SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 2003
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to
Commission File No. 0-27563
SARATOGA RESOURCES, INC.
______________________________________________
(Name of Small Business Issuer in its charter)
Texas 76-0314489
_______________________________ ____________________________________
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2304 Hancock Drive, Suite 5
Austin, Texas 78756
__________________________________________________
(Address of principal executive offices)(Zip code)
Issuer's telephone number, including area code: (512) 478-5717
Securities to be registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which each is registered
___________________ _________________________________________________
None None
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 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 [ ] No [X]
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
The Issuer's revenues for the fiscal year ended December 31, 2003 were $0.
The number of shares of the registrant's common stock, $0.001 par value per
share, outstanding as of June 10, 2005 was 3,465,292. The aggregate market value
of the voting and non-voting common equity held by non-affiliates of the
registrant on June 10, 2005, based on par value per share, was approximately
$1,000 (no market existed in the common stock).
DOCUMENTS INCORPORATED BY REFERENCE
None
Transition Small Business Disclosure Format: Yes [ ] No [X]
TABLE OF CONTENTS
Page
PART I
ITEM 1. DESCRIPTION OF BUSINESS............................. 3
ITEM 2. DESCRIPTION OF PROPERTY............................. 8
ITEM 3. LEGAL PROCEEDINGS................................... 8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS.................................... 8
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS......................... 8
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS................ 9
ITEM 7. FINANCIAL STATEMENTS................................ 11
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.............. 12
ITEM 8A. CONTROLS AND PROCEDURES............................. 12
ITEM 8B. OTHER INFORMATION................................... 12
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH
SECTION 16(a) OF THE EXCHANGE ACT................... 13
ITEM 10. EXECUTIVE COMPENSATION.............................. 14
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT............................... 14
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...... 15
ITEM 13. EXHIBITS AND REPORTS OF FORM 8-K.................... 15
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.............. 16
SIGNATURES
2
FORWARD-LOOKING STATEMENTS
This annual report on Form 10-KSB contains forward-looking statements within the
meaning of the federal securities laws. These forwarding-looking statements
include without limitation statements regarding our expectations and beliefs
about the market and industry, our goals, plans, and expectations regarding our
properties and drilling activities and results, our intentions and strategies
regarding future acquisitions and sales of properties, our intentions and
strategies regarding the formation of strategic relationships, our beliefs
regarding the future success of our properties, our expectations and beliefs
regarding competition, competitors, the basis of competition and our ability to
compete, our beliefs and expectations regarding our ability to hire and retain
personnel, our beliefs regarding period to period results of operations, our
expectations regarding revenues, our expectations regarding future growth and
financial performance, our beliefs and expectations regarding the adequacy of
our facilities, and our beliefs and expectations regarding our financial
position, ability to finance operations and growth and the amount of financing
necessary to support operations. These statements are subject to risks and
uncertainties that could cause actual results and events to differ materially.
We undertake no obligation to update forward-looking statements to reflect
events or circumstances occurring after the date of this annual report on Form
10-KSB.
As used in this annual report on Form 10-KSB, unless the context otherwise
requires, the terms "we," "us," "the Company," and "Saratoga Resources" refer to
Saratoga Resources, Inc., a Texas corporation.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
Saratoga Resources, Inc. is an oil and gas exploration and production company.
Since the 1996 sale of a majority of the Company's oil and gas producing
properties, the Company's operations have been limited to ownership of a
participation interest in a single oil property and pursuit of various potential
business opportunities, both within and outside of the oil and gas industry.
History and Development of the Company
The Company was incorporated in Texas on July 25, 1990 under the name Saratoga
Resources, Inc. In 1993, the Company became a wholly-owned subsidiary of
Saratoga Resources, Inc., a Delaware corporation ("Saratoga Delaware").
In May 1994, the Company acquired 57.15% of the outstanding Common Stock of Lobo
Energy, Inc., a Texas corporation ("LEI"), for $6,000,375. In conjunction with
the acquisition of a controlling interest in LEI, and to finance the purchase
price, the Company entered into a credit agreement and related documents (the
"Initial Credit Agreement") with Internationale Nederlanden (U.S.) Capital
Corporation ("ING"). Proceeds from the ING credit facility were used to (i)
finance acquisition of the LEI stock, (ii) pay off LEI's lenders at the time of
the acquisition, (iii) retire all credit facilities at BankOne, (iv) develop
existing oil and gas properties, and (v) provide general working capital.
In March 1995, the Company acquired the remaining 42.85% of the Common Stock of
LEI from Peter Pickup for $5,401,000, after which the Company owned 100% of the
stock of LEI. In conjunction with the acquisition of the remaining shares of
LEI, the Company and ING entered into a new credit agreement (the "Amended
Credit Agreement") to refinance the existing debt to ING under the Initial
Credit Agreement, to purchase the remaining LEI Common Stock and to provide
additional money for acquisition of oil and gas properties.
In May 1996, the Company entered into an agreement (the "ING-P/Energy
Agreement") by and among Saratoga Delaware, the Company, Lobo Operating, Inc.
("LOI"), LEI, Thomas F. Cooke ("Cooke"), Joseph T. Kaminski ("Kaminski"),
Randall F. Dryer ("Dryer") (the Company, Saratoga Delaware, LOI, LEI, and their
subsidiaries, Cooke, Kaminski and Dryer sometimes referred to herein as the
"Saratoga Parties"), Prime Energy Corporation ("P/Energy") and ING.
3
The ING-P/Energy Agreement provided for a sale of virtually all of the assets
(the "Interests") of the Company, LOI and LEI (the "Saratoga Entities") to ING
pursuant to ING's rights under the Amended Credit Agreement and the simultaneous
sale of the Interests to P/Energy for cash consideration of $7,180,000 and
additional consideration as provided in the agreement. The cash proceeds from
the sale were applied to the settlement of outstanding vendor debt and other
related liabilities of the Saratoga Entities, Saratoga Delaware and their direct
and indirect subsidiaries, and $1,500,000 was paid to Saratoga Delaware.
Following the 1996 sale of substantially all of its oil and gas properties under
the ING-P/Energy Agreement, the Company began pursuing various potential
business opportunities both within and outside of the oil and gas industry.
In April 1999, the Company entered into an agreement with DBX Geophysical
Corporation whereby, during the term of the agreement (which was for a minimum
period of 12 months and thereafter dependent on the term of any leasehold
interest acquired), the Company had the exclusive right to acquire a license to
data and the exclusive right to acquire all leasehold interests and any other
interest in oil, gas, and other mineral, or the revenues arising there from
which were attributable to lands located within an identified area in Dawson
County, Texas (collectively, the "DBX Data"). Pursuant to the terms of the
agreement with DBX, as consideration for the DBX Data, the Company agreed (1) to
grant to DBX a 3% overriding royalty in any leasehold acquired in the Adcock
Farms prospect and (2) to pay to DBX $100,000, payable (a) $25,000 upon
commencement of drilling operations of the first prospect, (b) $25,000 as a
production payment out of a 25% working interest in the first well, (c) $25,000
upon commencement of drilling operations on a second well, and (d) $25,000 as a
production payment out of a 25% working interest in the second well. In the
event that the required production payments are not made in full from the
referenced wells, such deficiency will be payable out of a 25% working interest
in all other wells drilled within the area of interest.
In March 1999, the Company entered into a one year consulting agreement with
Trek Oil and Gas, Inc. ("Trek"), an independent oil and gas exploration company,
to utilize the Company's seismic and well log data for the identification of oil
and gas exploration and development prospects in the Louisiana gulf coast
region. Under this agreement, Trek provided advisory services related to
interpretation of seismic data and received compensation for its expertise in
the form of a working interest and/or royalties of up to 33% generated from
identified prospects.
In June 1999, the Company entered into an agreement, with an unspecified term,
with Ivy Oil Company LLC ("Ivy") and Trek (Trek together with Ivy, the "Dawson
County Operators") by which the Company supplied the DBX Data to the Dawson
County Operators and received in return a one third interest in the development
of certain prospects in Dawson County, Texas (the "Dawson Prospects Agreement").
As a result of the work performed under the Dawson Prospects Agreement, the
Dawson County Operators acquired mineral leases covering 80 net acres underlying
the identified area in the DBX Data, acquired equipment, including service
equipment, down-hole equipment and a cased well bore to the depth of 12,000 feet
and re-entered the existing well (the "Adcock Farms No. 1") on the property.
Throughout 1999, the Company retained other consultants for the purpose of
evaluating mineral lease acquisitions in Houston County, Texas, and production
purchases in the Los Angeles basin. No mineral lease acquisitions or production
purchases were consummated as a result of those efforts.
In August 1999, Saratoga Delaware, then the parent of the Company, closed merger
agreements with each of PrimeVision Health, Inc., a Delaware corporation
("Prime"), a vertically integrated vision services company, and OptiCare Eye
Health Centers, Inc., a Connecticut corporation ("OptiCare"), a provider of
consulting, administrative and other support services to ophthalmology and
optometry eye care centers located in Connecticut. Pursuant to the merger
agreements, Saratoga Delaware acquired Prime and OptiCare in an all-stock
transaction by issuance to the shareholders of OptiCare and Prime shares of
Saratoga Delaware Common Stock constituting 97.5% of the outstanding Common
Stock of Saratoga Delaware (the "Eye Care Acquisition").
In conjunction with the Eye Care Acquisition, in August 1999, the Company was
spun off by Saratoga Delaware to continue its prior business operations. In the
spin-off, Saratoga Delaware, which was then the 100% owning parent entity of the
Company, made an in-kind distribution of all of the Company's issued and
outstanding stock to the shareholders of Saratoga Delaware as of August 9, 1999.
The distribution was made on the basis of one share of the Company's common
stock, for each share of Saratoga Delaware stock held. As a result of the
spin-off 3,465,292 shares of the Company's common stock were distributed to
1,363 shareholders. In conjunction with the spin-off and the Eye Care
Acquisition, Saratoga Delaware distributed to the Company 100% of the
outstanding shares of LOI and LEI as well as 9% of the outstanding shares of
Saratoga Holdings I, Inc. ("Holdings").
4
In January 2001, the Company and Ivy acquired the interests of Trek in the
Dawson Prospects Agreement, including the Adcock Farms No. 1, bringing their
interests therein to 50% each. The Company paid $6,028 as consideration for the
interest of Trek.
In April 2002, Holdings entered into a Share Exchange Agreement pursuant to
which Holdings acquired Agence 21, Inc. and resulting in Agence 21 becoming a
subsidiary of Holdings and Holdings changing its name to A21, Inc.
Oil and Gas Operations and Properties
Since May 1999, our operations have been limited to ownership of a participation
interest in a single oil and gas property in Dawson County, Texas.
As of June 2005, we had no plans to acquire additional oil and gas interests or
to conduct any other oil and gas operations other than the continued operation
of our existing property.
Our sole oil and gas property interest as of December 31, 2003 consisted of a
contractual right to participate in 50% of the profits and losses in an 80-acre
tract known as the Adcock Farms Prospect, including the Adcock Farms No. 1 well,
in Dawson County, Texas. Under the contractual participation interest, we
receive our proportionate interest in revenues from the Adcock Farms prospect
and bear a proportionate share of operating costs.
The Adcock Farms No. 1 well was drilled on the Adcock Farms Project in September
1993. The Adcock Farms No. 1 well tested the Fusselman and Mississippian
formations to a depth of 12,000 feet. The Adcock Farms No. 1 well was
successfully completed in October 1993 and commenced production as an oil well.
We presently have no plans with respect to drilling additional wells on the
Adcock Farms Prospect.
Marketing
At December 31, 2003 and June 10, 2005, we had no contractual agreements to sell
our gas and oil production and all production was sold on spot markets.
Risks Related to Our Oil and Gas Operations
Operational Hazards and Insurance. Our oil and gas activities may be
unsuccessful for many reasons, including weather, cost overruns, equipment
shortages and mechanical difficulties. A variety of factors, both geological and
market related can cause a well to become uneconomical or only marginally
profitable. Our business involves a variety of operating risks which may
adversely affect our profitability, including:
- fires;
- explosions;
- blow-outs and surface cratering;
- uncontrollable flows of oil, natural gas, and formation water;
- natural disasters, such as hurricanes and other adverse weather
conditions;
- pipe, cement, or pipeline failures;
- casing collapses;
- embedded oil field drilling and service tools;
- abnormally pressured formations; and
- environmental hazards, such as natural gas leaks, oil spills,
pipeline ruptures and discharges of toxic gases.
5
In accordance with industry practice, our insurance protects us against some,
but not all, operational risks. Further, we do not carry business interruption
insurance. As pollution and environmental risks generally are not fully
insurable, our insurance may be inadequate to cover any losses or exposure for
such liability.
Volatility of Oil and Gas Prices. As our sole source of revenue is our interest
in a single producing well, our revenue and profitability are substantially
dependent upon the prevailing prices of, and demand for, natural gas, oil, and
condensate. Prices for oil and natural gas are subject to wide fluctuation in
response to relatively minor changes in the supply of, and demand for, oil and
gas, market uncertainty and a variety of additional factors that are beyond our
control. Among the factors that can cause the volatility of oil and gas prices
are:
- worldwide or regional demand for energy, which is affected by
economic conditions;
- the domestic and foreign supply of natural gas and oil;
- weather conditions;
- domestic and foreign governmental regulations;
- political conditions in natural gas and oil producing regions;
- the ability of members of the Organization of Petroleum Exporting
Countries to agree upon and maintain oil prices and production
levels; and
- the price and availability of other fuels.
Competition
Competition in the oil and gas industry is intense. While the Company's
activities are currently limited to its interest in a single well, should the
Company seek to expand its oil and gas activities, it will compete with major
and other independent oil and gas companies with respect to the acquisition of
producing properties and proved undeveloped acreage. Existing competitors
actively bid for desirable oil and gas properties, as well as for the equipment
and labor required to operate and develop the properties. Many of those
competitors have significant financial resources and exploration and development
budgets. The Company presently has no financial resources that would allow it to
compete in that market. Our ability to acquire additional properties and develop
new and existing properties in the future will depend on our capability to
secure financing to support those efforts and our ability to conduct operations,
to evaluate and select suitable properties and to consummate transactions in
this highly competitive environment.
Governmental Regulation
Our business and the oil and gas industry in general are subject to extensive
laws and regulations, including environmental laws and regulations. As such, we
may be required to make large expenditures to comply with environmental and
other governmental regulations. State and federal regulations, including those
enforced by the Texas Railroad Commission as the primary regulator of the oil
and gas industry in the State of Texas, are generally intended to prevent waste
of oil and gas, protect rights to produce oil and gas between owners in a common
reservoir and control contamination of the environment. Matters subject to
regulation in the State of Texas include:
- location and density of wells;
- the handling of drilling fluids and obtaining discharge permits for
drilling operations;
- accounting for and payment of royalties on production from state,
federal and Indian lands;
- bonds for ownership, development and production of natural gas and
oil properties;
- transportation of natural gas and oil by pipelines;
- operation of wells and reports concerning operations; and
- taxation.
6
Under these laws and regulations, we could be liable for personal injuries,
property damage, oil spills, discharge of hazardous materials, remediation and
clean-up costs and other environmental damages. Failure to comply with these
laws and regulations also may result in the suspension or termination of our
operations and subject us to administrative, civil and criminal penalties.
Moreover, these laws and regulations could change in ways that substantially
increase our operating costs.
Natural gas operations are subject to various types of regulation at the
federal, state and local levels. Prior to commencing drilling activities for a
well, we are required to procure permits and/or approvals for the various stages
of the drilling process from the applicable state and local agencies. Permits
and approvals include those for the drilling of wells, and regulations including
maintaining bonding requirements in order to drill or operate wells and the
location of wells, the method of drilling and casing wells, the surface use and
restoration of properties on which wells are drilled, the plugging and
abandoning of wells, and the disposal of fluids used in connection with
operations.
Our operations are also subject to various conservation laws and regulations.
These include the regulation of the size of drilling and spacing units and the
density of wells, which may be drilled and the unitization or pooling of natural
gas properties. In this regard, some states allow the forced pooling or
integration of tracts to facilitate exploration while other states rely
primarily or exclusively on voluntary pooling of lands and leases. In areas
where pooling is voluntary, it may be more difficult to form units, and
therefore, more difficult to develop a project if the operator owns less than
100 percent of the leasehold.
Regulation of Sales and Transportation of Natural Gas. Historically, the
transportation and resale of natural gas in interstate commerce have been
regulated by the Natural Gas Act of 1938, the Natural Gas Policy Act of 1978,
and the regulations promulgated by the Federal Energy Regulatory Commission.
Maximum selling prices of some categories of natural gas sold in "first sales,"
whether sold in interstate or intrastate commerce, were regulated under the
NGPA. The Natural Gas Well Head Decontrol Act removed, as of January 1, 1993,
all remaining federal price controls from natural gas sold in "first sales" on
or after that date. FERC's jurisdiction over natural gas transportation was
unaffected by the Decontrol Act. While sales by producers of natural gas and all
sales of crude oil, condensate and natural gas liquids can currently be made at
market prices, Congress could reenact price controls in the future.
Sales of natural gas are affected by the availability, terms and cost of
transportation. The price and terms for access to pipeline transportation are
subject to extensive regulation. In recent years, FERC has undertaken various
initiatives to increase competition within the natural gas industry. As a result
of initiatives like FERC Order No. 636, issued in April 1992, the interstate
natural gas transportation and marketing system has been substantially
restructured to remove various barriers and practices that historically limited
non-pipeline natural gas sellers, including producers, from effectively
competing with interstate pipelines for sales to local distribution companies
and large industrial and commercial customers. The most significant provisions
of Order No. 636 require that interstate pipelines provide transportation
separate or "unbundled" from their sales service, and require that pipelines
make available firm and interruptible transportation service on an open access
basis that is equal for all natural gas suppliers.
In many instances, the result of Order No. 636 and related initiatives has been
to substantially reduce or eliminate the interstate pipelines' traditional role
as wholesalers of natural gas in favor of providing only storage and
transportation services. Another effect of regulatory restructuring is the
greater transportation access available on interstate pipelines. In some cases,
producers and marketers have benefited from this availability. However,
competition among suppliers has greatly increased and traditional long-term
producer pipeline contracts are rare. Furthermore, gathering facilities of
interstate pipelines are no longer regulated by FERC, thus allowing gatherers to
charge higher gathering rates.
Environmental Regulations. Our operations are subject to additional laws and
regulations governing the discharge of materials into the environment or
otherwise relating to environmental protection. Public interest in the
protection of the environment has increased dramatically in recent years. It
appears that the trend of more expansive and stricter environmental legislation
and regulations will continue.
7
We generate wastes that may be subject to the Federal Resource Conservation and
Recovery Act ("RCRA") and comparable state statutes, which have limited the
approved methods of disposal for some hazardous wastes. Additional wastes may be
designated as "hazardous wastes" in the future, and therefore become subject to
more rigorous and costly operating and disposal requirements. Although
management believes that we utilize good operating and waste disposal practices,
prior owners and operators of our properties may not have done so, and
hydrocarbons or other wastes may have been disposed of or released on or under
the properties owned or leased by us or on or under locations where wastes have
been taken for disposal. These properties and the wastes disposed on the
properties may be subject to the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA"), RCRA and analogous state laws, which
require the removal and remediation of previously disposed wastes, including
waste disposed of or released by prior owners or operators.
CERCLA and similar state laws impose liability, without regard to fault or the
legality of the original conduct, on some classes of persons that are considered
to have contributed to the release of a "hazardous substance" into the
environment. These persons include the owner or operator of the disposal site or
sites where the release occurred and companies that disposed of or arranged for
the disposal of the hazardous substances found at the site. Persons who are or
were responsible for release of hazardous substances under CERCLA may be subject
to joint and several liability for the costs of cleaning up the hazardous
substances that have been released into the environment and for damages to
natural resources, and it is not uncommon for neighboring landowners and other
third parties to file claims for personal injury and property damage allegedly
caused by the hazardous substances released into the environment.
Employees
As of June 10, 2005, we had one full-time employee and no part time employees.
The employee is not covered by a collective bargaining agreement, and we do not
anticipate that any of our future employees will be covered by such agreement.
ITEM 2. DESCRIPTION OF PROPERTY
As of June 10, 2005, the Company's executive offices consist of approximately
200 square feet in Austin, Texas which space is leased on a month-to-month basis
at a current rate of $150 per month. Management anticipates that the Company's
office space will be sufficient for the foreseeable future.
A description of our interests in oil and gas properties is included in "Item 1.
Description of Business."
ITEM 3. LEGAL PROCEEDINGS
As of June 10, 2005, we were not party to any pending litigation and were not
aware of any threatened litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established trading market in the Company's Common Stock and no
guarantee that a trading market will develop.
As of June 10, 2005, there were approximately 1,363 beneficial holders of our
Common Stock.
The Company has not paid any cash dividends since its inception and presently
anticipates that all earnings, if any, will be retained for development of the
Company's business and that no dividends on the shares of Common Stock will be
declared in the foreseeable future. Any future dividends will be subject to the
discretion of the Company's Board of Directors and will depend upon, among other
things, future earnings, the operating and financial condition of the Company,
its capital requirements, general business conditions and other pertinent facts.
Therefore, there can be no assurance that any dividends on the Common Stock will
be paid in the future.
8
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
General
Saratoga Resources, Inc. is an oil and gas exploration and production company.
Since the 1996 sale of a majority of the Company's oil and gas producing
properties pursuant to the ING-P/Energy Agreement (see "Item 1. Description of
Business - History and Development of the Company"), the Company's operations
have been limited to ownership of a participation interest in a single oil
property and pursuit of various potential business opportunities, both within
and outside of the oil and gas industry.
Overview of Operations
Our operations, and our operating results, are a continuation of the operations
previously conducted by our prior parent company, Saratoga Delaware. During 2002
and 2003 our operations were exclusively devoted to our ownership of a
participation interest in a single oil well, the Adcock Farms No. 1, and efforts
relating acquisitions of business opportunities, both within and outside the oil
and gas industry.
Our interest in the Adcock Farms No. 1 are reflected on our financial statements
as gain or loss from participation agreement. The gain or loss reported reflect
the excess of our allocable portion of revenues over expenses or expenses over
revenues, as appropriate. The gain or loss from the participation agreement is a
function of production volumes from the well, our interest in the well and the
market prices of production sold as well as costs incurred in operating the
well.
Critical Accounting Policies
The following describes the critical accounting policies used in reporting our
financial condition and results of operations. In some cases, accounting
standards allow more than one alternative accounting method for reporting, such
is the case with accounting for oil and gas activities described below. In those
cases, our reported results of operations would be different should we employ an
alternative accounting method.
Revenue Recognition.
The Company recognizes revenues from its participating interest in the profits
and losses of the Adcock Farm prospect in accordance with Statement of Financial
Accounting Standard ("SFAS") No. 69 - Disclosures About Oil and Gas Producing
Activities. As of December 31, 2003, the Company had no capitalized or equity
interest in, and had not realized significant net royalties with respect to the
participating interest in the profits and losses of the Adcock Farm prospect.
Due to the lack of significant revenue generation and the excessive cost
involved in reporting the associated activities, disclosure required by SFAS No.
69 is neither relevant nor reliable and has been excluded from the Company's
financial statements.
Marketable Securities.
Marketable securities are classified as available-for-sale and, at December 31,
2003, were available to support current operations or to take advantage of other
investment opportunities. The securities were stated at estimated fair value
based upon market quotes. Unrealized gains and losses, net of tax, are computed
on the basis of specific identification and are included as a separate component
of stockholders' equity. Realized gains, realized losses, and declines in value,
judged to be other-than-temporary, are included in Other Income. The cost of
securities sold is based on the specific identification method and interest
earned is included in Interest Income. Certain marketable securities held at
December 31, 2003 were pledged as security for a debt of Saratoga Delaware.
Impairment of Long-Lived Assets
We review all long-lived assets on a regular basis to determine if there has
been impairment in the value of those assets. If, upon review, it is determined
that the carrying value of those assets may not be recoverable, we will record a
charge to earnings and reduce the value of the asset on the balance sheet to the
amount determined to be recoverable.
9
For purposes of evaluating recoverability of long-lived assets, the
recoverability test is performed using undiscounted cash flows of the individual
assets and consolidated undiscounted net cash flows for long-lived assets not
identifiable to individual properties compared to the related carrying value. If
the undiscounted operating income is less than the carrying value, the amount of
the impairment, if any, will be determined by comparing the carrying value of
each asset with its fair value. Fair value is generally based on a discounted
cash flow analysis.
Based on our review of our present operating properties and other long-lived
assets, during the fiscal year ended December 31, 2003, we recorded no
impairments of our long-lived assets.
Results of Operations
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
Revenues. Revenues during 2003 were $0 as compared to $6,718 in 2002. Revenues
during 2002 were principally attributable to gain from participation in the
Adcock Farm No. 1 well and realized gains on the sale of securities.
As a result of work-over expenses, the Company recognized a loss from
participation in the Adcock Farm No. 1 well during 2003. The Company had no
sales of securities during 2003.
Costs and Expenses. Operating costs and expenses totaled $50,795 in 2003 as
compared to $104,938 in 2002 and, during 2003, consisted principally of general
and administrative expenses and interest expense. 2002 Operating costs included
a net loss from participation agreement and loss attributable to the acquisition
of an affiliate.
- General and Administrative Expenses. General and administrative expense
increased from $17,203 in 2002 to $22,807 in 2003. The increase in general and
administrative expense was attributable to increased professional fees relating
to efforts to bring the Company's SEC filings current.
- Depreciation Expense. Depreciation expense declined from $1,906 in 2002 to
$351 in 2003. The decline in depreciation expense during 2003 was attributable
to assets reaching full depreciation in 2002 with minimal asset additions in
2003.
- Interest Expense. Interest expense increased from $20,512 in 2002 to $24,391
in 2003. The increase in interest expense was attributable to higher long-term
debt in 2003 attributable to loans from a principal shareholder to support
operations.
- Net Loss from Participation Agreement. During 2003, the Company realized a
net loss from participation in the Adcock Farm No. 1 well of $3,246. The loss
was principally attributable to expenses of working-over the well.
- Loss from Acquisition of Affiliate. During 2002, the Company realized a loss
of $65,317 relating to the discharge of amounts owing to the Company from
Holdings and for which Holdings transferred to the Company 100% of the stock of
SH2, Inc., a Texas corporation with no appreciable assets or operations.
Financial Condition
Liquidity and Capital Resources.
The Company had a cash overdraft of $833 and a working capital deficit of
$104,673 at December 31, 2003 as compared to a cash overdraft of $804 and a
working capital deficit of $48,242 at December 31, 2002.
The Company's cash and working capital positions at December 31, 2003 reflect
the operating loss incurred during 2003, offset by borrowings from related
parties.
The Company, at and for the year ended December 31, 2003, had limited capital
resources and limited operating revenues to support its overhead. The Company
is, and was, dependent upon its principal shareholder to provide financing to
support operations and ongoing cost control measures to minimize negative cash
flow. Unless that shareholder continues to provide financing the Company will be
required to substantially limit its activities and may be unable to sustain its
operations.
10
Available-For-Sale Securities.
At December 31, 2003, the Company's current assets, totaling $22,672, consisted
entirely of securities holdings classified as "available-for-sale securities".
Those securities consisted of shares of stock of Opticare (formerly, Saratoga
Delaware) and A21, Inc. (formerly, Saratoga Holdings). All of the Opticare stock
is held in a pledge account to secure obligations guaranteed by the Company. The
Company's guarantee is limited to the extent of the shares pledged, the market
value of which was $5,957 at December 31, 2003. The A21 shares are freely
transferable by the Company and had a market value of $16,715 at December 31,
2003.
The Company had unrealized losses on its available-for-sale securities of
$32,839 during 2003. Those unrealized losses are included in Other Comprehensive
Income (Loss).
Long-Term Debt
At December 31, 2003, the Company had long-term debt of $159,963, attributable
entirely to amounts owed to the Company's principal shareholder. Loans from the
Company's principal shareholder bear interest at 12.5% and are payable on
demand.
Capital Expenditures and Commitments
During 2003, the Company made no capital expenditures and, at December 31, 2003,
the Company had no fixed capital commitment obligations.
The Company, at December 31, 2003, was contractually obligated to bear 50% of
the expenses of operating the Adcock Farm prospect.
The Company, at December 31, 2003, was also contractually obligated to pay
certain amounts relating to the licensing of the right to certain data from DBX
Geophysical. Pursuant to the terms of the agreement with DBX, as consideration
for the DBX Data, the Company agreed (1) to grant to DBX a 3% overriding royalty
in any leasehold acquired in the Adcock Farms prospect and (2) to pay to DBX
$100,000, payable (a) $25,000 upon commencement of drilling operations of the
first prospect, (b) $25,000 as a production payment out of a 25% working
interest in the first well, (c) $25,000 upon commencement of drilling operations
on a second well, and (d) $25,000 as a production payment out of a 25% working
interest in the second well. In the event that the required production payments
are not made in full from the referenced wells, such deficiency will be payable
out of a 25% working interest in all other wells drilled within the area of
interest. As of December 31, 2003, no wells had been drilled on the Adcock Farms
prospect. Accordingly, other than the overriding royalty, no amounts had, as of
that date, been paid to DBX.
Off-Balance Sheet Arrangements
As noted elsewhere, all of our marketable securities at December 31, 2003 were
pledged to secure obligations of our predecessor, Saratoga Delaware. Our
exposure in that regard is limited to the value of the securities pledged.
Except for the pledge of securities to secure obligations of Saratoga Delaware,
we had no off-balance sheet arrangements or guarantees of third party
obligations at December 31, 2003.
Inflation
We believe that inflation has not had a significant impact on our operations
since inception.
ITEM 7. FINANCIAL STATEMENTS
Our financial statements, together with the independent accountants reports
thereon of Robnett & Company, LLP, appears immediately after the signature page
of this report. See "Index to Financial Statements" on page 17 of this report.
11
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
In March 2000, the Company's Board of Directors decided that the Company would
select a regional accounting firm as the Company's principal independent
accountant to audit the Company's consolidated financial statements for the 1999
fiscal year; and thus, the Company would not re-appointment Ernst & Young LLP
("E&Y") as the Company's principal independent account. However, with regard to
completion of the Company's Form 10-SB (which had yet to reach the no comment
stage) the Company and E&Y agreed that the Company would continue to employ E&Y.
The reports of E&Y on any of the Company's financial statements for the past two
fiscal years did not contain an adverse opinion or a disclaimer of opinion and
were not qualified or modified as to uncertainty, audit scope, or accounting
principles.
In connection with any audits of the Company's financial statements for each of
the two fiscal years ended December 31, 1997 and December 31, 1998, and in any
subsequent interim period, there were no disagreements with E&Y on any matters
of accounting principles or practices, financial statement disclosure, or
auditing scope and procedures which, if not resolved to the satisfaction of E&Y
would have caused E&Y to make reference to the matter in their report. None of
the reportable events listed in Item 304(a)(1)(v) of Regulation S-K occurred
with respect to the Company and E&Y.
The determination not to re-appoint E&Y as independent accountants was reported
on Form 8-K dated March 23, 2000. Pursuant to Item 4(a) of Form 8-K and Item
304(a)(3) of Regulation S-K, the Company provided E&Y with a copy of the Form
8-K and requested E&Y to furnish the Company a letter addressed to the
Securities and Exchange Commission stating whether it agrees with the above
statements and, if not, to state the respects in which E&Y does not agree with
such statements. The letter was received and filed with the Form 8-K.
In September 2004, the Company's Board of Directors approved the appointment of
Robnett & Company, LLP as the Company's principal independent accounting firm.
Prior to the engagement of Robnett & Company, the Company did not consult with
such firm regarding the application of accounting principles to a specific
completed or contemplated transaction, or any matter that was either the subject
of a disagreement or a reportable event. The Company also did not consult with
Robnett & Company regarding the type of audit opinion which might be rendered on
the Company's financial statements and no oral or written report was provided by
Robnett & Company.
ITEM 8A. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the Company has evaluated
the effectiveness of the design and operation of its disclosure controls and
procedures under the supervision and with the participation of its chief
executive officer ("CEO") who also serves as chief financial officer ("CFO").
Based on this evaluation, management, including the CEO, concluded that the
Company's disclosure controls and procedures were effective.
During the quarter ended December 31, 2003, there were no significant changes in
the Company's internal controls over financial reporting that materially
affected, or are reasonably likely to materially affect, internal controls over
financial reporting.
ITEM 8B. OTHER INFORMATION
Not applicable.
12
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The following table sets forth the names, ages and offices of the present
executive officers and directors of the Company. The periods during which such
persons have served in such capacities are indicated in the description of
business experience of such persons below.
Name Age Position
______________ ___ _________________________________
Thomas Cooke 56 President, Treasurer and Director
Kevin M. Smith 60 Director
The following is a biographical summary of the business experience of the
present directors and executive officers of the Company:
Thomas F. Cooke has served as our president, secretary and treasurer since
co-founding the Company in 1990. In addition to his service as an officer of the
Company, Mr. Cooke has been self-employed as an independent oil and gas producer
for the last 23 years.
Kevin M. Smith has served as a Director of the Company since 1997. Mr. Smith has
in excess of 35 years experience as an exploration geophysicist. Since 1984 Mr.
Smith's work experience has been exclusively devoted to his own geophysical
consulting firm (Kevin M. Smith, Inc.). Mr. Smith received a Bachelor of Science
degree with a dual major of Geology and Geophysics from the University of
Houston. He also did post graduate studies in Geology and Geophysics at the
University of Houston.
The Company's directors serve for a term of one year or until their successors
are elected by the shareholders. The Company's executive officers are elected by
our board of directors and serve terms of one year or until their death,
resignation or removal by the board of directors.
Board Committees
The Company does not presently maintain an audit committee or any other
committee of our board of directors. Because we presently have only two
directors and do not presently maintain an audit committee, we have no audit
committee financial expert.
Compliance With Section 16(a) of Exchange Act
Under the securities laws of the United States, the Company's directors, its
executive officers, and any person holding more than ten percent of the
Company's Common Stock are required to report their initial ownership of the
Company's Common Stock and any subsequent changes in that ownership to the
Securities and Exchange Commission. Specific due dates for these reports have
been established and the Company is required to disclose any failure to file by
these dates during fiscal year 2003. To the Company's knowledge, all of the
filing requirements were satisfied on a timely basis in fiscal year 2003. In
making these disclosures, the Company has relied solely on copies of reports
provided to the Company.
13
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth information concerning cash and non-cash
compensation paid or accrued for services in all capacities to the Company
during the year ended December 31, 2003 of each person who served as the
Company's Chief Executive Officer during fiscal 2003 and the next four most
highly paid executive officers (the "Named Officers").
Long Term
Annual Compensation Compensation
------------------- -----------------------------
Name and Principal Position Year Salary($) Bonus($) Other ($) Stock Options($)
--------------------------- ---- --------- -------- --------- ----------------
Thomas Cooke 2003 -0- -0- - -
President and 2002 -0- -0- - -
Chief Executive Officer 2001 -0- -0- - -
The Company currently pays no compensation for service of directors. The Company
may consider payment of certain amounts to attract the services of independent
directors.
The Company, during 2003 and at June 10, 2005, had no employment agreements with
any employees.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth information as of June 10, 2005, based on
information obtained from the persons named below, with respect to the
beneficial ownership of shares of the Company's Common Stock held by (i) each
person known by the Company to be the owner of more than 5% of the outstanding
shares of the Company's Common Stock, (ii) each director, (iii) each named
executive officer, and (iv) all executive officers and directors as a group:
Name and Address Number of Shares Percentage
of Beneficial Owner (1) Beneficially Owned (2) of Class
----------------------- ---------------------- ----------
Thomas F. Cooke (3) 2,220,422 64.1%
1304 Alta Vista Ave
Austin, TX 78704
Kevin Smith (4) 203,643 5.9%
14003 Cherry Mound
Houston, TX 77077
All directors and officers
as a group (2 persons) 2,424,065 70.0%
----------
(1) Unless otherwise indicated, each beneficial owner has both sole voting
and sole investment power with respect to the shares beneficially owned
by such person, entity or group. The number of shares shown as
beneficially owned include all options, warrants and convertible
securities held by such person, entity or group that are exercisable or
convertible within 60 days of June 10, 2005.
(2) The percentages of beneficial ownership as to each person, entity or
group assume the exercise or conversion of all options, warrants and
convertible securities held by such person, entity or group which are
exercisable or convertible within 60 days, but not the exercise or
conversion of options, warrants and convertible securities held by
others shown in the table.
(3) Includes 109,148 shares held by June Cooke, Mr. Cooke's spouse, of
which Mr. Cooke disclaims beneficial ownership.
(4) Includes 20,000 shares held by Sandra Smith, Mr. Smith's spouse, of
which Mr. Smith disclaims beneficial ownership.
14
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 1999, in conjunction with the spin-off of the Company's stock by Saratoga
Delaware and pursuant to the terms of the Eye Care Acquisition, the Company
pledged marketable securities to secure certain debt of Saratoga Delaware.
During 2002 and 2003, Thomas Cooke, the principal officer, director and
shareholder of the Company loaned funds to the Company to support operations
and, for the foreseeable future, Mr. Cooke continued to advance funds to the
Company after 2003 to support operations. Amounts loaned to the Company by Mr.
Cooke, totaling $159,963 at December 31, 2003, bear interest at 12.5% and are
repayable on demand.
During 2002, the Company transferred a vehicle to Mr. Cooke, with a net book
value of $1,027, and Mr. Cooke assumed the remaining debt on the vehicle,
totaling $1,662.
During 2002, Holdings transferred to the Company 100% of the stock of SH2, Inc.
in full satisfaction of loans from the Company totaling $65,317. SH2 has no
appreciable assets or operations. The Company's principal shareholder and
officer also served as principal shareholder and officer of Holdings at the time
of the transaction.
ITEM 13. EXHIBITS
Exhibit
Number Description of Exhibit
_______ __________________________________________________________
3.1 Restated Articles of Incorporation of Saratoga Resources,
Inc. (incorporated by reference to Exhibit 3(i) to the
Company's Registration Statement on Form 10-SB filed with
the SEC on October 6, 1999).
3.2 Bylaws of Saratoga Resources, Inc. (incorporated by
reference to Exhibit 3(ii) to the Company's Registration
Statement on Form 10-SB filed with the SEC on October 6,
1999).
10.1 Geophysical/Geological Data Review Agreement dated
December 1999, between Saratoga Resources, Inc. and Trek
Oil and Gas, Inc. (incorporated by reference to Exhibit
10.1 to the Company's Registration Statement on Form 10-SB
filed with the SEC on February 16, 2000).
10.2 Letter Agreement, dated March 22, 1999, between Saratoga
Resources, Inc. and DBX Geophysical Corporation.
(incorporated by reference to Exhibit 10.2 to the
Company's Annual Report on Form 10-KSB for the year ended
December 31, 1999)
10.3 Letter Agreement, dated June 21, 1999, between Saratoga
Resources, Inc., Ivy Oil Company and Trek Oil and Gas,
Inc. (incorporated by reference to Exhibit 10.3 to the
Company's Annual Report on Form 10-KSB for the year ended
December 31, 1999)
10.4 Letter Agreement, dated January 3, 2001, between Saratoga
Resources, Inc. and Trek Oil and Gas, Inc. (incorporated
by reference to Exhibit 10.4 to the Company's Annual
Report on Form 10-KSB for the year ended December 31,
2000)
21.1 List of subsidiaries (incorporated by reference to Exhibit
21 to the Company's Registration Statement on Form 10-SB
filed with the SEC on October 6, 1999).
31.1 * Section 302 Certifications
32.1 * Section 906 Certifications
* Filed herewith
15
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table presents fees billed for professional services rendered by
the Company's principal accountants for the audit of the Company's annual
financial statements for the years ended December 31, 2002 and 2003 and fees
billed for other services rendered by that firm during those periods.
2002 2003
-------- --------
Audit fees (1) - 9,857
Audit related fees - -
Tax fees - -
All other fees - -
-------- --------
Total - $ 9,857
======== ========
(1) Audit fees consist of fees billed for professional services rendered
for the audit of the Company's consolidated annual financial statements
and review of the interim consolidated financial statements included in
quarterly reports and services that are normally provided by in
connection with statutory and regulatory filings or engagements. The
audit of the Company's financial statements for both 2002 and 2003 was
performed during 2003, 2004 and later periods. Accordingly, no audit,
or other, fees are shown during 2002. Fees shown as billed during 2003
relate to periods beginning in 1999 and running through 2003.
The Company does not maintain an Audit Committee. The policy of the Company's
board is to pre-approve all audit and non-audit services provided by the
independent auditors.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SARATOGA RESOURCES, INC.
Dated: July 8, 2005
By: /S/ Thomas F. Cooke
________________________
Thomas F. Cooke
President
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Signatures Title Date
/S/ THOMAS F. COOKE President, Director and July 8, 2005
________________________ Treasurer (Principal Executive
THOMAS F. COOKE and Financial Officer)
/S/ KEVIN SMITH Director July 8, 2005
________________________
KEVIN SMITH
16
SARATOGA RESOURCES, INC.
INDEX TO FINANCIAL STATEMENTS
Independent Auditors Report........................................ 18
Balance Sheet as of December 31, 2003.............................. 19
Statements of Operations For the Years ended December 31, 2003
and 2002........................................................... 20
Statements of Shareholders' Equity for the Years ended
December 31, 2003 and 2002......................................... 21
Statements of Cash Flows For the Years Ended December 31, 2003
and 2002........................................................... 22
Notes to Financial Statements...................................... 23
17
Report of Independent Auditors
Board of Directors
Saratoga Resources, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Saratoga
Resources, Inc. and Subsidiaries as of December 31, 2003, and the related
consolidated statements of operations, changes in stockholders' equity
(deficit), and cash flows for the years ended December 31, 2003 and 2002. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting. Our audit
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Saratoga Resources, Inc. and Subsidiaries as of December 31, 2003 and the
consolidated results of their operations and cash flows for the years ended
December 31, 2003 and 2002 in conformity with generally accepted accounting
principles.
Robnett & Company, LLP
Austin, Texas
September 7, 2004
18
Saratoga Resources, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEET
December 31, 2003
ASSETS
Current assets:
Available-for-sale securities $ 22,672
Fixed assets:
Furniture and equipment 26,688
Accumulated depreciation (25,083)
-----------
1,605
Total assets $ 24,277
===========
LIABILITIES AND STOCKHOLDERS' CAPITAL
Current liabilities:
Cash overdraft $ 833
Accounts payable & other accrued liabilities 126,512
-----------
127,345
Long-term debt:
Due to related parties 159,963
Stockholders' capital:
Preferred stock, $0.001 par value; 100,000 shares
authorized, 0 shares issued and outstanding --
Common stock, $0.001 par value; 100,000,000 shares
authorized, 3,465,292 shares issued and outstanding 3,465
Additional paid-in capital 2,489,499
Accumulated deficit (2,778,667)
Accumulated other comprehensive loss 22,672
-----------
(263,031)
Total liabilities and stockholders' capital $ 24,277
===========
See notes to financial statements.
19
Saratoga Resources, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME For the Years Ended December 31, 2003 and 2002
2003 2002
----------- -----------
REVENUES:
Net gain from participation agreement $ -- $ 5,523
Realized gains on available for sale securities -- 1,195
----------- -----------
-- 6,718
COSTS AND EXPENSES:
Net loss from participation agreement 3,246 --
Depreciation 351 1,906
General and administrative 22,807 17,203
Interest expense 24,391 20,512
Loss from acquisition of affiliate -- 65,317
----------- -----------
50,795 104,938
----------- -----------
Loss before extraordinary item (50,795) (98,220)
Gain from forgiveness of debt 6,176 --
----------- -----------
Net loss $ (44,619) $ (98,220)
----------- -----------
OTHER COMPREHENSIVE INCOME:
Unrealized holding gains (losses)
arising during the period (32,839) 54,336
----------- -----------
Comprehensive income (loss) $ (77,458) $ (43,884)
=========== ===========
Basic and diluted loss per share: $ (0.013) $ (0.028)
=========== ===========
Weighted-average number of common
shares outstanding 3,465,292 3,465,292
See notes to financial statements.
20
Saratoga Resources, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' CAPITAL (DEFICIT)
For the Years Ended December 31, 2003 and 2002
Accumulated
Common Stock Additional Other
------------------------- Paid-in Retained Comprehensive
Amount Shares Capital Deficit Gain (Loss) Total
----------- ----------- ----------- ----------- ------------- -----------
January 1, 2002 $ 3,465 3,465,292 $ 2,489,499 $(2,621,400) $ 1,175 $ (127,261)
Dividends paid -- -- -- (14,428) -- (14,428)
Net loss -- -- -- (98,220) -- --
Unrealized gains on securities -- -- -- -- 54,336 --
-------------
Comprehensive loss -- -- -- -- -- (43,884)
----------- ----------- ----------- ----------- ------------- -----------
December 31, 2002 3,465 3,465,292 2,489,499 (2,734,048) 55,511 (185,573)
Net loss -- -- -- (44,619) -- --
Unrealized losses on securities -- -- -- -- (32,839) --
-------------
Comprehensive loss -- -- -- -- -- (77,458)
----------- ----------- ----------- ----------- ------------- -----------
December 31, 2003 $ 3,465 3,465,292 $ 2,489,499 $(2,778,667) $ 22,672 $ (263,031)
=========== =========== =========== =========== ============= ===========
See notes to financial statements.
21
Saratoga Resources, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended
December 31, 2003 and 2002
2003 2002
-------- --------
Cash flows from operating activities:
Net loss $(44,619) $(98,220)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 351 1,906
Increase in accounts payable -- 24,028
Increase in accrued liabilities 23,564 --
Loss from acquisition of affiliate -- 68,039
-------- --------
(20,704) (4,247)
-------- --------
Cash flows from financing activities:
Principal payments on long-term debt -- (4,345)
Cash borrowed from related parties 20,675 5,538
Dividends paid -- 1,663
-------- --------
20,675 2,856
-------- --------
Net decrease in cash and equivalents (29) (1,391)
Cash and equivalents, beginning of year (804) 587
-------- --------
Cash and equivalents, end of year $ (833) $ (804)
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest expense $ -- $ 313
======== ========
See notes to financial statements.
22
Saratoga Resources, Inc. and Subsidiaries
Notes to Financial Statements
December 31, 2003
1. Organization and Summary of Significant Accounting Policies
Organization
Saratoga Resources, Inc., a Texas Corporation (the "Company", "Saratoga" or the
"Registrant") was incorporated on July 25, 1990 to engage in the transaction of
any and all lawful businesses for which corporations may be incorporated under
the Texas Business Corporation Act. The Company derives its revenues from a
contractual interest in a single oil and gas property.
Prior to August 9, 1999, the Company was a wholly owned subsidiary of Saratoga
Resources, Inc., a Delaware Corporation (the "Predecessor"). On August 9, 1999,
the Predecessor distributed 100% of the outstanding shares of the Company's
common stock to the Predecessor's shareholders (the "Spin-Off"). Concurrently,
the Predecessor distributed its assets and 100% of the outstanding common shares
of its previously wholly owned subsidiaries, Lobo Operating, Inc., a Texas
Corporation ("Lobo Operating"), and Lobo Energy, Inc., a Texas Corporation
("Lobo Energy"), as well as a 9% equity interest in Saratoga Holdings, Inc., a
Texas Corporation ("Holdings"), to the Company. Holdings had no identifiable
assets or a readily determinable fair market value and did not affect the
Company's financial position or results of activities and cash flows as of or
for the year ended December 31, 2003.
Use of Estimates
The preparation of the Company's consolidated financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from these
estimates.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the
Company and all of its wholly-owned and majority-owned subsidiaries. All
significant inter-company accounts and transactions are eliminated in
consolidation.
23
Saratoga Resources, Inc. and Subsidiaries
Notes to Financial Statements
December 31, 2003
1. Organization and Summary of Significant Accounting Policies - Continued
Cash and Cash Equivalents
The company considers all investments with maturities of ninety days or less
when purchased to be cash equivalents.
Marketable Securities
All marketable securities are classified as available-for-sale. These securities
are stated at estimated fair value based upon market quotes. Unrealized gains
and losses, net of tax, are computed on the basis of specific identification and
are included as a separate component of stockholders' equity. Realized gains,
realized losses, and declines in value, judged to be other-than-temporary, are
included in Other Income. The cost of securities sold is based on the specific
identification method and interest earned is included in Interest Income.
Marketable securities of the Company's are pledged as security for a debt of the
Predecessor incurred during the Spin-Off. (See Note 4). The exposure to loss in
the surety is limited to the value of 7,839 shares of the Predecessor's stock
held in the Company's brokerage accounts, valued at $5,957, as of December 31,
2003.
Equipment
Equipment is recorded at cost less accumulated depreciation. Depreciation of
equipment is computed using the straight-line method over the estimated useful
life of the assets (five to seven years). Expenditures for 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.
Recognition of Revenues
The Company recognizes net gains and losses arising from its participating
interest in the profits and losses of an unaffiliated oil & gas production
company in accordance with Statement of Financial Accounting Standard ("SFAS")
No. 69 - Disclosures About Oil and Gas Producing Activities. As of the date of
report, the Company has no capitalized or equity interest in, and has not
realized significant net royalties with respect to the participating interest in
the profits and losses of the unaffiliated oil & gas production company. Due to
the lack of significant revenue generation and the excessive cost involved in
reporting the associated activities, disclosure required by SFAS No. 69 are
neither relevant nor reliable and are therefore excluded from this report.
24
Saratoga Resources, Inc. and Subsidiaries
Notes to Financial Statements
December 31, 2003
1. Organization and Summary of Significant Accounting Policies - Continued
Income Taxes
The Company accounts for income taxes in accordance with Statement of Financial
accounting Standards (SFAS) No. 109, Accounting for Income Taxes. This statement
prescribes the use of the asset and liability method whereby deferred tax asset
and liability account balances are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse.
Loss Per Share
The Company follows the provisions of SFAS No. 128, Earnings Per Share. Basic
net loss per share is computed by dividing net loss available to common
stockholders by the weighted average number of common shares outstanding during
the period.
Segments
In 1997, the Financial Accounting Standards Board issued SFAS No. 131,
Disclosures About Segments of an Enterprise and Related Information, which
establishes reporting standards for a company's operating segments in annual
financial statements and the reporting of selected information about operating
segments in financial statements. The adoption of SFAS No. 131 had no effect on
the disclosure of segment information as the Company continues to consider its
business activities as a single segment.
2. Related Parties
Due to Related Parties
As of December 31, 2003 the company was indebted to the principal shareholder in
the amount of $227,238 which includes $67,276 of accrued interest. The
indebtedness to the principle shareholder bears interest at 12.5% and is to be
repaid from proceeds from operations as they become available. Accrued interest
of $24,391 is included in the interest expense recognized in the Consolidated
Statement of Operations and Comprehensive Income for the year ended December 31,
2003. Subsequent to December 31, 2003, operations of the Company have been
funded by loans from the Company's principal shareholder. As of the date of
report, principal and accrued interest of $174,963 and $86,258 respectfully,
remain outstanding to the principle shareholder.
25
Saratoga Resources, Inc. and Subsidiaries
Notes to Financial Statements
December 31, 2003
3. Income Taxes.
As of December 31, 2003, the company had federal net operating loss
carry-forwards approximating $843,100. The net operating losses will expire
beginning in 2012, if not utilized.
Utilization of the net operating losses may be subject to a substantial annual
limitation due to the "change in ownership" provisions of the Internal Revenue
Code of 1986. The annual limitation, if applicable, may result in the expiration
of net operating losses.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred taxes for the years ended December 31, 2003 and 2002 are
as follows:
Deferred tax asset (liabilities) 2003 2002
--------- ---------
Depreciable assets $ (1,798) $ (1,880)
Tax carry-forwards 350,154 333,625
Accrual to cash adjustment 14,377 5,516
--------- ---------
Total deferred tax assets 362,712 337,261
Valuation allowance for deferred tax assets (362,712) (337,261)
--------- ---------
Net deferred tax assets (liabilities) $ -0- $ -0-
========= =========
The Company has established valuation allowances equal to the net deferred tax
assets due to uncertainties regarding their realization. The valuation allowance
increased by approximately $25,400 during the year ended December 31, 2003 due
primarily to current year net operating losses, which were aggregated with prior
year un-utilized net operating losses.
The reconciliation of generally accepted accounting principles net loss to
taxable net loss is as follows:
2003 2002
--------- ---------
GAAP Net Loss $ (44,619) $ (98,220)
Differences in realized losses 50,713
Cash to accrual adjustments 23,949 23,748
--------- ---------
Taxable Net Loss $ (24,172) $ (33,259)
4. Commitments & Contingencies
Debt Surety
The Company pledged equity securities to secure debt of the Predecessor incurred
in the Spin-Off. The amount of the surety is limited to the equity securities
held in brokerage accounts pledged as collateral for the debt.
26