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, 1997
[ ] 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.)
301 Congress Avenue, Suite 1550
Austin, Texas 78701
(Address of principal executive offices) (Zip Code)
Issuer's Telephone number (512) 478-5717
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 report is), and (2)
his 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 M of this form
10-KSB or any amendment to this Form 10-KSB. [X]
The Registrant's revenues for the calendar year ended December 31, 1997
were $35,000.
As of March 26, 1998, the aggregate market value of the voting stock of
the registrant held by non-affiliates was $172,250.
As of December 31, 1997 there were 3,465,292 shares of common stock
outstanding.
Transitional Small Business Disclosure Format (check one). Yes No. X
DOCUMENTS INCORPORATED BY REFERENCE - None
<PAGE>
TABLE OF CONTENTS
PART I.........................................................................1
Item 1. Description of Business..........................................1
Item 2. Description of Property..........................................5
Item 3. Legal Proceedings................................................6
Item 4. Submission of Matter to a Vote of Security Holders...............7
PART II........................................................................7
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters...........................................7
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations.........................................8
Item 7. Financial Statements and Supplementary Data......................9
Item 8. Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure.....................................19
PART III......................................................................20
Item 9. Directors, Executive Officers, Promoters and Control Persons....20
Item 10. Executive Compensation.........................................21
Item 11. Security Ownership and Certain Beneficial Owners and
Management..................................................22
Item 12. Certain Relationships and Related Transactions.................23
Item 13. Exhibits and Reports on Form 8-K...............................23
SIGNATURES....................................................................25
<PAGE>
PART I
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 a result of the "Agreement" discussed below under
"RECENT DEVELOPMENTS," the Company as of December 31, 1997, had no material
assets other than $666,000 in cash and $44,000 in equipment.
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.
1
<PAGE>
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, 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.
2
<PAGE>
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 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 an 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
operation 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, include 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) made it
difficult to pursue any of the proposals until resolution 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 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.
3
<PAGE>
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 acquisition of Saratoga Resources, Inc., a Texas
corporation ("Saratoga-Texas"). Through transaction, the then existing five
stockholders of Saratoga-Texas, exchanged 100% of Saratoga-Texas 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 "Hunter Agreement") with Hunter Petroleum, Inc. ("Hunter") pursuant to
which the Company 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.
4
<PAGE>
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, and has no material liabilities.
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.
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) 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 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.
EMPLOYEES
At December 31, 1997, the Company employed two full time employees
consisting of one executive officer (the Chief Executive Officer) and an office
manager.
ITEM 2. DESCRIPTION OF PROPERTY .
At December 31, 1997, the Company's assets consisted of $666,000 in cash
and $44,000 of equipment. The Company leases office space in Houston, Texas from
Kevin M. Smith, a director of the Company, on a month-to-month basis for no
charge. Additionally, the Company maintains an office in Austin, Texas on a
month-to-month basis at a current rate of $2,175 per month.
5
<PAGE>
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 "ITEM 1. DESCRIPTION OF BUSINESS--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), (vii) Form 8-K (filed March
14, 1997), (viii) Form 10-KSB (filed March 26, 1997, and (ix) Form 10-QSB (filed
May 14, 1997).
On January 6, 1997, the "Company Federal Lawsuit" proceeded to trial,
whereupon the Company, Cooke, Dryer and Dryer, Ltd. received a 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, consisting of 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) Kaminski forgave debt owed him by
the Company in an amount equal to $50,000 plus accrued interest, (iv) the
Company, Cooke, Dryer and Dryer, Ltd. released Kaminski from any and all claims
and causes of action, and (v) the Company, Cooke, Dryer, Dryer, Ltd. and
Kaminski filed motions to dismiss with prejudice the "Company Federal Lawsuit"
and the "Kaminski Lawsuit".
6
<PAGE>
Accordingly, all claims and counterclaims by and against the Company and
its two directors (Cooke and Dryer) have been dismissed, and there is no other
pending litigation against the Company or its directors.
Additionally, and as a result of the Settlement Agreement, the total
number of shares of common stock of the Company issued and outstanding was
reduced as of March 10, 1997 from 6,809,400 to 4,336,029 with 2,473,371 shares
then being held in treasury. (See "ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS.")
ITEM 4. SUBMISSION OF MATTER 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, 1997.
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, 1996
First Quarter $0.750 $0.125
Second Quarter 0.625 0.125
Third Quarter 0.500 0.063
Fourth Quarter 0.375 0.063
YEAR ENDED DECEMBER 31, 1997
First Quarter 0.281 0.094
Second Quarter 0.219 0.094
Third Quarter 0.219 0.094
Fourth Quarter 1.125 0.063
7
<PAGE>
As of December 31, 1997, 3,465,292 shares of the Company's common stock
were issued and outstanding and held by 1,374 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 was
reduced as of March 10, 1997 from 6,809,400 to 4,336,029, with 2,473,371 then
being held in treasury. Effective May 17, 1997, the Company purchased 870,737
shares of common stock and warrants to purchase 50,000 shares of common stock
from Dr. Randall F. Dryer, a former Director of the Company, for a total
purchase price of $175,000. As a result of such stock purchase, the total number
of shares issued and outstanding is 3,465,292, with 3,344,108 shares 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 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 .
The Company is not currently conducting any oil and gas operations. The
Board of Directors of the Company is, however, in the process of re-evaluating
its business plan going forward. See "ITEM 1. DESCRIPTION OF BUSINESS--RECENT
DEVELOPMENTS," SUPRA).
RESULTS OF OPERATIONS
REVENUES. As a result of the Foreclosure Sale of the Interests, the
Company had no revenues from oil and gas operations in 1997. Revenues for
fiscal 1997 were $35,000 as compared to $705,000 for fiscal 1996.
COSTS AND EXPENSES. Cost and expenses were significantly reduced in 1997.
Costs and expenses for fiscal 1997 totaled $462,000 as compared to $2,174,000 in
costs and expenses for fiscal 1996.
NET INCOME. Net income saw a significant decrease in 1997. The Company had
a net loss of ($118,000) in 1997, as compared to net income of $10,622,000 in
1996. A substantial portion of 1996 net income resulted from the Foreclosure
Sale and the forgiveness of debt by ING. Net loss per share for fiscal 1997 was
($0.03) per share as compared to net income of $1.57 per share for fiscal 1996.
8
<PAGE>
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 "ITEM 7. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA--NOTE 10," INFRA).
LIQUIDITY AND CAPITAL RESOURCES
The Company's assets at December 31, 1997 consist almost entirely of cash
in the amount of $666,000. The Company believes that its current cash balance
will be sufficient to conduct its business for the foreseeable future.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA .
INDEX TO FINANCIAL STATEMENTS
PAGE
Independent Auditor's Report - .........................................10
Consolidated Balance Sheets - December 31, 1996 and 1997................11
Consolidated Statements of Operations
-For the years ended December 31, 1996 and 1997.....................12
Consolidated Statements of Changes in Stockholders' Equity (Deficit)....13
-For the years ended December 31, 1996 and 1997
Consolidated Statements of Cash Flows
-For the years ended December 31, 1996 and 1997.....................14
Notes to Consolidated Financial Statements..............................15
9
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Stockholders
Saratoga Resources, Inc.
Houston, Texas
We have audited the accompanying consolidated balance sheets of Saratoga
Resources, Inc. and Subsidiaries as of December 31, 1996 and 1997 and the
related consolidated statements of operations, changes in stockholders' equity
(deficit), and cash flows for the years then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based 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 1997, and the results of their
operations and their cash flows for years then ended, in conformity with
generally accepted accounting principles.
Hein + Associates LLP
Certified Public Accountants
/s/ Hein + Associates LLP
Houston, Texas
January 15, 1998
10
<PAGE>
<PAGE>
SARATOGA RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1997
------- -------
<S> <C> <C>
ASSETS
Current Assets:
Cash .......................................................... $ 1,350 $ 666
Trade receivables; less allowance for doubtful
accounts of $23,000 at December 31, 1997 ................... 50 --
Other receivables ............................................. 25 --
------- -------
Total current assets .......................................... 1,425 666
------- -------
Equipment, net of accumulated depreciation .................... 20 44
------- -------
Total Assets .................................................... $ 1,445 $ 710
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities ...................... $ 218 $ 2
Legal suspense ................................................ 19 16
Current maturities of debt .................................... -- 4
------- -------
Total current liabilities ..................................... 237 22
------- -------
Long-term debt, net of current portion .......................... -- 21
Commitments and Contingencies (Notes 4 and 6) ................... -- --
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 and 3,465,292 shares, respectively, issued
and outstanding ........................................ 7 3
Additional paid-in capital .................................. 2,909 2,490
Accumulated deficit ......................................... (1,706) (1,824)
Treasury stock, at cost ..................................... (2) (2)
------- -------
Total stockholders' equity ...................................... 1,208 667
------- -------
Total Liabilities and Stockholders' Equity ...................... $ 1,445 $ 710
======= =======
</TABLE>
See Notes to Consolidated Financial Statements
11
<PAGE>
SARATOGA RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31,1996 DECEMBER 31, 1997
--------------- ---------------
Revenues:
<S> <C> <C>
Oil and gas .................................................................. $ 684 $ --
Other ........................................................................ 21 35
--------------- ---------------
705 35
Costs and expenses:
Production ................................................................... 236 --
Severance tax ................................................................ 43 --
Depletion, depreciation, amortization
and provision for impairment ............................................... 362 7
General and administrative ................................................... 1,109 446
Interest expense ............................................................. 424 9
--------------- ---------------
2,174 462
--------------- ---------------
Gain arising from settlement of lawsuit .................................................. -- 309
--------------- ---------------
Loss before income taxes and
extraordinary item .................................................................... (1,469) (118)
Income tax benefit ....................................................................... 25 --
--------------- ---------------
Loss before extraordinary item ........................................................... (1,444) (118)
Extraordinary item - gain arising from
forgiveness of debt ..................................................................... 12,066 --
--------------- ---------------
Net income (loss) ........................................................................ $ 10,622 $ (118)
=============== ===============
Basic and diluted earnings per share:
Loss before extraordinary item ...................................................... $ (.21) $ (.03)
=============== ===============
Extraordinary item ................................................................... $ 1.78 $ --
=============== ===============
Net income (loss) .................................................................... $ 1.57 $ (.03)
=============== ===============
Weighted average number of common
shares outstanding ................................................................. 6,782 4,260
=============== ===============
</TABLE>
See Notes to Consolidated Financial Statements
12
<PAGE>
SARATOGA RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
---------------------- PAID-IN ACCUMULATED TREASURY TOTAL STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT STOCK EQUITY (DEFICIT)
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, JANUARY 1, 1996 ............... 6,699 $ 7 $ 2,909 $(12,328) $ (2) $ (9,414)
COMMON STOCK ISSUED IN LIEU OF
COMPENSATION .......................... 110 -- -- -- -- --
NET INCOME ............................. -- -- -- 10,622 -- 10,622
-------- -------- -------- -------- -------- --------
BALANCES, DECEMBER 31, 1996 .............. 6,809 7 2,909 (1,706) (2) 1,208
ACQUISITION OF STOCK ARISING FROM
SETTLEMENT OF LAWSUIT ................ (2,465) (3) (244) -- -- (247)
PURCHASE OF STOCK ARISING FROM
SETTLEMENT OF LAWSUIT ................ (8) -- (1) -- -- (1)
PURCHASE OF STOCK FROM FORMER DIRECTOR .. (871) (1) (174) -- -- (175)
NET LOSS ................................. -- -- -- (118) -- (118)
-------- -------- -------- -------- -------- --------
BALANCES, DECEMBER 31, 1997 .............. 3,465 $ 3 $ 2,490 $ (1,824) $ (2) $ 667
======== ======== ======== ======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements
13
<PAGE>
SARATOGA RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1997
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) ....................................................... $ 10,622 $ (118)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depletion, depreciation, amortization and provision ................ 362 7
for impairment
Provision for doubtful accounts .................................... -- 23
Amortization of debt discount ...................................... 24 --
Write off of organization costs .................................... 236 --
Gain arising from forgiveness of debt ............................. (12,066) --
Gain arising from settlement of lawsuit ........................... -- (309)
Changes in operating assets and liabilities:
Receivables .................................................. 971 52
Prepaids ..................................................... 104 --
Other assets ................................................. 15 --
Trade payables ............................................... (92) (154)
Legal suspense ............................................... -- (3)
-------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES .................... 176 (502)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions ........................................ (37) (5)
Net proceeds from sale of assets ........................................ 686 --
-------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES ..................... 649 (5)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of stock from former director .................................. -- (175)
Purchase of stock in settlement of lawsuit .............................. -- (1)
Payments on borrowings .................................................. (79) (1)
-------- --------
NET CASH USED IN FINANCING ACTIVITIES ................................... (79) (177)
-------- --------
NET (DECREASE) INCREASE IN CASH ......................................... 746 (684)
CASH AT BEGINNING OF YEAR ............................................... 604 1,350
-------- --------
CASH AT END OF YEAR ..................................................... $ 1,350 $ 666
======== ========
Supplemental Cash Flow information:
Cash paid for interest ............................................. -- 9
Equipment acquired with long-term debt ............................. -- 26
</TABLE>
See Notes to Consolidated Financial Statements
14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Saratoga Resources, Inc., a Delaware corporation, (the "Company",
"Saratoga", or the "Registrant") has been engaged in oil and gas exploration and
development of properties located in far southwest and east Texas and in
Louisiana.
In 1996, the Company sold substantially all of its oil and gas
interests to a third party for cash pursuant to a foreclosure sale more fully
discussed in Note 8. During 1997, on behalf of the seller, the Company
participated in a bidding process to acquire certain federal oil and gas mineral
leases. The bid was not accepted and the Company was reimbursed $400,000 by a
federal court for expenses incurred which amount has been recorded as a
reduction of general and administrative expenses during 1997.
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.
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.
EQUIPMENT: Equipment is recorded at cost. Depreciation of equipment
is generally provided on the straight-line basis over the estimated useful lives
of the assets as follows:
Office equipment 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.
INCOME TAXES: The Company accounts for income taxes on the liability
method. The liability method requires an asset and liability approach in the
recognition of deferred tax liabilities and assets for the expected future tax
consequences of temporary differences between the carrying amounts and the tax
bases of the Company's assets and liabilities
OIL AND GAS REVENUES: The Company recognized oil and gas revenues as
the sales occurred. The Company currently has no oil and gas production.
15
<PAGE>
EARNINGS PER SHARE: Basic and diluted earnings (loss) per share was
computed by dividing net income (loss) by the weighted average common shares
outstanding as of December 31, 1996 and 1997. Options to purchase shares of
common stock were outstanding during 1996 and 1997 but were not included in the
computation of diluted earnings (loss) per share because the option price was
greater than the average market price of the common stock.
RECENT PRONOUNCEMENTS
New accounting pronouncements - The Financial Accounting Standards
Board (FASB) issued SFAS No. 121 entitled IMPAIRMENT OF LONG-LIVED ASSETS. SFAS
No. 121, which became effective beginning February 1, 1996, provides that in the
event that facts and circumstances indicate that the cost of operating assets or
other assets may be impaired, and evaluation of recoverability would be
performed. If an evaluation is required, the estimated future undiscounted cash
flows associated with the asset would be compared to the carrying amount of the
asset to determine if a writedown to market value or discounted cash flow is
required. SFAS No. 121 did not have a material impact on its operating results
or financial condition of the Company upon implementation.
The FASB also issued SFAS No. 123, ACCOUNTING FOR STOCK BASED
COMPENSATION, effective for fiscal years beginning after December 15, 1995. This
statement allows companies to choose to adopt the statement's new rules for
accounting for employee stock-based compensation plans. For those companies
which choose not to adopt the new rules, the statement requires disclosures as
to what earnings per share would have been if the new rules had been adopted.
Management adopted the disclosure requirements of this statement during fiscal
1997.
The FASB also issued SFAS No. 128, entitled EARNINGS PER SHARE,
during February 1997. The new statement, which is effective for financial
statements issued after December 31, 1997, including interim periods,
establishes standards for computing and presenting earnings per share. The new
statement requires retroactive restatement of all prior-period earnings per
share data presented. The management adopted the disclosure requirements of this
statement for 1996 and 1997.
The FASB also issued SFAS No. 130, REPORTING COMPREHENSIVE INCOME
and SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION. SFAS No. 130 establishes standards for reporting and display of
comprehensive income, its components and accumulated balances. Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. No. 131 supersedes SFAS No.
14, FINANCIAL REPORTING FOR SEGMENTS OF A BUSINESS ENTERPRISE. SFAS No. 131
establishes standards on the way that public companies report financial
information about operating segments in interim financial statements issued to
the public. It also establishes standards for disclosures regarding products and
services, geographic areas and major customers.
SFAS Nos. 130 and 131 are effective for financial statements for
periods beginning after December 15, 1997 and require comparative information
for earlier years to be restated. Because of the recent issuance of these
standards, management has been unable to fully evaluate the impact, if any, the
standards may have on the future financial statement disclosures. Results of
operations and financial position, however, will be unaffected by implementation
of these standards.
16
<PAGE>
CONCENTRATIONS OF CREDIT RISK: The Company maintains deposits in
banks which exceed the amount of federal deposit insurance available. Management
believes the possibility of loss on these deposits is minimal.
RECLASSIFICATIONS: Certain reclassifications have been made in prior
year amounts to conform to the current year's presentation.
NOTE 2 - EQUIPMENT
Equipment is summarized below (in thousands):
DECEMBER 31,
---------------------
1996 1997
------- -------
Office equipment ................................... $ 22 $ 22
Automobile ......................................... -- 31
------- -------
22 53
Less accumulated depreciation ...................... 2 9
------- -------
$ 20 $ 44
======= =======
Depreciation expense was approximately $2,000 and $7,000 in 1996 and 1997
respectively.
NOTE 3 - LONG-TERM DEBT
As of December 31, 1997, long-term debt consisted of a note payable
to a bank due in monthly installments of $564, including interest at 10%. The
note payable is due August 27, 2002 and is collaterized by an automobile.
Future maturities of the long-term debt as of December 31, 1997 are
as follows: $4,000 in 1998; $5,000 in 1999; $6,000 in 2000; $6,000 in 2001; and
$4,000 in 2002.
NOTE 4 - LEASE OBLIGATION
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 on
a month-to-month basis at a current rate of $2,175 per month.
17
<PAGE>
NOTE 5 - INCOME TAXES
Deferred income taxes result from timing differences in the
recognition of income and expense items for income tax and financial reporting
purposes. As of December 31, 1996 the Company had no material deferred tax
assets and deferred tax liabilities. As of December 31, 1997 the company had a
long-term deferred tax benefit of $40,000 resulting from net operating loss
carry forwards for income tax reporting purposes, for which a valuation
allowance has been provided in full.
The Company had net operating loss carry forwards for income tax
reporting purposes of $118,000 at December 31, 1997. If not utilized, these
NOL's will expire in fifteen years.
NOTE 6 - LITIGATION
From May, 1996 to May, 1997, the Company was involved in litigation
with Joseph T. Kaminski ("Kaminski"), a former executive officer and director of
the Company. As previously reported by the Company in report filed with the
Securities and Exchange Commission, the most recent of which was Form 8-K (filed
March 14, 1997), the Company and two of its directors, Thomas F. Cooke and
Randall F. Dryer, entered into a settlement agreement and full and final release
(the "settlement agreement") dated March 10, 1997 with Kaminski, in full
settlement of all matters concerning the lawsuits.
Pursuant to the terms of the settlement agreement, Kaminski
transferred all of his equity interest in the Company, consisting of 2,465,371
shares of common stock and 100,000 stock warrants, to the Company, and forgave
amounts owed him by the Company of $62,000. As a result of this settlement, the
Company recorded a gain of $309,000. Kaminski also agreed to sell to the Company
8,000 shares of the Company's common stock held in trust in exchange for
approximately $1,000. 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.
Accordingly, all claims and counterclaims by and against the Company
and its two directors Thomas F. Cooke and Randall F. Dryer have been dismissed,
and there is no pending litigation against the Company or its directors at
December 1997.
NOTE 7 - 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 of the Company.
The Company issued warrants to a former consultant to purchase 6,667
shares of common stock for an exercise price of 120% of the share price that is
offered to the public in any public
18
<PAGE>
offering. These warrants were issued in December, 1993 and have no expiration
date. The Company issued warrants to the Company's president to purchase 100,000
shares of common stock for an exercise price of $1.60 per share. These warrants
were issued in December, 1994 and expire in May, 1999.
NOTE 8 - FORECLOSURE SALE
As of May 7, 1996, the Company owed $13,431,000 plus accrued
interest to Internationale Nederlanden (U.S.) Capital Corporation under a credit
agreement. 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 of the company's subsidiaries 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 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.
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" below.
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
19
<PAGE>
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.
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, 1997:
NAME POSITION AGE
Thomas F. Cooke Chairman of the Board, Chief Executive 49
Officer, President, Treasurer and
Secretary
Kevin M. Smith Director 53
20
<PAGE>
BIOGRAPHICAL INFORMATION
As of December 31, 1997, 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 OF THE BOARD, CHIEF EXECUTIVE OFFICER, PRESIDENT,
TREASURER AND SECRETARY, age 49, 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 17 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 a 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.
KEVIN M. SMITH, DIRECTOR, age 53, has in excess of 30 years experience as an
exploration geophysicist. In 1977, after 10 years with Amoco Production Mr.
Smith joined R. Brewer and Company, a geophysical consulting firm. In 1984, he
formed his own geophysical consulting firm (Kevin M. Smith, Inc.), which he
continues to operate. Mr. Smith completed three years of undergraduate work at
the University of Texas in 1966 and received a Bachelor of Science degree with a
dual major of Geology and Geophysics at the University of Houston in 1967. He
also did post graduate studies in Geology and Geophysics at the University of
Houston. Mr. Smith has given professional papers on innovative uses of
geophysics in horizontal drilling projects.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT. During the fiscal
year ended December 31, 1997, based on a review of Forms 3 and 4 furnished to
the Company during its most recent fiscal year and Forms 5 furnished to the
Company with respect to its most recent fiscal year, all reporting persons of
the Company were in compliance with Section 16(a) of the Exchange Act.
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, 1997, 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.
21
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
-------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------- ---------- ------------
OTHER RESTRICTED
NAME AND FISCAL ANNUAL STOCK LTIP ALL OTHER
PRINCIPAL YEAR COMPEN- AWARD(S) OPTIONS/ PAYOUTS COMPEN-
POSITION ENDED SALARY($) BONUS($) SATION ($) ($) SARS(#) ($) SATION ($)
- ----------------- -------- ------------ -------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CEO ............. 1997 $ 120,000(1) None None None None None None
Cooke,
Thomas(2) ....... 1996 $ 116,500(2) None None None None None None
1995 $ 116,000(3) None None None None None None
</TABLE>
(1) During fiscal years 1995, 1996 and 1997, the Company deferred
payment of a total of $95,000 in salary due to Mr. Cooke. In fiscal
year 1997, the Company paid Mr. Cooke for all deferred salary,
together with $8,048 in interest. The salary information set forth
in the Summary Compensation Table does not include interest payments
on deferred salary.
(2) Includes $60,000 which was earned in fiscal year 1996, but deferred
and paid to Mr. Cooke in fiscal year 1997.
(3) Includes $25,000 which was earned in fiscal year 1995, but deferred
and paid to Mr. Cooke in fiscal year 1997.
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 27, 1998. The mailing address for
all officers and directors is Saratoga Resources, Inc., 301 Congress Avenue,
Suite 1550, Austin, Texas 78701.
22
<PAGE>
NUMBER
NAME OF BENEFICIAL OWNER SHARES PERCENT(1)
----------- --------
Thomas F. Cooke(2) ................................. 2,320,422 65.08%
Kevin M. Smith ..................................... 238,295(3) 6.68%
All executive officers and directors as a group .... 2,558,717 71.76%
(2 persons)
(1) Based on 3,565,292 shares outstanding. Includes warrants to purchase 100,000
shares of Company common stock, which are exercisable within 60 days of March
27, 1998.
(2) Includes warrants to purchase 100,000 shares of Company common stock, which
are exercisable within 60 days of March 27, 1998. Also includes 109,148 shares
held by June Cooke, Mr. Cooke's spouse, of which Mr. Cooke disclaims beneficial
ownership.
(3) Includes 20,000 shares held by Sandra Smith, Mr. Smith's spouse, of which
Mr. Smith disclaims beneficial ownership.
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 of 50,000,
100,000, and 100,000 shares, respectively, at $1.60 per share. These options
were exercisable May 11, 1994 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. (See "ITEM 3.
LEGAL PROCEEDINGS," SUPRA).
Effective May 17, 1997, the Company purchased 870,737 shares of
common stock and warrants to purchase 50,000 shares of common stock from Dr.
Randall F. Dryer, who resigned as a Director of the Company effective as of the
same date. The total purchase price for the common stock and the warrants was
$175,000.
On March 10, 1997, the Company, Cooke, Dryer and Dryer, Ltd. and
Kaminski settled the Kaminski lawsuit pursuant to the terms of the Settlement
Agreement. (See "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:
23
<PAGE>
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.
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
Incorporated by reference to the Form 10-KSB filed March 26, 1997,
filed as Exhibit 21 thereto.
(27) FINANCIAL DATA SCHEDULE
(B) REPORTS ON FORM 8-K: NONE
24
<PAGE>
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/ THOMAS F. COOKE Date:MARCH 27, 1998
Thomas F. Cooke, Chairman of the Board, Chief
Executive Officer, President, Secretary and Treasurer
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/ THOMAS F. COOKE Date:MARCH 27, 1998
Thomas F. Cooke, Chairman of the Board, Chief
Executive Officer, President, Secretary, Treasurer
and Principal Accounting and Financial Officer
By: /S/ KEVIN M. SMITH Date:MARCH 27, 1998
Kevin M. Smith, Director
25
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF SARATOGA RESOURCES, INC.
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 666
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 666
<PP&E> 53
<DEPRECIATION> (9)
<TOTAL-ASSETS> 710
<CURRENT-LIABILITIES> 22
<BONDS> 21
0
0
<COMMON> 3
<OTHER-SE> 664
<TOTAL-LIABILITY-AND-EQUITY> 710
<SALES> 35
<TOTAL-REVENUES> 35
<CGS> 0
<TOTAL-COSTS> 453
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9
<INCOME-PRETAX> (118)
<INCOME-TAX> 0
<INCOME-CONTINUING> (118)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (118)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
</TABLE>
