ITEM 1. DESCRIPTION OF BUSINESS.
(a) BUSINESS DEVELOPMENT
(i) Business Development, Organization and Acquisition Activities
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Aztec Oil & Gas, Inc. ("Aztec" or "the Company") is a Houston-based oil and gas exploration and production (E&P) company. The Company is taking advantage of significant opportunities that are proving to possess high revenue potential. Since its formation in 2004, Aztec's business plan has been to purchase oil and gas interests utilizing strategies that seek to manage and reduce the risk associated with traditional exploration and production operations.
The Company is a developmental stage company whose original principal business objective involved its participation in the broadcast and television business through its then wholly-owned subsidiary, Lloyd Communications, Inc., a Illinois corporation and Golden Circle Broadcasting Inc., a Tennessee corporation. As a result of adverse business circumstances, the Company sold all its business operations, and no material business operations have been conducted by the Registrant since 1990. In 2004, the Company changed its name from Aztec Communications Group, Inc. to Aztec Oil & Gas, Inc.
In September, 2004 the company acquired a 31.283% membership unit interest in Z2, LLC., a Florida limited liability company. Z2, LLC, owns 100% of the working interest in the 7,200+ acre Big Foot oil field in Texas.
On February 23, 2006, the Company sold its interest in Z2, LLC for $1,555,404. The sales agreement provides for $25,000 to be paid at time of signing, and a note receivable. The note is for $1,561,000 with no stated interest rate. Interest on the note is imputed at 8% per annum. The terms of the note require payments of $75,000 on the 17th of each month for three months, with a balloon payment on May 31, 2006. All amounts due under this note were paid in full in April 2006.
B. Business of Issuer
1) Principal Products, Services and Principal Markets.
Aztec's business plan calls for purchasing interests in producing oil & gas properties with undrilled reserves. Aztec's growth strategy is partially based on participation, as it intends to team up with outside participation investors who will assume the costs associated with the drilling of additional wells in exchange for a part of the revenues derived from the wells they finance. Once the well hard costs are repaid to those participation investors, the Company expects that any working interest revenues would be split approximately 50-50 between those participation investors and Aztec and other lease interest holders. The Company expects that implementation of this strategy should allow a reduction in the financial risks for Aztec in drilling new wells, while Aztec would still be receiving income from present field production in addition to income from any successful new drilling.
Phase two of Aztec's business plan calls for investing in various drilling prospects with industry professionals. Aztec has participated in ten drilling projects in Texas, Oklahoma, and Louisiana. Four of the wells have been completed, three are awaiting evaluation and completion, and three have been plugged and abandoned. Aztec is also participating in a forty well project in Pennsylvania. This project has drilled thirty eight of the forty wells. To date, nineteen wells have been completed.
The Company has an operating history since 2004 with oil and gas properties, upon which an evaluation of the Company, its current business and its prospects can be based, each of which must be considered in light of the risks, expenses and problems frequently encountered by all companies in the early stages of development, and particularly by such companies entering new areas of business. The Company’s prospects must be considered in light of the risks, uncertainties, expenses and difficulties frequently encountered by companies in their early stages of a new business plan, particularly companies involved in the highly competitive oil and gas industry. Such risks include, without limitation, the ability of the Company to manage its operations, including the amount and timing of capital expenditures and other costs relating to the expansion of the company’s operations, direct and indirect competitors of the Company, including those with greater financial, technical and marketing resources, the inability of the Company to attract, retain and motivate qualified personnel and general economic conditions.
The Company has not demonstrated a successful business plan or profitability to date, and the Company anticipates that it will continue to incur net losses for the foreseeable future. The extent of these losses will depend, in part, on the amount of expenditures the Company earmarks to execute its new business strategy. As of August 31, 2006, the Company had an accumulated deficit of $(2,723,633). The Company expects that its operating expenses will increase as it defines its new business strategy, especially in the areas of acquisitions.
Thus, the Company will need to generate revenues to achieve profitability. To the extent that increases in its operating expenses precede or are not subsequently followed by commensurate increases in revenues, or that the Company is unable to adjust operating expense levels accordingly, the Company’s business, results of operations and financial condition would be materially and adversely affected. There can be no assurances that the Company can achieve or sustain profitability or that the Company’s operating losses will not increase in the future.
The Company participated in a minority participation interest in a two-well drilling program in the Deep Lake Field in Cameron Parish, Louisiana (State Lease 2038). Under the terms of the participation agreement Aztec is participating as a minority interest holder in drilling and completion of two wells in excess of 13,500 feet each. The first well (Deep Lake Well No. 2), which cost approximately $3.5 million to drill to a vertical depth of approximately 14,300 feet, had a spud (start) date of April 15, 2005. The second well (Deep Lake Well No. 1) was drilled to an approximate vertical depth of 13,600 feet. According to the program's operator and several consulting geologists, both well sites targeted formations that are considered to contain natural gas plus some condensate. Both wells have been drilled and completed into target zones. The wells were connected to the pipeline during the Company’s 4th quarter. The initial flow from the wells indicates that production will be in commercial quantities.
On October 21, 2005 the Company announced its recent progress in the McCoy No. well in the Barnett Shale play north of Fort Worth, Texas. The McCoy No. 2 well has recently been completed and is in the "flow-back" process after completion of stimulation procedures. The operator of the well reported present oil production of approximately 130 barrels of oil per day and good gas presence with approximately 70% of the treatment fluid recovered to date. The operator anticipates complete fluid recovery and analysis of production capability over the next 45 days. Strong oil and gas production is projected from this well. McCoy No. 2 is Aztec's first well in Aztec's efforts to participate in the exploitation of oil and gas reserves in the Barnett Shale play. Under the terms of the participation agreement with Rife Energy Operating, Inc., the operator, Aztec Oil & Gas acquired a minority working interest in the drilling and completion of McCoy No. 2.
On October 26, 2005, Aztec announced that it has taken a minority working interest in a program to drill up to 40 natural gas wells located in Cambria, Clearfield and Potter counties in Pennsylvania. To date thirty eight wells have been drilled. Nineteen wells have been completed and were in various stages of testing and evaluation. Twenty one of the wells are awaiting the completion of a pipeline. The pipeline is expected to be completed before December 31, 2006
(a) Limited Operating History
The Company's prospects must be considered in light of the risks, uncertainties, expenses and difficulties frequently encountered by companies in their early stages of a new business plan.
The ability of the Company to manage its operations, including the amount and timing of capital expenditures and other costs relating to the expansion of the company's operations, the introduction and development of different or more extensive communities by direct and indirect competitors of the Company, including those with greater financial, technical and marketing resources, the inability of the Company to attract, retain and motivate qualified personnel and general economic conditions.
(b) Anticipated Losses for the Foreseeable Future
The Company has not achieved profitability to date, and the Company anticipates that it will continue to incur net losses for the foreseeable future. As of August 31, 2006, the Company had an accumulated deficit of $(2,723,633) dollars. Management expects its expenses will increase as the Company further executes its business plan. There can be no assurances that the Company can achieve or sustain profitability or that the Company's operating losses will not increase in the future.
(c) Developing New Business Strategies
As stated, until the Company acquired Z2, LLC, on September 15, 2004 (which was subsequently sold in February 2006, the Company had been inactive. With the acquisition of Z2, LLC, the Company developed a business strategy to team-up with outside participation investors who will assume the costs associated with the drilling of additional wells in exchange for a part of the revenues derived from the wells they finance.
The Company will analyze all relevant factors and make a determination based on a composite of available information, without reliance on any single factor. The period within which the Company will decide to participate in a given business venture cannot be predicted and will depend on certain factors, including the time involved in identifying businesses, the time required for the Company to complete its analysis of such businesses, the time required to prepare appropriate documentation and other circumstances.
(d) Uncertainties Related to the Oil and Gas Business in General
The Company's current business is subject to all of the risks normally incident to the exploration for and production of oil and gas, including blow-outs, cratering, pollution, fires, and theft of equipment. Each of these incidents could result in damage to or destruction of oil and gas wells or formations or production facilities or injury to persons, or damage to or loss of property. As is common in the oil and gas industry, the Company is not fully insured against these risks either because insurance is not available or because the Company has elected not to insure due to prohibitive premium costs.
The oil and gas business is further subject to many other contingencies which are beyond the control of the Company. Wells may have to be shut-in because they have become uneconomical to operate due to changes in the price of oil, depletion of reserves, or deterioration of equipment. Changes in the price of imported oil, the discovery of new oil and gas fields and the development of alternative energy sources have had and will continue to have a dramatic effect on the Company's business.
(e) Selection of a Business Opportunity
Should the Company pursue other potential business opportunities, it anticipates they will be referred from various sources, including its officers and directors, professional advisors, and its shareholders, who may present unsolicited proposals. The Company does not plan to engage in any general solicitation or advertising for a business opportunity, and would rely upon personal contacts of its officers, as well as indirect associations with other business and professional people. Management's reliance on "word of mouth" may limit the number of potential business opportunities identified. While it is not presently anticipated that the Company will engage unaffiliated professional firms specializing in business acquisitions or reorganizations, such firms may be retained if management deems it in the best interest of the Company.
The Company will not restrict its search to any particular business, industry, or geographical location. Management reserves the right to evaluate and enter into any type of business in any location. In seeking a business venture, the decision of management will not be controlled by an attempt to take advantage of any anticipated or perceived appeal of a specific industry, management group, product, or industry, but will be based on the business objective of seeking long-term capital appreciation. The Company may participate in a newly organized business venture or in a more established business. Participation in a new business venture entails greater risks since, in many instances, management of such a venture may not have a proven track record; the eventual market for such venture's product or services will likely not be established; and the profitability of the venture will be untested and impossible to accurately forecast. Should the Company participate in a more established venture that is experiencing financial difficulty, risks may stem from the Company's inability to generate sufficient funds to manage or reverse the circumstances causing such financial problems.
During 2005 Aztec retained the services of Doherty & Company, L.L.C., a firm specializing in acquisitions, specifically for the purpose of identifying acquisition targets. Aztec's business model is based on purchasing interests in proven, producing oil & gas properties with underexploited drilling sites rather than taking on the very large expenses and high risks associated with traditional drilling and exploration. With its retention of Doherty & Company, Aztec began looking at other potential oil & gas properties and/or drilling prospects in which it may have the potential to acquire working interests in an effort to boost its oil & gas properties portfolio and thus further increase its overall oil production capabilities. The relationship with Doherty & Co. has been terminated.
(f) Risks Associated with Acquisitions
If appropriate opportunities present themselves, the Company would acquire businesses, technologies, services or product(s) that the Company believes are strategic.
The Company currently has no understandings, commitments or agreements with respect to any other material acquisition and no other material acquisition is currently being pursued. There can be no assurance that the Company will be able to identify, negotiate or finance future acquisitions successfully, or to integrate such acquisitions with its current business. The process of integrating an acquired business, technology, service or product(s) into the Company may result in unforeseen operating difficulties and expenditures and may absorb significant management attention that would otherwise be available for ongoing development of the Company's business. Moreover, there can be no assurance that the anticipated benefits of any acquisition will be realized. Future acquisitions could result in potentially dilutive issuances of equity securities, the incurrence of debt, contingent liabilities and/or impairment or amortization expenses related to goodwill and other intangible assets, which could materially adversely affect the Company's business, results of operations and financial condition. Any future acquisitions of other businesses, technologies, services or product(s) might require the Company to obtain additional equity or debt financing, which might not be available on terms favorable to the Company, or at all, and such financing, if available, might be dilutive.
(g) Competition
The search for viable oil and gas prospects and leases is intensely competitive. The Company will compete with other business entities, many of which will have a competitive edge over the Company by virtue of their stronger financial resources and prior experience in the business. There is no assurance that the Company will be successful in identifying and executing suitable business opportunities.
There are many companies and individuals engaged in the oil business. Some are very large and well established with substantial capabilities and long earnings records. The Company is at a competitive disadvantage with some other firms and individuals in acquiring and disposing of oil properties since they have greater financial resources and larger technical staffs than the Company. In addition, in recent years a number of small companies have been formed which have objectives similar to those of the Company and which present substantial competition to the Company.
A number of factors, beyond the Company's control and the effect of which cannot be accurately predicted, affect the production and marketing of oil. These factors include crude oil imports, actions by foreign oil producing nations, the availability of adequate pipeline and other transportation facilities, the marketing of competitive fuels and other matters affecting the availability of a ready market, such as fluctuating supply and demand.
(h) Risks Associated With New Business Strategies, Features and Functions
As the Company develops its new business strategies, there can be no assurance that the Company would be able to expand its operations in a cost-effective or timely manner or that any such efforts would maintain or increase overall market acceptance. Furthermore, any new business launched by the Company that is not favorably received by consumers could damage the Company's reputation. Expansion of the Company's operations in this manner would also require significant additional expenses and development, Company's management, financial and operational resources. The lack of market acceptance of the Company's services would result in the Company's inability to generate satisfactory revenues and its inability to offset their costs could have a material adverse effect on the Company's business, results of operations and financial condition.
(i) Because the Oil and Gas industry is cyclical, the Company's operating results may fluctuate.
The Company's operating results may fluctuate significantly in the future as a result of a variety of factors, many of which are outside the Company's control. See "--Limited Operating History." As a strategic response to changes in the competitive environment, the Company may from time to time have to make certain pricing, marketing decisions or acquisitions that could have a material short-term or long-term adverse effect on the Company's business, results of operations and financial condition.
Oil prices have been and are expected to remain volatile. This volatility causes oil and gas companies and drilling contractors to change their strategies and expenditure levels. The Company may experience in the future, significant fluctuations in operating results based on these changes.
There can be no assurance that such patterns will not have a material adverse effect on the Company's business, results of operations and financial condition. There can be no assurance that the Company will receive any material amount of revenue as it pursues new business strategies in the future. The foregoing factors, in some future quarters, may lead the Company's operating results to fall below the expectations.
2) Patents, Trademarks, Licenses, Franchises, Concessions, Royalty Agreements, or Labor Contracts
With regards to the Company's future oil production, the Company does not hold any patents, trademarks, licenses, etc., with respect to, nor are patents significant in regard to, the Company's oil production activities. The Company plans to enter into confidentiality agreements with its future employees, future suppliers and future consultants and in connection with its license agreements with third parties and generally seeks to control access to and distribution of its technology, documentation and other proprietary information. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use the Company's proprietary information without authorization or to develop similar technology independently.
3) Government Regulation
General - The Company's oil production activities are, and any drilling operations of the Company would be, subject to extensive regulation by numerous federal, state and local governmental authorities, including state conservation agencies, the Department of Energy and the Department of the Interior (including the Bureau of Indian Affairs and Bureau of Land Management). Regulation of the Company's production, transportation and sale of oil or gas have a significant effect on the Company and its operating results.
State Regulation - The current production operations of the Company are, and any drilling operations of the Company would be, subject to regulation by state conservation commissions which have authority to issue permits prior to the commencement of drilling activities, establish allowable rates of production, control spacing of wells, prevent waste and protect correlative rights, and aid in the conservation of natural gas and oil. Typical state regulations require permits to drill and produce oil, protection of fresh water horizons, and confirmation that wells have been properly plugged and abandoned.
Environmental Matters - Various federal and state authorities have authority to regulate the exploration and development 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.
4) Employees
The Company currently has: one President, one Chief Financial Officer, one Senior Economist, one Corporate Secretary and a separate Director. The Company has no intention at this time to add employees until it can become a profitable entity. The Company plans to retain consultants with respect to current and proposed properties and operations. The Company from time to time may retain independent engineering and geological consultants and the services of lease brokers and geophysicists in connection with its operations.
(i) The Company's performance is dependent on the performance of its officers. In particular, the Company's success depends on their ability to develop a business strategy which will be successful for the Company.
(ii) The Company does not carry key person life insurance on any of its personnel. The loss of the services of any of its executive officers or other key employees could have a material adverse effect on the business, results of operations and financial condition of the Company. The Company's future success also depends on its ability to retain and attract highly qualified technical and managerial personnel.
(iii) There can be no assurance that the Company will be able to retain its key managerial and technical personnel or that it will be able to attract and retain additional highly qualified technical and managerial personnel in the future. The inability to attract and retain the technical and managerial personnel necessary to support the growth of the Company's business, due to, among other things, a large increase in the wages demanded by such personnel, could have a material adverse effect upon the Company's business, results of operations and financial condition.
ITEM 2.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company's corporate headquarters are located at: One Riverway, Suite 1700, Houston, Texas 77056, Phone: (713) 840-6444.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
As of the date hereof, Aztec is not a party to any material legal proceedings, and none are known to be contemplated against Aztec.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company did not submit any matters to a vote of securities holder during the fiscal year ended August 31, 2006.
PART II
ITEM 5.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(i) Market Information
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The Company's common stock was cleared for trading on the OTC Bulletin Board system. Its stock symbol is AZGS. For the year ended August 31, 2006, the prices of the common stock in the over-the-counter market, as reported and summarized by the OTC Bulletin Board were $0.58 high bid, and $0.10 low asked. Such prices are based on inter-dealer bid and asked prices, without markup, markdown, commissions, or adjustments and may not represent actual transactions.
The table below sets forth the high and low bid prices of our common stock for each quarter shown, as provided by the NASD Trading and Market Services Research Unit. Quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.
CALENDAR QUARTER
HIGH
LOW
FISCAL
Quarter ended November 30, 2004
$2.90
$0.10
Quarter ended February 28, 2005
$1.78
$0.81
Quarter ended May 31, 2005
$2.49
$0.67
Quarter ended August 31, 2005
$0.70
$0.47
FISCAL
Quarter ended November 30, 2005
$0.51
$0.28
Quarter ended February 28, 2006
$0.32
$0.15
Quarter ended May 31, 2006
$0.26
$0.13
Quarter ended August 31, 2006
$0.22
$0.10
(ii) Dividends
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The Company has never paid or declared any dividend on its Common Stock and does not anticipate paying cash dividends in the foreseeable future. Holders of common stock are entitled to receive such dividends as the board of directors may from time to time declare out of funds legally available for the payment of dividends. The Company does not anticipate paying any dividends on its common stock in the foreseeable future.
(iii) Holders
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The approximate number of holders of record of common stock as of August 31, was approximately one hundred twenty (120).
(iv) Stock Repurchase
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The Company did not repurchase any of its shares during the fiscal year covered by this report.
(v) Stock Split
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On August 13, 2004, the Registrant effectuated a 3-for-1 forward stock split.
ITEM 6.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
(i) General
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RESULTS OF OPERATIONS
For the twelve months ended August 31, 2006, the Company recognized partnership income of $213,660 and interest income of $30,316 as compared to partnership loss of $(719,000) and $165,543 interest income for the same period last year. For the twelve months ended August 31, 2006, the Company had oil and gas income of $6,049 as compared to $301 for the same period last year. Oil and Gas Expenses were $(11,068) for the twelve month period, which resulted in a net Oil and Gas Loss of $(5,019). Total operating expenses for the twelve months ended August 31, 2006 were $1,164,814 as compared to $1,112,469 for the same period last year. Other expenses included a $78,046 note receivable discount given for early payment received on the note receivable arising from the sale of Aztec’s investment in Z2, LLC.
PLAN OF OPERATION
The Company is a developmental stage company whose original principal business objective is to purchase oil and gas interests utilizing strategies that seek to manage and reduce the risk associated with traditional exploration and production operations.
On February 23, 2006, the Company sold its interest in Z2, LLC for $1,555,404. The sales agreement provides for $25,000 to be paid at time of signing, and a note receivable. The note is for $1,561,000 with no stated interest rate. Interest on the note is imputed at 8% per annum. The terms of the note require payments of $75,000 on the 17th of each month for three months, with a balloon payment on May 31st. The note provides for a discount if payments are made before the required dates. On April 29th, the note was paid. The discount for early payment was $78,046.
The Company believes it has sufficient funding to sustain itself for the next twelve months. However, there can be no assurances to that effect, as the Company has no revenues and the Company's need for capital may change dramatically if it acquires an interest in a business opportunity during that period. In the event the Company requires additional funds, the Company will have to seek loans or equity placements to cover such cash needs. There is no assurance additional capital will be available to the Company on acceptable terms. In the event the Company is able to complete a business combination during this period, lack of its existing capital may be a sufficient impediment to prevent it from accomplishing the goal of completing a business combination. There is no assurance, however, that without funds it will ultimately allow the Company to complete a business combination. Once a business combination is completed, the Company's needs for additional financing are likely to increase substantially.
Management is in the process of seeking other businesses to acquire so that it can expand its operations. The analysis of new businesses opportunities and evaluating new business strategies will be undertaken by or under the supervision of the Company's directors. In analyzing prospective business opportunities, management will consider, to the extent applicable, the available technical, financial and managerial resources of any given business venture. Management will also consider the nature of present and expected competition; potential advances in research and development or exploration; the potential for growth and expansion; the likelihood of sustaining a profit within given time frames; the perceived public recognition or acceptance of products, services, trade or service marks; name identification; and other relevant factors. The Company anticipates that the results of operations of a specific business venture may not necessarily be indicative of the potential for future earnings, which may be impacted by a change in marketing strategies, business expansion, modifying product emphasis, changing or substantially augmenting management, and other factors.
Management will analyze all relevant factors and make a determination based on a composite of available information, without reliance on any single factor. The period within which the Company will decide to participate in a given business venture cannot be predicted and will depend on certain factors, including the time involved in identifying businesses, the time required for the Company to complete its analysis of such businesses, the time required to prepare appropriate documentation and other circumstances.
(iii) Liquidity and Capital Resources
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The Registrant entered into a Term Credit Agreement on August 12, 2004 with Hong Kong League Central Credit Union, whereby the Registrant borrowed $1,950,000 (USD) which is payable in full on June 30, 2006. This loan was repaid during the Company’s fourth quarter.
In September 2005, Aztec issued 83,258 shares of common stock valued at $38,000 for consulting services.
In October 2005, Aztec issued 46,782 shares of common stock valued at $17,000 for consulting services.
In November 2005, Aztec issued 51,471 shares of common stock valued at $17,100 for consulting services.
In November 2005, Aztec issued 15,686 shares of common stock valued at $5,333 for services as director of Aztec.
During the quarter ended February 28, 2006, Aztec issued 495,535 shares of common stock valued at $82,498 for consulting services.
During the quarter ended May 31, 2006 Aztec issued 389,887 shares of common stock valued at $61,300 for consulting services and directors' fees.
During the quarter ended August 31, 2006 Aztec authorized issuance of 1,012,914 shares of common stock valued at $131,920. Of these shares, 148,824 valued at $19,800 are to be issued in 2007. In addition, Aztec cancelled some stock that was issued in prior quarters during fiscal year 2006. Shares of common stock that were cancelled totaled 474,756 valued at $310,439.
At year end Aztec has three consultants who are paid $16,100 in stock on a monthly basis. For one consultant, the number of shares is determined using an average closing price of the last five days each month. For the other consultants, the number of shares is determined by using the average value of the shares traded during the month. Two of the consultants are issued stock for their services. The third consultant will receive his stock in 2007 as it is recorded as stock payable at August 31, 2006. Four other consultants were paid for consulting and legal services during fourth quarter.
At year end, Aztec had two directors who are paid $13,000 in stock on a
quarterly basis. For one director, the number of shares is determined by using the average value of the shares traded during the month. Shares for the other director is determined using an average closing price of the last five days of each month.
The Company has limited financial resources available, which has had an adverse impact on the Company's liquidity, activities and operations. These limitations have adversely affected the Company's ability to obtain certain projects and pursue additional business. There is no assurance that the Company will be able to raise sufficient funding to enhance the Company's financial resources sufficiently to generate volume for the Company.
The Company has an agreement with CSI Energy, LP (“CSI”) wherein CSI has agreed to provide the Company with funds as needed to permit the Company to meet its monthly operating expenses and other obligations as they become due over the twelve month period following August 31, 2006. Other than the CSI agreement, the Company does not have any preliminary agreements or understandings between the Company and its officers and directors with respect to loans or financing to operate the Company.
ITEM 7.
ITEM 7. FINANCIAL STATEMENTS.
PAGE
Report of Independent Registered Public Accounting Firm
Balance Sheet
Statements of Operations
Statement of Stockholders' Deficit
Statements of Cash Flows
Notes to Financial Statements
-11
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Aztec Oil & Gas, Inc.
(A Development Stage Company)
Houston, Texas
We have audited the accompanying balance sheet of Aztec Oil & Gas, Inc. as of August 31, 2006, and the related statements of operations, stockholders' deficit and cash flows for the two years then ended and for the period from January 24, 1986 (inception) through August 31, 2006. These financial statements are the responsibility of Aztec's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements for the period January 24, 1986 (Inception) through August 31, 2003. Those statements were audited by other auditors whose report has been furnished to us, and our opinion on the statements of operations, stockholders' equity, and cash flows for the period January 24, 1986 (Inception) through August 31, 2003, insofar as it relates to the amounts for prior periods through August 31, 2003, is based solely on the report of the other auditors.
We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform each audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Aztec as of August 31, 2006 and the results of its operations and its cash flows for each of the periods described above in conformity with accounting principles generally accepted in the United States of America.
/s/ Malone & Bailey, PC
Malone & Bailey, PC
www.malone-bailey.com
Houston, Texas
December 14, 2006
AZTEC OIL & GAS, INC.
(A Development Stage Company)
BALANCE SHEET
August 31, 2006
Current Assets
Cash
$
Accounts Receivable
Prepaid Consulting Fees
27,175
Total Current Assets
27,470
Oil and natural gas properties,
successful efforts method of accounting
Unproved properties - not currently amortized,
net of impairment and dry hole costs of $198, 953
304,681
Non-current Assets
Prepaid Costs
2,795
TOTAL ASSETS
$ 334,946
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Notes payable
$ 5,000
Common stock payable
52,800
Accounts payable to related part
215,502
Total current liabilities
273,302
Stockholders’ Equity Preferred stock, Series A, $.001 par value, 100,000 shares
Authorized, issued and outstanding respectively
Common stock, $.001 par value, 100,000,000 shares
authorized, 29,055, 549 issued and
outstanding
29,055
Additional paid-in capital
2,756,122
Deficit accumulated during the development stage
(2,723,633)
Total Stockholders’ Equity
61,644
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$ 334,946
See accompanying Notes to Financial Statements
AZTEC OIL & GAS, INC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
See accompanying Notes to Financial Statements
AZTEC OIL & GAS, INC.
(Formerly Aztec Communications Group, Inc.)
(A Development Stage Company)
STATEMENT OF STOCKHOLDERS’ DEFICIT
Years Ended August 31, 2006, 2005, and 2004
Preferred
Common
Shares
Shares
Balances, August 31, 2003
-
22,107,150
Stock Issued for Services
50,000
2,400,000
Stock Issued for Cash
50,000
-
Balances, August 31, 2004
100,000
24,507,150
Stock Issued for Services
-
2,775,201
Balances, August 31, 2005
100,000
27,282,351
Stock Issued for Services
-
1,773,198
Balances, August 31, 2006
100,000
29,055,549
See accompanying notes to financial statements.
AZTEC OIL & GAS, INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOW
See accompanying Notes to Financial Statements
AZTEC OIL & GAS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF ACCOUNTING POLICIES
Aztec Oil & Gas, Inc. (the “Company” or “Aztec”) was initially known as Aztec Communications Group, Inc. was organized in Utah on January 24, 1986, and
had not had any activity since 1989. In mid-2003, there was a change in control and new management elected to pursue oil and gas exploration and development. In November 2003, Aztec reincorporated in Nevada. Aztec changed its name to Aztec Oil & Gas, Inc. on August 13, 2004. Also on August 13, 2004, Aztec affected a 3-for-1 forward stock split.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of American requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, as well as certain financial statement disclosures. While management believes that the estimates and assumptions used in the preparation of the financial statements are appropriate, actual results could differ from these estimates.
Certain prior year amounts have been reclassified to conform with the 2006 presentation.
Cash Equivalents. Highly liquid investments with original maturities of three
months or less are considered cash equivalents.
Oil and gas properties. Aztec uses the successful efforts method of accounting for oil and gas producing activities. Costs to acquire mineral interests in oil and gas properties, to drill and equip exploratory wells that find proved reserves, and to drill and equip development wells 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 will be expensed.
Unproved oil and gas properties that are individually significant will be periodically assessed for impairment of value, and a loss will be recognized at the time of impairment by providing an impairment allowance. Other unproved properties will be amortized based on Aztec's experience of successful drilling properties, after considering estimated abandonment costs and estimated 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 will be 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 will be recognized, taking into consideration the amount of any recorded impairment if the property had been assessed individually. If a partial interest in an unproved property is sold, the amount received will be treated as a reduction of the cost of the interest retained.
Interest will be capitalized on expenditures for significant exploration and development projects while activities are in progress to bring the assets to their intended use.
Asset Retirement Obligations. The Company follows the provisions of Financial Accounting Standards Board Statement No. 143, “Accounting for Asset Retirement Obligations” (SFAS No. 143). This accounting standard requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes a cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement.
Revenue recognition. We recognize oil and natural gas revenue for its interest in producing wells as oil and natural gas is produced and sold from those wells. Oil and natural gas sold by us is not significantly different from our share of production.
Income Taxes. U.S. income tax expense is based on reported earnings before income taxes. Deferred income taxes reflect the impact of temporary differences between assets and liabilities recognized for financial reporting purposes and such amounts recognized for tax purposes, and are measured by applying enacted tax rates in effect in years in which the differences are expected to reverse.
Share Based Compensation. In December 2004, the FASB issued SFAS No. 123R, “Share-Based Payments” (“FAS 123R”). The Company adopted the disclosure requirements of FAS 123R as of January 1, 2006 using the modified prospective transition method approach as allowed under FAS 123R. FAS 123R establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. FAS 123R focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. FAS 123R requires that the fair value of such equity instruments be recognized as expense in the historical financial statements as services are performed. Prior to FAS 123R, only certain pro forma disclosures of fair value were required.
Earnings Per Share. Basic earnings per share equals net earnings divided by weighted average shares outstanding during the year. Diluted earnings per share include the impact of common stock equivalents using the treasury stock method when the effect is dilutive.
Recently Issued Accounting Pronoucements. In May 2005, the Financial Accounting Standards Board (“FASB”) issued SFAS Statement No. 154 (“SFAS 154”), Accounting Changes and Error Corrections. SFAS 154 requires that, when a company changes its accounting policies, the change must be applied retrospectively to all prior periods presented instead of a cumulative effect adjustment in the period of the change. SFAS 154 may also apply when the FASB issues new rules requiring changes in accounting. If the new rule allows cumulative effect treatment, it will take precedence over SFAS 154. This statement is effective for fiscal years beginning after December 15, 2005. The adoption of SFAS 154 is not expected to have a significant impact on the Company’s financial position or its results of operations.
In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income taxes (“FIN 48”). FIN 48, which is an interpretation of SFAS No. 109, “Accounting for Income Taxes,” provides guidance on the manner in which tax positions taken or to be taken on tax returns should be reflected in an entity’s financial statements prior to their resolution with taxing authorities. The Company is required to adopt FIN 48 during the first quarter of fiscal 2008. The Company is currently evaluating the requirements of FIN 48 and has not yet determined the impact, if any; this interpretation may have on its consolidated financial statements.
NOTE 2 - INVESTMENT
In September 2004, Aztec purchased a 31.283% membership unit interest in Z2, LLC, a Florida limited liability company, for $250,000 cash, 400,000 shares of Aztec common stock valued at $204,000, and the assumption of $265,000 in debt. Z2, LLC owns a 100% working interest (60% net revenue interest) in the Big Foot oil field in Texas.
In October 2004, Aztec borrowed $265,000 for the purchase of the 31.283% interest in Z2, LLC. The notes bear 10% interest, and mature one year from the issue date.
Aztec loaned $1,850,000 to Z3, LLC (an affiliate of Z2, LLC) for a drilling program. This loan is being repaid at the rate of $50,000 per month, including interest at 10.5% per annum.
On February 23, 2006, the Company sold its interest in Z2, LLC for $1,555,404. The sales agreement provides for $25,000 to be paid at time of signing, and a note receivable. The note is for $1,561,000 with no stated interest rate. Interest on the note is imputed at 8% per annum. The terms of the note require payments of $75,000 on the 17th of each month for three months, with a balloon payment on May 31st. The note provides for a discount if payments are made before the required dates. On April 29th, the note was fully paid. The discount for early payment was $78,046.
NOTE 3 - INCOME TAX
Income taxes are not due since Aztec has a net loss in retained earnings whereby the net income generated in 2005 is offset by the net losses from inception. Aztec has net operating losses of $127,000 which will expire in fiscal years starting in 2024.
The components of deferred taxes are as follows:
Deferred tax assets
Net operating loss carryforwards
$ 43,000
Less: valuation allowance
(43,000)
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Current net deferred tax assets
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NOTE EQUITY
During 2006, Aztec issued 1,773,198 shares valued at $312,501 to various consultants and directors for services.
In accordance with SFAS 123R, Aztec recognized amortization of options issued in 2006 beginning March 1, 2006 of $47,488. Had SFAS 123R been in effect as of September 1, 2006, additional expense of $42,842 would have been recognized. This change would not have any effect on the earnings per share or fully diluted earnings per share.
During 2006 800,000 options were issued to the president and CEO. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions. A risk free interest rates used of 3.9%, and expected volatility of 161%.
A summary of the options issued by us for the year ended August 31, 2006 is as follows:
The weighted-average grant-date fair value for the years ended August 31, 2006 was $0.35/share, respectively. No options were exercised during the year. The unrecognized share based compensation cost related to stock option expense at August 31, 2006 is $192,531 and will be recognized over a weighted average of 4.0 years.
During August 2006, 6,000,000 warrants issued during 2005 were cancelled and re-issued in accordance with a consulting agreement. The fair value on the grant date as determined using the Black Scholes warrant pricing model was $618,696. Estimates used in the model include a risk free interest rates used of 4.8%, and expected volatility of 145%. The warrants are expensed over the remaining life of the consulting agreement which is approximately 8 years. As of 2006, $3,235 was amortized.
NOTE SIGNIFICANT EQUITY INVESTMENT
Aztec's investment in the partnership Z2 LLC constitutes a significant portion of its assets. The company's share of Z2 LLC is 31.283%. Selected information is as follows:
Twelve Months Ended August 31, 2006
Gross Sales
1,731,338
Hedge Income (Loss)
(1,338,813)
Net Sales
3,070,151
Gross Profit
2,165,694
Net Income
1,522,371
During the twelve month's ended August 31, Aztec's share of income from Z2 LLC was used first to offset unrecognized losses from prior periods of approximately $261,600. Income in excess of the unrecognized losses was reported as income and increased the company's basis in Z2 LLC. As is noted above in Note 2, Aztec sold its investment in Z2 LLC in February 2006.
NOTE OIL AND GAS PROPERTIES
All oil and gas interests currently owned directly by Aztec fell into the unproved, exploratory category. While some wells have been completed and are preparing to deliver oil or gas, there is insufficient data to re-categorize the wells from exploratory to proved and make a determination of the proved reserves.
NOTE 7 - SUBSEQUENT EVENTS
At August 31, 2006 the Company has common stock payable of $52,800 to Kirk N. Blackim. Mr. Blackim serves as Director and President of the Company.
ITEM 8.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On November 23, 2004, the Company filed Form 8-K with the United States Securities and Exchange Commission, in which the Company stated in Item 4.01 "Changes in Registrant's Certifying Account:"
a) On November 18, 2004 the Registrant's Board of Directors dismissed Gwendolyn J. Giles CFE, CPA ("Giles") as its independent auditors. On November 18, 2004, the Registrant's Board of Directors engaged Malone & Bailey, PC, Houston, Texas to serve as the Registrant's independent public accountants and to audit the Registrant's financial statements for the year ended August 30, 2004. The Registrant does not presently have an Audit Committee.
During the Registrant's two prior fiscal years and the period from September 1, 2001 through the date of its dismissal, there have been no disagreements with Giles on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements if not resolved to the satisfaction of Giles would have caused it to make reference thereto in its reports on the Registrant's financial statements. In addition, for the same periods, there have been no reportable events (as defined in Regulation S-K Item 304(a)(1)(v)).
Giles's reports on the financial statements of the Registrant for the years ended December 31, 2002 and 2003 did not contain any adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles, except that the reports for both years indicated that there was a substantial doubt as to the Registrant's ability to continue as a going concern and that the financial statements did not include any adjustments that might result from the outcome of this uncertainty.
The Company provided Giles with a copy of the disclosures contained herein and requested Giles furnish the Company with a letter addressed to the Securities and Exchange Commission stating whether Giles agrees with the above statements, and if not, the respects in which Giles does not agree. The Company will file the letter requested from Giles by amendment to this report when provided.
b) During the two fiscal years of the Registrant ended August 31, 2003 and August 31, 2002 and the interim period through the date of this Current Report on Form 8-K, the Registrant did not consult with Malone & Bailey, PC regarding (i) the application of accounting principles to a specified transaction, either completed or proposed or the type of audit opinion that might be rendered on the Registrant's financial statements, and either a written report was provided to the Registrant or oral advice was provided that Malone & Bailey, PC concluded was an important factor considered by the Registrant in reaching a decision as to an accounting, auditing or financial reporting issue or (ii) any matter that was either the subject of a disagreement (as defined in paragraph 304(a)(1)(iv) of Regulation S-K and the related instructions to this item) or a reportable event (as described in paragraph 304(a)(1)(v) of Regulation S-K).
ITEM 8a. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the Company conducted an evaluation, under the supervision and with the participation of the principal executive officer and principal financial officer, of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")). Based on this evaluation, the principal executive officer and principal financial officer concluded that the Company's 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 Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. There was no change in the Company's internal control over financial reporting during the Company's most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
On August 25, 2006 the Board elected Mr. Larry Hornbrook as Chief Financial Officer to succeed Mr. Kenneth Lehrer who remains as director of Aztec Oil & Gas, Inc.
PART III
ITEM 9.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
A. The following table sets forth the current officers and directors of Aztec Oil & Gas, Inc.
Name
Age
Position
Director Since
Kirk N. Blackim
President and Director
Oct. 25, 2005
Larry Hornbrook
VP and CFO
Aug. 25, 2006
Mark Vance
Director
Oct. 25, 2005
Kathryn E. Parks
VP and Secretary
June 12, 2006
B. Work Experience
Kirk N. Blackim, President and Director
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Matrix Energy Capital Associates, company specializes in oil and gas consulting with emphasis on capital development for small and mid-sized exploration, production and transportation companies. Houston, TX Job Title: Founder. Period of Employment: November 1998 to Present Responsibilities: Reservoir engineering, geological, geophysical and facilities design and management.
Koch Producer Services, Inc., Subsidiary of Koch Industries, Inc. Houston, Texas. Job Title: Senior Vice President Period of Employment: April, 1996 to November, 1998 Responsibilities: Closed mezzanine debt and risk management transactions.
TCW Asset Management Company Houston, Texas. Job Title: Vice President Period of Employment: August, 1994 to April, 1996 Responsibilities: Closed mezzanine debt transactions.
Kansas Pipeline Operating Company (including affiliated companies) Lenexa, Kansas. Job Title: Senior Vice President and Director (Prior titles: SVP, CFO, COO) Period of Employment: January, 1987 to July, 1994 Responsibilities: Involved in numerous acquisitions and asset construction projects that included financing transactions.
Koch Industries, Inc. (including subsidiaries) Wichita, Kansas Job Title: General Accounting Manager/Computer Systems Coordinator Koch Carbon Division Period of Employment: May, 1983 to January, 1987 Responsibilities: Managed accounts receivable, accounts payable, fixed asset and cash accounting.
Larry Hornbrook, VP and CFO
---------------------------
Larry A. Hornbrook, CPA, has practiced public accounting since 1990 as a sole practitioner or under the company name of Crawford & Hornbrook, PLLC. His clientele are in a variety of industries including oil and gas, real estate, construction, and services. The firm performs tax research and planning, tax return preparation, financial statement preparation and corporate restructurings.
Mr. Hornbrook was Tax Manager for Golden Corral Corporation, an owner of national and regional restaurant chains, from 1987 to 1989.
He served as Tax Manager for Transcontinental Energy Corporation from 1983 to 1986. Transcontinental Energy Corporation was an independent oil and gas producer and contract driller, which offered public limited partnerships. His responsibilities included preparation of federal and state income and franchise taxes for corporate entities, preparation of federal and state income tax returns for over 30 partnership involving more than 10,000 partners.
He served as Tax Manager for Mitchell Energy & Development Corp. from 1978 to 1983. Mitchell was one of the largest independent energy firms headquartered in Texas and owned and operated oil and gas wells, contract drilling rigs, pipelines, compressors and liquid extraction plants.
Mr. Hornbrook was Tax Senior for Arthur Andersen & Co from 1975 to 1978.
Mr. Hornbrook has been a Texas Certified Public Accountant since 1978. He received his B.S. (Management) Cum Laude from the University of South Dakota. He served in the United States Marine Corps from 1969 to 1972 attaining the rank of Sergeant and receiving a Meritorious Mast for excellent performance of duties. He also received a Meritorious Unit Commendation, Good Conduct Medal, National Defense Medal, and Vietnam Service Medal with two stars.
Kenneth E. Lehrer, VP, Sr. Economist and Director
-----------------------------------
Dr. Lehrer formed an organization in 1982, engaged in the areas of - Economics, Finance, Economic Damage Analysis (including Business and Technology Losses), Banking, Business, ESOP and Non Public Business Valuations, Securities, Healthcare, Fairness and Advisory Opinions, Intellectual Property Valuations, Real Estate and Corporate Finance. His company both prepares institutional economic / finance reports, feasibility analysis, corporate business plans and provides litigation support (having been qualified in both State and Federal Courts) in the areas of - economics, real estate, banking, corporate and IP valuations, class actions and finance. Dr. Lehrer, served for approximately twenty (20) years (1984 - 2002) as an Adjunct Professor of Finance at the University of Houston, Graduate School of Business Administration and is presently an Adjunct Professor of Finance and Economics at the University of Phoenix (Houston Division).
Dr. Lehrer has served as Chairman of the Board of Directors for the Federal Home Loan Bank of Dallas as agent for the Federal Savings and Loan Insurance Corporation of - Acadia Savings and Loan Association, French Market Homestead Savings, Twin City Savings, First Savings of Louisiana and is a member of the National Association of Corporate Directors.
Dr. Lehrer commenced his career in 1970 at Bankers Trust Company (New York), and then became a Manager for the Greek Shipper, Costas Lemos [dec'd]. Here, he assisted on projects in New York, Houston, Denver, Guam and in Europe. Dr. Lehrer relocated to Houston in 1977.
Dr. Lehrer holds four (4) degrees from New York University: Bachelor of Science (Finance), Master of Business Administration (Banking), Master of Arts (Economics) and a Doctorate in Urban Economics. Dr. Lehrer is registered with the Securities and Exchange Commission as an Investment Advisor under the Investment Advisors Act of 1940 and has held the Full Registration/General Securities (Series 7) and Texas Securities (Series 63) Licenses.
Mark Vance, Director
--------------------
From to mid-2005, Mr. Vance was the senior executive in charge of strategic alliances with Worksafe, Inc. (Dallas, TX) and YCO Services (Houston, TX). Most recently, he developed Worksafe's strategic plan and led the mezzanine fund raise with private equity groups in the U.S. At YCO Services, he created an alliance partnership with Compaq/Hewlett Packard for the distribution of professional services.
From to 2001, Mr. Vance was vice president of business development and chief financial officer for Control Network System Inc. in Los Angeles. This $17 million privately held, fully integrated company developed international voice over data networks between the U.S. and Asia and was acquired by Total Axcess Inc. in December 2001. As a company founder, he developed strategic relationships in adding to managing all financial affairs, cash management and investor relations.
Mr. Vance was a founder and served as senior vice president and chief financial officer for Telescape International Inc. (Houston, TX) from 1996 to 1997. He developed the business plan and investor presentation and succeeded in raising first rounds of private equity funding, positioning the company for an IPO.
Prior, he was a founder and developed the strategic plan for a $10 million private equity raise with Alex Brown that led to the merger of Matrix Telecom and DNS Communications (Dallas, TX) creating a formidable competitor in the industry. He served as chief operating officer and chief financial officer-- including management of the finance, legal, accounting, human resources, information services and insurance departments--from 1993 to 1995.
He served as director of finance (and chief financial officer of a subsidiary) at Wiltel Corporation (Houston, TX) from 1992 to 1993. While there he developed and instituted a Latin American distributorship program for the company, including strategic marketing, pricing and sales policies.
Mr. Vance served as a financial analyst, controller and tax manager with various companies within the energy industry in Houston from 1976 to 1991 including Mitchell Energy, Quintana Petroleum, and Texaco.
He received his MBA in Accounting from the University of Houston in 1979, and a bachelor of science degree in finance from LSU in 1976.
Kate Parks, VP and Secretary
_________________________
Ms. Parks currently works for Robert L. Sonfield, Jr. of Sonfield & Sonfield, Attorneys at Law. She also acts as a filing agent for EDGAR submitting information to the US Securities and Exchange Commission. From 2001 to 2006 Ms. Parks worked as a Registered Certified Pharmacy Technician.
Directors are elected in accordance with our bylaws to serve until the next annual stockholders meeting. Aztec does not currently pay compensation to directors for services in that capacity.
Officers are elected by the board of directors and hold office until their successors are chosen and qualified, until their death or until they resign or have been removed from office. All corporate officers serve at the discretion of the board of directors.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
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 and other Aztec Oil & Gas, Inc. equity securities. Reporting persons are required by Commission regulations to furnish us with copies of all Section 16(a) forms they file.
ITEM 10.
ITEM 10. EXECUTIVE COMPENSATION.
As a result of our the Company's current limited available cash, no officer or director received compensation during the fiscal year ended August 31, 2006. Aztec intends to pay salaries when cash flow permits.
SUMMARY COMPENSATION TABLES
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Annual Compensation
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(1) In September 2005, the company retained the services of Kirk Blackim as President of the company. Mr. Blackim will be paid $6,600 in stock monthly for services. The number of shares is determined using the average value of the shares traded during the month. Additionally warrants were issued to Kirk Blackim for services for 800,000 shares at exercise prices ranging from $1.00 per share to $2.00 per share.
(2) On August 25, 2006, Kenneth Lehrer vacated the position of CFO and accepted the newly created position of Sr. Economist.
(3) Larry Hornbrook filled the vacancy of CFO on August 25, 2006.
(4) Kenneth E. Lehrer received $259 in expense reimbursement.
(5) On June 12, 2006, Danyell Owens resigned as Secretary of Aztec and the position was filled by Kathryn Parks.
Long Term Compensation Table
(1) Kenneth E. Lehrer received an additional 2,006 common shares in October, 2005.
The Company currently does not have employment agreements with its executive officers.
Audit Committee
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The company does not presently have an Audit Committee. The members of the Board sit as the Audit Committee. No qualified financial expert has been hired because the company is to small to afford such expense.
Code of Ethics
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The company has not adopted a Code of Ethics for the Board and the salaried
employees.
Committees and Procedures
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(1) The registrant has no standing audit, nominating and compensation committees of the Board of Directors, or committees performing similar functions. The Board acts itself in lieu of committees due to its small size.
(2) The view of the board of directors is that it is appropriate for the registrant not to have such a committee because its directors participate in the consideration of director nominees and the board and the company are so small.
(3) The members of the Board who acts as nominating committee is not independent, pursuant to the definition of independence of a national securities exchange registered pursuant to section 6(a) of the Act (15 U.S.C. 78f(a).
(4) The nominating committee has no policy with regard to the consideration of any director candidates recommended by security holders, but the committee will consider director candidates recommended by security holders.
(5) The basis for the view of the board of directors that it is appropriate for the registrant not to have such a policy is that there
is no need to adopt a policy for a small company.
(6) The nominating committee will consider candidates recommended by security holders, and by security holders in submitting such
recommendations.
(7) There are no specific, minimum qualifications that the nominating committee believes must be met by a nominee recommended by security holders except to find anyone willing to serve with a clean background.
(8) The nominating committee's process for identifying and evaluation of nominees for director, including nominees recommended by security holders, is to find qualified persons willing to serve with a clean backgrounds. There are no differences in the manner in which the nominating committee evaluates nominees for director based on whether the nominee is recommended by a security holder, or found by the board.
ITEM 11.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information concerning the beneficial ownership of our outstanding common stock as of August 31, 2006, by each person known by Aztec to own beneficially more than 10% of the outstanding common stock, by each of our directors and officer and by all of our directors and officers as a group. Unless otherwise indicated below, to our knowledge all persons listed below have sole voting and investment power with respect to their shares of common stock except to the extent that authority is shared by spouses under applicable law.
TITLE OF CLASS
NAME, ADDRESS OF BENEFICIAL OWNER AND POSITION(1)(2)
SHARES OF COMMON STOCK
PERCENT OF CLASS(3)
Common
Kirk N. Blackim
25,683
1.46%
President, Director
Common
Larry Hornbrook
9,000
nil
VP, CFO
Common
Ken Lehrer
408,839
1.40%
VP, Sr. Economist, Director
Common
Mark Vance
193,628
nil
Secretary, Director
Common
Kathryn E. Parks
10,000
nil
VP & Secretary
All directors and officers
as a group (4 persons)
1,047,150
3.60%
(1) Address: One Riverway, Suite 1700, Houston, Texas 77056.
(2) Unless otherwise indicated, each person named in the above-described table has the sole voting and investment power with respect to his shares of the Common Stock beneficially owned.
(3) Unless otherwise provided, the calculation of percentage ownership is based on 29,055,549 shares of the Common Stock outstanding as of August 31, 2006, any shares of the Common Stock which are not outstanding as of such date but are subject to options, warrants, or rights of conversion exercisable within 60 days of August 31, 2006 shall be deemed to be outstanding for the purpose of computing percentage ownership of outstanding shares of the Common Stock by such person but shall not be deemed to be outstanding for the purpose of computing the percentage ownership of any other person.
B. Persons Sharing Ownership of Control of Shares
No person or shareholder owns or shares the power to vote ten percent (10%) or more of the Company's securities.
C. Non-voting Securities and Principal Holders Thereof
The Company has not issued any non-voting securities.
D. Options, Warrants and Rights
Aztec issued International Fluid Dynamics warrants for 6,000,000 shares at exercise prices ranging from $0.75 per share to $1.65 per share. No compensation was recorded in connection with these warrants because their fair value was nominal and the exercise prices were extremely "out of the money".
E. Preferred Stock
On June 11, 2004, the Board of Directors approved Articles of Designation of Series A Preferred Stock. Series A Preferred stock was established on August 26, 2004. All 100,000 authorized shares were immediately issued, with 50,000 shares for $15,000 cash and 50,000 shares for services valued at $15,000. The shares of outstanding Series A Preferred Stock shall have the number of votes equal to seventy percent (70%) of votes of all outstanding shares of capital stock such that all the outstanding shares of Preferred Stock shall always constitute 70% of the voting rights of the Corporation, but the holders are not obliged or bound to vote together and the shares are owned by separate entities. Such Series A Preferred stock has no other extraordinary preferences.
F. Parents of Issuer
Under the definition of parent, as including any person or business entity who controls substantially all (more than 80%) of the issuers of common stock, the Company has no parents.
ITEM 12.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Through a Board Resolution, the Company hired the professional services of Malone & Bailey, PC, Houston, Texas, Certified Public Accountants, to perform audits of the Company's financials. Malone & Bailey, PC owns no stock in the Company. The company has no formal contracts with its accountants, they are paid on a fee for service basis.
The officers and directors of the Company are involved in other business activities and may, in the future, become involved in other business opportunities. If a specific business opportunity becomes available, such persons may face a conflict in selecting between the Company and their other business interests. The Company has not formulated a policy for the resolution of such conflicts.
ITEM 13.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
31.1 Certifications of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certifications of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certifications of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002.
(b) REPORTS ON FORM 8-K
The Company filed a Current Report on September 28, 2005, pursuant to Item 7.01 ("Regulation FD Disclosure") and 9.01 ("Exhibits").
The Company filed an amended Current Report on September 29, 2005, pursuant to 4.02 ("Non-Reliance on Previously Issued Financial Statements or a Related Audit").
The Company filed an amended Current Report on October 4, 2005, pursuant to 4.02 ("Non-Reliance on Previously Issued Financial Statements or a Related Audit") and 9.01 ("Exhibits").
The filed a Current Report on October 25, 2006, pursuant to Item 5.02 (“Departure of Directors or Principal Officers; Election of Directors;
Appointment of Principal Officers”).
The Company filed a Current Report on December 15, 2005, pursuant to Item 4.02 ("Non-Reliance on Previously Issued Financial Statements or a Related Audit Report or Completed Interim Review").
The Company filed a Current Report on December 19, 2005, pursuant to Item 9.01 ("Exhibit"), entitled, Letter from Malone & Bailey, PC.
The Company filed an amended Current Report on January 4, 2006, pursuant to Item 4.02 ("Non-Reliance on Previously Issued Financial Statements or a Related Audit Report or Completed Interim Review") and Exhibit 9.01 ("Exhibits").
The Company filed a Current Report on February 21, 2006, pursuant to Item 4.02 ("Non-Reliance on Previously Issued Financial Statements or a Related Audit Report or Completed Interim Review") reporting the need to restate the audited financial statements for the twelve months ended August 31, 2005, previously filed with the Securities and Exchange Commission in order to correct misstatements relating to the accounting for the equity method investment in Z2, LLC.
The Company filed a Current Report on February 28, 2006, pursuant to Item 1.01 (“Entry into a Material Definitive Agreement”) and Item 2.01 (“Completion of Acquisition or Disposition of Assets”).
The Company filed an amended Current Report on March 14, 2006, pursuant to Item4.02 ("Non-Reliance on Previously Issued Financial Statements or a Related Audit Report or Completed Interim Review") and Exhibit 9.01 ("Exhibits").
Subsequent Reports on Form 8-K
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The Company filed a Current Report on September 14, 2006, pursuant to Item 5.02 (“Departure of Directors or Principal Officers; Election of Directors; Appointment of Principal Officers”).
Item 14.
Item 14. Principal Accountant Fees and Services
AUDIT FEES
Audit Fees: During Aztec's 2006 and 2005 fiscal year, Malone & Bailey, PC, billed Aztec $54,343 and $23,460, respectively, in fees for the audit of the Company's annual financial statements and the review of those financial statements included in the Company's quarterly reports on Form 10-QSB.
AUDIT-RELATED FEES
Aztec did not engage Malone & Bailey, PC to provide services to Aztec regarding
financial information systems design and implementation during the fiscal year
ended August 31, 2006.
TAX FEES
The aggregate fees billed by the Company's auditors for professional services for tax compliance, tax advice, and tax planning were $0 and $0 for fiscal 2006 and 2005, respectively.
ALL OTHER FEES
All Other Fees: During Aztec's 2006 fiscal year, Malone & Bailey, PC, billed Aztec $0 in fees for all other non-audit services rendered to Aztec, which amount includes tax related services of $0, foreign statutory audits of $0.
The Aztec Board of Directors believes that the provision of the services described under "All other Fees" was compatible with maintaining Malone & Bailey, PC's independence from Aztec.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the registrant has duly caused this amended report to be signed on its behalf by the undersigned, thereunto duly authorized.
Aztec Oil & Gas, Inc.
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(Registrant)
Dated: December 14, 2006
By: /s/ Kirk N. Blackim
Kirk N. Blackim
President and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Dated: December 14, 2006
By: /s/ Kathryn E. Parks
Kathryn E. Parks
Secretary