10KSB/A 1 l10ksba123105.txt SOUTH TEXAS OIL COMPANY FORM 10-KSB/A U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB/A #1 (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, 2005 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to ___________ Commission file number: 0-50732 SOUTH TEXAS OIL COMPANY -------------------------------------------- (Name of small business issuer in its charter) Nevada 74-2949620 -------------------------------- ------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 2881 CR 2880, Big Foot, TX 78005 ---------------------------------- --------- (Address of principal executive offices) (Zip Code) P.O. Box 531431, Henderson, NV 89053 ---------------------------------- --------- (Mailing Address) (Zip Code) 210-568-9760 (Telephone) 210-568-9761 (Fax) -------------------------------------------- (Issuer's telephone number) 900 NE Loop 410, Suite E-121, San Antonio, TX 78209 --------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Securities registered under Section 12(b) of the Exchange Act: None Securities registered under Section 12(g) of the Exchange Act: Common Stock, par value $.001 ----------------------------- (Title of class) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.Yes [X] No[ ] Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained herein, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X] The issuer had revenues of $278,817 for the fiscal year ended December 31, 2005. Based on the average of the closing bid and asked prices of the issuer's common stock on December 31, 2005, the aggregate market value of the voting stock held by non-affiliates of the registrant on that date was $1,613,426. As of March 30, 2006, the issuer had 4,889,171 shares of common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE The Company's report on Form 8-K dated February 7, 2006 - Part III, Item 9 The Company's report on Form 8-K dated December 14, 2005 The Company's report on Form 8-K dated December 14, 2005 - Part II, Item 5 The Company's report on Form 8-K dated August 1, 2005 - Part II, Item 5 The Company's report on Form 8-K dated April 14, 2005 - Part II, Item 5 The Company's report on Form 8-K dated April 7, 2005 - Part I, Item 2 Transitional Small Business Disclosure Format (check one): Yes [ ] No [X] 2 TABLE OF CONTENTS Page No. PART I Item 1. Description of Business.................................... 6 Item 2. Description of Properties.................................. 16 Item 3. Legal Proceedings.......................................... 23 Item 4. Submission of Matters to a Vote of Security Holders........ 23 PART II Item 5. Market for Common Equity and Related Stockholder Matters .. 23 Item 6. Management's Discussion and Analysis of Financial Condition or Plan of Operation............................. 27 Item 7. Financial Statements....................................... F-1 Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..................... 32 Item 8A. Controls and Procedures.................................... 32 Item 8B. Other Information.......................................... 32 PART III Item 9. Directors and Executive Officers of the Registrant......... 32 Item 10. Executive Compensation..................................... 36 Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters............. 37 Item 12. Certain Relationships and Related Transactions............. 38 Item 13. Exhibits and Reports on Form 8-K........................... 40 Item 14. Principal Accountant Fees and Services..................... 42 Signatures ........................................................... 43 3 PART I Forward-Looking Statements References in this annual report to "the Company," "we," "us" or "our" are intended to refer to South Texas Oil Company. This report contains numerous "forward-looking statements" that involve substantial risks and uncertainties. These include, without limitation, statements relating to future drilling and completion of wells, well operations, production, prices, costs and expenses, cash flow, investments, business strategies and other plans and objectives of our management for future operations and activities and other such matters including, but not limited to: - Failure to obtain, or a decline in, oil production, or a decline in oil or gas prices, - Incorporate estimates of required capital expenditures, - Increase in the cost of drilling, completion and oil production or other costs of production and operations, - An inability to meet growth projections, and - Other risk factors set forth under "Risk Factors" in this annual report. In addition, the words "believe", "may", "could", "when", "estimate", "continue", "anticipate", "intend", "expect", and similar expressions, as they relate to the South Texas Oil Company, our business or our management, are intended to identify forward-looking statements. These statements are based on our beliefs and the assurances we made using information currently available to us. Because these statements reflect our current views concerning future events, these statements involve risks, uncertainties and assumptions. Our actual results could differ materially from the results discussed in the forward-looking statements. Some, but not all, of the factors that may cause these differences include those discussed below under the section entitled "Risk Factors" in this annual report. You should not place undue reliance on these forward-looking statements. You should also remember that these statements are made only as of the date of this report and future events may cause them to be less likely to prove to be true. Glossary of Terms CONDENSATE refers to hydrocarbons associated with natural gas which are liquid under surface conditions but gaseous in a reservoir before extraction. DEPLETION is the reduction in petroleum reserves due to production. FORMATION is a reference to a group of rocks of the same age extending over a substantial area of a basin. HYDROCARBONS is the general term for oil, gas, condensate and other petroleum products. PARTICIPATION INTEREST or WORKING INTEREST is an equity interest (compared with a royalty interest) in an oil and gas property whereby the participating interest holder pays its proportionate percentage share of development and operating costs and receives the equivalent share of the proceeds of hydrocarbon sales after deduction of royalties due on the gross income. PROSPECT is a potential hydrocarbon trap which has been confirmed by geological and geophysical studies to the degree that drilling of an exploration well is warranted. 4 PROVED RESERVES of crude oil, natural gas, or natural gas liquids are estimated quantities that geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions, i.e., prices and costs as of the date the estimate is made. Prices include consideration of changes in existing prices provided only by contractual arrangements, but not on escalations based upon future conditions. Reservoirs are considered proved if economic producibility is supported by either actual production or conclusive formation tests or if core analysis and/or log interpretation demonstrates economic producibility with reasonable certainty. The area of a reservoir considered proved includes (1) that portion delineated by drilling and defined by fluid contacts, if any, and (2) the immediately adjoining portions not yet drilled that can be reasonably judged as economically productive on the basis of available geological and engineering data. In the absence of data on fluid contacts, the lowest known structural occurrence of hydrocarbons controls the lower proved limit of the reservoir. Proved reserves are estimates of hydrocarbons to be recovered from a given data forward. They are expected to be revised as hydrocarbons are produced and additional data become available. Reserves that can produced economically through the application of established improved recovery techniques are included in the proved classification when these qualifications are met: (1) successful testing by a pilot project, or the operation of an installed program in that reservoir, provides support for the engineering analysis on which the project or program was based, and (2) it is reasonably certain the project will proceed. Estimates of proved reserves do not include the following: (1) oil that may become available from known reservoirs but is classified separately as indicated additional reserves; (2) crude oil, natural gas, and natural gas liquids, the recovery of which is subject to reasonable doubt because of uncertainty as to geology, reservoir characteristics, or economic factors; (3) crude oil, natural gas, and natural gas liquids, that may occur in undrilled prospects; and (4) crude oil, natural gas, and natural gas liquids, that may be recovered from oil shales, coal, gilsonite and other such sources. PROVED DEVELOPED RESERVES A subcategory of proved reserves. They are those reserves that can be expected to be recovered through existing wells with existing equipment and operating methods. Additional oil and gas expected to be obtained through application of fluid injection or other improved recovery techniques for supplementing the natural forces and mechanisms of primary recovery are considered developed only after testing by a pilot project or after the operation of an installed program has confirmed through production response that increased recovery will be achieved. PROVED UNDEVELOPED RESERVES is a subcategory of proved reserves. They are reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for recompletion. Reserves on undrilled acreage are limited to those drilling units offsetting productive units that are reasonably certain of production when drilled. Proved reserves for other undrilled units are claimed only where it can be demonstrated with certainty that there is continuity of production from the existing productive formation. Estimates for proved undeveloped reserves are not attributable to any acreage for which an application of fluid injection or other improved recovery technique is contemplated, unless such techniques have been proved effective by actual tests in the area and in the same reservoir. RESERVOIR is a porous and permeable sedimentary rock formation containing adequate pore space in the rock to provide storage space for oil, gas or water. 5 TRAP is a geological structure in which hydrocarbons build up to form an oil or gas field. ITEM 1. DESCRIPTION OF BUSINESS. (a)Business Development Historical Corporate Development SOUTH TEXAS OIL COMPANY, was incorporated under the laws of the State of Texas on December 3, 1998 and was not operational until February 22, 2000. At inception South Texas Oil Company's Articles of Incorporation Authorized 50,000,000 Common Shares at $.001 Par Value and 5,000,000 preferred shares at $.001 Par Value. On February 22, 2000, South Texas Oil Company, issued to Nutek, Inc. (the parent company) 4,500,000 unregistered shares of its $.001 par value common stock for selected assets, at their fair market value of $1,279,896. Nutek, Inc. had acquired these selected assets from the Clipper Operating Company. On or about May 10, 2001, the domicile of the Corporation was changed from Texas to Nevada and was incorporated in the State of Nevada on that date. On August 1, 2001 a dividend of approximately 509,604 shares of the common stock of South Texas Oil Company, was distributed pro rata to Nutek Inc., shareholders on the basis of a ratio of one (1) share of South Texas Oil Company for each one hundred (100) issued and outstanding shares of Nutek, Inc. held. On September 17, 2002, South Texas Oil Company began trading its Common Shares on the Pink Sheets Electronic Quotation Service, under the symbol NUTO. On January 8, 2004 the parent Company distributed a further dividend of shares of the common stock of South Texas Oil Company. This distribution was distributed pro rata to Nutek Inc., shareholders on the basis of a ratio of one (1) share of South Texas Oil Company for each five hundred (500) issued and outstanding shares of Nutek, Inc. held. The dividend was in the form of a dividend certificate representing restricted common stock, and was distributed to the parent Company's beneficial stockholders of record as of the record date, which was January 8, 2004. On April 1, 2005, South Texas Oil Company changed its name from Nutek Oil, Inc., to South Texas Oil Company. (b) Business of Issuer The Company. South Texas Oil Company was formed for the purpose of development and operation of oil and gas properties with proven reserves. South Texas Oil Company's strategy is to focus in domestic areas where major oil and gas producing companies have reduced their exploration efforts to move offshore and overseas in search of the larger reserves. South Texas Oil Company's initial development strategy has been to acquire such proven fields and attempt to increase production and the exploration of other proven formations in the same fields. However, marginal wells frequently have production costs that are higher than the revenue from hydrocarbons produced which would have a material adverse affect on earnings. See Item 1 (c) Risk Factors Relating to the Oil Industry and Our Business. 6 South Texas Oil Company's primary operational strategy includes the operation of its own projects, giving it substantial control over drilling and production costs. South Texas Oil Company has associated itself with Mr. Conrad Humbke, an experienced oil field developer to advise on methods of adding production at lower costs through development drilling, work-overs, behind pipe re-completions and secondary recovery operations. General Discussion of Operations From inception in 1998, South Texas Oil Company had no operations until it acquired its interests in producing oil wells in 2000. On April 1, 2005, South Texas Oil purchased an additional 44 oil wells, increasing the total number of wells South Texas Oil Company has interest in to 135 and total gross acres under lease to 5,243.685 acres. South Texas Oil Company currently has two full time employees and three part-time employees and contracts the services of consultants and contractors in the various areas of expertise as required. The way in which the business currently operates is as follows: Most of the engineering and geology for South Texas Oil Company's projects is performed by consulting firms, while the actual drilling, rework and other field operations are performed on a project basis by contractors who bid for the work. This is the most cost-effective manner of operation, as the range of expertise and services required varies by project and time duration. South Texas Oil Company recently employed Mr. Edward Shaw as Chief Operating Officer who is responsible for all day to day field operations. This includes oil lease repairs to electrics, maintaining the operation of the wells, providing production reports to South Texas Oil Company and communicating with the oil haulers to collect production when necessary. Mr. Conrad Humbke, is available to advise on methods of adding production at lower costs through development drilling, work-overs, behind pipe re- completions and secondary recovery operations. South Texas Oil Company's website address is http://www.southtexasoil.com 7 (c) Risk Factors Relating to the Oil Industry and Our Business. 1. South Texas Oil Company must increase its oil production revenue or this could adversely affect South Texas Oil Company's oil operations. South Texas Oil Company's long term success is ultimately dependent on its ability to expand its revenue base through the acquisition and development of producing properties. South Texas Oil Company has made significant investments in producing properties in Texas. The acquisitions are not indicative of future success. All of the producing projects are subject to the risk of failure and the loss of South Texas Oil Company's investment. In the event South Texas Oil Company is not able to increase the revenues from its properties, or unable to continue to produce oil from its properties, the leases could fall into default and South Texas Oil Company lose its rights to those leases. 2. Prices of oil fluctuate widely based on market conditions and any extended decline in oil prices may adversely affect our business, financial condition or results of operation and our ability to meet our capital expenditure obligations and financial commitments. South Texas Oil Company's revenues, operating results, cash flow and future rate of growth are very dependent upon prevailing prices for oil. Historically, oil markets have been volatile and not predictable, and they are likely to continue to be volatile in the future. The price we receive for our oil production heavily influences our revenue, profitability, access to capital and future rate of growth. Lower oil prices may not only decrease our revenues on a per unit basis but also may reduce the amount of oil that we can produce economically. A substantial or extended decline in oil or natural gas prices may materially and adversely affect our future business, financial condition, results of operations, liquidity or ability to finance planned capital expenditures. Prices for oil are subject to wide fluctuations in response to relatively minor changes in the supply of and demand for oil, market uncertainty and a variety of additional factors that are beyond our control, including: - political conditions in the oil producing and exporting countries; - the supply and price of foreign oil; - the level of consumer product demand; - the price and availability of alternative fuels; - the effect of federal and state regulation of production and transportation; and - the proximity of South Texas Oil Company's wells to pipelines and their capacity. 3. Unless we replace our oil reserves, our reserves and production will decline, which would adversely affect our cash flows and income. The following leases contain proved developed oil reserves: Ann Burns A, Jane Burns B, Jane Burns, G. Davidson, Foster, Talley, and E. Wright. The following leases have not been attributed with proved developed reserves: Ann Burns, Jane Burns C, Jane Burns D, Jane Burns E, Jane Burns F, Crowther, Hill, Rizik, Shell C, Smith et al, Tomblin, and Wright. Successful development and production of those reserves cannot be assured. Additional drilling or workovers will be necessary in future years both to maintain production levels and to define the extent and recoverability of existing reserves. South Texas Oil Company's present oil wells may not continue to produce at current or anticipated rates of production, development drilling may not be successful, production of oil may not commence when expected, there may be unfavorable markets for oil produced in the future or that prior 8 (cont) production rates cannot be maintained. If South Texas Oil Company is unable to develop or produce reserves for continued production at current rates, South Texas Oil Company would become unprofitable or cease business. 4. Drilling for and producing oil is a high risk activity with many uncertainties that could adversely affect our business, financial condition or results of operations. Our future success will depend on the success of our exploitation, exploration, development and production activities. Our oil exploration and production activities are subject to numerous risks beyond our control, including the risk that drilling will not result in commercially viable oil production. Our decisions to purchase, explore, develop or otherwise exploit prospects or properties will depend in part on the evaluation of data obtained through geophysical and geological analyses, production data and engineering studies, the results of which are often inconclusive or subject to varying interpretations. Our cost of drilling, completing and operating wells is often uncertain before drilling commences. Overruns in budgeted expenditures are common risks that can make a particular project uneconomical. The cost of drilling, completing and operating wells is often uncertain. Moreover, drilling may be curtailed, delayed or canceled as a result of many factors, including title problems, weather conditions, shortages of, or delays in delivery of equipment, as well as the financial instability of well operators, major working interest owners and well servicing companies. South Texas Oil Company's wells may be shut-in for lack of a market until a pipeline or gathering system with available capacity is extended into our area. Our oil wells may have production curtailed until production facilities and delivery arrangements are acquired or developed for them. The affect of one or more of the above factors could result in South Texas Oil Company becoming unprofitable or ceasing business. 5. Competition in the oil industry is intense, which may adversely affect our ability to compete. The oil industry is highly competitive. South Texas Oil Company competes with others for property acquisitions and for opportunities to explore or to develop and produce oil. South Texas Oil Company faces strong competition from many companies and individuals with greater capital, financial resources and larger technical staffs. South Texas Oil Company also faces strong competition in procuring services from a limited pool of laborers, drilling service contractors and equipment vendors. The affect of one or more of the above factors could result in South Texas Oil Company becoming unprofitable or ceasing business. 6. South Texas Oil Company may not carry sufficient insurance, which could adversely affect our business, financial condition and future operations. South Texas Oil Company and well operators maintain general liability insurance but it may not cover all future claims. If a large claim is successfully asserted against South Texas Oil Company, it might not be covered by insurance, or it might be covered but cause South Texas Oil Company to pay much higher insurance premiums or a large deductible or co-payment. Furthermore, regardless of the outcome, litigation involving South Texas Oil Company operations or even insurance companies disputing coverage could divert management's attentions and energies away from operations. The nature of the oil business involves a variety of operating hazards such as fires, explosions, cratering, blow-outs, adverse weather conditions, pollution and environmental risks, encountering formations with abnormal pressures, and, in horizontal wellbores, the increased risk of mechanical failure and collapsed holes, the occurrence of any of which could result in substantial losses to South Texas Oil Company. 9 7. Reserve estimates depend on many assumptions that may turn out to be inaccurate. Any material inaccuracies in these reserve estimates or underlying assumptions will materially affect the quantities and present value of our reserves. Estimating South Texas Oil Company proved reserves involves many uncertainties, including factors beyond South Texas Oil Company's control. There are uncertainties inherent in estimating quantities of proved oil reserves since petroleum engineering is not an exact science. Estimates of commercially recoverable oil reserves and of the future net cash flows from them are based upon a number of variable factors and assumptions including: - historical production from the properties compared with production from other producing properties; - the effects of regulation by governmental agencies; - future oil prices; and - future operating costs, severance and excise taxes, abandonment costs, development costs and workover and remedial costs. 8. Governmental regulation, environmental risks and taxes could adversely affect South Texas Oil Company's oil operations in the state of Texas. South Texas Oil Company's oil operations in Texas are subject to regulation by federal and state governments, including environmental laws. To date, South Texas Oil Company has not had to expend significant resources in order to satisfy environmental laws and regulations presently in effect. However, compliance costs under any new laws and regulations that might be enacted could adversely affect South Texas Oil Company's business and increase the costs of planning, designing, drilling, installing, operating and abandoning South Texas Oil Company's oil wells. Additional matters that are, or have been from time to time, subject to governmental regulation include land tenure, royalties, production rates, spacing, completion procedures, water injections, utilization, the maximum price at which products could be sold, energy taxes and the discharge of materials into the environment. The Registrant is subject to laws and regulations that control the discharge of materials into the environment require removal and cleanup in certain circumstances, require the proper handling and disposal of waste materials or otherwise relate to the protection of the environment. In operating and owning petroleum interests, the Registrant may be liable for damages and the costs of removing hydrocarbon spills for which it is held responsible. Laws relating to the protection of the environment have in many jurisdictions become more stringent in recent years and may, in certain circumstances, impose strict liability, rendering the Registrant liable for environmental damage without regard to negligence of fault on the part of the Registrant. Such laws and regulations may expose the Registrant to liability for the conduct of, or conditions caused by, others or for acts of the Registrant that were in compliance with all applicable law at the time such acts were performed. The application of these requirements or the adoption of new requirements could have a material adverse effect on the business of the Registrant. 9. Properties that we buy may not produce as projected, and we may be unable to identify liabilities associated with the properties or obtain protection from sellers against them. Our business strategy includes a continuing acquisition program. The successful acquisition of producing properties requires assessments of many factors, which are inherently inexact and may be inaccurate, including the following: 10 (cont) - the amount of recoverable reserves; - future oil prices; - estimates of operating costs; - estimates of future development costs; - estimates of the costs and timing of plugging and abandonment; and - potential environmental and other liabilities. Our assessment will not reveal all existing or potential problems, nor will it permit us to become familiar enough with the properties to assess fully their capabilities and deficiencies. In the course of our due diligence, we may not inspect every well, platform or pipeline. Inspections may not reveal structural and environmental problems, such as pipeline corrosion or groundwater contamination, when they are made. We may not be able to obtain contractual indemnities from the seller for liabilities that it created. We may be required to assume the risk of the physical condition of the properties in addition to the risk that the properties may not perform in accordance with our expectations. 10. Indemnities may be Unenforceable or Uncollectible which could adversely affect our business, financial condition and future operations. The operating agreements with participants in a property provide for the indemnification of the Registrant as operator. Such indemnification may not be enforceable or a participant may not be financially able in all circumstances to comply with its indemnification obligations, or the Registrant may not be able to obtain such indemnification agreements in the future. The failure to obtain enforceable indemnification agreements or a participant's inability to indemnify the Registrant may cause the Registrant to assume all operating costs of a property. Such a result could adversely affect our business, financial condition and future operations which additionally, could cause the Registrant to become insolvent. 11. Our Stock is considered a "Penny Stock" which could have an adverse effect on the trading market for South Texas Oil Company's shares. South Texas Oil Company's securities are classified as a "penny stock" based upon their market price and the manner in which they are traded. The Securities and Exchange Act of 1934 requires additional disclosure relating to the market for "penny stocks." A penny stock is generally defined to be any equity security not listed on NASDAQ or a national securities exchange that has a market price of less than $5.00 per share, subject to certain exceptions. Among these exceptions are shares issued by companies that have: - net tangible assets of at least $2 million, if the issuer has been in continuous operation for three years; - net tangible assets of at least $5 million, if the issuer has been in continuous operation for less than three years; or - average annual revenue of at least $6 million for each of the last three years. South Texas Oil Company does not currently meet the requirements of these exceptions and, therefore, the common shares are deemed penny stocks for purposes of the Exchange Act at any time while South Texas Oil Company's common stock trades below $5.00 per share. In such cases, trading in South Texas Oil Company's shares is regulated pursuant to Rules 15-g-1 through 15-g-6 and 15-g- 9 of the Exchange Act. Under these rules, brokers or dealers recommending our shares to prospective buyers would be required, unless an exemption is available, to: 11 (cont) - deliver a lengthy disclosure statement in a form designated by the SEC relating to the penny stock market to any potential buyers, and obtain a written acknowledgement from each buyer that such disclosure statement has been received by the buyer prior to any transaction involving our shares; - provide detailed written disclosure to buyers of current price quotations for our shares, and of any sales commissions or other compensation payable to any broker or dealer, or any other related person, involved in the transaction; - send monthly statements to buyers disclosing updated price information for any penny stocks held in their accounts, and these monthly statements must include specified information on the limited market for penny stocks. In addition, as South Texas Oil Company is subject to the penny stock rules, all brokers or dealers involved in a transaction in which our shares are sold to any buyer, other than an established customer or "accredited investor," must make a special written determination that South Texas Oil Company's shares would be a suitable investment for the buyer, and the brokers or dealers must receive the buyer's written agreement to purchase our shares, as well as the buyer's written acknowledgement that the suitability determination made by the broker or dealer accurately reflects the buyer's financial situation, investment experience and investment objectives, prior to completing any transaction in our shares. These Exchange Act rules may limit the ability or willingness of brokers and other market participants to make a market in our shares and may limit the ability of our shareholders to sell in the secondary market, through brokers, dealers or otherwise. South Texas Oil Company also understands that many brokerage firms discourage their customers from trading in shares falling within the "penny stock" definition due to the added regulatory and disclosure burdens imposed by these Exchange Act rules. The SEC from time to time may propose and implement even more stringent regulatory or disclosure requirements on shares not listed on NASDAQ or on a national securities exchange. The adoption of the proposed changes that may be made in the future could have an adverse effect on the trading market for South Texas Oil Company's shares. 12. Dilution could have an adverse affect on the ownership of the stockholder in the Registrant. The Registrant may issue more common shares at prices determined by the board of directors in any private placements or offerings of securities, possibly resulting in dilution of the value of common shares, and, given there is no preemptive right to purchase common shares, if a stockholder does not purchase additional common shares, the percentage share ownership of the stockholder in the Registrant will be reduced. 13. Defeasance of Title could adversely affect South Texas Oil Company's oil operations. The possibility exists that title to one or more properties of the Registrant may be lost due to an omission in the claim of title. The Registrant does not maintain title insurance. If title to one or more properties is lost, this could adversely affect our business, financial condition and future operations. 14. A Limited Operating History could adversely affect our business, financial condition and future operations. South Texas Oil Company first acquired its interests in producing oil wells in 2000. No additional wells have been acquired. Because of the limited operating history of South Texas Oil Company, stockholders and South Texas Oil Company face a 12 (cont) risk that future acquisitions of oil wells or development may be unsuccessful. South Texas Oil Company would then remain unprofitable which would adversely affect our business, financial condition and future operations. 15. Lack of Management Experience in the Oil and Gas Industry could adversely affect South Texas Oil Company. Some members of Management and the Board of Directors do not have prior experience in the oil industry. Some members do have extensive work experience in geology, land acquisition, leasing properties for natural resource extraction (mining), and business management. The lack of experience in the oil industry may impair Management and the Directors' ability to evaluate and make decisions involving current operations of South Texas Oil Company and any future projects South Texas Oil Company may undertake in the oil industry. Such impairment and lack of experience could adversely affect our business, financial condition and future operations. 16. Amount of Time Officers Can Devote to South Texas Oil Company Operations could have a material adverse affect on South Texas Oil Company. Mr. Conradie, our President and Chief Executive Officer and Mr. Shaw, our Chief Operational Officer currently devote 100% of their time to the operations and demands of South Texas Oil Company. If two or more of the officers of South Texas Oil Company could not perform the duties and responsibilities necessary for the success and development of South Texas Oil Company, this could have a material adverse affect on our business, financial condition and both current and future operations. Environmental and Government Compliance and Costs. All oil and gas operations are subject to extensive environmental permitting and governmental regulation. All drilling and rework operations are subject to inspection by local, state and federal regulators. Violation of these requirements or environmentally damaging spills or accidents due to non- compliance in these areas can result in fines and, depending on the severity of the negligence, criminal prosecution. South Texas Oil Company is not currently a party to any judicial or administrative proceedings which involve environmental regulations or requirements and management believes that it is in substantial compliance with all applicable environmental regulations. GOVERNMENTAL REGULATION GENERAL. South Texas Oil Company is subject to federal, state and local laws and regulations governing environmental quality and pollution control. It is anticipated that, absent the occurrence of an extraordinary event, compliance with existing federal, state and local laws, rules and regulations concerning the protection of the environment and human health will not have a material effect upon South Texas Oil Company, capital expenditures, or earnings. South Texas Oil Company cannot predict what effect additional regulation or legislation, enforcement policies thereunder and claims for damages for injuries to property, employees, other persons and the environment resulting from South Texas Oil Company's operations. South Texas Oil Company's operations related to the exploration, development and production of oil and natural gas are subject to stringent environmental regulation by state and federal authorities including the Environmental Protection Agency ("EPA"). This regulation has increased the cost of planning, designing, drilling, operating and in some instances, abandoning wells. In most instances, the regulatory requirements relate to the handling and disposal of drilling and production waste products and waste created by water and air 13 (cont) pollution control procedures. Although South Texas Oil Company believes that compliance with environmental regulations will not have a material adverse effect on its operations or results of these operations, risks of substantial costs and liabilities are inherent in oil and gas operations, and there can be no assurance that significant costs and liabilities, including criminal penalties, will not be incurred. Moreover, it is possible that other developments, including stricter environmental laws and regulations, and claims for damages for injuries to property or persons resulting from South Texas Oil Company activities could result in substantial costs and liabilities. EXPLORATION AND PRODUCTION. South Texas Oil Company's operations are subject to various types of regulation at the federal, state and local levels. Such regulation includes requiring permits for the drilling of wells, maintaining bonding requirements in order to drill or operate wells and regulating the location of wells, the method of drilling and casing wells, the surface use and restoration of properties upon which wells are drilled, the plugging and abandoning of wells and the disposal of fluids used or obtained in connection with operations. South Texas Oil Company is also subject to various conservation 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 oil and gas properties. In addition, state conservation laws establish maximum rates of production from oil and gas wells, generally prohibit the venting or flaring of gas and impose certain requirements regarding the ratability of production. These regulations limit the amount of oil and gas that can be produce from wells and to limit the number of wells or the locations at which wells can be drill. WASTE DISPOSAL. South Texas Oil Company currently owns or leases, and has in the past owned or leased, numerous properties that for many years have been used for the exploration and production of oil. Although South Texas Oil Company has utilized operating and disposal practices that were standard in the industry at the time, hydrocarbons or other wastes may have been disposed of or released on or under the properties owned or leased by South Texas Oil Company or on or under other locations where these wastes have been taken for disposal. State and federal laws applicable to oil and natural gas wastes and properties have gradually become stricter. Under these laws, South Texas Oil Company could be required to remove or remediate previously disposed wastes (including wastes disposed of or released by prior owners or operators) or property contamination (including groundwater contamination) or to perform remedial plugging operations to prevent future contamination. South Texas Oil Company's operations and activities may generate wastes, including hazardous wastes, that are subject to the federal Resource Conservation and Recovery Act ("RCRA") and comparable state statutes. The EPA and applicable state agencies have limited the disposal options for certain hazardous and nonhazardous wastes and are considering the adoption of stricter disposal standards for nonhazardous wastes. Furthermore, certain wastes that may be generated by the oil and natural gas operations that are currently exempt from treatment as hazardous wastes may in the future be designated as hazardous wastes, and therefore be subject to considerably more rigorous and costly operating and disposal requirements. SUPERFUND. The Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), also known as the "Superfund" law, imposes liability, without regard to fault or the legality of the original conduct, on certain classes of persons with respect to the release of a "hazardous substance" into the environment. These persons include the owner and operator of a site, persons that disposed of or arranged for the disposal of the hazardous substances found at a site, and prior owners and operators of the site. CERCLA also authorizes the EPA and, in some cases, third parties to take actions in response to threats to the public health or the environment and to seek to recover from responsible classes of 14 (cont) persons the costs of such action. In the course of operations, South Texas Oil Company's operations and activities may generate wastes that fall within CERCLA's definition of "hazardous substances." South Texas Oil Company may be responsible under CERCLA for all or part of the costs to clean up sites at which such wastes have been released. To date, however, neither South Texas Oil Company nor, to its knowledge, its predecessors have been named a potentially responsible party under CERCLA or similar state Superfund laws affecting the Leases on which South Texas Oil Company's wells are located. AIR EMISSIONS. South Texas Oil Company's operations and activities are subject to local, state and federal regulations for the control of emissions of air pollution. Legal and regulatory requirements in this area are increasing, and there can be no assurance that significant costs and liabilities will not be incurred in the future as a result of new regulatory developments. In particular, regulations promulgated under the Clean Air Act Amendments of 1990 may impose additional compliance requirements that could affect the operations. However, it is currently impossible to predict accurately the effect, if any, of the Clean Air Act Amendments on South Texas Oil Company's operations and activities. South Texas Oil Company may in the future become subject to civil or administrative enforcement actions for failure to comply strictly with air regulations or permits. These enforcement actions are generally resolved by payment of monetary fines and correction of any identified deficiencies. Alternatively, regulatory agencies could require South Texas Oil Company to forego construction or operation of certain air emission sources. OSHA. In the conduct of its activities South Texas Oil Company and its operations will be subject to the requirements of the federal Occupational Safety and Health Act ("OSHA") and comparable state statutes. The OSHA hazard communication standard, the EPA community right-to-know regulations under Title III of the federal Superfund Amendment and Reauthorization Act and similar state statutes require us to organize information about hazardous materials used, released or produced in its operations. Certain of this information must be provided to employees, state and local governmental authorities and local citizens. South Texas Oil Company is also subject to the requirements and reporting set forth in OSHA workplace standards. OPA AND CLEAN WATER ACT. Federal regulations require certain owners or operators of facilities that store or otherwise handle oil to prepare and implement spill prevention control plans, countermeasure plans and facilities response plans relating to the possible discharge of oil into surface waters. The Oil Pollution Act of 1990 ("OPA") amends certain provisions of the federal Water Pollution Control Act of 1972, commonly referred to as the Clean Water Act ("CWA"), and other statutes as they pertain to the prevention of and response to oil spills into navigable waters. The OPA subjects owners of facilities to strict joint and several liability for all containment and cleanup costs and certain other damages arising from a spill, including, but not limited to, the costs of responding to a release of oil to surface waters. The CWA provides penalties for any discharges of petroleum product in reportable quantities and imposes substantial liability for the costs of removing a spill. State laws for the control of water pollution also provide varying civil and criminal penalties and liabilities in the case of releases of petroleum or its derivatives into surface waters or into the ground. Regulations are currently being developed under OPA and state laws concerning oil pollution prevention and other matters that may impose additional regulatory burdens on South Texas Oil Company. 15 SAFE DRINKING WATER ACT. South Texas Oil Company's operations and activities involve the disposal of produced saltwater and other nonhazardous oilfield wastes by reinjection into the subsurface. Under the Safe Drinking Water Act ("SDWA"), oil and gas operators, like South Texas Oil Company, must obtain a permit for the construction and operation of underground Class II injection wells. To protect against contamination of drinking water, periodic mechanical integrity tests are often required to be performed by the well operator. TOXIC SUBSTANCES CONTROL ACT. The Toxic Substances Control Act ("TSCA") was enacted to control the adverse effects of newly manufactured and existing chemical substances. Under the TSCA, the EPA has issued specific rules and regulations governing the use, labeling, maintenance, removal from service and disposal of PCB items, including transformers and capacitors used by oil and gas companies. South Texas Oil Company believes it is in compliance with the TSCA and that the TSCA will not have a material adverse effect on South Texas Oil Company's operations and activities. In many cases there is a bond required of operators to ensure that a prospective well is properly plugged and abandoned when its useful life is determined to be concluded. South Texas Oil Company has posted such a bond in the amount of $50,000 with the Texas Rail Road Commission to cover its projects. Such bonds are additions to the cost of South Texas Oil Company's projects. The current bond of $50,000 covers the wells operated by South Texas Oil Company as required by the Rail Road Commission of Texas under the Texas Administrative Code, Title 16 Economic Regulation, Chapter 3 Oil and Gas Division, Rule {section}3.78 Fees, Performance Bonds and Alternate Forms of Financial Security Required To Be Filed. ITEM 2. DESCRIPTION OF PROPERTY. The corporate offices of South Texas Oil Company are located in San Antonio, Texas, within the Petroleum Building located at 900 NE Loop 410, Suite E-121, San Antonio, Texas, 78209 at a monthly cost of $535. Current Oil and Gas Properties. 1. BIG FOOT AND KYOTE FIELDS. Selected assets and leases of the Clipper Operating Company were acquired on February 22, 2000 with 2,064,348 shares of Nutek, Inc. (former parent company) stock at the current market price of $.31 representing $639,948; a note for $639,948 was issued for the balance of the purchase price. The purchase price of $1,279,896 was made up of mineral acreage for $454,959; equipment at market value $788,217 and a gas pipeline at market value $36,720. (See Exhibit 10.1: Letter of Intent to Purchase Selected Assets from Clipper Operating Company.) On or about February 22, 2000, South Texas Oil Company issued to Nutek, Inc. 4,500,000 unregistered shares of its .001 par value common stock for these assets, at their fair market value of $1,279,896. (See Exhibit 10.2: Purchase Agreement of Selected Assets from Nutek Inc.) South Texas Oil Company acquired a 100 percent working interest in these properties in the Big Foot and Kyote fields of Frio and Atascosa Counties, Texas. 16 The highlights of the purchase agreement included the following terms: A. Purchase of all mineral acreage at a price of one hundred dollars ($100.00) per acre. Total price was four hundred fifty-four thousand nine hundred and fifty-nine dollars ($454,959). B. Purchase of equipment will be at market value. Total price will be seven hundred eighty-eight thousand two hundred and seventeen and no/100 dollars ($788,217). C. Purchase of pipeline will be at market value. Total price will be thirty six thousand seven hundred twenty and no/100 dollars ($36,720). Big Foot Field: This is a 3,605 acre oil field that South Texas Oil Company has under lease and is made up of 15 leases consisting of 75 wells. It includes several existing well bore that South Texas Oil Company intends to recomplete in new pay zones shown on the logs. BIG FOOT FIELD, FRIO COUNTY Ann Burns 20 ac. Ann Burns A 689.43 ac. Burns 637.25 ac. Davidson 300 ac. Foster 331.062 ac. Jane Burns 80 ac. Jane Burns 'A' 20 ac. Jane Burns 'B' 80 ac. Jane Burns 'C' 80 ac. Jane Burns 'D' 80 ac. Jane Burns 'E' 40 ac. Jane Burns 'F' 20 ac. Jane Burns 'G' 20 ac. Shell - C. 80 ac. Smith, et. al. 327.48 ac. Talley 800 ac. Total acreage in Big Foot field - Frio Co. = 3,605.222 ac. Kyote Field: This is a 944 acre oil field that South Texas Oil Company has under lease and is made up of 5 leases consisting of 16 wells. This property has three wells that are candidates for re-entry so as to workover and recomplete in zones that were not produced to their economic limits and were prematurely plugged during low oil prices in the 1980s. There are also other possible productive zones that have never been produced. One of the wells in the field can be converted into a salt water disposal well. KYOTE FIELD, ATASCOSA COUNTY Crowther 197.42 ac. Hill 87.41 ac. Rizik 180 ac. Tomblin 129.24 ac. Wright 350.293 ac. Total acreage in Kyote field - Atascosa Co. = 944.363 ac. 17 Currently, the Talley Lease has the most oil wells, while the Davidson lease has the most potential for future drilling. The Davidson lease has untapped B and D strata that can be drilled. Also, many of the existing wells are only pulling from the deeper D stratum, thus there is more oil in the B stratum to be pumped at high production rates. South Texas Oil Company plans its future growth through a balance of acquisition of working interests in existing wells and leases, increased production on current leases and new drilling on current leases in accordance with new State of Texas guidelines of one (1) well per ten (10) acres, as opposed to the previous ratio of one (1) well per twenty (20) acres. This latter strategy of in-fill drilling affords the most potential for South Texas Oil Company. The new guidelines will allow South Texas Oil Company to place new wells between existing wells that have previously produced or are currently producing oil. South Texas Oil Company serves as operator with respect to these properties acquired pursuant to association contracts in which South Texas Oil Company obtains a controlling interest or holds the largest ownership interest. It is anticipated that South Texas Oil Company will also participate in the development of properties operated by third parties and in some cases may delegate operations to a third party. The production from the fields for 2005 was 2,060 gross bbls for the Kyote Field and 5,674 gross bbls for the Big Foot Field and 1,077 for the Somerset Field. South Texas Oil Company currently has an interest in 135 wells; 16 in the Kyote Field, 75 in the Big Foot Field and 44 in the Somerset Field. The number of gross wells South Texas Oil Company operates in each field are: BIG FOOT FIELD, FRIO COUNTY Ann Burns 1 Ann Burns A 8 Burns 1 Davidson 17 Foster 9 Jane Burns 1 Jane Burns 'A' 0 Jane Burns 'B' 3 Jane Burns 'C' 2 Jane Burns 'D' 1 Jane Burns 'E' 2 Jane Burns 'F' 1 Jane Burns 'G' 1 Shell - C. 4 Smith, et. al. 1 Talley 23 Total wells in Big Foot field - Frio Co. = 75 KYOTE FIELD, ATASCOSA COUNTY Crowther 3 Hill 1 Rizik 2 Tomblin 2 Wright 8 Total wells in Kyote field - Atascosa County = 16 18 2. Somerset Fields On April 1, 2005, South Texas Oil Company completed the purchase of the leases, farm-outs and mineral interests held by JGM Oil Investments, LLC in Atascosa County, Texas insofar as they cover the following minimum net revenue interests (NRI). Minimum Net Revenue Interest (NRI) A. G.O. Davidson Lease, a minimum of a seventy and 4/10 percent (70.4%) net revenue interest (NRI). B. Oldjamie Lease, a minimum of a sixty five and 925/1000 percent (65.925%) net revenue interest (NRI). C. Diamond Head Lease, a minimum of a fifty seven percent (57%) net revenue interest (NRI). D. Fowler A Lease, a minimum of a fifty eight and 1/8 percent (58.125%) net revenue interest (NRI). E. Fowler C Lease, a minimum of a sixty three percent (63%) net revenue interest (NRI). South Texas Oil Company additionally purchased all of the personal property associated with the oil wells on the lands described in the Purchase Agreement attached as Exhibit 10.14 including, but not limited to, all well equipment, spare equipment and tank batteries. Equipment will be sold "as is". The total purchase price was three hundred seven thousand four hundred twenty-six dollars ($307,426) made up as follows; Purchase of all mineral acreage at a price of one hundred dollars ($100.00) per acre. Total price for the acreage was sixty nine thousand four hundred ten and no/100 dollars ($69,410). Purchase of all equipment was at a depreciated price of forty five percent (45%) of the replacement value. Total price for equipment was two hundred thirty eight thousand sixteen and no/100 dollars ($238,016). The method of payment will be as follows; The issuance of five hundred twelve thousand three hundred seventy-seven (512,377) shares of South Texas Oil Company restricted stock representing fifty percent (50%) of the purchase price at $0.30 per share, calculated as the prior thirty (30) day average closing price from the date of closing. The remaining amount of one hundred fifty three thousand seven hundred thirteen and no/100 dollars ($153,713) will be paid monthly for a period of thirty six (36) months with interest of seven percent (7%) accruing on the outstanding balance. The monthly payment amount is not to exceed the income from the minimum net revenue interest (NRI) from the prior month's production. Payment will be adjusted accordingly and the remaining balance increased by the monthly shortfall should any occur. The purchase price of the leases and assets were based on current market conditions as well as the historical purchase prices made by South Texas Oil Company for acreage and a determination of the current replacement value of the equipment. Somerset Field: This is a 694.1 acre oil field that South Texas Oil Company has under lease and is made up of 7 leases consisting of 44 wells. 19 SOMERSET FIELD - ATASCOSA COUNTY G.O.Davidson 40 ac. Fowler 'A' 140 ac. Fowler 'C' 229 ac. Oldjamie 105.1 ac. Diamond Head 40 ac. Diamond Head 'A' 120 ac. Diamond Head 'B' 20 ac. Total acreage in Somerset Field - Atascosa Co. = 694.1 ac. Total acreage in Big Foot, Kyote and Somerset fields = 5,243.685 ac. The number of gross wells South Texas Oil Company operates in the Somerset field are: SOMERSET FIELD - ATASCOSA COUNTY G.O. Davidson 2 Fowler 'A' 9 Fowler 'C' 22 Oldjamie 6 Diamond Head 1 Diamond Head 'A' 3 Diamond Head 'B' 1 Total wells Somerset = 44 Total of wells in Big Foot, Kyote and Somerset fields = 135 Oil Operations. South Texas Oil Company realized from the sale of its production for the fiscal year ended December 31, 2005, $53.03 per barrel of oil. Production was calculated as 5,674 barrels from the Big Foot Field, 2,060 barrels from the Kyote Field and 1,077 barrels from the Somerset Field for a total production of 8,811 barrels in 2005. As of the end of December 31, 2005, South Texas Oil Company is currently producing from twenty-three wells in the Big Foot and Kyote Fields, from a potential fifty-six wells which are able to be brought back online through workovers, on a total of approximately 4,549 acres. With the purchase of the additional 694.1 acres on April 1, 2005, South Texas Oil Company is currently only producing from twenty-seven wells, from a potential ninety-two wells, on a total of approximately 5,244 acres as of December 31, 2005. Productive Wells and Acreage South Texas Oil Company conducts its oil and gas exploration and production operations in southern Texas. At December 31, 2005, South Texas Oil Company had interests in 135 wells located in Texas. All of South Texas Oil Company's Producing Properties are leased for an indeterminate number of years, as long as production is maintained. Therefore, it is not possible to provide expiration dates of the Leases on which Producing Properties are located. 20 The following table sets forth, at December 31, 2005, by state, South Texas Oil Company's producing wells, Developed Acreage, and Undeveloped Acreage, excluding service (injection and disposal) wells: Productive Wells (1) Developed Acreage Undeveloped Acreage (2) -------------------- ----------------- ----------------------- Gross Net Gross Net Gross Net Texas 37 37 1,350 1,350 3,893.69 3,893.69 -- -- ----- ----- -------- -------- Totals 37 37 1,350 1,350 3,893.69 3,893.69 The following table sets forth, at December 31, 2004, by state, South Texas Oil Company's producing wells, Developed Acreage, and Undeveloped Acreage, excluding service (injection and disposal) wells: Productive Wells (1) Developed Acreage Undeveloped Acreage (2) -------------------- ----------------- ----------------------- Gross Net Gross Net Gross Net Texas 28 28 910 910 3,639.59 3,639.59 -- -- --- --- -------- -------- Totals 28 28 910 910 3,639.59 3,639.59 The following table sets forth, at December 31, 2003, by state, South Texas Oil Company's producing wells, Developed Acreage, and Undeveloped Acreage, excluding service (injection and disposal) wells: Productive Wells (1) Developed Acreage Undeveloped Acreage (2) -------------------- ----------------- ----------------------- Gross Net Gross Net Gross Net Texas 28 28 910 910 3,639.59 3,639.59 -- -- --- --- -------- -------- Totals 28 28 910 910 3,639.59 3,639.59 (1) The wells in Texas are oil wells. (2) "Undeveloped Acreage" includes leasehold interests on which wells have not been drilled or completed to the point that would permit the production of commercial quantities of natural gas and oil regardless of whether the leasehold interest is classified as containing proved undeveloped reserves. 21 The basic terms of the oil and gas leases held by South Texas Oil Company as of December 31, 2004 are shown in the following table. Gross Annual Lease Acres Rental (1) Expiration Texas 4,549.59 Held By Production N/A -------- 4,549.59 The basic terms of the oil and gas leases held by South Texas Oil Company as of December 31, 2005 are shown in the following table. Gross Annual Lease Acres Rental (1) Expiration Texas 5,243.685 Held By Production N/A --------- 5,243.685 (1) Represents South Texas Oil Company's share of the annual rental payment. Leased acres Held By Production remain in force so long as oil is produced from the well on the particular lease. Leased acres which are not Held By Production require annual rental payments to maintain the lease until the first to occur of the following the expiration of the lease or the time oil is produced from one or more wells drilled on the lease acreage. At the time oil is produced from wells drilled on the leased acreage the lease is considered to be Held By Production. Although some of the leases do not contain proved developed reserves, they are still held by production so long as there is production within a two year period. All of South Texas Oil Company's leases currently meet this requirement and no leases are currently at risk of being lost. Production, Prices and Costs South Texas Oil Company is not obligated to provide a fixed and determined quantity of oil or gas in the future. During the last three fiscal years, South Texas Oil Company has not had, nor does it now have, any long-term supply or similar agreement with any government or governmental authority. The following table sets forth South Texas Oil Company's net production of oil and gas, average sales prices and average production costs during the periods presented: Year Ended December 31, ------------------------------------- 2005 2004 2003 ---- ---- ---- Production Data: Production, Net - Oil (Bbls) 5,258 4,972 7,586 Gas (Mcf) 0.00 0.00 0.00 Average sales price - Oil (Bbls) $53.03 $39.35 $26.18 Gas (Mcf) $ 0.00 $ 0.00 $ 0.00 Average production costs per BOE (inclusive of taxes) $27.16 $31.09 $12.12 Production Taxes $ 2.76 $ 4.73 $ 2.36 22 (cont) Average production costs per BOE (exclusive of taxes) $24.40 $ 26.36 $9.76 The components of production costs may vary substantially among wells depending on the methods of recovery employed and other factors, but generally include severance taxes, administrative overhead, maintenance and repair, labor and utilities. ITEM 3. LEGAL PROCEEDINGS. South Texas Oil Company is from time to time involved in litigation incident to the conduct of its business. Certain litigation with third parties and present and former employees of South Texas Oil Company is routine and incidental, such litigation can result in large monetary awards for compensatory or punitive damages. South Texas Oil Company is not a party to any pending material legal proceeding. To the knowledge of management, no federal, state or local governmental agency is presently contemplating any proceeding against South Texas Oil Company. To the knowledge of management, no director, executive officer or affiliate of South Texas Oil Company, any owner of record or beneficially of more than 5% of South Texas Oil Company's common stock is a party adverse to South Texas Oil Company or has a material interest adverse to South Texas Oil Company in any proceeding. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended December 31, 2005. PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Market Information South Texas Oil Company's common stock is traded on the Over the Counter Bulletin Board (OTCBB), under the symbol "STXX". The following table sets forth the high and low bid quotations for the Common Stock for the periods indicated. Period High Low ------------------ ---- ---- Calendar Year 2004 March 31, 2004 0.30 0.11 June 30, 2004 0.30 0.12 September 30, 2004 0.51 0.18 December 31, 2004 0.51 0.18 Calendar Year 2005 March 31, 2005 1.01 0.20 June 30, 2005 1.16 0.25 September 30, 2005 0.56 0.17 December 31, 2005 0.49 0.17 23 These quotations were obtained from Commodity Systems, Inc. (CSI) and do not necessarily reflect actual transactions, retail mark-ups, mark-downs or commissions. The transactions include inter-dealer transactions. These quotations reflect inter dealer prices, without retail mark-up, markdown or commission, and may not necessarily represent actual transactions. These bid quotations have not been adjusted retroactively by any stock split. Shareholders of Record and Outstanding Shares The authorized capital stock of South Texas Oil Company consists of 50,000,000 shares of common stock with a par value of $.001 and 5,000,000 shares of preferred stock at a par value of $.001. Common Stock. The holders of the common stock are entitled to one vote per share on each matter submitted to a vote at any meeting of the shareholders. Shares of common stock do not carry cumulative voting rights, and therefore a majority of the shares of outstanding common stock will be able to elect the entire Board of Directors, and if they do so, minority stockholders would not be able to elect any persons to the Board of Directors. South Texas Oil Company's By-laws provide that a majority of the issued and outstanding shares of South Texas Oil Company shall constitute a quorum for shareholders' meeting except with respect to certain matters for which a greater percentage quorum is required by statute or South Texas Oil Company's Articles of Incorporation or By-laws. Shareholders of South Texas Oil Company have no pre-emptive rights to acquire additional shares of common stock or other securities. The common stock is not subject to redemption and carries no subscription or conversion rights. Preferred Stock. As of December 31, 2005, there were no preferred shares issued or outstanding. The Board of Directors is authorized by the Articles of Incorporation to prescribe by resolution the voting powers, designations, preferences, limitations, restrictions, reactive rights and distinguishing designations of the preferred shares if issued. Shares Eligible for Future Sale As of December 31, 2005, South Texas Oil Company has issued 4,889,171 shares of Common Stock. South Texas Oil Company has registered 9,130,003 shares of Common Stock for resale, all of which will be freely tradable without restriction or further registration under the Securities Act. 7,170,775 of the underlying common shares that were registered through the registration statement pertain to $450,000 in Convertible Debentures issued to the Longview Equity Fund, LP, $1,700,000 in convertible debentures issued to the Longview Fund LP, and $150,000 in convertible debentures issued to the Longview International Equity Fund, LP. This also includes the registration of warrants to issue 1,959,228 shares of common stock with an exercise price of $0.574 per share. These shares are related to the convertible debentures issued above. The Shares offered for resale by our Selling Stockholders are issuable in accordance with section 4(2) and Rule 506 under the Securities Act of 1933, as amended (the "Securities Act"), 24 Recent Financing On July 28, 2005, South Texas Oil Company entered into a subscription agreement for $2,300,000, whereby South Texas Oil Company issued Convertible Debentures to the following: 1) $450,000 to the Longview Equity Fund LP, 2) $1,700,000 to the Longview Fund LP., and 3) $150,000 to the Longview International Equity Fund, LP. The interest rate on these notes shall not be less than eight percent (8%). The convertible notes are convertible into the number of common shares that would equal forty-five percent (45%) of the equity of the fully diluted shares of South Texas Oil Company. At the time of the registration, on a fully diluted basis, this approximated 3,918,456 shares at $.587 per share. The subscription agreement executed required South Texas Oil Company to reserve shares at 175% of the shares estimated to be issued plus interest or an aggregate of 7,170,775 shares. In conjunction with the convertible notes, warrants were issued to the note holders that convert into 1,959,228 common shares with an exercise price of $.574 per share. There are no provisions in the By-laws or Articles of Incorporation of South Texas Oil Company which would delay, defer or prevent a change in control of South Texas Oil Company. The stock transfer agent for South Texas Oil Company is Transfer Online, Inc., located at 317 SW Alder Street, 2nd Floor, Portland, OR 97204. Their telephone and fax numbers are respectively (503) 227-2950 and (503) 227-6874. As of March 30, 2006, South Texas Oil Company had four million eight hundred and eighty nine thousand one hundred and seventy-one (4,889,171) shares of its $.001 par value common voting stock issued and outstanding which are held by one thousand eight hundred and thirty three (1,833) shareholders of record. There are no preferred shares issued and outstanding. Dividends South Texas Oil Company has not paid any dividends to date. In addition, it does not anticipate paying dividends in the immediate foreseeable future. The Board of Directors of South Texas Oil Company will review its dividend policy from time to time to determine the desirability and feasibility of paying dividends after giving consideration to South Texas Oil Company's earnings, financial condition, capital requirements and such other factors as the board may deem relevant. 25 Securities Authorized for Issuance under Equity Compensation Plans In March 2004, our board of directors adopted an executive stock option plan, the Qualified Equity Incentive Stock Option Plan, which has not been approved by our stockholders. The following table sets forth information as of December 31, 2005 regarding outstanding options granted under the plan to each of the directors and executive officers Option/SAR Grants in Last Fiscal Year (Individual Grants): Number of Percent of total Securities Options/SARs Underlying granted to Exercise or Options/SARS employees in base price Expiration Name Granted fiscal year ($/Share) date ------------------ ------------ ---------------- ---------- ----------- Murray N. Conradie 150,000 18.2 $0.46 4/1/09 200,000 24.2 $0.50 4/1/14 Jason F. Griffith 100,000 12.1 $0.46 4/1/09 100,000 12.1 $0.50 4/1/14 Edward Shaw 100,000 12.1 $0.46 12/1/10 100,000 12.1 $0.50 12/1/15 Conrad Humbke 75,000 9.09 $0.46 11/2/09 Recent Sales of Unregistered Securities During the fiscal year ended December 31, 2005, South Texas Oil Company issued securities using the exceptions available under the Securities Act of 1933 including unregistered sales made pursuant to Section 4(2) of the Securities Act of 1933 as follows: On December 27, 2005, 100,000 shares of restricted common stock valued at $.17 per share were issued to Edward Shaw, our Chief Operating Officer as part of his incentive package. This transaction was exempt from the registration requirements of the Securities Act of 1933, as amended, by virtue of the exemptions provided under section 4(2) was available because: - The transfer or issuance did not involve underwriters, underwriting discounts or commissions; - A restriction on transfer legend was placed on all certificates issued; - The distributions did not involve general solicitation or advertising; and, - The distributions were made only to insiders, accredited investors or investors who were sophisticated enough to evaluate the risks of the investment. Each shareholder was given access to all information about our business and the opportunity to ask questions and receive answers about our business from our management prior to making any investment decision. Issuer Repurchases We did not make any repurchases of our equity securities during the quarter ending December 31, 2005. 26 ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION. Introduction The following discussion and analysis should be read in conjunction with our accompanying financial statements and the notes to those financial statements included elsewhere in this Annual Report. The following discussion includes forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below and elsewhere in this Annual Report. Overview South Texas Oil Company derives its revenues from its producing oil properties. These properties consist of working interests in producing oil wells having proved reserves. South Texas Oil Company's capital for investment in producing oil properties has been provided by the sale of common stock to its shareholders. Plan of Operation (a) Work-overs South Texas Oil Company intends to continue with its current work-overs of existing wells over the next 12 months by way of replacing any existing tubing which has deteriorated and/or pumps that have failed on our existing wells. The estimated cost for this rework program is between $1,500 to $2,500 per well. (b) In-field Drilling South Texas Oil Company's independently commissioned engineering report has identified several potential low risk offset in-field drilling opportunities on our leased acreage, which are classified as proved undeveloped. South Texas Oil Company intends to drill at a minimum one of these in-field wells within the next 12 months. The costs for the drilling of an in-field well are estimated to be $200,000 - $240,000 per new well based on the depth of the well. (c) Cash Requirements South Texas Oil Company intends to meet its financial needs for the next 12 months from funds derived from revenue and utilizing the recent funding received. (d) Purchase of Additional Leases. South Texas Oil Company does not anticipate acquiring additional oil or gas properties over the next 12 months. However, South Texas Oil Company will continue to evaluate any properties as the opportunities arise and the potential of the property to produce oil and gas. (e) Expected Significant Changes in the Number of Employees South Texas Oil Company does not expect any significant change in the number of employees over the next 12 months of operations. As noted previously, South Texas Oil Company currently coordinates all operations, oil field maintenance and supervision activities using part time employees, consultants and contract labor. 27 Managements Discussion and Analysis of Financial Condition and Results of Operations For the calendar year, ended December 31, 2005, South Texas Oil Company has generated $278,817 in revenues and generated a loss of $1,020,568 for the same period. This compares to $195,654 in revenues and a loss of $183,196 for the calendar year ended December 31, 2004. For the calendar year ended December 31, 2005, South Texas Oil Company has increased its working capital position by $2,393,936 from a negative $786,949 as of December 31, 2004 to a positive $1,606,987 as at December 31, 2005. Analysis of the calendar year ended December 31, 2005 compared to the calendar year ended December 31, 2004. Net loss was $1,020,568 for the calendar year ended December 31, 2005 compared to a loss of $183,196 for the calendar year ended December 31, 2004, an increased loss of $837,372. Total expenses increased to $1,312,813 for the calendar year ended December 31, 2005 from $378,982 for the calendar year ended December 31, 2004, an increase of $933,831. The increase in expenses was due to the following: (1) having two employees on full time payroll; and (2) the costs associated with the recent funding. Depreciation and depletion expense for the calendar year ended December 31, 2005 was $206,073 compared to $98,886 for the calendar year ended December 31, 2004, an increase of $107,187. The increase resulted from the increase in assets purchased during the year as well as the adjustment to depletion from straight line on some of the assets. Interest expense for the calendar year ended December 31, 2005 was $550,249 compared to $19,584 for the calendar year ended December 31, 2004 an increase of $530,665, with the increase due to costs associated with recent funding and interest expense on the new debt. Liquidity and Capital Resources Liquidity Management believes that its working interest revenues from the existing wells will meet its minimum general and administrative cost requirements and provide the basic liquidity South Texas Oil Company needs to operate at current levels over the next twelve months. South Texas Oil Company entered into a funding agreement on July 28, 2004 for $2,300,000 which has been received through the issuance of convertible notes. This should provide the necessary capital for our needs over the next twelve months. On December 31, 2005, South Texas Oil Company had assets of $4,107,838 compared to $2,045,506 on December 31, 2004, an increase of $2,062,332. South Texas Oil Company had a total stockholders' equity of $986,143 on December 31, 2005 compared to $217,618 on December 31, 2004, an increase in equity of $768,525. All assets are booked at historical purchase price and there is no variance between book value and the purchase price. On December 31, 2005 South Texas Oil Company had Property and Equipment of $2,201,805 compared to $2,019,581 on December 31, 2004, or an increase of $853,200 which is a result of the depreciation of $206,073 along with the purchase of property and equipment. 28 For the calendar year ended December 31, 2005, South Texas Oil Company has increased its working capital position by $2,393,936 from a negative $786,949 as of December 31, 2004 to a positive $1,606,987 as of December 31, 2005. Capital Resources The Registrant's capital resources are comprised primarily of private investors, including members of management, who are either existing contacts of the Registrant's management or who come to the attention of the Registrant through brokers, financial institutions and other intermediaries. The Registrant's access to capital is always dependent upon general financial market conditions, especially those which pertain to venture capital situations such as oil and gas exploration companies. The Registrant's capital resources are not anticipated to change materially in 2006. Material Commitments for Capital Expenditures. South Texas Oil Company has made no material commitments for future projects. Each drilling and/or rework project is stand-alone and although South Texas Oil Company is in constant discussion with prospective working interest partners on each potential project, commitments for the actual drilling or rework and site preparation operations are not made for each project until South Texas Oil Company has received the funds from its working interest partners and the funds for its portion of the working interest are in place. The leases South Texas Oil Company holds are "held by production". If the leased property has a producing well that is providing royalty payments to the leaseholders, then annual lease payments and renewals are not required. South Texas Oil Company strives to accomplish the drilling or rework planned for each property within the year first leased. When that does not occur however, management reviews the potential of each property as its leases come up for renewal and makes a decision whether or not to renew each lease in light of South Texas Oil Company's business planning at that time. The Registrant has no agreements with management, investors, shareholders or anyone else respecting additional financing at this time. Because of the nature of the Registrant's business, there are no trends in the nature of its capital resources which could be considered predictable. Inflation South Texas Oil Company's results of operations have not been affected by inflation and management does not expect inflation to have a material impact on its operations in the future. Off-Balance Sheet Arrangements. South Texas Oil Company currently does not have any off-balance sheet arrangements. Recent Accounting Pronouncements In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others" ("Interpretation No. 45"). Interpretation No. 45 elaborates on the existing disclosure requirements for most guarantees, including loan guarantees such as standby letters of credit. It also clarifies that at the time a company issues a guarantee, the company must recognize an initial liability for the fair market value of the obligations it assumes under that guarantee and must disclose that information in its interim and annual financial statements. The initial recognition and measurement provisions of Interpretation 29 (cont) No. 45 apply on a prospective basis to guarantees issued or modified after December 31, 2002. Interpretation No. 45 did not have an effect on the financial statements. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" ("Interpretation No. 46"), that clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. Interpretation No. 46 is applicable immediately for variable interest entities created after January 31, 2003. For variable interest entities created prior to January 31, 2003, the provisions of Interpretation No. 46 are applicable no later than July 1, 2003. Interpretation No. 46 did not have an effect on the financial statements. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation -- Transition and Disclosure, an amendment of FASB Statement No. 123" ("SFAS 148"). This Statement amends SFAS 123 to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements. Certain of the disclosure modifications are required for fiscal years ending after December 15, 2002 and are included in the notes to these consolidated financial statements. Statement of Financial Accounting Standards SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities", SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity", were recently issued. SFAS No, 149, and 150 have no current applicability to South Texas Oil Company or their effect on the financial statements would not have been significant. In May 2005, the FASB issued SFAS 154, "Accounting Changes and Error Corrections - a Replacement of APB Opinion No. 20 and FASB Statement No. 3". SFAS 154 requires retrospective application to prior period financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS 154 also redefines "restatement" as the revising of previously issued financial statements to reflect the correction of an error. This statement is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. South Texas Oil Company does not believe that the adoption of SFAS 154 will have a significant impact on the consolidated financial statements. Subsequent Events Effective December 1, 2005 Mr. Edward Shaw was appointed as Chief Operating Officer of South Texas Oil Company to head field operations in Texas. Mr. Shaw is qualified as both a mechanical and electrical engineer with over 10 years of experience in Saudi Arabia and has spent the last 4 years in New Zealand where he was researching and developing methods of monitoring oil wells to optimize production, including using existing products integrated with emerging telemetry technologies. An employment agreement was entered into with Edward Shaw effective December 1, 2005. The initial term of employment is three (3) years. We agreed to pay Mr. Shaw a base salary of $48,000 per annum for the first year of employment, increasing based on performance of South Texas Oil Company. In addition to the cash 30 compensation earned by Mr. Shaw, we granted Mr. Shaw 100,000 shares as an employment and relocation incentive in addition to an option to purchase shares of our common stock according to the Executive Stock Option Plan. Mr. Shaw will also be provided with employee benefits, fringe benefits and perquisites on a basis no less favorable than such benefits and perquisites are provided by the Company from time to time to the Company's other senior executives. Effective February 7, 2006, Jason Griffith resigned as the Chief Financial Officer and member of the Board of Directors of the Company to focus on the development of his Accounting practice. He will continue to offer his services as an advisor and consultant to the Company as needed. In the interim, Mr. Conradie, President and CEO of South Texas Oil Company will additionally assume the position of Principal Financial Officer. Mr. Griffith has not had any disagreements with management or the company on any matter relating to the company's operations, policies or practices. On February 6, 2006, there was a special meeting of the majority of the Board of Directors in which the Board approved the appointment of Edward Shaw as a Board Member of the Company to replace Mr. Griffith on the effectiveness of his resignation. Effective March 1, 2006, the company has closed the San Antonio office located at 900 NE Loop 410, Suite E121, San Antonio, TX and relocated to 2881 CR 2880, Big Foot, TX and pays the same monthly rental as before. Safe Harbor The discussions of the results of operations and financial condition of South Texas Oil Company should be read in conjunction with the financial statements and notes pertaining to them that appear elsewhere in this Form 10- KSB. Statements made in this Form 10-KSB that are not historical or current facts are "forward-looking statements" made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933 (the "Act") and Section 21E of the Securities Exchange Act of 1934. These statements often can be identified by the use of terms such as "may," "will," "expect," "believe," "anticipate," "estimate," "approximate" or "continue," or the negative thereof. South Texas Oil Company intends that such forward-looking statements be subject to the safe harbors for such statements. South Texas Oil Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. Any forward-looking statements represent management's best judgment as to what may occur in the future. However, forward-looking statements are subject to risks, uncertainties and important factors beyond the control of South Texas Oil Company that could cause actual results and events to differ materially from historical results of operations and events and those presently anticipated or projected. These factors include adverse economic conditions, highly speculative nature of oil and gas exploration and development, risks of foreign operation, entry of new and stronger competitors, inadequate capital and unexpected costs. South Texas Oil Company disclaims any obligation subsequently to revise any forward-looking statements to reflect events or circumstances after the date of such statement or to reflect the occurrence of anticipated or unanticipated events. 31 ITEM 7. FINANCIAL STATEMENTS. SOUTH TEXAS OIL COMPANY FINANCIAL STATEMENTS -------------------- December 31, 2005 December 31, 2004 F-1 TABLE OF CONTENTS ----------------- PAGE ---- INDEPENDENT AUDITORS' REPORT: Independent Auditors Report - 2005 and 2004 F-3 FINANCIAL STATEMENTS: Balance Sheets F-4 Statements of Operations F-5 Statement of Changes in Stockholders' Equity F-6 Statements of Cash Flows F-7 NOTES TO FINANCIAL STATEMENTS: F-8 SUPPLEMENTARY INFORMATION: Oil and Gas Producing Activities F-17 F-2 Larry O'Donnell, CPA, P.C. Telephone (303)745-4545 2228 South Fraser Street Unit 1 Aurora, Colorado 80014 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors South Texas Oil Company formerly Nutek Oil, Inc. Midland, Texas I have audited the accompanying balance sheets of South Texas Oil Company formerly Nutek Oil, Inc., a Nevada corporation, as of December 31, 2005 and 2004, and the related statements of loss, changes in stockholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. My responsibility is to express an opinion on these financial statements based on my audits. I conducted my audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that I plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. I believe that my audits provide a reasonable basis for my opinion. In my opinion, the financial statements referred to above present fairly, in all material respects, the financial position of South Texas Oil Company formerly Nutek Oil, Inc., as of December 31, 2005 and 2004, and the results of its operations and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. LARRY O'DONNELL, CPA, P.C. March 15, 2006 except for Note 2 and Note 13, which is April 13, 2007 F-3 SOUTH TEXAS OIL COMPANY BALANCE SHEETS DECEMBER 31, 2005 AND 2004
Restated Restated 2005 2004 ---------- ---------- Current Assets: Cash and cash equivalents $1,874,862 $ 9,944 Accounts receivable 26,671 15,981 Prepaid expenses 3,150 - ---------- ---------- Total current assets 1,904,683 25,925 Office equipment, net of depreciation 4,279 427 Proved reserves, net of depletion 2,459,133 1,754,772 Unproved reserves, net of depletion 389,369 264,382 Accumulated depreciation, depletion and amortization (650,976) Deposits 1,350 - ---------- ---------- Total Assets $4,107,838 $2,045,506 ========== ========== Current Liabilities: Accounts payable $ 13,026 $ 52,164 Related party accrued interest - 11,500 Accrued interest 96,268 - Asset retirement obligation 26,484 480,492 Line of credit - 72,573 Related party payable - 73,850 Accrued payroll liabilities 56,052 2,295 Other short term loans 70,000 - Related party current portion 35,866 120,000 of long-term debt ---------- ---------- Total current liabilities 297,696 812,874 ---------- ---------- Long term loans 2,300,000 - Asset retirement obligation, long term 452,267 - Related party L.T. debt, 71,732 1,015,014 net of current portion ---------- ---------- Total Liabilities 3,121,695 1,827,888 ---------- ---------- Stockholders' Equity: Preferred Stock $0.001 par value 5,000,000 shares authorized, none issued - - Common stock, $0.001 par value, 50,000,000 shares authorized; 13,260,881 shares issued and outstanding at December 31, 2006 and 4,893,677 at December 31, 2005 4,894 3,061 Additional paid-in capital 2,400,281 730,272 Subscribed Stock - (117,250) Accumulated deficit (1,419,032) (398,466) ---------- --------- Total stockholders' equity 986,143 217,618 ---------- --------- Total Liabilities $4,107,838 $2,045,506 and Stockholders' Equity ========== ========== The accompanying notes to financial statements are an integral part of these financial statements.
F-4 SOUTH TEXAS OIL COMPANY STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
Restated Audited 2005 2004 ----------- ---------- Revenue Oil and gas sales $ 278,817 $ 195,654 Interest income 13,428 82 Other Income - 50 ----------- ---------- Total Revenues 292,245 195,786 Expenses General and administrative 379,134 40,581 Production costs 117,813 154,570 Workovers 43,206 - Depreciation, depletion, and amortization 206,073 98,886 Interest expense 550,249 19,584 Plugging of wells - 41,858 Production taxes 16,338 23,503 ----------- ---------- Total expenses 1,312,813 378,982 ----------- ---------- Income before provision for income taxes (1,020,568) (183,196) Provision for income taxes - - ----------- ---------- Net Loss $(1,020,568) $ (183,196) =========== ========== Basic weighted average number of common shares outstanding 4,640,474 2,992,954 =========== ========== Basic Net Loss Per Share $ (0.22) $ (0.06) =========== ========== The accompanying notes to financial statements are an integral part of these financial statements.
F-5 STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Common Common Additional Stock Stock Paid-in Subscribed Income Total Shares Amount Capital Stock Deficit Equity --------- -------- ---------- ---------- ----------- ----------- Balance at December 31, 2003 5,157,742 $ 5,158 $ 1,353,908 $ - $ (215,270) 1,143,796 ========= ======== =========== ========== =========== =========== Balances at December 31, 2003 5,157,742 5,158 1,353,908 - (215,270) 1,143,796 Repurchase and put into Subscribed Stock - - - (272,610) - (272,610) Sale of Stock 25,000 25 4,975 - - 5,000 Repurchase and retired shares (2,325,588) (2,326) (648,839) - - (651,165) Issued for services 204,320 204 20,228 - - 20,432 Payment received for subscribed stock - - - 62,500 - 62,500 Reduction in subscribed stock - - - 92,860 - 92,860 Net Profit (Loss) for Year Ended December 31, 2004 - - - - (183,196) (183,196) Balance at December 31, 2004 3,061,474 $ 3,061 $ 730,272 $ (117,250) $ (398,466) $ 217,618 ========= ======== ========== ========== =========== =========== Final adjustment on Nutek dividend issuance 6,740 7 (491) (484) Payment received for subscribed stock - - - 117,250 - 117,250 Issued for settlement of debt 957,349 957 1,002,874 - - 1,003,831 Purchase of new leases 512,377 512 153,201 - - 153,713 Purchase of option for additional drilling benefits 20,000 20 4,980 - - 5,000 Issued for services 157,959 159 31,896 - - 32,055 Sale of common stock 177,778 178 39,822 - - 40,000 Debt discount from convertible, fully expensed 113,241 113,241 Beneficial conversion feature from warrants, fully expensed 142,032 142,032 Debt discount from convertible, fully expensed 80,154 80,154 Beneficial conversion feature from warrants, fully expensed 102,300 102,300 Net Profit (Loss) for Year Ended December 31, 2005 - - - - (1,020,568) (1,020,568) --------- -------- ---------- ---------- ----------- ---------- Balance at December 31, 2005 4,893,677 $ 4,894 $2,400,281 $ (0) $(1,419,032) $ 986,143 ========= ======== ========== ========== =========== ========== The accompanying notes to financial statements are an integral part of these financial statements.
F-6 SOUTH TEXAS OIL COMPANY STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
Restated 2005 2004 ----------- --------- Cash Flows from Operating Activities: Net loss $(1,020,568) $(183,196) Stock issued (cancelled) for services and purchases 37,055 20,433 Non cash financing costs related to funding 437,727 Adjustments to reconcile net loss to net cash provided (used) by operating activities: Depreciation and amortization 206,073 98,886 (Increase) decrease in accounts receivable (10,689) 1,772 Increase in prepaid expenses and deposits (4,500) 3,775 Increase in related party accrued interest (11,500) 5,083 Increase in accrued interest 96,268 - Increase (decrease) in related party payable (295,706) 73,850 Increase (decrease) in payroll liabilities 53,757 2,295 Increase (decrease) in accounts payable (39,138) 43,408 ----------- --------- Net cash provided (used) by operating activities (551,221) 66,306 ----------- --------- Cash Flows from Investing Activities: Purchase of property and equipment (97,393) (39,615) ---------- --------- Cash Flows from Financing Activities: Increase (decrease) in loans payable 2,263,563 - Increase in related party notes payable 50,036 89,979 Increase in subscribed stock 117,250 (117,250) Increase in line of credit (1,834) (352) Issuance of stock (484) - Sale of common stock 40,000 5,000 ----------- --------- Net cash provided by financing activities 2,468,531 (22,623) ----------- --------- Net Increase in Cash 1,819,918 4,068 Balance, Beginning 54,944 50,876 ----------- --------- Balance, Ending $ 1,874,862 $ 54,944 =========== ========= Interest Paid $ 81,222 $ 10,883 =========== ========= Taxes Paid $ - $ - =========== ========= Summary of Non Cash Items: Purchase of leases for note from seller $ 138,933 - The accompanying notes to financial statements are an integral part of these financial statements.
F-7 SOUTH TEXAS OIL COMPANY NOTES TO FINANCIAL STATEMENTS NOTE 1 - HISTORY AND ORGANIZATION OF THE COMPANY Nutek Oil, Inc. was incorporated on December 3, 1998. The company is in the oil producing business in the United States of America. The Company purchased selected equipment and assets from Clipper Operating Company and began operations as a separate company during 2001. The company changed its name from Nutek Oil to South Texas Oil on April 1, 2005. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of highly liquid investments with maturities of three months or less when purchased. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires that management make estimates and assumptions which affect the reported amounts of assets and liabilities as of the date of the financial statements and revenues and expenses for the period reported. Actual results may differ from these estimates. The estimates include amortization and depreciation of capitalized costs of oil wells and related equipment. Management emphasizes that amortization and depreciation estimates are inherently imprecise. Actual results could materially differ from these estimates. DIVIDEND POLICY The Company has not yet adopted any policy regarding payment of dividends. COMPREHENSIVE INCOME Statements of Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS 130), requires that total comprehensive income be reported in the financial statements. The Company does not have any items considered to be other comprehensive income for the three months ended December 31, 2004. FIXED ASSETS The Company follows the "successful efforts" method of accounting for its costs of acquisition, exploration and development of oil properties. Costs to acquire mineral interest in oil and gas properties, to drill and equip exploratory wells that find proved reserves, to drill and equip development wells and related asset retirement costs are capitalized. Costs to drill exploratory wells that do not find proved reserves, geological and geophysical costs, and costs of carrying and retaining unproved properties are expensed. Details of the Asset Retirement Account are as follows: Balance, 12/31/03 $496,737 Accretion 25,613 Payments (41,858) -------- Balance, 12/31/04 480,492 Accretion 27,354 Payments (29,095) -------- Balance, 12/31/05 478,751 Based on the historical amounts expended during the prior years, the company has assessed $26,484 as the current portion, with the balance at December 31, 2005 and 2004 as long term. Unproved oil and gas properties that are individually significant are periodically assessed for impairment of value and a loss is recognized at the time of impairment by providing an impairment allowance. Other unproved properties are amortized based on the Company's experience of successful drilling and average holding period. Capitalized costs of producing oil and gas properties, after considering estimated residual salvage values, are depreciated and depleted by the unit-of-production method. Support equipment and other property and equipment are depreciated over their estimated useful lives. On the sale or retirement of a complete unit of a proved property, the cost and related accumulated depreciation, depletion, and amortization are eliminated from the property accounts, and the resultant gain or loss is recognized. On the retirement or sale of a partial unit of proved property, the cost is charged to accumulated depreciation, depletion, and amortization with a resulting gain or loss recognized in income. On the sale of an entire interest in an unproved property for cash or cash equivalent, gain or loss on the sale is recognized, taking into consideration the amount of any recorded impairment if the property has been assessed individually. If a partial interest in an unproved property is sold, the amount received is treated as a reduction of the cost of the interest retained. F-8 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) FIXED ASSETS (continued) Depreciation is computed primarily on the straight-line method for financial statements purposes over the following estimated useful lives: Office equipment 5 years Vehicles 5 years All assets are booked at historical purchase price and there is no variance between book value and the purchase price. Management reviews on an annual basis the book value, along with the prospective dismantlement, restoration, and abandonment costs and estimate residual value for the assets, in comparison to the carrying values on the financial statements. OIL AND GAS PRODUCING ACTIVITIES Suspended well cost - Effective for reporting periods beginning after the issuance date of 4 April 2005, the FASB Staff Position No. FAS 19-1 "Accounting for Suspended Well Costs" provides guidance in the accounting for exploratory well costs. Paragraph 19 of FASB Financial Accounting Standards Statement No. 19 "Financial Accounting and Reporting by Oil and Gas Producing Companies" (SFAS 19) requires the cost of drilling exploratory wells to be capitalized pending determination of whether the well has found proved reserves. FSP FAS 19-1 amended SFAS 19 to allow suspended well costs to remain capitalized beyond one year from drilling if certain specific criteria are met and additional disclosures provided. The company has not recognized any changes to the amounts previously capitalized. Exploratory costs, excluding the cost of exploratory wells and acquired exploration rights, are charged to expense as incurred. Drilling costs for exploratory wells are capitalized pending the determination of the existence of proved reserves. If reserves are not found, the drilling costs are charged to operating expense. Oil and gas lease acquisition costs are capitalized when incurred. Unproved properties with individually significant acquisition costs are assessed quarterly on a property-by-property basis, and any impairment in value is recognized. Unproved properties with acquisition costs that are not individually significant are aggregated, and the portion of such costs estimated to be nonproductive, based on historical experience, is amortized over the average holding period. If the unproved properties are determined to be productive, the appropriate related costs are transferred to proved oil and gas properties. Development Costs - Costs incurred to drill and equip development wells, including unsuccessful development wells, are capitalized. EARNINGS PER SHARE Basic earnings per share are computed using the weighted average number of shares of common stock outstanding for the period end. The net income (loss) for the period end is divided by the weighted average number of shares outstanding for that period to arrive at earnings per share. REVENUE RECOGNITION Revenues from the sale of oil are recorded using the sales method. Under this method, revenue is recognized based on the cash received rather than the Company's proportionate share of the oil and gas produced. Oil and gas imbalances and related values at December 31, 2004 and 2005 were insignificant. Management has reviewed the potential variances between the units and the value themselves and do not note and significant differences. CONCENTRATIONS OF CREDIT RISK Credit risk represents the accounting loss that would be recognized at the reporting date if counter parties failed completely to perform as contracted. Concentrations of credit risk (whether on or off balance sheet) that arise from financial instruments exist for groups of customers or counter parties when they have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions described below. The Company operates in one segment, the oil and gas industry. The Company's customers are located within the United States of America. Financial instruments that subject the Company to credit risk consist principally of oil and gas sales which are based on a short-term purchase contracts from Shell Trading (US) Company and various other gatherers in the area, with related accounts receivable subject to credit risk. During the years ended December 31, 2005 and 2004, Shell Trading (US) Company accounted for 82% and 100%, respectively, of the Company's oil revenues. Management does not believe the loss of Shell Trading (US) Company would materially affect the ability to sell the oil. INCOME TAXES The Company experienced losses during the previous fiscal tax year reported. The Company will review its need for a provision for federal income tax after each operating quarter. The Company has adopted FASB No. 109, as discussed in Note 7. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS FASB Interpretation 46R "Consolidation of Variable Interest Entities", as revised (FIN 46R), requires that variable interest entities created before December 31, 2003 be consolidated during the first interim period beginning after December 15, 2003. Management does not believe this pronouncement will have a material effect on the financial statements of the company. In January, 2004 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 132 (revised 2003) "Employers' Disclosures about Pensions and Other Postretirement Benefits", an amendment of FASB Statements No. 87, 88, and 106. The Statement revises employers' disclosures about pension plans F-9 (cont.) and other postretirement benefit plans. The statement retains the disclosure requirements contained in FASB Statement No. 132, which it replaces, and requires additional annual disclosures about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. Statement No. 132R requires us to provide disclosures in interim periods for pensions and other postretirement benefits. Management does not believe this pronouncement will have a material effect on the financial statements of the company. In November 2004, the FASB issued SFAS No. 151, "Inventory Costs an amendment of ARB No. 43, Chapter 4." This Statement clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted materials. This Statement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Management does not believe this pronouncement will have a material effect on the financial statements of the company. In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment," which establishes standards for transactions in which an entity exchanges its equity instruments for goods or services. This standard replaces SFAS No. 123 and supersedes APB Opinion No. 25, Accounting for Stock-based compensation. This Standard requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. This eliminates the exception to account for such awards using the intrinsic method previously allowable under APB Opinion No. 25. SFAS No. 123(R) is effective for interim or annual reporting periods beginning on or after June 15, 2005. The Company has adopted SFAS 123 (R) as of January 1, 2006. In December 2004, the FASB issued SFAS No. 152, "Accounting for Real Estate Time-Sharing Transactions - an amendment of FASB Statements No. 66 and 67." This Statement references the financial accounting and reporting guidance for real estate time-sharing transactions that is provided in AICPA Statement of Position 04-2, "Accounting for Real Estate Time-Sharing Transactions." This Statement also states that the guidance for incidental operations and costs incurred to sell real estate projects does not apply to real estate time-sharing transactions. This Statement is effective for financial statements for fiscal years beginning after June 15, 2005. Management does not believe this pronouncement will have a material effect on the financial statements of the company. In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets - an amendment of APB Opinion No. 29." This Statement eliminates the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. This Statement is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company does not expect application of SFAS No. 153 to have a material affect on its financial statements. In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections" ("SFAS 154"). SFAS 154 replaces Accounting Principles Board Opinion No. 20 "Accounting Changes" and SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements-An Amendment of APB Opinion No. 28." SFAS 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. SFAS 154 requires "retrospective application" of the direct effect of a voluntary change in accounting principle to prior periods' financial statements where it is practicable to do so. SFAS 154 also redefines the term "restatement" to mean the correction of an error by revising previously issued financial statements. SFAS 154 is effective for accounting changes and error corrections made in fiscal years beginning after December 15, 2005 unless adopted early. We do not expect the adoption of SFAS 154 to have a material impact on its consolidated financial position, results of operations or cash flows, except to the extent that the statement subsequently requires retrospective application of a future item. In February 2006, the FASB issued Statement of Financial Accounting Standards No. 155, ACCOUNTING FOR CERTAIN HYBRID FINANCIAL INSTRUMENTS ("SFAS No. 155"), which amends Statement of Financial Accounting Standards No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES ("SFAS No. 133") and Statement of Financial Accounting Standards No. 140, ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES ("SFAS No. 140"). SFAS No. 155 permits fair value measurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or hybrid financial instruments containing embedded derivatives. We do not expect the adoption of SFAS 155 to have a material impact on its consolidated financial position, results of operations or cash flows. In March 2006, the FASB issued Statement of Financial Accounting Standards No. 156, ACCOUNTING FOR SERVICING OF FINANCIAL ASSETS ("SFAS No. 156"), which amends FASB Statement No. 140 ("SFAS No. 140"). SFAS 156 may be adopted as early as January 1, 2006, for calendar year-end entities, provided that no interim financial statements have been issued. Those not choosing to early adopt are required to apply the provisions as of the beginning of the first fiscal year that begins after September 15, 2006 (e.g., January 1, 2007, for calendar year-end entities). The intention of the new statement is to simplify accounting for separately recognized servicing assets and liabilities, such as those common with mortgage securitization activities, as well as to s implify efforts to obtain hedge-like accounting. Specifically, the FASB said FAS No. 156 permits a service using derivative financial instruments to report both the derivative financial instrument and related servicing asset or liability by using a consistent measurement attribute, or fair value. We do not expect the adoption of SFAS 156 to have a material impact on its consolidated financial position, results of operations or cash flows. ACCOUNTS RECEIVABLE Accounts receivable are stated at the amount management expects to collect from outstanding balances. Management provides for probable uncollectible amounts through a charge to earnings and a credit to a valuation allowance based on its assessment of the current status of individual accounts. Balances outstanding after management has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to trade accounts receivable. Changes in the valuation allowance have not been material to the financial statements. STOCK-BASED COMPENSATION The Company applies Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and Related Interpretations, in accounting for stock options issued to employees. Under APB No. 25, employee compensation cost is recognized when estimated fair value of the underlying stock on date of the grant exceeds exercise price of the stock option. For stock options and warrants issued to non-employees, the Company applies SFAS No. 123, Accounting for Stock-Based Compensation, which requires the recognition of compensation cost based upon the fair value of stock options at the grant date using the Black-Scholes option pricing model. F-10 The following table represents the effect on net loss and loss per share if the Company had applied the fair value based method and recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation", to stock-based employee compensation for the year ended December 31, 2005 and 2004: 2005 2004 ------------ ------------ Net loss, as reported $ (1,020,568) $ (183,196) Add: Stock-based employee compensation expense included in reported loss, net of related tax effects -- -- Deduct: Total stock-based employee Compensation expense determined under fair value based methods for all awards, net of related tax effects (21,221) (60,926) ------------ ----------- Pro forma net loss $ (1,041,789) $ (244,122) Net loss per common share: Basic and fully diluted loss per share, as reported $ (0.22) $ (0.06) Basic and fully diluted loss per share, pro forma $ (0.22) $ (0.08) For the options granted in 2005, the company used the exercise price of $0.46, the fair market value of $0.49 per share at the end of the year, a 3.25 year term, and 23% volatility to determine the value of the options. For the options granted in 2004, the company used the exercise price of $0.46, the fair market value of $0.25 per share at the end of the year, a 5 year term, and 100% volatility to determine the value of the options. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure". SFAS No. 148 amends the transition and disclosure provisions of SFAS No. 123. The Company has adopted SFAS No. 123R for employee stock options using the fair value method and will begin the transition to this method on January 1, 2006 NOTE 3 - OIL PROPERTIES Oil properties are made up of the following: 2005 2004 --------- --------- Proved Reserves, net of accumulated depreciation 1,914,834 1,754,772 Unproved Reserves, net of accumulated depreciation 282,692 264,382 --------- --------- Total 2,197,526 2,019,154 F-11 NOTE 4 - LINE OF CREDIT The Company has a line of credit agreement with a financial institution which provides maximum borrowing of $75,000. Interest on outstanding balances accrues at prime plus 2% and is payable monthly. The current interest rate at December 31, 2005 is 7.25%. The line must be renewed each year. As of December 31, 2005, the balance on this line was $0. NOTE 5 - RELATED PARTY TRANSACTIONS The Company has a note payable to a shareholder, in the amount of $50,000 as of December 31, 2005. This obligation is due in 2006 and accrues interest at 10% annually. The accrued interest on this loan as of December 31, 2005 was $13,417. The amounts are considered short term due to the delinquency of payments on the accrued interest. The Company has a note payable to a shareholder, in the amount of $20,000 as of December 31, 2005. This obligation is due in 2006 and accrues interest at 10% annually. The accrued interest on this loan as of December 31, 2005 was $4,500. The amounts are considered short term due to the delinquency of payments on the accrued interest. The Company has an outstanding note payable to Murray Conradie, the Company's CEO, related to the purchase of wells during the 2nd quarter of 2005, as December 31, 2005 for $68,133. This note will be paid monthly for a period of thirty six (36) months (from April 2005) with interest of seven percent (7%) accruing on the outstanding balance. The monthly payment amount is not to exceed the income from the minimum net revenue interest (NRI) from the prior month's production. Payment will be adjusted accordingly and the remaining balance increased by the monthly shortfall should any occur. The Company has an outstanding note payable to Jason Griffith, the Company's CFO, related to the purchase of wells during the 2nd quarter of 2005, as of December 31, 2005 for $34,066. This note will be paid monthly for a period of thirty six (36) months (from April 2005) with interest of seven percent (7%) accruing on the outstanding balance. The monthly payment amount is not to exceed the income from the minimum net revenue interest (NRI) from the prior month's production. Payment will be adjusted accordingly and the remaining balance increased by the monthly shortfall should any occur. NOTE 6 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES As of December 31, 2005, the company has accrued payroll liabilities due of $56,052. As of December 31, 2005, the company has accounts payable balance of $13,026 and accrued interest of $96,268. NOTE 7 - CONVERTIBLE DEBTS AND WARRANTS On July 28, 2005, the Company entered into a funding agreement from institutional and accredited investors with gross proceeds of $2,300,000, to be received in two traunches. The first traunch of $1,300,000 received upon execution of the agreement and the remaining $1,000,000 within five days after a to be filed registration statement becomes effective, or sooner if certain milestones are achieved. The remaining $1,000,000 was received on November 10, 2005 as all conditions of the funding agreement had been met including the effectiveness of the registration statement. The funding consists of convertible securities which shall convert into forty- five percent (45%) equity of the fully diluted shares of South Texas Oil Company if both traunches are received. South Texas Oil will use the net proceeds of the first traunch to perform workovers on existing wells, drill two new wells, capital expenditures and working capital. The second traunch will be used to drill an additional 4-5 wells, if the milestones for the first traunch are met. F-12 Additionally, the Company entered into Lock-Up Agreements with the following board members of the Company; Murray Conradie and Jason Griffith. In this Agreement, these board members agreed not to sell any shares in the Company's Common Stock owned by them for a period of 12 months, or until such time as certain milestones have been met. For purposes of the year ended December 31, 2005, the company recorded the loan of $2,300,000 as well as the interest accrual of $78,405. The company initially determined the relative fair value between the convertible debt and the detached warrants. After allocating a portion of the proceeds to the detached warrants (based on relative fair values), the convertible debt and the detached warrants were recorded. The company then evaluated whether the embedded conversion option within the debt instrument was beneficial (had an intrinsic value) to the holder. The effective conversion price (that is, the allocated proceeds divided by the number of shares to be received on conversion) based on the proceeds was determined. The total debt discount immediately after the initial accounting was performed, as well as the beneficial conversion feature were expensed on the income statement. The debt discount related to the debt was $193,395 and was expensed at issuance of each traunch of the debt. The expense was to interest expense and the offsetting entry was to additional paid in capital. The beneficial conversion feature related to the warrants was $244,332 and was also expensed at the issuance. The expense was to interest expense and the offsetting entry was to additional paid in capital. The latter related to 1,959,228 and 851,789 warrants, with a calculated relative fair value, based on Black-Scholes, of $126,794 and 89,068, respectively. For the Black-Scholes model, the company assumed a risk free rate of 3.50%, a dividend rate of 0%, the respective stock price and exercise price for each group of warrants and a volatility rate based on the trailing 18-month historical prices. NOTE 8 - STOCKHOLDERS' EQUITY During the year ended December 31, 2005, the Company sold 177,778 shares of common stock for $40,000. During the year ended December 31, 2005, the Company issued 157,959 shares of common stock for services rendered valued at $32,055. During the year ended December 31, 2005, the Company issued 512,377 shares of common stock for the purchase of additional interest in oil leases, as well as issuing 957,249 to settle debts listed on the books at $1,003,831. The company also issued 20,000 shares of stock, valued at $5,000, to royalty owners of certain leases in relation to an agreement related to additional royalty interest incentives if the company drills on certain leases. During the year ended December 31, 2004, 2,325,588 shares of common stock were repurchased and retired at a value of $651,165, and subscribed stock was recorded for $272,610. 6,740 shares were issued as a final adjustment to the original issuance from the prior parent company's spin out, Nutek Inc. Those shares were issued to unrelated parties who had not received their initial share distribution. As of December 31, 2005, there were 4,893,677 shares issued and outstanding. F-13 NOTE 9 - INCOME TAXES Deferred income taxes result from timing differences in the recognition of expense for tax and financial statement purposes. Statements of Financial Accounting Standards No. 109 "Accounting for Income Taxes", (SFAS 109) requires deferred tax liabilities or assets at the end of each period to be determined using the tax rate expected to be in effect when taxes are actually paid or recovered. The sources of those timing differences and the current tax effect of each were as follows: Net operating loss carryforward$ 32,962 Depreciation and amortization (10,587) Valuation allowance (22,375) --------- $ - The components of the net deferred tax asset at December 31, 2005 under SFAS 109 are as follows: Net operating loss carryforward$ 524,127 Depreciation and amortization (428,561) Valuation allowance (95,566) -------- $ - Reconciliations between the actual tax expense and the amount computed by applying the U.S. Federal Income Tax rate to income before taxes are as follows: Percent of Pretax Amount Income ---------- -------- Expected $ (22,375) (34%) Change in valuation allowance 22,375 34% --------- ------- Actual expense $ - 0% The net operating loss will begin to expire in 2021. NOTE 10 - WARRANTS AND OPTIONS Prior to January 1, 2006, the company would expense the intrinsic value of stock options issued. In prior years, the company has never issued stock options which with a strike price less than the then current market value. In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment," which establishes standards for transactions in which an entity exchanges its equity instruments for goods or services. This standard replaces SFAS No. 123 and supersedes APB Opinion No. 25, Accounting for Stock-based compensation. This Standard requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. This eliminates the exception to account for such awards using the intrinsic method previously allowable under APB Opinion No. 25. SFAS No. 123(R) is effective for interim or annual reporting periods beginning on or after June 15, 2005. The Company has adopted SFAS 123 (R) as of January 1, 2006. We do not anticipate a significant impact on our financial statements due to the adoption of SFAS 123(R). There were no options granted to officers or directors in 2005. The options and warrants issued in 2004 expire in April 2014 and are exercisable at prices from $0.46 to $0.50 per option or warrant. See Note 2 for pro-forma information and calculations. F-14 The following is a schedule of the activity relating to the Company's stock options and warrants. Year Ended Year Ended December 31, 2005 December 31, 2004 ----------------- ------------------ Weighted Avg. Weighted Avg. Shares Exercise Shares Exercise (x 1,000) Price (x1,000) Price --------- -------- -------- -------- Options and warrants outstanding at beginning of year 650 $ 0.48 - $ - Granted: Options 175 $ 0.46 650 $ 0.48 Warrants - $ - - $ - Exercised - $ - - $ - Expired: Warrants (-) $ - - $ - --------- -------- -------- -------- Options and warrants outstanding and exercisable at end of period 825 $ 0.48 650 $ - ======== ======== Weighted average fair value of options and warrants granted during the year $ 21,221 $ 60,926 The following table summarizes information about the Company's stock options and warrants outstanding at December 31, 2005, all of which are exercisable. Weighted Average Range of Number Remaining Weighted Average Exercise Prices Outstanding Contractual Life Exercise Price --------------- ---------------- ---------------- ---------------- $ 0.46 - 0.50 107,550 5.2 years $ 0.477 NOTE 11 - ENVIRONMENTAL MATTERS Various federal and state authorities have authority to regulate the exploration and developments of oil and gas and mineral properties with respect to environmental matters. Such laws and regulations, presently in effect or as hereafter promulgated, may significantly affect the cost of its current oil production and any exploration and development activities undertaken by the Company and could result in loss or liability to the Company in the event that any such operations are subsequently deemed inadequate for purposes of any such law or regulation. F-15 NOTE 12 - SUBSEQUENT EVENTS Effective December 1, 2005 Mr. Edward Shaw was appointed as Chief Operating Officer of South Texas Oil Company to head field operations in Texas. Mr. Shaw is qualified as both a mechanical and electrical engineer with over 10 years of experience in Saudi Arabia and has spent the last 4 years in New Zealand where he was researching and developing methods of monitoring oil wells to optimize production, including using existing products integrated with emerging telemetry technologies. An employment agreement was entered into with Edward Shaw effective December 1, 2005. The initial term of employment is three (3) years. We agreed to pay Mr. Shaw a base salary of $48,000 per annum for the first year of employment, increasing based on performance of South Texas Oil Company. In addition to the cash compensation earned by Mr. Shaw, we granted Mr. Shaw 100,000 shares as an employment and relocation incentive in addition to an option to purchase shares of our common stock according to the Executive Stock Option Plan. Mr. Shaw will also be provided with employee benefits, fringe benefits and perquisites on a basis no less favorable than such benefits and perquisites are provided by the Company from time to time to the Company's other senior executives. Effective February 7, 2006, Jason Griffith resigned as the Chief Financial Officer and member of the Board of Directors of the Company to focus on the development of his Accounting practice. He will continue to offer his services as an advisor and consultant to the Company as needed. In the interim, Mr. Conradie, President and CEO of South Texas Oil Company will additionally assume the position of Principal Financial Officer. Mr. Griffith has not had any disagreements with management or the company on any matter relating to the company's operations, policies or practices. On February 6, 2006, there was a special meeting of the majority of the Board of Directors in which the Board approved the appointment of Edward Shaw as a Board Member of the Company to replace Mr. Griffith on the effectiveness of his resignation. NOTE 13 - RESTATEMENT OF FINANCIALS The company has determined there were adjustments necessary to the financial statements and they are as follows: 1. For 2004, the only adjustment was an increase in property and equipment $480,492, with a corresponding increase in liabilities of $480,492 to record the asset retirement obligation (ARO) for the current wells. 2. In 2005, the company recorded an expense of $27,354 for the 2005 accretion of the ARO, along with a decrease in the ARO of $29,095 related to wells plugged during the year. 3. In 2005, the company expensed $43,206 of previously capitalized workover costs. 4. In 2005, the company had previously been depreciating its leasehold improvements using the straight line method and has since corrected this to the depletion method. The total depletion adjustment was $67,647. The 2004 adjustments did not effect the income statement, nor did it effect the per share earnings amounts. The 2005 adjustments increased the loss $109,110, from $911,458, to $1,020,568. The basic loss per share increased from $0.20 to a loss of $0.22 per share.
BALANCE SHEET RESTATED CHANGES ADJUSTMENTS AUDITED 12/31/2004 2004 12/31/2004 ---------- ------------ ---------- CURRENT ASSETS: Cash and cash equivalents $ 9,944 $ - $ 9,944 Accounts receivable 15,981 - 15,981 Prepaid expenses - - - ---------- ------------ ---------- TOTAL CURRENT ASSETS 25,925 25,925 Office equipment, net of depreciation - 427 427 Vehicles, net of depreciation - - - Proved reserves, net of depletion - 1,754,772 1,754,772 Unproved reserves, net of depletion - 264,382 264,382 ---------- ------------ ---------- PROPERTY AND EQUIPMENT, net of accumulated depreciation and depletion 1,539,089 (1,539,089) - TOTAL ASSETS $1,565,014 $ 480,492 $2,045,506 ========== ============ ========== CURRENT LIABILITIES: Accounts payable $ 52,164 $ 52,164 Related party accrued interest 11,500 11,500 Accrued interest - - Asset retirement obligation 480,492 480,492 Line of credit 72,573 72,573 Related party payable 73,850 73,850 Accrued payroll liabilities 2,295 2,295 Other short term loans - - Related party current portion of long-term debt 120,000 120,000 ---------- ------------ ---------- TOTAL CURRENT LIABILITIES 332,382 480,492 812,874 ---------- ------------ ---------- Long term loans - - - Related party L.T. debt, net of current portion 1,015,014 - 1,015,014 ---------- ------------ ---------- TOTAL LIABILTIES 1,347,396 480,492 1,827,888 ---------- ------------ ---------- STOCKHOLDERS' EQUITY: Common stock, $0.001 par value, 50,000,000 shares authorized; 13,260,881 shares issued and outstanding at December 31, 2006 and 4,893,677 at December 31, 2005 3,061 - 3,061 Additional paid-in capital 730,272 - 730,272 Subscribed Stock (117,250) - (117,250) Accumulated deficit (398,466) - (398,466) ---------- ------------ ---------- TOTAL STOCKHOLDERS' EQUITY 217,618 - 217,618 ---------- ------------ ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,565,014 $ 480,492 $2,045,506 ========== ============ ==========
ORIGINALLY FILED RESTATED AUDITED ADJUSTMENTS AUDITED 12/31/2005 2005 12/31/2005 ----------- ----------- ----------- CURRENT ASSETS: Cash and cash equivalents $ 1,874,862 $ - $ 1,874,862 Accounts receivable 26,671 - 26,670 Prepaid expenses 3,150 - 3,150 ----------- ----------- ----------- TOTAL CURRENT ASSETS 1,904,683 1,904,682 Office equipment, net of depreciation - 4,279 4,279 Proved reserves, net of depletion - 2,459,133 2,459,133 Unproved reserves, net of depletion - 389,369 389,369 PROPERTY AND EQUIPMENT, net of accumulated depreciation and depletion 1,832,164 (1,832,164) - Deposits 1,350 - 1,350 ----------- ----------- ----------- TOTAL ASSETS $ 3,738,197 $ 1,020,617 $ 4,107,838 =========== =========== =========== CURRENT LIABILITIES: Accounts payable $ 13,026 $ - $ 13,026 Accrued interest 96,268 - 96,268 Asset retirement obligation - 26,484 26,484 Accrued payroll liabilities 56,052 - 56,052 Other short term loans 70,000 - 70,000 Related party current portion of long-term debt 35,866 - 35,866 ----------- ----------- ----------- TOTAL CURRENT LIABILITIES 271,212 26,484 297,696 ----------- ----------- ----------- Long term loans 2,300,000 - 2,300,000 Asset Retirement obligation, long term - 452,267 452,267 Related party L.T. debt, net of current portion 71,732 - 71,732 ----------- ----------- ----------- TOTAL LIABILITIES 2,642,944 478,751 3,121,695 ----------- ----------- ----------- STOCKHOLDERS' EQUITY: Common stock, $0.001 par value, 50,000,000 shares authorized; 13,260,881 shares issued and outstanding at December 31, 2006 and 4,893,677 at December 31, 2005 4,902 - 4,902 Additional paid-in capital 2,400,273 - 2,400,273 Accumulated deficit (1,309,923) (109,110) (1,419,033) ----------- ----------- ----------- TOTAL STOCKHOLDERS' EQUITY 1,095,252 (109,110) 986,142 ----------- ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,738,196 $ 369,641 $ 4,107,837 =========== =========== ===========
INCOME STATEMENT ORIGINALLY FILED RESTATED CHANGES AUDITED ADJUSTMENTS AUDITED 2005 2005 2005 ---------- ----------- ----------- REVENUE Oil and gas sales $ 278,817 $ - $ 278,817 Interest income 13,326 (102) 13,428 Forgiveness of debt - - - Other Income - - - ---------- ----------- ----------- Total Revenues 292,143 (102) 292,245 Expenses General and administrative 379,134 - 379,134 Production costs 32,033 14,220 117,813 Workovers - (43,206) 43,206 Depreciation, depletion, and amortization 111,072 (95,001) 206,073 Asset retirement obligation expense - - - Interest expense 550,249 - 550,249 Plugging of wells 14,775 14,775 - Production taxes 16,338 - 16,338 ---------- ----------- ----------- Total expenses 1,203,601 (109,212) 1,312,813 ---------- ----------- ----------- Income before provision for income taxes (911,458) 109,110 (1,020,568) Provision for income taxes - - - ---------- ----------- ----------- NET LOSS $ (911,458) $ 109,110 $(1,020,568) ========== =========== ===========
NOTE 14 - UNAUDITED SUPPLEMENTARY OIL AND NATURAL GAS INFORMATION The following supplementary information is presented in compliance with United States Securities and Exchange Commission ("SEC") regulation and FASB Statement No. 69, "Disclosures About Oil and Gas Producing Activities." The supplementary information is not a required part of the basic financial statements and therefore not covered by the report of the Company's independent auditors. Proved oil and gas reserves are the estimated quantities of crude oil, natural gas, and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed oil and gas reserves are reserves expected to be recovered through existing wells with current equipment and operating methods. The reserve data is based on studies prepared by the Company's independent consulting petroleum engineers. Reserve estimates require substantial judgment on the part of petroleum engineers resulting in imprecise determinations, particularly with respect to new discoveries. Accordingly, it is expected that the estimates of reserves will change as future productions and development information become available. At December 31, 2005, the Company's proved oil and gas reserves are located in Texas. The following analysis relates only to the wells in the Big Foot and Kyote fields and does not address the reserves in the Somerset wells which were acquired during 2005. F-16 SOUTH TEXAS OIL COMPANY SUPPLEMENTARY INFORMATION REGARDING OIL AND GAS PRODUCING ACTIVITIES FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004 UNAUDITED The following supplementary oil and gas information is provided in accordance with Statement of Financial Accounting Standards No. 69, Disclosures about Oil and Gas Producing Activities (SFAS 69). The Company has properties in only one reportable geographic area, all of which are oil properties. 1. CAPITALIZED COSTS RELATING TO OIL AND GAS PRODUCING ACTIVITIES 2005 2004 ---- ---- Proved oil and gas properties $2,459,133 $ 39,614 Unproved oil and gas properties 389,369 -- Support equipment, proved properties -- -- ---------- --------- 2,848,502 39,614 Accumulated depreciation and depletion (650,976) 1,150 ---------- --------- Net capitalized costs $2,197,526 $ 38,464 ========== ========= 2. COSTS INCURRED IN OIL AND GAS PRODUCING ACTIVITIES FOR ABOVE REFERENCED PERIODS 2005 2004 ---- ---- Acquisition of proven properties $307,426 $ 0 Exploration costs 0 0 3. RESULTS OF OPERATIONS FOR OIL AND GAS PRODUCING ACTIVITIES FOR THE ABOVE REFERENCED PERIODS 2005 2004 ---------- ---------- Oil Sales - 100% $ 467,247 $ 351,386 Oil Sales - Royalty Share (188,430) (155,732) ---------- ---------- Oil and gas sales 278,817 195,654 Lease operating income - - Production taxes (16,338) (23,503) Production costs (161,019) (131,067) Exploration expenses - - Depreciation and depletion (206,073) (98,886) Income tax expense - - ---------- ---------- Results of operations for oil and gas producing activities (excluding corporate overhead and financing costs) $ (104,613) $ (57,802) ========== ========== F-17 4. RESERVE QUANTITY INFORMATION The following estimates of proved developed reserve quantities are estimates only, and do not purport to reflect realizable values or fair market value of the Company's reserves. They are presented in accordance with the guidelines established by the S.E.C. and disclosure requirements promulgated by SFAS 69. The Company emphasizes the reserve estimates are inherently imprecise and that estimates of new discoveries are more imprecise than those of currently producing oil and gas properties. Accordingly, these estimates are expected to change as future information becomes available. All of the Company's reserves are located in southern Texas. Proved reserves are estimated reserves of crude oil (including condensate and natural gas liquids) and natural gas that geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed reserves are those expected to be recovered through existing wells, equipment, and operating method. The Company's proved developed and undeveloped reserves and changes in them during the periods are as follows. Proved Developed and Undeveloped Reserves: Oil Gas (BBLS) (MCF) ------ ----- Purchase of Minerals in Place(02/22/00) 698,290 - Production, 2000 (10,270) - Production, 2001 (11,283) - Production, 2002 (5,554) - ------- ----- Reserves at December 31, 2002 671,183 - Revisions of Previous Estimates (435,092) - Purchase of minerals in place - - Production, 2003 (7,586) - ------- ----- Reserves at December 31, 2003 228,505 - ------- ----- Revisions of Previous Estimates (2,337) - Purchase of minerals in place - - Production, 2004 (4,972) - ------- ----- Reserves at December 31, 2004 221,196 - ------- ----- Revisions of Previous Estimates (167,508) - Purchase of minerals in place - - Production, 2005 (5,258) - ------- ----- Reserves at December 31, 2005 48,430 - ======= ===== F-18 (cont) Proved Developed Reserves: Oil Gas (BBLS) (MCF) ------ ----- Purchase of Minerals in Place (02/22/00) 95,640 - Production, 2000 (10,270) - Production, 2001 (11,283) - Production, 2002 (5,554) - ------- ----- Reserves at December 31, 2002 68,533 - Revisions of Previous Estimates (28,192) - Purchase of minerals in place - - Production, 2003 (7,586) - ------- ----- Reserves at December 31, 2003 32,755 - Revisions of Previous Estimates (2,337) - Purchase of minerals in place - - Production, 2004 (4,972) - ------- ----- Reserves at December 31, 2004 25,445 - ------- ----- Revisions of Previous Estimates 28,243 - Purchase of minerals in place - - Production, 2005 (5,258) - ------- ----- Reserves at December 31, 2005 48,430 - ======= ===== Based on a revised Evaluation of Proved Reserves on November 23, 2004 and January 31, 2005, as well as an Evaluation of Proved Reserves by an independent petroleum engineering firm as of December 31, 2005 the proved reserves have been revised to account for changes in economic factors and the historical net oil production generated. The engineer's report analyzed the historical production and investments made by the company during the period since the last report and then along with evaluating the current economic factors the report was revised accordingly. In 2002, the Company's production declined significantly, as the Company was in a transition period between pumper's. As a result of this decline the reserve estimates have been adjusted downward to reflect how this decline would affect the reserves if production continued at the reduced levels. When determining the estimated reserves, the corresponding costs of drilling and completing new wells are also included. Since the original reserve study of 2000, the cost of drilling and completing new wells has significantly increased, whereas the price of oil used for determining the future net revenue rose only $2.55 from $30 in 2000 to $32.55 in the current study. The increase in costs for drilling and completion, along with the relatively minor oil price increase and the low level of production during 2002 and 2003 resulted in a significant decline in the value for proved developed and undeveloped reserves. While our year end 2005 assumptions used a higher price of oil, the reserves had revised lower due to lower production in prior years. 5. STANDARDIZED MEASURES OF DISCOUNTED FUTURE NET CASH FLOWS AND CHANGES THEREIN RELATING TO PROVED OIL AND GAS RESERVES AT THE ABOVE REFERENCED DATE Statement of Financial Accounting Standards No. 69, "Disclosures about Oil and Gas Producing Activities," prescribes guidelines for computing a standardized measure of future net cash flow and changes therein relating to estimated proved reserves. The Company has followed these guidelines, which are briefly discussed in the following paragraphs. F-19 Future cash inflows and future production and development costs are determined by applying year-end oil prices and costs to the estimated quantities of oil to be produced. Estimated future income taxes are computed using current statutory income tax rates including consideration for estimated future depletion. The resulting future net cash flows are reduced to present value amounts by applying a 10% annual discount factor. The assumptions used to compute the standardized measure are those prescribed by the Financial Accounting Standards Board and, as such, do not necessarily reflect the Company's expectations of actual revenues to be derived from those reserves nor their present worth. The limitations inherent in the reserve quantity estimation process, as discussed previously, are equally applicable to the standardized measure computations since these estimates are the basis for the valuation process. The following summary sets forth the Company's future net cash flows relating to proved oil and gas reserves based on the standardized measure prescribed in Statement of Financial Accounting Standards No. 69: 2005 2004 ----------- ------------- Future cash inflows $ 2,581,000 $ 7,224,115 Future production costs (1,279,100) (1,089,078) Future development costs (-) (3,146,000) Future income tax provision ( 179,100) (198,927) ----------- ------------- Future net cash flows 1,122,800 2,790,110 Effect of 10% discount factor (331,800) (2,974,620) ----------- ------------- Standardized measure of discounted future net cash flows $ 791,000 $ (184,510) =========== ============= Year-end oil prices used in calculating the standardized measure of discounted future net cash flows for 2005 were $52.84 per barrel. The principal sources of changes in the standardized measure of discounted future net cash flows are as follows for the period from December 31, 2004 to December 31, 2005: 2005 2004 --------- --------- Standardized measure, beginning of period $(184,510) $ (79,435) Purchase of reserves in place 0 0 Sales of oil produced, net of production costs (117,797) (64,587) Net changes in prices and production costs (190,022) (40,488) Net change in estimated future development costs 3,146,000 0 Net change in income taxes 0 0 Revisions of previous quantity estimates (1,862,671) 0 Accretion of discount 0 0 Other 0 0 --------- --------- Standardized measure, end of period $ 791,000 $(184,510) ========= ========= F-20 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. ITEM 8A. CONTROLS AND PROCEDURES. The Company's management is responsible for establishing and maintaining a system of disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) that is designed to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer's management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. In accordance with Exchange Act Rules 13a-15 and 15d-15, an evaluation was completed under the supervision and with the participation of the Company's management, including the Company's President, Principal Financial Officer and Secretary, of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of the end of the period covered by this Annual Report. Based on that evaluation, the Company's management including the President, Principal Financial Officer and Secretary, concluded that there was a deficiency in the Company's disclosure controls and procedures for the year ended December 31, 2005 relating to the reporting and disclosure of the value of the asset retirement obligation and calculation of the depletion. Additionally, reserve estimates were not appropriately updated with information obtained from new reserve studies. Subsequent to the identification of the deficiency in the Company's disclosure controls and procedures as described above, the Company performed and implemented a variety of additional procedures to ensure that amounts and, disclosures included were fairly presented in all material respects in accordance with GAAP, including obtaining updated reserve studies performed by independent petroleum engineers to update information related to the estimated proved reserves and recording a liability for the fair value of asset retirement obligations. As a result of the implementation of these additional procedures, the Company believes that its disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the 1934 Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. We also maintain a system of internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)) designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. During our most recent fiscal year, there have been no changes in our internal control over financial reporting that occurred that have materially affected or are reasonably likely to materially affect our internal control over financial reporting. ITEM 8B. OTHER INFORMATION. None. PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT. Directors and Executive Officers The following table sets forth information regarding our executive officers, certain other officers and directors as of December 31, 2005: Name Age Position/Office Served Since ------------------ --- ---------------------- ------------- Murray N. Conradie 39 Chairman/President/CEO April 1999 Jason F. Griffith 27 CFO/Director June 2002 Edward Shaw 44 COO December 2005 Conrad Humbke 71 Director November 2004 The following is a brief description of the business background of the directors and executive officers of South Texas Oil Company: Murray N. Conradie - President/CEO and Chairman of the Board Mr. Conradie has been the CEO and Chairman of the Board and a Director of South Texas Oil Company since April 1999. He was also the CEO and Chairman of the Board and a Director of Datascension, Inc., a public company trading on the OTCBB, since April 1999, the parent company of South Texas Oil Company, prior to the spin-off. He resigned from Datascension Inc, on April 1, 2005 to focus more attention on South Texas Oil Company. Mr. Conradie has several years of experience in creating and developing start-up enterprises and has a background in Law and Accounting. 32 Jason F. Griffith - CFO/Director Mr. Griffith was the CFO and a Director of South Texas Oil Company, and the prior CFO and Director of Datascension, Inc., a public company trading on the OTCBB, which was the parent company of South Texas Oil Company, prior to the spin-off. Mr. Griffith held both these positions from June of 2002. He resigned from Datascension Inc, on April 1, 2005 to focus more attention on South Texas Oil Company. Prior to that, Mr. Griffith was the accounting manager for a CPA firm in Henderson, Nevada starting in August of 2001. Before taking on this position, he worked for Arthur Andersen in Memphis, Tennessee from December 1998 until his move to Nevada in the summer of 2001. Prior to joining Arthur Andersen, Mr. Griffith was in the process of completing his undergraduate degree and Masters in Accounting from Rhodes College in Memphis, Tennessee. Mr. Griffith is a licensed CPA in both the state of Nevada and Tennessee. He is a member of the American Institute of Certified Public Accountants, The Association of Certified Fraud Examiners, The Institute of Management Accountants, along with being a member of the Nevada and Tennessee State Society of CPAs. Mr. Griffith resigned as CFO and Director of South Texas Oil Company on February 7, 2006 in order to focus more attention on his growing accounting practice. (See South Texas Oil Company's report on Form 8-K dated February 7, 2006 items 5.02 and 9.01.) Edward Shaw - COO Effective December 1, 2005 Mr. Edward Shaw was appointed as Chief Operating Officer of South Texas Oil Company to head field operations in Texas. Mr. Shaw is qualified as both a mechanical and electrical engineer with over 10 years of experience in Saudi Arabia and has spent the last 4 years in New Zealand where he was researching and developing methods of monitoring oil wells to optimize production, including using existing products integrated with emerging telemetry technologies. Conrad Humbke - Director Mr. Humbke has many years experience in the oil and gas industry and has served both as a director and officer of oil and gas companies which also included oil and mining exploration. Mr. Humbke has been in retirement for the past 5 years. Significant Employees South Texas Oil Company has not identified any employee who is not an executive who is expected to make a significant contribution to the business. Family Relationships There are no family relationships among the directors, executive officers or persons nominated or chosen by South Texas Oil Company to become directors or executive officers. 33 Legal Proceedings None of South Texas Oil Company's directors, executive officers or nominees for such office have been involved in any legal proceedings related to bankruptcy of an entity where they held such positions; nor charged or convicted in any criminal proceedings; nor subject to any order, judgment, or decree permanently or temporarily enjoining, barring, suspending or other wise limiting their involvement in any type of business, securities or banking activities; nor found in any manner whatsoever to have violated a federal or state securities or commodities law. None of South Texas Oil Company's officers or directors, nor to the knowledge of South Texas Oil Company, any of South Texas Oil Company's control persons, has: - had any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time; - been convicted in a criminal proceeding or is subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); - been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; or - been found by a court of competent jurisdiction (in a civil action), the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, where the judgment has not been reversed, suspended or vacated. Committees South Texas Oil Company does not have any audit, compensation, and executive committees. Because the Board of Directors currently consists of only three members, South Texas Oil Company does not have a standing nominating, compensation or audit committee. Rather, the full Board of Directors performs the functions of these committees. South Texas Oil Company does not believe it is necessary for its Board of Directors to appoint such committees because the volume of matters that come before its Board of Directors for consideration permits each Director to give sufficient time and attention to such matters to be involved in all decision making. Conflicts of Interest The officers and directors of South Texas Oil Company are now and may in the future become shareholders, officers or directors of other companies which may be engaged in business activities similar to those conducted by South Texas Oil Company. Accordingly, additional direct conflicts of interest may arise in the future with respect to such individuals acting on behalf of South Texas Oil Company or other entities. Moreover, additional conflicts of interest may arise with respect to opportunities which come to the attention of such individuals in the performance of their duties or otherwise. South Texas Oil Company does not currently have a right of first refusal pertaining to opportunities that come to management's attention insofar as such opportunities may relate to South Texas Oil Company's proposed business operations. 34 The officers and directors are, so long as they are officers or directors of South Texas Oil Company, subject to the restriction that all opportunities contemplated by South Texas Oil Company's plan of operation which come to their attention, either in the performance of their duties or in any other manner, will be considered opportunities of, and be made available to South Texas Oil Company and the companies that they are affiliated with on an equal basis. A breach of this requirement will be a breach of the fiduciary duties of the officer or director. If South Texas Oil Company or the companies in which the officers and directors are affiliated with both desire to take advantage of an opportunity, then said officers and directors would abstain from negotiating and voting upon the opportunity. However, all directors may still individually take advantage of opportunities if South Texas Oil Company should decline to do so. Except as set forth above, South Texas Oil Company has not adopted any other conflict of interest policy with respect to such transactions. Compliance with Section 16(a) of the Exchange Act Section 16(a) of the Securities Exchange Act of 1934 requires our directors and executive officers, and persons who beneficially own more than ten percent of a registered class of our equity securities (referred to as "reporting persons"), to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of common stock. Reporting persons are required by Commission regulations to furnish us with copies of all Section 16(a) forms they file. Based solely upon a review of Forms 3, 4 and 5 furnished to us, we are not aware of any person who at any time during the fiscal year ended December 31, 2005, was a director, officer, or beneficial owner of more than ten percent of our common stock, who failed to file, on a timely basis, reports required by Section 16(a) of the Securities Exchange Act of 1934 during such fiscal year. Code of Ethics We have adopted a code of ethics that applies to our executive officers, including our Chief Executive Officer and Chief Financial Officer. Indemnification of Directors and Officers. The By-laws of South Texas Oil Company state that to the extent allowed by Nevada State law, as same may be amended, and subject to the required procedure thereof, the corporation shall indemnify any person who was or is a party of is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, shall not of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation, and with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. 35 ITEM 10. EXECUTIVE COMPENSATION. Compensation of Executive Officers The following table sets forth the aggregate cash compensation paid by South Texas Oil Company for services rendered during the periods indicated to its directors and executive officers: SUMMARY COMPENSATION TABLE Name & Position Fiscal Year Salary Bonus Other Compensation --------------- ----------- ------ ----- ----------------- Murray N. Conradie 2003 -0- -0- -0- Chairman/CEO 2004 24,000 -0- -0- 2005 150,000 -0- -0- Jason F. Griffith 2003 -0- -0- -0- CFO 2004 12,000 -0- -0- 2005 12,000 -0- -0- Edward Shaw 2003 -0- -0- -0- COO 2004 -0- -0- -0- 2005 $4,000 -0- 100,000 shares(1) (1) Mr. Shaw received 100,000 shares of restricted common stock of South Texas Oil Company as an incentive payment as part of his Employment Agreement. Common Stock The Officers have not received any common stock in compensation for their services, other than the unpaid salary they have converted to common stock. Employment Agreements On April 1, 2004, we entered into an employment agreement with Murray Conradie. The term of employment is five (5) years. Mr. Conradie serves as President, CEO, Chairman and Director. We agreed to pay Mr. Conradie a base salary of $24,000 per annum for the first year of employment, increasing based on performance of South Texas Oil Company and time devoted solely to South Texas Oil Company. In addition to the cash compensation earned by Mr. Conradie, we granted Mr. Conradie an option to purchase shares of our common stock according to the Executive Stock Option Plan. On April 1, 2004, we entered into an employment agreement with Jason Griffith. The term of employment is five (5) years. Mr. Griffith serves as Chief financial Officer, Secretary/Treasurer and Director. We agreed to pay Mr. Griffith a base salary of $12,000 per annum for the first year of employment, increasing based on performance of South Texas Oil Company and time devoted solely to South Texas Oil Company. In addition to the cash compensation earned by Mr. Griffith, we granted Mr. Griffith an option to purchase shares of our common stock according to the Executive Stock Option Plan. On December 1, 2005, we entered into an employment agreement with Edward Shaw. The term of employment is five (5) years. Mr. Shaw serves as Chief Operational Officer. We agreed to pay Mr. Shaw a base salary of $48,000 per annum for the first year of employment, increasing based on performance of South Texas Oil Company and time devoted solely to South Texas Oil Company. In addition to the cash compensation earned by Mr. Shaw, we granted Mr. Conradie an option to purchase shares of our common stock according to the Executive Stock Option Plan. 36 Aggregated Option/SAR Exercises and Fiscal Year-End Option/SAR Values The following table sets forth the options granted in 2004 to each of the directors and executive officers: Option/SAR Grants in Last Fiscal Year (Individual Grants): Number of Percent of total Securities Options/SARs Underlying granted to Exercise or Options/SARS employees in base price Expiration Name Granted fiscal year ($/Share) date ----- ------------ ---------------- ---------- ----------- Murray N. Conradie 150,000 18.2 $0.46 4/1/09 200,000 24.2 $0.50 4/1/14 Jason F. Griffith 100,000 12.1 $0.46 4/1/09 100,000 12.1 $0.50 4/1/14 Edward Shaw 100,000 12.1 $0.46 12/1/10 100,000 12.1 $0.50 12/1/15 Conrad Humbke 75,000 9.09 $0.46 11/2/09 There were options issued to officers in April of 2004. Compensation cost for options granted has not been recognized in the accompanying financial statements because the exercise prices exceeded the current market prices of South Texas Oil Company's common stock on the dates of grant. The options and warrants expire in April 2010 and 2015 and are exercisable at prices from $.46 to $.50 per option or warrant, respectively. Compensation of Directors There were no arrangements pursuant to which any director of South Texas Oil Company was compensated through December 31, 2005 for any service provided as a director. In addition, no such arrangement is contemplated for the foreseeable future as South Texas Oil Company's only directors are its current executive officers. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Security Ownership of Management and Certain Beneficial Owners The following table sets forth information as of the date of this Registration Statement certain information with respect to the beneficial ownership of the Common Stock of South Texas Oil Company concerning stock ownership by (i) each director, (ii) each executive officer, (iii) the directors and officers of South Texas Oil Company as a group, (iv) and each person known by South Texas Oil Company to own beneficially more than five (5%) of the Common Stock. Unless otherwise indicated, the owners have sole voting and investment power with respect to their respective shares. The mailing address for each of the persons indicated is our corporate headquarters. 37 Beneficial ownership is determined under the rules of the Securities and Exchange Commission. In general, these rules attribute beneficial ownership of securities to persons who possess sole or shared voting power and/or investment power with respect to those securities and includes, among other things, securities that an individual has the right to acquire within 60 days. Unless otherwise indicated, the stockholders identified in the following table have sole voting and investment power with respect to all shares shown as beneficially owned by them. Title of Name and Address Amount and Nature Percent of Class of Beneficial Owner of Beneficial Owner Class -------- -------------------------- ------------------ ---------- Common Murray N. Conradie President/CEO 8.82% 6330 McLeod Drive, Suite 1 Chairman Las Vegas, Nevada 89120 431,179 Shares Common Jason F. Griffith CFO/Director 2.80% 6330 McLeod Drive, Suite 1 136,664 Shares Las Vegas, Nevada 89120 Common Edward Shaw COO 2.09% 6330 McLeod Drive, Suite 1 102,000 Shares Las Vegas, Nevada 89120 Common Conrad Humbke Director 0.0% 6330 McLeod Drive, Suite 1 0 Shares Las Vegas, Nevada 89120 Common Officers and Directors as a Group 669,843 Shares 13.70% Mr. Conradie, Mr. Griffith, Mr. Shaw, and Mr. Humbke have options to purchase a total of 425,000 shares of South Texas Oil Company's Common Stock at $.46 any time before March 31, 2009; and a total of 400,000 shares at $.50 any time before March 31, 2014. The percentage ownership calculations listed above are based upon 4,889,171 shares of common stock being outstanding, and no options granted being exercised as of December 31, 2005. Persons Sharing Ownership of Control of Shares Management has no knowledge of the existence of any arrangements or pledges of South Texas Oil Company's securities which may result in a change in control of South Texas Oil Company. No person owns or shares the power to vote ten percent (10%) or more of South Texas Oil Company's securities. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Company has a note payable to a shareholder, in the amount of $50,000 as of December 31, 2005. This obligation is due in 2006 and accrues interest at 10% annually. The accrued interest on this loan as of December 31, 2005 was $13,417. The amounts are considered short term due to the delinquency of payments on the accrued interest. 38 The Company has a note payable to a shareholder, in the amount of $20,000 as of December 31, 2005. This obligation is due in 2006 and accrues interest at 10% annually. The accrued interest on this loan as of December 31, 2005 was $4,500. The amounts are considered short term due to the delinquency of payments on the accrued interest. Mr. Conradie received 100,000 shares of restricted common stock of South Texas Oil Company per Section 3(g) of his employment contract with Nutek Inc., the parent company, upon the spin-off of South Texas Oil Company as a separate trading entity. (See Exhibit 10.16 Employment Agreement Murray N. Conradie of Nutek Inc.) South Texas Oil Company also has a note payable to Murray Conradie, related to the purchase of wells during the 2nd quarter as of December 31, 2005 for $68,132. This note is paid only from a percentage of production of the related wells. South Texas Oil Company also has a note payable to Jason Griffith, related to the purchase of wells during the 2nd quarter as of December 31, 2005 for $34,066. This note is paid only from a percentage of production of the related wells. South Texas Oil Company recently moved its offices from 900 NE Loop 410, Suite E121, San Antonio, TX and relocated to 2881 CR 2880, Big Foot, TX. This property is owned by Mr. Conradie. There has been no change to the monthly rental amount payable by the company. A material relationship exists between JGM Oil Investments, LLC from which the Somerset leases were purchased on April 1, 2005 and South Texas Oil Company in so far as both Mr. Conradie the President/CEO and a Director of South Texas Oil Company and Mr. Jason Griffith, the Chief Financial Officer and a Director of South Texas Oil Company have a combined majority ownership of JGM Oil Investments, LLC. A material relationship exists between Horizon Ridge Oil Company, the operator of record with the Texas Rail Road Commission for the Somerset leases which were purchased on April 1, 2005 and South Texas Oil Company in so far as both Mr. Conradie the President/CEO and a Director of South Texas Oil Company and Mr. Jason Griffith, the Chief Financial Officer and a Director of South Texas Oil Company own Horizon Ridge Oil Company. A nominal amount is paid to Horizon Ridge Oil Company each month to cover the Rail Road Commission Surety bond for these leases as well as the reporting requirements with the Rail Road Commission. The amount to date has averaged less than $1,000 per month. Other Material Transactions. With the exception of the above mentioned transactions, there have been no material transactions, series of similar transactions or currently proposed transactions to which South Texas Oil Company or any officer, director, their immediate families or other beneficial owner is a party or has a material interest in which the amount exceeds $50,000. 39 ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits. The following documents are included or incorporated by reference as exhibits to this report: Exhibit 3. Articles of Incorporation and Bylaws. 3.1 Articles of Incorporation* 3.2 Bylaws* Exhibit 10.Material Contracts 10.1 Letter of Intent to Purchase Selected Assets from Clipper Operating Company.* 10.2 Purchase Agreement of Selected Assets from Nutek Inc.(1) 10.3 Executive Compensation Agreement (Murray N. Conradie)(1) 10.4 Executive Compensation Agreement (David Cummings)(1) 10.5 Executive Compensation Agreement (Jason F. Griffith)(1) 10.6 Executive Stock Option Agreement (Murray N. Conradie)(1) 10.7 Executive Stock Option Agreement (David Cummings)(1) 10.8 Executive Stock Option Agreement (Jason F. Griffith)(1) 10.9 Executive Stock Option Agreement (Charles Snipes)(1) 10.10 Qualified Equity Incentive Stock Option Plan(1) 10.11 Contract for Services (Peter R. Maupin)(2) 10.12 Contract for Services (Smitty's Pumping)(2) 10.13 Executive Stock Option Agreement (Conrad Humbke)(3) 10.14 Purchase Agreement - Mineral Acres(3) 10.15 Executive Compensation Agreement (Edward B. Shaw) 10.16 Executive Stock Option Agreement (Edward B. Shaw) (1) Previously filed as an exhibit to South Texas Oil Company's Form 10-SB, filed April 30, 2004. (2) Previously filed as an exhibit to South Texas Oil Company's Amendment No. 2 to Form 10-SB, filed September 3, 2004. (3) Previously filed as an exhibit to South Texas Oil Company's Current Report to Form 8-K, filed April 7, 2005. Exhibit 23.Consent of Experts and Counsel 23.1 Consent of Larry O'Donnell, CPA, P.C., Certified Public Accounts. Exhibit 31.Certifications required by Rule 13a-14(a) or Rule 15d-14(a) 31.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.ss .1850 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Principal Financial Officer pursuant to 18 U.S.C.ss.1850 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Exhibit 32.Certifications required by Rule 13a-14(b) or Rule 15d-14(b) and section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.ss.1850 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 40 32.2 Certification of Principal Financial Officer pursuant to 18 U.S.C.ss.1850 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K South Texas Oil Company's report on Form 8-K dated April 7, 2005 items 1.01, 2.01, 3.02 and 9.01. On April 7, 2005, South Texas Oil Company filed a Current Report on Form 8-K, relating to the Executive Stock Option Agreement filed as Exhibit 10.13 with the Current Report detailing the options offered to Conrad Humbke as a result of his Board Appointment. Additionally on April 7, 2005, South Texas Oil Company reported the purchase of the leases, farm-outs and mineral interests held by JGM Oil Investments, LLC in Atascosa County. The total purchase price was three hundred seven thousand four hundred twenty-six dollars ($307,426) made up as follows; Purchase of all mineral acreage at a price of one hundred dollars ($100.00) per acre. Total price for the acreage was sixty nine thousand four hundred ten and no/100 dollars ($69,410). Purchase of all equipment was at a depreciated price of forty five percent (45%) of the replacement value. Total price for equipment was two hundred thirty eight thousand sixteen and no/100 dollars ($238,016). South Texas Oil Company's report on Form 8-K dated April 14, 2005, item 3.02. On April 14, 2005, South Texas Oil Company filed a Current Report on Form 8-K, relating to South Texas Oil Company agreeing to April 27, 2005 as the record date for the issuance of 957,349 shares of restricted common stock of South Texas Oil Company that Datascension Inc. (the parent company prior to the spin- off of South Texas Oil Company) had an interest in valued at $1,003,831. South Texas Oil Company's report on Form 8-K dated August 1, 2005, items 1.01 and 9.01. On August 1, 2005, South Texas Oil Company filed a Current Report on Form 8-K, relating to the entering into a funding agreement from institutional and accredited investors with gross proceeds of $2,300,000, to be received in two traunches. The first traunch of $1,300,000 received upon execution of the agreement and the remaining $1,000,000 within five days after a to be filed registration statement becomes effective, or sooner if certain milestones are achieved. The funding consists of convertible securities which shall convert into forty-five percent (45%) equity of the fully diluted shares of South Texas Oil Company if both traunches are received. South Texas Oil will use the net proceeds of the first traunch to perform workovers on existing wells, drill two new wells, capital expenditures and working capital. The second traunch will be used to drill additional 4-5 wells, if the milestones for the first traunch are met. Additionally, South Texas Oil Company entered into Lock-Up Agreements with the following board members of South Texas Oil Company; Murray Conradie and Jason Griffith. In this Agreement, these board members agreed not to sell any shares in South Texas Oil Company's Common Stock owned by them for a period of 12 months, or until such time as certain milestones have been met. 41 South Texas Oil Company's report on Form 8-K dated December 14, 2005 item 8.01 On December 14, 2005, South Texas Oil Company filed a Current Report on Form 8-K, relating to the meeting of certain milestones set by the institutional and accredited investors and would receive the second traunch of $1,000,000. South Texas Oil Company's report on Form 8-K dated December 14, 2005 item 8.01 On December 14, 2005, South Texas Oil Company filed a Current Report on Form 8-K, stating that the company was to commence trading on the OTC Bulletin Board (OTCBB). South Texas Oil Company's report on Form 8-K dated February 7, 2006 items 5.02 and 9.01. On February 7, 2006, South Texas Oil Company filed a Current Report on Form 8-K, relating to the appointment of Mr. Edward Shaw as a Director of South Texas Oil Company along with the resignation of Mr. Jason Griffith as Chief Financial Officer and Director. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Audit Fees For the fiscal years ended December 31, 2005, South Texas Oil Company's principal accountant billed $5,300, for the audit of South Texas Oil Company's annual financial statements and review of financial statements included in South Texas Oil Company's Form 10-QSB filings. For the year ended December 31, 2004, South Texas Oil Company's prior accountant billed South Texas Oil Company $5,300 for the annual audit of the financial statements. Audit-Related Fees For the fiscal years ended December 31, 2005 and 2004, South Texas Oil Company's principal accountant billed $0 and $0, respectively, for assurance and related services that were reasonably related to the performance of the audit or review of South Texas Oil Company's financial statements outside of those fees disclosed above under "Audit Fees". Tax Fees For the fiscal years ended December 31, 2005 and 2004, South Texas Oil Company's principal accountant billed $0 and $0, respectively, for tax compliance, tax advice, and tax planning services. All Other Fees For the fiscal years ended December 31, 2005 and 2004, South Texas Oil Company's principal accountant billed $0 and $0, respectively, for products and services other than those described above. Pre-approval Policies and Procedures Prior to engaging South Texas Oil Company's accountants to perform a particular service, South Texas Oil Company's board of directors obtains an estimate for the service to be performed. The board of directors, in accordance with procedures for South Texas Oil Company, approved all of the services described above prior to the services being performed. 42 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. South Texas Oil Company /s/ Murray N. Conradie ---------------------- Murray N. Conradie, President, Chairman and Director (Principal Executive Officer and Principal Financial Officer) Date: April 17, 2007 Pursuant to the requirements of Section 12 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. /s/ Murray N. Conradie ---------------------- Murray N. Conradie, President, Chairman and Director (Principal Executive Officer and Principal Financial Officer) Date: April 17, 2007 43