00 for the negligent misrepresentation claim, and no
damages for the remaining claims. The jury also awarded Saratoga Resources, Inc.
punitive damages in the amount of $250,000.00 relative to the breach of
fiduciary claim. Saratoga Resources, Inc. has elected to proceed with its claims
for damages against Kaminski and not rescission. The jury also found Joseph
Kaminski liable to Thomas Cooke and Randall Dryer for fraud and negligent
misrepresentation. The jury did not award Thomas F. Cooke or Randall F. Dryer
any damages. A final judgment has not yet been entered in the case and Joseph
Kaminski has expressed an intention to appeal any final judgment.

WHEREAS, the parties are aware of the risks, uncertainties, and costs of
continued litigation and now desire to compromise and settle ALL matters in
dispute between them of whatever

3
<PAGE>
kind or character concerning the Federal Court Claims and the State Court
Claims.

II.

SETTLEMENT TERMS

The terms of the Settlement Agreement and Full and Final Release are set
out below:

1. All parties to this Settlement Agreement and Full and Final Release
(this "Agreement") have agreed that this Agreement shall neither constitute nor
be construed as an adjudication or finding on the merits of the Federal Court
Claims or State Court Claims and shall neither constitute nor be construed as an
admission by any party of liability.

2. The parties to this Agreement desire to dispose between them all claims
and causes of action that relate to the Federal Court Claims and the State Court
Claims.

3. Upon signing of this Agreement, Joseph Kaminski agrees to convey and
assign all of the stock, warrants, stock options, or other rights to purchase
any debt or equity interest, under his actual or constructive control, now or in
the future, in Saratoga Resources, Inc. or its affiliates to Saratoga Resources,
Inc. This conveyance and/or assignment applies to all such stock, warrants,
stock options, debt instruments, or other rights which Joseph Kaminski may
obtain or acquire, by whatever means, during the next three years from the date
of this Agreement; however, this conveyance and/or assignment does not affect or
apply to any stock Joseph Kaminski may obtain in Saratoga Resources, Inc. by
reason of his guarantee of the so-called "First Interstate loan." Joseph
Kaminski represents that as of the date of this Agreement such debt or equity
interest in Saratoga Resources, Inc. or its subsidiaries or affiliates is in the
aggregate

4
<PAGE>
amount of 2,465,371 shares, 100,000 warrants and no stock options, and no debt.
As part of this Agreement, Joseph Kaminski shall sign and execute the documents
attached as Exhibit A which are necessary to effectuate this conveyance and
assignment.

4. Further, upon signing of this Agreement, Joseph Kaminski, as trustee for
the Kristen Marie Kaminski and Joseph J. Kaminski Trustee, agrees to sell to
Saratoga Resources, Inc. the 8,000 shares of Saratoga Resources, Inc., for
$1,411.76. Such sale shall take place within seven days from the execution of
this Agreement. Joseph Kaminski represents to Saratoga Resources, Inc. that he
has obtained the consent of Kristen Marie Kaminski and Joseph J. Kaminski or his
legal representative to this transaction and that under Joseph Kaminski's belief
and advice from counsel this is a lawful transaction.

5. Joseph Kaminski hereby releases, acquits, and discharges Saratoga
Resources, Inc., Thomas Cooke, Randall Dryer, and Dryer, Ltd., including their
officers, directors, agents, partners, attorneys, heirs, successors,
representatives, and assigns, from any and all claims or causes of action of
every nature, whether known or unknown, existing between the parties as of the
date of this Agreement including, but not limited to, any claims asserted or
which could have been asserted in the Federal Court Claims or the State Court
Claims. However, this release does not cover any possible claims by or against
the parties to this Agreement for breach of the terms of this Agreement or to
enforce any covenant in this Agreement.

6. Saratoga Resources, Inc., Thomas Cooke, Randall Dryer, and Dryer, Ltd.
hereby release, acquit and discharge Joseph Kaminski, including his agents,
attorneys, heirs, successors,

5
<PAGE>
representatives, and assigns, from any and all claims or causes of action of
every nature, whether known or unknown, existing between the parties as of the
date of this Agreement including, but not limited to, any claims asserted or
which could have been asserted in the Federal Court Claims or the State Court
Claims. However, this release does not cover any possible claims by or against
the parties to this Agreement for breach of the terms of this Agreement or to
enforce any covenant in this Agreement.

7. Joseph Kaminski hereby grants, sells, conveys and assigns to Saratoga
Resources, Inc. all right, title, and interest to any property or assets
(including, without limitation, all cash on hand and in banks; U.S. Governments
securities; accounts, loans, and notes receivables; cash or surrender value in
any life insurance; other stocks or bonds; real estate; and automobiles) owned
by Joseph Kaminski, directly or beneficially, or in the name of Joseph Kaminski,
which are not reflected on Joseph Kaminski's sworn financial statement dated
February 5, 1997, with the attached addendum, which is attached to this
Agreement as Exhibit B. The effective date of this conveyance is February 5,
1997. Joseph Kaminski claims that there are no such assets, and Saratoga
suspects that there are such assets. Within seven days after the final execution
of this Agreement, Saratoga Resources, Inc. will disclose in writing those
assets of Kaminski, if any, that it believes were conveyed and/or assigned by
Joseph Kaminski pursuant to this paragraph 7. Thereafter, either Kaminski or
Saratoga Resources, Inc. may within fourteen days from the final execution of
this Agreement notify the other party that it wishes and by this Agreement
Kaminski and Saratoga Resources, Inc. agree to arbitrate any claims or disputes
arising out of the title or

6
<PAGE>
interest to any property or asset that has been conveyed and/or assigned by
Joseph Kaminski to Saratoga Resources, Inc. under this paragraph 7. Kaminski and
Saratoga Resources, Inc. agree that the case will be arbitrated by Michael S.
Wilk who will convene such arbitration within fourteen days after such notice.
Any arbitration will be limited to a one day hearing. The arbitrator shall award
the fee and expenses of the arbitrator to the prevailing party. This arbitration
shall be governed by the General Arbitration Act of Texas, Chapter 171 of the
Texas Civil Practice and Remedies Code. Any assets not specifically identified
or disclosed upon completion of the arbitration hearing shall be forever
excluded from the conveyance and/or assignment under this paragraph 7.

8. In consideration of the terms of this Agreement, the parties to this
Agreement agree to file motions to dismiss with prejudice all Federal Court
Claims and the State Court Claims. In particular, but without limitation, Joseph
Kaminski agrees to dismiss the derivative claims against Thomas Cooke, Randall
Dryer, and Dryer, Ltd.. The parties to this Agreement agree to execute at the
signing of this Agreement the agreed motions to dismiss as reflected in Exhibits
C and D.

9. Joseph Kaminski acknowledges that by the terms of this Agreement
Saratoga Resources, Inc. has not rescinded any term of the agreements dated
September 30, 1993, including the Joint Venture Agreement, the Assignment of
License for Exploration Use of Seismic Data Agreement, the Seismic Data Purchase
and Loan Retirement Agreement, and the Stock Rights Agreement, and that whatever
rights Joseph Kaminski had to the Seismic Data or contract or other

7
<PAGE>
rights related to these referenced agreements have been conveyed to Saratoga
Resources, Inc. Joseph Kaminski acknowledges that Saratoga Resources, Inc. has
the sole and exclusive right to deal with whatever rights related to the Seismic
Data. Further, Saratoga Resources, Inc., Thomas Cooke, Joseph Kaminski, Randall
Dryer, and Dryer, Ltd. terminate and extinguish any rights or claims for
indemnity, if any, between themselves arising out of the agreements dated
September 30, 1993, including the Joint Venture Agreement, the Assignment of
License for Exploration Use of Seismic Data Agreement, the Seismic Data Purchase
and Loan Retirement Agreement, and the Stock Rights Agreement.

10. Joseph Kaminski acknowledges by signing this Agreement that the
consideration for this Agreement is adequate and all that Joseph Kaminski is
ever entitled to receive. Joseph Kaminski agrees that he will not request any
additional consideration from Saratoga Resources, Inc. or its subsidiaries or
affiliates or successors, or Thomas Cooke, Randall Dryer, and/or Dryer, Ltd. in
the future. Joseph Kaminski understands that Saratoga Resources, Inc. intends to
consummate an acquisition, enter into a merger or consolidation or otherwise
enter into a similar material transaction as soon as practicable (all of the
foregoing collectively "a Fundamental Corporate Transaction"). Although Saratoga
Resources, Inc. has been exploring a variety of Fundamental Corporate
Transactions, Saratoga Resources, Inc. has not entered into any definitive
agreement, letter of intent or otherwise entered into any formal or informal
commitment to pursue any particular Fundamental Corporate Transaction, but
intends to do so as soon as practicable. At such time as any Fundamental
Corporate Transaction is effected, it is likely that the value of

8
<PAGE>
Saratoga Resources, Inc.'s stock would be effected and that such effect may be
material. Kaminski will not be entitled to participate in any such material
change in value, if any, resulting from such Fundamental Corporate Transaction
by reason of entering into this Agreement and consummation of the transactions
set forth in this Agreement.

11. The parties to this Agreement do hereby represent and warrant that:

a. they thoroughly understand this Agreement as a complete Settlement
Agreement and Full and Final Release;

b. they are entering into this Agreement freely and voluntarily, after
receiving the advice of their respective attorneys; and

c. this Agreement constitutes the only agreement between the parties.

12. If any term or provision of this Agreement is held by a court of
competent jurisdiction to be invalid, void, or unenforceable, the remainder of
the provisions of this Agreement shall remain in full force and effect and shall
in no way be affected, impaired, or invalidated.

13. The parties further agree to execute any and all documents necessary to
effectuate the terms of this Agreement.

9
<PAGE>
Executed this 10th day of March, 1997.

/s/
Robert Ketchand
Short & Ketchand, L.L.P.

ATTORNEY-IN-CHARGE FOR SARATOGA RESOURCES, INC.

/s/
Michael Burnett
Minton, Burton, Foster & Collins, P.C.

ATTORNEY-IN-CHARGE FOR THOMAS F. COOKE,
RANDALL F. DRYER, AND DRYER, LTD.

/s/
Thomas Sankey
Sankey & Luck, L.L.P.

ATTORNEY-IN-CHARGE FOR JOSEPH KAMINSKI

10
<PAGE>
/s/
Thomas F. Cooke

Before me, the undersigned Notary Public, on this day personally
appeared Thomas F. Cooke, who, after being duly sworn, stated under oath that:
I, Thomas F. Cooke, executed the foregoing Agreement for the purposes and
consideration expressed in the Agreement. I have read the entire Agreement and
thoroughly understand its contents. I have personal knowledge of the facts set
forth in the Agreement and they are true and correct.

SUBSCRIBED AND SWORN TO BEFORE ME on the 5th day of March, 1997.

/s/ JANICE TEAS
Notary Public in and for
the State of Texas
My commission expires 6/20/99

11
<PAGE>
/s/
Kevin Smith, as a duly authorized
representative of Saratoga
Resources, Inc.

Before me, the undersigned Notary Public, on this day personally
appeared Kevin Smith, who, after being duly sworn, stated under oath that: I,
Kevin Smith, executed the foregoing Agreement on behalf of Saratoga Resources,
Inc. for the purposes and consideration expressed in the Agreement. I have read
the entire Agreement and thoroughly understand its contents. I have personal
knowledge of the facts set forth in the Agreement and they are true and correct.

SUBSCRIBED AND SWORN TO BEFORE ME on the 6 day of March, 1997.

/s/ DEBBIE RAMBIN
Notary Public in and for
the State of Texas
My commission expires 7/9/98

12
<PAGE>
/s/
Joseph T. Kaminski, individually
and as trustee for the Kristen
Marie Kaminski and Joseph J.
Kaminski Trust.

Before me, the undersigned Notary Public, on this day personally
appeared Joseph T. Kaminski, who, after being duly sworn, stated under oath
that: I, Joseph T. Kaminski, executed the foregoing Agreement for the purposes
and consideration expressed in the Agreement. I have read the entire Agreement
and thoroughly understand its contents. I have personal knowledge of the facts
set forth in the Agreement and they are true and correct.

SUBSCRIBED AND SWORN TO BEFORE ME on the 7th day of March, 1997.

/s/ MARY E. RUIZ
Notary Public in and for
the State of Texas
My commission expires 8/13/98

13
<PAGE>
/s/
Randall F. Dryer, as a duly authorized
representative of Dryer, Ltd. and in his
individual capacity

Before me, the undersigned Notary Public, on this day personally
appeared Randall F. Dryer, who, after being duly sworn, stated under oath that:
I, Randall F. Dryer, executed the foregoing Agreement, individually and on
behalf of Dryer, Ltd., for the purposes and consideration expressed in the
Agreement. I have read the entire Agreement and thoroughly understand its
contents. I have personal knowledge of the facts set forth in the Agreement and
they are true and correct.

SUBSCRIBED AND SWORN TO BEFORE ME on the 5th day of March, 1997.

/s/ JANICE TEAS
Notary Public in and for
the State of Texas
My commission expires 6/20/99

14
<PAGE>
EXHIBIT A

STOCK TRANSFER AGREEMENT

This Stock Transfer Agreement dated effective as of March 6 1997, by and
between Saratoga Resources, Inc., a Delaware corporation (the "Company"), and
Joseph T. Kaminski ("Kaminski").

WITNESSETH

WHEREAS, the Company, Kaminski and certain other parties have entered
into a Settlement Agreement and Full and Final Release as of March 6, 1997 (the
"Settlement Agreement") pursuant to which Kaminski has agreed to convey and
assign to the Company his entire equity and debt interest in the Company; and

WHEREAS, the parties hereto desire to set forth their understanding and
representations in order to effect that transfer;

NOW THEREFORE, in consideration of the foregoing and of the terms and
conditions herein contained, the Company and Kaminski hereby agree as follows:

1. OWNERSHIP OF STOCK. Kaminski hereby represents and warrants that he
is the legal record and beneficial owner of 2,465,371 shares of Company common
stock, and warrants to purchase 100,000 shares of Company common stock, that
being all of the debt or equity interest owned or controlled, beneficially or of
record, by Kaminski, in the Company or any of its subsidiaries or affiliates
(hereinafter collectively referred to as the "Stock"). Kaminski represents and
warrants that he owns the Stock free and clear of all liens, claims or
encumbrances, and that he has full right, power and authority to transfer the
Stock hereunder and to make the representations, warranties and agreements
regarding the Stock contained herein.

2. TRANSFER OF STOCK. Kaminski hereby assigns, transfers and conveys to
the Company, and the Company accepts from Kaminski, all right, title and
interest in and to the Stock. Kaminski contemporaneously herewith shall
surrender all certificates or other evidences of the Stock, duly endorsed for
transfer, and execute such stock powers or other instrument of transfer as may
be deemed necessary or advisable by the Company fully and effectively to
transfer the Stock to the Company under the terms and conditions hereof. This
transfer of Stock applies to any and all Stock or other securities in the
Company which Kaminski may acquire by whatever means during the next three years
from the execution of this agreement.

3. PAYMENT. The Company accepts the transfer of the Stock as partial
payment of the obligations of Kaminski to the Company as set forth in the
Settlement Agreement.

1
<PAGE>
4. ACCESS TO DOCUMENTS. Kaminski acknowledges and agrees that he has
been furnished a copy of and has thoroughly and carefully reviewed the following
documents with respect to the Company and its actual and proposed business and
affairs (such documents being collectively referred to as the "Company
documents"):

(a) Forms 10-K of the Company for the fiscal years ended October 31,
1994 and 1995, and any other 10-Ks, filed with the Securities and Exchange
Commission "SEC') under the Securities Exchange Act of 1934, as amended
(the "Exchange Act");

(b) Forms 10-Q of the Company for the fiscal quarters ended January
31, April 30, July 31, and September 30 1996;

(c) All Forms 8-K of the Company filed by it reporting certain
significant events in any of fiscal years 1994 through 1996, and since the
last fiscal year end to the date hereof; and

(d) any other filings of the Company with the SEC in the last three
years.

5. REPRESENTATIONS AND WARRANTIES. Kaminski hereby acknowledges, represents
and warrants to, and agrees with the Company as follows:

(a) He understands the information contained in the Company documents
and has had access to the same kind of information which would be available
in a registration statement filed by the Company under the Securities Act
of 1933, as amended (the "Securities Act"), and all other information
requested by him in order to make an informed decision with respect to the
transfer of the Stock to the Company;

(b) all documents, records and books pertaining to the transfer,
assignment and conveyance of the Stock hereby have been produced and made
available to his satisfaction for inspection by him, his attorney,
accountant or other representative advising him in this transaction
(hereinafter his "advisors");

(c) he and his advisors have had a reasonable opportunity to ask
questions of and receive answers from representatives of the Company
concerning the business and prospects of the Company, the Stock and the
transfer effected hereby, and all such questions have been answered to the
full satisfaction of Kaminski;

(d) no oral or written representations have been made other than as
stated in this Agreement, and no oral or written information furnished to
Kaminski or his advisors in connection with the transfer of the Stock
hereunder were in any way inconsistent with the information stated in this
Agreement or the Company documents;

(e) he has, or together with his advisors they have, such knowledge
and

2
<PAGE>
experience in financial, tax and business matters so as to enable Kaminski
to utilize the information made available to him in connection with the
transfer of the Stock hereby, to evaluate the merits and risks of a
disposition of the Stock and to make an informed decision with respect
thereto;

(f) he is not relying on the Company with respect to the tax and other
economic considerations of the transfer of the Stock, and Kaminski has
relied on the advice of and consulted with his own advisors with respect
thereto;

(g) the representations, warranties and agreements of Kaminski
contained herein shall survive the execution and delivery of this Agreement
and the Settlement Agreement, and the transfer of the Stock;

(h) the Company is relying on these representations and warranties of
Kaminski in its decision to enter into the Settlement Agreement and to
accept transfer of the Stock from Kaminski hereby, and that the Company
would not accept the transfer of the Stock from Kaminski but for the
representations and warranties of Kaminski made herein.

6. AUTHORITY. Kaminski represents and warrants that he has full right,
power and authority to convey, assign and transfer the Stock pursuant to the
terms of this Agreement, and that any execution of this Agreement by his wife,
if any, conveys the only other potential claim of ownership or control of the
Stock by any other party. The parties executing this Agreement on behalf of the
Company have full power and authority to bind the Company to this Agreement.

7. INDEMNIFICATION. Kaminski agrees to indemnify and hold harmless the
Company and its officers, directors, employees, agents, affiliates and counsel
against any and all loss, liability, claim, damage and expense whatsoever
(including, but not limited to, any and all expenses reasonably incurred in
investigating, preparing, or defending against any litigation commenced or
threatened or any claim whatsoever) arising out of or based upon any false
representation or warranty or breach or failure by Kaminski to comply with any
covenant or agreement made by him herein, in the Settlement Agreement or in any
other document furnished by him to the Company.

8. NON-WAIVER. Failure on the part of a party in any one or more instance
to enforce any of its rights which arise in connection with this Agreement, or
to insist upon the strict performance of any of the terms, conditions or
covenants of this Agreement, shall not be construed as a waiver or
relinquishment for the future of any such rights, terms, conditions or
covenants. No waiver of any condition of this Agreement shall be valid unless it
is in writing, and executed by the party against whom such waiver is sought to
be enforced.

9. NOTICES. All notices, requests, deliveries, payments, demands and other
communications which are required or permitted to be given under this Agreement
shall be in writing and shall be either delivered personally or sent by
registered or certified mail, return

3
<PAGE>
receipt requested, postage prepaid, to the parties at their respective addresses
as shall have been specified by notice in writing to the other.

10. SEVERABILITY. If any provision of this Agreement shall for any reason
be held to violate applicable law, and so much of said Agreement is held
unenforceable, then the invalidity of such specific provisions herein shall not
be held to invalidate any other provision of this Agreement, which shall remain
in full force and effect.

11. ENTIRE AGREEMENT. This Agreement, together with the Settlement
Agreement and other documents contemplated hereby and thereby, collectively set
forth the entire agreement among the parties with respect to the subject matter
hereof.

12. MODIFICATION. Neither this Agreement nor any provisions hereof shall be
waived, modified, discharged or terminated except by an instrument in writing
signed by the party against whom any such waiver, modification, discharge or
termination is sought.

13. ASSIGNMENT. Neither party shall have the right to transfer or assign,
in whole or in part, its rights and obligations hereunder without the prior
written consent of the other party.

14. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas.

15. HEADINGS. Headings in this Agreement are for convenience only and shall
not affect the interpretation of this Agreement.

16. COUNTERPARTS. This Agreement may be executed in multiple counterparts,
each of which shall have the force and effect of an original, and all of which
shall constituted one and the same agreement.

17. SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of
and be binding upon the parties and their respective successors and assigns, but
this provision shall in no way alter the restrictions set forth herein relating
to assignment by the parties.

IN WITNESS WHEREOF, the parties hereto have signed this Agreement as of the
day and year first above written.

SARATOGA RESOURCES, INC.

By: /s/
Kevin Smith, Director

/s/
Joseph T. Kaminski

<PAGE>
EXHIBIT C

IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION

AGREED MOTION TO DISMISS WITH PREJUDICE

The parties to the above-numbered cause respectfully request that this
Court dismiss this action in its entirety with prejudice against all parties.
Each party shall be responsible for their own costs and attorney's fees.

WHEREFORE, the parties request that this Court grant their Agreed Motion to
Dismiss
<PAGE>
with Prejudice.
Respectfully submitted,

SANKEY & LUCK, L.L.P.
6500 Texas Commerce Tower
600 Travis
Houston, Texas 77002
(713) 224-1007
(713) 228-3919

/s/ THOMAS W. SANKEY
Thomas W. Sankey
State Bar No. 17635670
ATTORNEY-IN-CHARGE FOR KAMINSKI

SHORT & KETCHAND, L.L.P.
11 Greenway Plaza, Suite 1520
Houston, Texas 77046
(713) 960-1996
(713) 960-1517

/s/ ROBERT L. KETCHAND
Robert L. Ketchand
State Bar No. 11362500
ATTORNEY-IN-CHARGE FOR
SARATOGA RESOURCES, INC.

MINTON, BURTON, FOSTER & COLLINS
A Professional Corporation
1100 Guadalupe
Austin, Texas 78701
(512)476-4873
(512)479-9315(FAX)

/s/ MICHAEL BURNETT
Michael Burnett
State Bar No. 00790399
ATTORNEY-IN-CHARGE FOR COOKE,
DRYER & DRYER, LTD.
<PAGE>
EXHIBIT D

CAUSE NO. 96-24469

AGREED MOTION TO DISMISS WITH PREJUDICE

WHEREFORE, the parties request that this Court grant their Agreed Motion to
Dismiss with Prejudice.
Respectfully submitted,

SANKEY & LUCK, L.L.P.
6500 Texas Commerce Tower
600 Travis
Houston, Texas 77002
(713) 224-1007
(713) 228-3919

/s/ THOMAS W. SANKEY
Thomas W. Sankey
State Bar No. 17635670
ATTORNEY-IN-CHARGE FOR KAMINSKI

SHORT & KETCHAND, L.L.P.
11 Greenway Plaza, Suite 1520
Houston, Texas 77046
(713) 960-1996
(713) 960-1517

/s/ ROBERT L. KETCHAND
Robert L. Ketchand
State Bar No. 11362500
ATTORNEY-IN-CHARGE FOR
SARATOGA RESOURCES, INC.

MINTON, BURTON, FOSTER & COLLINS
A Professional Corporation
1100 Guadalupe
Austin, Texas 78701
(512)476-4873
(512)479-8315(FAX)

/s/ MICHAEL BURNETT
Michael Burnett
State Bar No. 00790399
ATTORNEY-IN-CHARGE FOR COOKE,
DRYER & DRYER, LTD.

EXHIBIT 21

SUBSIDIARIES

1. Saratoga Resources, Inc., a Texas corporation.

2. Lobo Operating, Inc., a Texas corporation.

3. Lobo Energy, Inc., a Texas corporation.

<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE FINANCIAL STATEMENTS IN THE 10-KSB AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>

<S> <C>
<MULTIPLIER> 1,000
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,350
<SECURITIES> 0
<RECEIVABLES> 75
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,425
<PP&E> 22
<DEPRECIATION> (2)
<TOTAL-ASSETS> 1,445
<CURRENT-LIABILITIES> 237
<BONDS> 0
0
0
<COMMON> 2,914
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 1,445
<SALES> 0
<TOTAL-REVENUES> 705
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,750
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 424
<INCOME-PRETAX> (1,469)
<INCOME-TAX> 25
<INCOME-CONTINUING> (1,444)
<DISCONTINUED> 0
<EXTRAORDINARY> 12,066
<CHANGES> 0
<NET-INCOME> 10,622
<EPS-PRIMARY> 1.57
<EPS-DILUTED> 1.57

</TABLE>