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Zion Oil & Gas Inc – ‘SB-2/A’ on 9/11/03

On:  Thursday, 9/11/03, at 2:07pm ET   ·   Accession #:  1131312-3-6   ·   File #:  333-107042

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  As Of                Filer                Filing    For·On·As Docs:Size

 9/11/03  Zion Oil & Gas Inc                SB-2/A                12:1.6M

Pre-Effective Amendment to Registration of Securities by a Small-Business Issuer   —   Form SB-2
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: SB-2/A      Amended Registration Statement on Form SB-2/A       HTML    621K 
 2: EX-4        Exhibit 4.1: Speciman Stock Certificate             HTML      6K 
 3: EX-5        Exhibit 5.1: Opinion of Securities Counsel          HTML     10K 
 4: EX-8        Exhibit 8.1: Opinion of Tax Counsel                 HTML     16K 
 5: EX-9.I      Exhibit 9.1: Brown Voting Agreement                 HTML     73K 
 6: EX-9.II     Exhibit 9.2: Devore Voting Agreement                HTML     62K 
 7: EX-10.I     Exhibit 10.2: Placement Agent Agreement             HTML     38K 
 8: EX-10.II    Exhibit 10.3: Escrow Agreement                      HTML     40K 
 9: EX-10.III   Exhibit 10.4: Employment Letters                    HTML     31K 
10: EX-16       Exhibit 16.1: Change in Accountants                 HTML      7K 
11: EX-23.I     Exhibit 23.2: Consent of Accountants                HTML      8K 
12: EX-23.II    Exhibit 23.3: Consent of Tax Attorney               HTML      6K 


SB-2/A   —   Amended Registration Statement on Form SB-2/A
Document Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page   -   Filing Submission
"Report of Independent Certified Public Accountants
"Balance Sheets
"Statements of Operations
"Statements of Changes in Stockholders' Equity
"Statements of Cash Flows
"Notes to Financial Statements

This is an HTML Document rendered as filed.  [ Alternative Formats ]



  SB-2  

As filed with the Securities and Exchange Commission on September 11, 2003

Registration No. 333-107042

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

Amendment No. 1 to

FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

ZION OIL & GAS, INC.

(Name of Small Business Issuer in its Charter)

Delaware

211111

20-0065053

(State or Jurisdiction of

(Primary Standard Industrial

(I.R.S. Employer

Incorporation or Organization)

Classification Code Number)

Identification No.)

6510 Abrams Road, Suite 300, Dallas, Texas 75231
(214) 221-4610
(Address and Telephone Number of Principal Executive Offices)

9 Yair Stern St., Herzliya, 46412 Israel
+972 (9) 955-2619
(Address of principal place of business or intended principal place of business)

The Corporation Trust Company
1209 Orange Street, Wilmington, Delaware 19801
(302) 658-7581
(Name, Address and Telephone Number of Agent for Service)

COPIES TO:
Alice A. Waters, Esq.
111 East Franklin Street, Waxahachie, Texas 75165
(972) 938-9090

Approximate Date of Commencement of Proposed Sale to the Public:
As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box: [X]
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [  ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [  ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [  ]

If delivery of the Prospectus is expected to be made pursuant to Rule 434, check the following box. [  ]

CALCULATION OF REGISTRATION FEE

Title of each

Amount

Proposed Maximum

Proposed

Amount of

Class of Securities

to be

Offering Price

Maximum Aggregate

Registration

To be Registered

Registered

       Per Unit       

      Offering Price      

       Fee       

Common Stock,

5,000,000

$5.00 per share

$25,000,000

$2,300.00

$.01 par value

shares

 

 

 

 

 

____________________________________________________________________________________________

The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.


PRELIMINARY PROSPECTUS

Zion Oil & Gas, Inc.
Shares of Common Stock, par value $.01 per Share

Minimum 1,200,000 Shares                                                                                       Maximum 5,000,000 Shares

Zion Oil & Gas, Inc. (acting as our own managing underwriter) is offering to sell to the public a minimum of 1,200,000 up to a maximum of 5,000,000 shares of our common stock, par value $.01 per share, at a price of $5.00 per share. Our officers and directors will be making offers and sales to the public. They will not be paid any commission for such sales. In addition, certain broker-dealers who are members of the National Association of Securities Dealers, Inc. (NASD), and who are listed later in this prospectus, will be acting as underwriters to make offers and sales as "Placement Agents" for us. The total compensation to any Placement Agent will be a cash commission of $0.30 per share for those shares he sells.

This offering is a "best efforts minimum/maximum offering." The Placement Agents are not required to place any firm orders or purchase any of the shares, but have agreed to use their best efforts to market the shares on our behalf. We cannot sell any of the shares until we have received and accepted subscriptions (using the tear-out form in the back of this prospectus) and payment for a minimum of 1,200,000 shares ($6,000,000). We and the Placement Agents will deposit all payments in an escrow account at Commerce Bank, NA, with whom we have signed an escrow agreement. If we do not accept an investor's subscription, we will return his funds promptly. If we do not receive acceptable subscriptions and payment for 1,200,000 shares on or before March 1, 2004 (which may be extended for sixty days), we will terminate the offering and refund the money raised promptly. If the minimum is received on or before March 1, 2004 (or later, if extended), we will set a closing date (no more than 60 days thereafter) to complete the initial sale of at least the minimum by transferring the funds out of the escrow account and promptly issuing the stock to the investors. After the initial closing, we and the Placement Agents will continue to deposit all subsequent payments into the escrow account until the earlier of (i) December 31, 2004, or (ii) the date on which a total of 5,000,000 shares have been subscribed and accepted, promptly after which we will have a final closing. There may be one or more interim closings between the initial sale and the final closing. Your minimum purchase must be at least 100 shares ($500). This is our initial public offering and no public market currently exists for our common stock.

Investing in our common stock is very risky. We plan to spend most of the money raised to prepare for and drill one or more "wildcat" oil and gas exploratory wells in the State of Israel. Your investment will be subject to a combination of the highest risks associated with new ventures, oil and gas exploration, and political uncertainty. See "Risk Factors" at page 5 of this prospectus to read about the risks that you should consider before buying shares of our stock. You should consider acquiring these shares only with funds you can afford to completely lose.

 

 

 

 

Price to Public

Placement Agents' Commissions (1)

Proceeds to Zion (2)

Per Share

$5.00

$0.30

$4.70

Total Minimum

$6,000,000.00

$360,000.00

$5,640,000.00

Total Maximum

$25,000,000.00

$1,500,000.00

$23,500,000.00

 

(1) Reflects maximum amount of commissions payable to Placement Agents. To the extent that shares are directly placed by us through our officers and directors, commissions to Placement Agents will decrease and proceeds to us will increase. In addition, we have agreed to indemnify the Placement Agents against certain liabilities, including liabilities under the Securities Act of 1933, as amended (the "Securities Act").

(2) Before deducting estimated offering expenses of up to $240,000 in the minimum offering and $400,000 in the maximum offering.

_____________________________________

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The information in this prospectus is not complete and may be changed. We may not sell these shares until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these shares and it is not soliciting an offer to buy these shares in any state where the offer or sale is not permitted.

                                                                The date of this preliminary prospectus is September 11, 2003.


[Map of Seismic Lines of the Joseph Project]

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TABLE OF CONTENTS

 

PROSPECTUS SUMMARY *

RISK FACTORS *

USE OF PROCEEDS *

CAPITALIZATION *

DETERMINATION OF OFFERING PRICE *

DILUTION *

DIVIDEND POLICY *

PLAN OF DISTRIBUTION *

LEGAL PROCEEDINGS *

MANAGEMENT *

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT *

DESCRIPTION OF SECURITIES *

SHARES ELIGIBLE FOR FUTURE SALE *

INTEREST OF NAMED EXPERTS AND COUNSEL *

BUSINESS AND PROPERTIES *

PLAN OF OPERATION AND MANAGEMENT'S DISCUSSION *

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS *

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS *

MARKET FOR SECURITIES *

EXECUTIVE COMPENSATION *

TAX CONSEQUENCES *

LEGAL MATTERS *

EXPERTS *

WHERE YOU CAN FIND MORE INFORMATION *

 

 

 

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PROSPECTUS SUMMARY

All references in this prospectus to the "Company", "Zion", "we", "us" or "our" are to Zion Oil & Gas, Inc., a Delaware corporation, and its predecessor, Zion Oil & Gas, Inc., a Florida corporation. Because this is a summary, it does not contain all of the information that may be important to you as a prospective purchaser of our common stock. You should read the entire prospectus carefully, including the risk factors and financial statements, before you decide to purchase our common stock. You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus.

Zion Oil & Gas, Inc.

Zion is a development stage oil and gas exploration company with a limited operating history and limited financial resources. Our executive offices are located at 6510 Abrams Road, Suite 300, Dallas, Texas 75231 and our telephone number is (214) 221-4610. Our office in Israel is located at 9 Yair Stern Street, Herzliya, Israel 46412 and the telephone number is +972 (9) 955-2619. We were incorporated in Florida in April 2000 and reincorporated in Delaware in July 2003. For the past three years we have been conducting data accumulation, research and analysis related to onshore oil and gas potential in the north central coastal plain of Israel. In October 2002 we submitted a detailed exploration report to the Oil Commissioner of the Ministry of National Infrastructures of the State of Israel, identifying our recommended prospect areas for deep drilling (to a depth of approximately 16,000 feet). Effective January 1, 2003, the Israeli government approved our prospects for drilling and consolidated our existing petroleum rights into a single exploration license covering approximately 95,800 acres as shown on the map on the inside cover of this prospectus. The license expires April 30, 2005. If we begin deepening an existing well or begin drilling a new well by July 1, 2004 and diligently attempt to drill to the target depth we will be entitled to request a two-year additional extension of our license to April 30, 2007. If we do not begin the work by July 1, 2004, the government could begin proceedings to cancel the license for failure to meet the work program.

The Offering

Securities offered by Zion

A minimum of 1,200,000 and a maximum of

5,000,000 shares of common stock, par value $.01

per share

Common stock to be outstanding after

Minimum of 5,766,268 shares

this offering

Maximum of 9,566,268 shares

Use of Proceeds

Net proceeds will be used for exploratory well

drilling, to reduce debt and for working capital

See "Use of Proceeds" for more information.

 

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Summary of Financial Data

Balance sheets as of:

12/31/2001

12/31/2002

6/30/2003

6/30/2003

6/30/2003

(Pro Forma)(1)

(Pro Forma)(2)

Assets

388,959

737,393

883,926

6,283,926

23,983,926

Liabilities

65,602

297,137

547,530

547,530

547,530

Stockholders' equity

323,357

440,256

336,396

5,736,396

23,436,396

Stockholders' equity per

0.11

0.11(3)

0.07(3)

1.00(3)

2.46(3)

common share

Statements of operations for:

Year ending

Year ending

6 mo. Ending

12/31/2001

12/31/2002

6/30/2003

Net income (loss)

(166,753)

(387,152)

(279,142)

___________

(1) Assumes minimum amount raised in the offering
(2) Assumes maximum amount is raised in the offering
(3) Assumes each share of outstanding preferred stock is converted into 12 shares of common stock (which occurred during July 2003)

 

RISK FACTORS

An investment in our shares is highly speculative and involves a high degree of risk. Therefore, you should consider all of the risk factors discussed below, as well as the other information contained in this prospectus, before investing. You should not invest in our shares unless you can afford to lose your entire investment and you are not dependent on the funds you are investing.

We are a development stage company.

Zion was incorporated in April 2000 and is still in its development stage. Our operations are subject to all of the risks inherent in establishing a new business enterprise. Our potential for success must be considered in light of the problems, expenses, difficulties, complications and delays frequently encountered in connection with a new business, especially an oil and gas exploration business.

We have no proved reserves or current production.

We do not have any proved reserves or current production of oil or gas. We cannot assure you that any wells will be completed or produce oil or gas in commercially profitable quantities.

We have a history of operating losses.

We incurred operating losses of $166,753 for the year ended December 31, 2001, $387,152 for the year ended December 31, 2002, and $291,155 for the six months ended June 30, 2003. The accumulated deficit as of June 30, 2003 was $850,422. We cannot assure that we will ever be profitable.

 

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If we are unable to obtain additional financing, we may be unable to successfully execute our business plan.

Our planned work program is expensive. A new well could cost as much as $5 million for a dry hole and $7 million for a completed producer, assuming there are no drilling or completion problems.

We intend to finance our initial exploratory drilling with the proceeds from this offering. If we do not raise enough to drill the first well by ourselves (currently estimated at $5 million), we will have to seek other forms of financing, including the sale (if possible) of a portion of our license rights and obligations to one or more other petroleum exploration companies. Any additional financing could cause your relative interest in our assets and potential to be significantly diluted. Even if we have exploration success, we may not be able to generate sufficient revenues to offset the cost of dry holes and general and administrative expenses.

All of our audited financial statements since inception have contained a statement by the auditors that raise the question about us being able to continue as a "going concern" unless we are able to raise additional capital.

Your investment will be diluted.

Depending upon the total amount raised in this offering, your investment will be immediately diluted in terms of net tangible asset value per share. If the minimum amount of $6,000,000 is raised, your dilution will be 80%. If the maximum amount of $25,000,000 million is raised, your dilution will be 51%. See "Dilution," page 17 for more details.

Oil and gas exploration is an inherently risky business.

Exploratory drilling involves enormous risks, including the risk that no commercially productive natural gas or oil reservoirs will be discovered. Even when properly used and interpreted, seismic data analysis and other computer simulation techniques are only tools used to assist geoscientists in trying to identify subsurface structures and hydrocarbon indicators. They do not allow the interpreter to know conclusively if hydrocarbons are present or economically available. The risk analysis techniques we use in evaluating potential drilling sites rely on subjective judgments of our personnel and consultants. There is no assurance that other companies with superior financial resources, larger technical infrastructure and more experience will agree with our analysis and recommendations. The prospects we intend to drill may be significantly more risky than we think they are, and your investment could be at greater risk than if you invested with an established oil and gas exploration company.

Our operations in Israel are subject to political and economic risks.

Our operations are concentrated in Israel and are directly affected by political, economic and military conditions in Israel. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors and the Palestinians in


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the West Bank and the Gaza Strip and a state of hostility, varying in degree and intensity, has led to security and economic problems for Israel. Despite the progress towards peace between Israel and its Arab neighbors, the future of these peace efforts is uncertain. Since October 2000, there has been a significant increase in violence primarily in the West Bank and the Gaza Strip, and negotiations between Israel and Palestinian representatives ceased for a period of over thirty months. Negotiations recommenced in June 2003 with the internationally sponsored "Road Map" plan, to which there is significant opposition from extremists on both sides. The chances for this renewed peace process cannot be predicted.

The Ma'anit Reef where we intend to drill our first well is in an area adjacent to Israeli Arab villages where anti-Israeli rioting broke out in late 2000 and near bus routes and Israeli towns which have suffered terrorist attacks. Any future armed conflict, political instability or continued violence in the region would likely have a negative effect on our operations and business conditions in Israel, as well as our ability to raise additional capital necessary for completion of our exploration program. Such armed conflict would likely adversely affect the share price of publicly traded companies with operations concentrated in Israel. Furthermore, several countries and companies still restrict trade with Israel, a situation which may limit our ability to import required goods and services into Israel.

Following Knesset (Israel's parliament) elections in Israel in January 2003, a new government was formed in February 2003. No one can predict how the new government will deal with the security and political situation or what effect the policies of the new government will have on the political and security conditions, even though the government has endorsed the Road Map.

Our operations in Israel may be subject to:

Consequently, our operations may be substantially affected by factors beyond our control, any of which could negatively affect our financial performance. Further, in the event of a legal dispute in Israel, we may be subject to the exclusive jurisdiction of Israeli courts or we may not be successful in subjecting persons who are not United States residents to the jurisdiction of courts in the United States, either of which could adversely affect the outcome of a dispute.

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Our license could be canceled or terminated, and we would not be able to successfully execute our business plan.

Our license is granted for a fixed period and requires the compliance with a work program detailed in the license. If we do not fulfill the work program, the Israeli government may cancel or terminate the license before its scheduled expiration date.

There are limitations on the transfer of interests in the license, which could impair our ability to raise additional funds to execute our business plan.

The Israeli government has the right to approve any transfer of rights and interests in our license and any mortgage of the license to borrow money. If we try to raise additional funds through borrowings or joint ventures with other companies and are unable to obtain some of these approvals from the government, the value of your investment could be significantly diluted or even lost.

Our dependence on the limited contractors, equipment and professional services available in Israel will result in increased costs and possibly material delays in our work schedule.

In Israel now there is only one drilling contractor, one provider of seismic services and one provider of logging services. The drilling contractor has only one drilling rig in Israel capable of drilling to our target depth. We do not know if we will be able to locate and encourage any other drilling and service contractors to come into the country. Consequently, costs for our operations are likely to be more expensive than costs for similar operations in other parts of the world. We are also more likely to incur material delays in our drilling schedule and have increased risk of failing to meet our required work schedule.

Similarly, some of the oil field personnel we need to undertake our planned operations are not necessarily available in Israel or available on short notice for work in Israel, a situation that may result in increased costs and material delays in the work schedule.

Our dependence on local licenses and permits may require more funds than we have budgeted and may cause delays in our work schedule.

We are subject to a number of local licenses and permits. Some of these are issued by the Israeli security forces, the Ministry of the Environment, the Civil Aviation Authority, the Israeli national water company, the Israel Lands Authority, the holders of the surface rights in the lands on which we intend to conduct drilling operations, including Kibbutz Ma'anit, the Department of Public Works, local and regional Planning Commissions, and Regional and Town Councils. In order to obtain necessary licenses and permits, more money than the amounts budgeted for those purposes may be required, and we may have to delay the planned work schedule.

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Voting control is concentrated, which may diminish control of minority shareholders.

John M. Brown, our founder and our chairman of the board and chief executive officer, and Ralph F. DeVore, one of our directors, hold proxies to vote the shares of common stock of some of our shareholders. Including their own shares of common stock, Mr. Brown holds 68%, and Mr. DeVore holds 15%, of our voting rights outstanding prior to this offering. After the completion of this offering, assuming the minimum shares offered are issued, Mr. Brown and Mr. DeVore will have control of 54% and 12%, respectively, of our outstanding voting rights. If the maximum shares are issued they will hold 32% and 7%, respectively, of our outstanding votes. The ability of Mr. Brown and Mr. DeVore to exercise significant control over us may discourage, delay or prevent a takeover attempt that a shareholder might consider in his or her best interest and that might result in a shareholder receiving a premium for his or her common stock. Also, Mr. Brown and Mr. DeVore (if they vote the same way) may have the ability to:

Some of the shares of common stock owned by the other officers and directors are not subject to the proxies held by Mr. Brown and Mr. DeVore. When those shares are added in, the management of Zion holds 81% of the voting control prior to the completion of this offering and would have 64% of the voting control if the minimum amount of the offering is placed and 39% of the voting control if the maximum is placed.

Cash dividends may not be paid to shareholders.

You may receive little or no dividends on your shares of common stock. The board of directors has not directed the payment of any dividends, does not anticipate paying dividends on the shares for the foreseeable future and intends to retain any future earnings to finance our growth. Payment of dividends, if any, will depend, among other factors, on our earnings, capital requirements, and the general operating and financial condition, and will be subject to legal limitations on the payment of dividends out of paid-in capital.

There will be a limited public market, if any, for the shares.

There is no public market for the shares of common stock being offered. We cannot assure you that a sufficient active trading market will develop or that you will be able to resell your shares at prices equal to or greater than your respective initial purchase price. The market prices for the securities of energy companies have historically been highly volatile. The market has from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of any particular company. The market price of the shares may be affected significantly by factors such as announcements by us or by our competitors, variations in our results of operations, and market conditions in the extractive industries in general. The market

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price may also be affected by movements in prices of stock in general. As a result of these factors, you may not be able to liquidate an investment in the shares readily or at all.

Failure to obtain or maintain market makers could impair the value of your investment.

The value of your investment would be impaired if we are not listed on a national exchange and are unable to obtain or maintain at least one NASD market maker. This would mean fewer shares of common stock being bought and sold, delays in transactions, and lower prices than might otherwise prevail. Furthermore, the lack of market makers could result in persons being unable to buy or sell shares of the common stock on any secondary market. We cannot assure you that we will be able to obtain or maintain market makers.

Shares currently outstanding may soon be eligible for future sale, which might put downward pressure on the price of all shares.

All of the shares of common stock that are currently held are restricted securities and were purchased at prices significantly lower than the price of this offering. Such shares cannot be sold in the open market without a separate registration except in reliance upon Rule 144 under the Securities Act of 1933. However, most of these shares have been held for more than the minimum holding period under Rule 144, and the holders may sell those shares into the public market, which might put downward pressure on the price.

There may be a limited market for natural gas, causing natural gas prices to decrease, which could negatively impact the results of our operations and financial condition.

To the best of our knowledge, as of the date hereof, there are four primary competitors for the sale of natural gas to the Israeli market. The source of the gas is from the recently discovered large gas fields offshore Israel and the Gaza Strip and the very large gas fields offshore Egypt. In light of the relatively small size of the current Israeli market for natural gas, in the event that we and other groups exploring for natural gas in Israel succeed in discovering significant new reserves of natural gas, such discoveries may result in a decrease in the market price for natural gas and impede our ability to sell any reserves of natural gas we discover until such time as the Israeli market for natural gas increases to an extent where it is able to accommodate additional reserves.

Although our projects are for oil reserves, we may find significant volumes of natural gas. If, as we develop and expand production of our Israeli gas reserves, the Israeli market for gas does not also develop and grow, there may be too much gas for the market to absorb, causing natural gas prices to significantly decrease, which would negatively impact the results of our operations and our financial condition. Unlike the United States, Israel's market for natural gas is in the early stage of development and is now primarily based on electric power generation and industrial use. At present, there is no pipeline and there are limited other means available to transport large amounts of gas from our areas of operation to major power plants or industrial and population centers.

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In the event of a discovery of natural gas, our ability to supply the gas discovered to the potential market will to a large extent be dependent on the establishment of the Israeli national natural gas pipeline. As of the date hereof, it is uncertain who will construct and operate this pipeline and, as a result, it is uncertain when the pipeline will be completed or exactly where it will be routed with respect to our license.

If compliance with environmental regulations is more expensive than anticipated, it could adversely impact the profitability of our business.

Our operations are subject to laws and regulations relating to the generation, storage, handling, emission, transportation and discharge of materials into the environment, which can adversely affect the cost, manner or feasibility of our doing business. Many laws and regulations require permits for the operation of various facilities, and these permits are subject to revocation, modification and renewal. Governmental authorities have the power to enforce compliance with their regulations, and violations could subject us to fines, injunctions or both. These laws and regulations increase the costs of planning, designing, drilling, installing and operating oil and gas facilities. Risks of substantial costs and liabilities related to environmental compliance issues are inherent in oil and gas operations. It is possible that other developments, such as stricter environmental laws and regulations, and claims for damages to property or persons resulting from oil and gas exploration and production, would result in substantial costs and liabilities.

Sales of less than the maximum offering amount will limit our activities and result in less profit.

This offering is being made on a "best efforts" basis. Failure to raise funds beyond the minimum subscription of 1,200,000 shares will limit the activities of Zion. We cannot assure you that all of the shares will be sold. Subscriptions are irrevocable, but we have the right to accept or not accept a subscription. We currently intend not to accept any subscriptions for less than $500 per subscriber.

There is significant competition in the oil and gas industry, and some of our competitors have more capital than we do.

The oil and gas exploration business is highly competitive and has few barriers to entry. We will be competing with other oil and gas companies and investment partnerships to develop oil and gas properties in Israel and to purchase equipment and obtain labor necessary to complete wells. Many of our competitors are larger than we and have substantially greater access to capital and technical resources than we do and may therefore have a significant competitive advantage.

Fluctuation in oil and gas prices could adversely affect our financial condition.

Our revenues, operating results, financial condition and ability to borrow funds or obtain additional capital may depend substantially on prevailing prices for oil and natural gas. Declines in oil and gas prices may materially adversely affect our financial condition, liquidity, ability to obtain financing and operating results. Lower oil and gas prices also may reduce the amount of

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oil and gas that we can produce economically. Historically, oil and gas prices and markets have been volatile, with prices fluctuating widely, and they are likely to continue to be volatile. Depressed prices in the future would have a negative impact on our future financial results. The volatile nature of the energy markets make it impossible to predict with any certainty the future prices of oil and gas.

In addition, we assess the carrying value of our assets annually in accordance with generally accepted accounting principles under the full cost method. If oil and gas prices decline, the carrying value of our assets could be subject to downward revision.

Earnings will be diluted due to charitable contributions and key employees incentive plan.

We are committed to donating 6% of our gross sales revenues to two charitable trusts and allocating 1.5% to a key employees incentive plan. As our expenses increase with respect to the amount of sales, these donations and allocation could significantly dilute future earnings, and thus depress the price of the common stock.

Price of common stock was arbitrarily determined without regard to tangible book value.

The price of the common stock you would be purchasing from us has been arbitrarily set without regard to our tangible book value per share. We cannot promise that the shares will continue to be worth what you will pay for them.

In addition to the above risks, businesses are often subject to risks not foreseen or fully appreciated by management. In reviewing this prospectus potential investors should keep in mind other possible risks that could be important.

 

USE OF PROCEEDS

The net proceeds to us from the sale of a minimum of 1,200,000 and a maximum of 5,000,000 shares of common stock at an offering price of $5.00 per share are estimated to be approximately $5,400,000 and $23,100,000, respectively, after deducting estimated placement agent commissions and offering expenses. Any shares that are sold by our officers and directors will have no commissions deducted and, to that extent, will provide additional funds for working capital.

Some of our officers, directors, their affiliates and associates have loaned (and/or have not been paid for services billed, or salaries earned) amounts totaling approximately $450,000 during the past two years. These notes and accounts payable will be paid out of the first proceeds received.

We intend to use most of the net proceeds of this offering for exploration and development drilling on our Israeli license area. Our work program calls for re-entering and deepening an existing well (the Ma'anit #1) in the license area at an estimated "dry hole" cost of $3,300,000 to drill to a total depth of approximately 5000 meters (16,400 feet) and evaluate the well through a

12


combination of electrical wireline tool investigations, recovery of samples from the target formation (coring) and testing. We also intend to drill one or more new wells in the license area to approximately the same depth at an estimated "dry hole" cost of $5,500,000 per well. A "dry hole" is a well that for either geological or mechanical reasons is judged by us to be incapable of producing oil or gas in commercial quantities. In either case (re-entry or new well), if the well is not a "dry hole," a completion attempt would be made at an estimated completion cost of $800,000 in order to set production casing, perforate, install the production tubing and wellhead and conduct extended tests of the well. We cannot assure you that any wells will be completed or produce oil or gas in commercial quantities. If the minimum $5,400,000 net proceeds are raised, we will re-enter the Ma'anit #1. If the maximum $23,100,000 net proceeds are raised, we plan to re-enter the Ma'anit #1 as our first well and then proceed to drill at least two additional wells. See "Plan of Operation and Management's Discussion".

The remaining net proceeds will be used for general and administrative expenses and working capital. We intend to invest the net proceeds of this offering in short-term, investment grade obligations or bank certificates of deposit in both Israel and the United States until they are used.

If the minimum amount is raised, the proceeds from this offering will satisfy our cash requirements through December 2004, including the re-entry of the first well. This assumes that our officers would be willing, as they have done in the past, to defer most of their salaries until more cash is available. Thereafter, it will be necessary to raise additional funds for subsequent drilling. Out of the net proceeds of $5,400,000 in this minimum case, $450,000 would repay our outstanding notes and accounts payable to shareholders and officers, $750,000 would be used for general and administrative expenses (mostly salaries and professional fees), $100,000 would be used to maintain our license (mostly fees to the Israeli government), and $3,300,000 would be used to re-enter and deepen the first well. This would leave us with approximately $800,000 available to spend on completing the first well if it is a producer. If not, then the $800,000 would be used as additional working capital.

To the extent this offering is successful in raising the maximum funds, we expect to have sufficient money to drill and complete at least three wells and pay overhead through December 2006. Out of the net proceeds of $23,100,000, we would spend the same $450,000 to repay our outstanding notes and accounts payable to shareholders and officers. For the three year exploratory drilling period ending December 31, 2006, we estimate that our general and administrative expenses will be $4,000,000, most of which would be spent on salaries, benefits and professional fees. With the maximum funds available, we anticipate seeking additional petroleum rights in the general area of our license and we estimate that we would spend $650,000 to obtain and explore those rights (including approximately $100,000 to maintain our current license). We would spend the same $3,300,000 for the first well re-entry and reserve the same $800,000 for a possible completion attempt. The remaining $13,900,000 would be reserved for additional drilling of exploratory wells.

The estimates for legal and accounting fees below increase substantially from the minimum to the maximum case. This occurs because the minimum case covers only a single year (2004) while the maximum case provides funds for three years (2004-6). In addition, the maximum case

13


would cause us to have a higher activity level, so the annual fees would be higher. None of our experts, consultants, accountants, or legal counsel has been hired on a contingent fee basis. Our salaries and benefits also increase substantially in the maximum case because we will be able to pay our officers and directors on a current basis, rather than on the deferred basis required by the minimum case. We would also need a larger staff for the increased activity.

Our position is that the additional funds paid to our officers in the event of a maximum offering should not be considered compensation for their selling our shares in the offering because their basic compensation rates remain unchanged in either case. The only difference is that in the case of minimum offering some of our officers would be working less than full time for less than full salary. They would most likely also be deferring part of that salary as well.

The $100,000 note payable to a shareholder was borrowed this year and used for the legal costs of this offering. The principal is due promptly after the initial closing of the minimum offering, and interest accrues at the rate of 10% annually. The $50,000 note payable to an officer-shareholder was debt incurred over one year ago, bears interest at prime plus 2.5% and may be terminated at any time. The $300,000 accounts payable to officers have accumulated during the past twelve months as deferred compensation. There is no interest charged and the amounts are due upon the first closing of funds from this offering.

The following table sets forth the use of the proceeds from this offering:

 

Minimum ($)

Maximum ($)

Total Proceeds

6,000,000

25,000,000

Less: Offering Expenses

   

   Placement Agent Fees

360,000

1,500,000

   Listing Fees

25,000

25,000

   Transfer Agent Fees

10,000

35,000

   Registration Fees (State and Federal)

22,300

42,300

   Legal & Accounting

125,000

160,000

   Printing & Advertising

30,000

60,000

   Travel & Public Relations

27,700

77,700

Net Proceeds from Offering

5,400,000

23,100,000

Use of Net Proceeds:

 

Notes Payable to Shareholders

150,000

150,000

Accounts Payable to Officers

300,000

300,000

General & Administrative:

  Salaries & Benefits--Officers

360,000

2,600,000

  Salaries & Benefits--Tech.

60,000

300,000

  Salaries & Benefits--Admin

50,000

180,000

  Directors Fees

30,000

180,000

  Office Rent

50,000

150,000

  Legal and Accounting

40,000

120,000

  Shareholder Relations

20,000

60,000

14


  Printing & Advertising

20,000

30,000

  Travel

20,000

30,000

  Insurance

80,000

300,000

  Other

  20,000

     50,000

Total General & Admin.

750,000

4,000,000

Exploration Costs

   License Fee

78,000

234,000

   New Exploration Permits

6000

6,000

   Consultants

10,000

100,000

   Joint Venture Presentations

0

10,000

   Seismic Studies

    6,000

300,000

Total Exploration Costs

100,000

650,000

Pre-Drilling Costs

   Engineering Consultants

10,000

10,000

   Long Lead Tubulars

380,000

380,000

   Long Lead Valves

50,000

50,000

   Other Long Lead Items

60,000

60,000

   Drilling Contract Fee

100,000

100,000

Total Pre-Drilling Costs

600,000

600,000

First well drill & test

2,700,000

2,700,000

Reserve for first completion

800,000

800,000

Reserve for future wells

0

13,900,000

Total Use of Net Proceeds

5,400,000

23,100,000

The foregoing reflects only estimates of the use of the proceeds if the minimum amount or maximum amount is attained. If more than the minimum but less than the maximum is raised, the amounts will be adjusted appropriately. Actual expenditures may vary materially from these estimates.

CAPITALIZATION

The following table sets forth our total consolidated capitalization as of December 31, 2002, as reflected in our audited financial statements, and our pro forma capitalization as of December 31, 2002 giving effect to the sale of a minimum of 1,200,000 shares and a maximum of 5,000,000 shares at $5.00 per share in this offering and application of the estimated net proceeds as described in this prospectus. The first pro forma column of the table shows the pro forma result of the exchange of 43,100 shares of preferred stock (the amount outstanding on December 31, 2002) for 517,200 shares of common stock that occurred as part of the total exchange of 63,564 shares of preferred stock for 762,768 shares of common stock during July 2003. You should read the information presented below together with our consolidated financial statements and notes and "Plan of Operation and Management's Discussion" included elsewhere in this prospectus.

15


 

Amount of Capitalization as of December 31, 2002

_____________As Adjusted______________

($)

Exchange ($)

Minimum ($)

Maximum ($)

Short-term debt (prime + 2.5%)

50,590

50,590

50,590

50,590

Stockholders equity:

     Series A Convertible Preferred stock,

     par value $0.01 per share

431

0

0

0

     Common stock - par value $0.01 per share

35,525

40,697

52,697

90,697

Additional paid in capital

963,569

958,828

6,346,828

24,008,828

Retained earnings (deficit)

(559,269)

(559,269)

(559,269)

(559,269)

Total stockholders equity

440,256

440,256

5,840,256

23,540,256

Total Capitalization

490,846

490,846

5,890,846

23,580,846

The next table sets forth our total consolidated capitalization as of June 30, 2003, as reflected in our financial statements, and our pro forma capitalization on the same date giving effect to the sale of a minimum of 1,200,000 shares and a maximum of 5,000,000 shares at $5.00 per share in this offering and application of the estimated net proceeds as described in this prospectus. The first pro forma column of the table shows the pro forma result of the exchange of 63,564 shares of preferred stock (the amount outstanding on June 30, 2003) for 762,768 shares of common stock that occurred during July 2003. You should read the information presented below together with our consolidated financial statements and notes and "Plan of Operation and Management's Discussion" included elsewhere in this prospectus.

Amount of Capitalization as of June 30, 2003

_____________As Adjusted______________

($)

Exchange ($)

Minimum ($)

Maximum ($)

Short-term debt (approx. 7.5% interest rate)

116,029

116,029

116,029

116,029

Stockholders equity:

   Series A Convertible Preferred stock,

par value $0.01 per share

636

0

0

0

   Common stock - par value $0.01 per share

37,675

45,307

57,307

95,307

Additional paid in capital

1,148,507

1,141,511

6,529,511

24,191,511

Retained earnings (deficit)

(850,422)

(850,422)

(850,422)

(850,422)

Total stockholders equity

336,396

336,396

5,736,396

23,436,396

Total Capitalization

452,425

452,425

5,852,425

23,552,425

 

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DETERMINATION OF OFFERING PRICE

Prior to this offering, there has been no public market for our common stock. The initial public offering price of our common stock was determined solely by us. The factors considered in determining the public offering price include the initial cost by others for the technical data made available to us by the Israeli government or otherwise available to us from publicly accessible sources, our business potential and earnings prospects, the oil and gas industry and the general condition of the securities markets at the time of the offering. The offering price does not bear any relationship to our assets, revenue, book value, net worth or other recognized objective criteria of value. The estimated initial public offering price set forth on the cover page of this prospectus is subject to change as a result of market conditions and other factors.


DILUTION

As of June 30, 2003, our audited net tangible book value was 336,396 or $0.07 per share of common stock, assuming all outstanding shares of preferred stock were converted into common stock at the ratios that occurred during July 2003. Net tangible book value is the aggregate amount of our tangible assets less our total liabilities. Net tangible book value per share represents our total tangible assets less our total liabilities, divided by the number of shares of common stock outstanding.

Minimum Offering

After giving effect to the sale of a minimum of 1,200,000 shares of common stock at an offering price of $5.00 per share of common stock and after deducting placement agent commissions and other offering expenses, our net tangible book value as of June 30, 2003 would increase from $336,396 to $736,396, and the net tangible book value per share would increase from $0. 07 to $1.00. This represents an immediate increase in net tangible book value of $0.93 per share to current shareholders, and immediate dilution of $4.00 per share to new investors or 80%, as illustrated in the following table:

Public offering price per share of common stock

 

$5.00

Net tangible book value per share before this offering

$0.07

 

Increase per share attributable to new investors

$0.93

 

Adjusted net tangible book value per share after this offering

 

$1.00

Dilution per share to new investors

 

$4.00

Percentage dilution

 

80%

Another view of dilution is to look at the differences in shares purchase price (assuming conversion of existing preferred stock) as of June 30, 2003:

Shares Purchased

Total Consideration

Number        

     Percent

Amount                 

    Percent

Average per Share

Current Shareholders

4,530,628

79%

$           1,186,818

17%

$0.26

17


New Investors

1,200,000

21%

$           6,000,000

83%

$5.00

5,730,268

100%

$           7,186,818

100%

Maximum Offering

After giving effect to the sale of a maximum of 5,000,000 shares of common stock at an offering price $5.00 per share and (after deducting placement agent commissions and other offering expenses), our net tangible book value as of June 30, 2003 would increase from $336,396 to $23,436,396, and the net tangible book value per share would increase from $0.07 to $2.46. This represents an immediate increase in net tangible book value of $2.39 per share to current shareholders, and immediate dilution of $2.54 per share to new investors or 51%, as illustrated in the following table:

Public offering price per share of common stock

$5.00

       Net tangible book value per share before this offering

$0.07

       Increase per share attributable to new investors

$2.39

Adjusted net tangible book value per share after this offering

$2.46

Dilution per share to new investors

$2.54

Percentage dilution

51%

Another view of dilution is to look at the differences in shares purchase price (assuming conversion of existing preferred stock) as of June 30, 2003:

Shares Purchased

Total Consideration

Number        

     Percent

Amount                

  Percent

Average per Share

Current Shareholders

4,069,700

45%

$            999,525

4%

$0.25

New Investors

5,000,000

55%

$       25,000,000

96%

$5.00

9,069,700

100%

$       25,999,925

100%

 

DIVIDEND POLICY

During the year 2002, we issued a series of preferred stock entitled to an annual stock dividend of 10%. In February 2003 we paid the stock dividend to the preferred shareholders of record on December 31, 2002. During July 2003 all the shares of preferred stock were exchanged for shares of common stock as part of our reorganization to become a Delaware corporation. We are no longer authorized to issue any preferred shares and would not be able to issue any preferred shares or pay any dividends with respect to preferred shares without first obtaining the approval of our shareholders to amend our certificate of incorporation.

18


We have never paid dividends on our common stock and do not plan to pay dividends on the common stock in the foreseeable future. Whether dividends will be paid in the future will be in the discretion of our board of directors and will depend on various factors, including our earnings and financial condition and other factors our board of directors considers relevant. We currently intend to retain earnings to develop and expand our business. See "Plan of Operation and Management's Discussion" for more information on our business plans.

PLAN OF DISTRIBUTION

Placement Agents

We will offer our shares through licensed securities dealers ("Placement Agents") in the United States who are members of the National Association of Securities Dealers, Inc. ("NASD") or who reside outside the United States and agree to be bound by NASD guidelines. The Placement Agents will offer and sell the shares on a best-efforts basis. Under the terms of our agreement with the Placement Agents (a copy of which has been filed with the SEC), we will pay them a commission on completed sales of six percent (6%) of the subscription amount, and no other compensation. Each Placement Agent's expenses will be for his own account. The Placement Agent agreement also provides for indemnification by us of the Placement Agents against certain civil liabilities, including liabilities under the Securities Act. No Placement Agent has the right to designate or nominate a member of our board of directors. We currently have no finders in connection with this offering. We are not aware of any underwriter that intends to sell to any discretionary account or that intends to engage in passive market-making or stabilizing transactions at this time.

The names and addresses of the Placement Agents who have entered into the agreement with us are set forth below. No Placement Agents listed have a material relationship with us. Any additional Placement Agents who sign the agreement after this prospectus is effective will be added to the list by post-effective amendment and each recipient of this prospectus who has not already subscribed will be promptly notified of the additions to the list.

Placement Agent Name

Address                     

Principal Broker Name

Phone No.

       
       
       

Issuer Sales

We will act as our own managing underwriter for this offering. We will also offer and sell the shares through five of our officers and directors: John M. Brown, Eugene A. Soltero, Philip Mandelker, Ralph DeVore and William H. Avery. There will be no compensation paid to us for acting as managing underwriter or for shares of stock sold by us through our officers and

19


directors. Zion is not a broker, as defined under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as we do not sell any securities for others. Zion is not a dealer under the Exchange Act because we are not in the business of buying and selling securities for our own account.

Escrow Account

We will establish an escrow account with Commerce Bank, NA and have filed a copy of the proposed escrow agreement with the SEC. Under the terms of the proposed agreement, all checks from investors will be deposited into such account until we receive and accept funds representing the minimum offering amount. Funds in the escrow account may be invested in obligations of, or obligations guaranteed by, the United States government or bank money market accounts, or certificates of deposit of national or state banks that have deposits insured by the Federal Deposit Insurance Corporation (including certificates of deposit of any bank acting as depositary or custodian for any such funds). If we do not accept an investor's subscription, we will return his funds promptly, without interest.

As soon as the minimum offering amount of $6,000,000 (representing 1,200,000 shares) has been deposited into the escrow account, an initial closing will be scheduled for a date no later than 60 days afterward and the funds will be transferred at the closing into one of our operating accounts. Following the initial closing, funds will continue to be deposited in the escrow account until the final closing at the end of this offering, which will take place promptly after the receipt and acceptance of the maximum offering amount of $25,000,000 or December 31, 2004, whichever occurs first. One or more interim closings may take place between the initial closing and the final closing.

If the minimum offering amount is not reached by the termination date of this offering (which is now set at March 1, 2004, but which maybe extended for sixty days), we will promptly refund and return all monies to investors, without interest or deduction for service charges. You will therefore receive 100% of your money back if the minimum offering is not subscribed.

State Securities ("Blue Sky") Laws

In order to comply with certain states' securities laws, if applicable, our shares will be sold in such jurisdictions only through registered or licensed brokers or dealers. In addition, in certain states our shares may not be sold unless the shares have been registered or qualified for sale in such state or an exemption from registration or qualification is available and is satisfied. Our officers, directors and Placement Agents will all be provided information on a current basis as to those states and foreign jurisdictions in which we have qualified or in which we have an opinion of counsel that our shares are exempt from registration.

 

LEGAL PROCEEDINGS

Zion is not a party to any legal proceedings.

20


MANAGEMENT

Our directors, executive officers and key employees, their present positions and their ages are as follows:

Name

Age

Position

John M. Brown

63

Chairman of the Board and Chief

Executive Officer

Eugene A. Soltero

60

Director, President and Chief Operating

Officer

Glen H. Perry

60

Director, Executive Vice President

Philip Mandelker

56

Director, General Counsel and Secretary

Ralph F. DeVore

65

Director

Z. Sheldon Fink

60

Director

Eitan Lubitch

66

Director

William H. Avery

55

Vice President - Finance and Treasurer

Elisha Roih

76

Vice President - Administration of Israeli

Operations

Eliezer L. Kashai

81

Vice President - Israeli Exploration

 

All of the officers currently work for us part time or full time as the need for their special skills require. Upon completion of the offering, Mr. Brown, Mr. Soltero, Mr. Perry and Mr. Roih will be working full time. Mr. Mandelker will be joining us as a full time employee as such time as his law practice enables it, but he will be devoting the majority of his time to Zion business. Mr. Avery will be devoting 50% to 100% of his time to our business, as required. Dr. Kashai provides services to us on an as needed part-time basis for an hourly consulting rate. None of our officers or directors has been the subject of any court or regulatory proceeding relating to violation or possible violation of federal or state securities or commodities law.

The following biographies describe the business experience of our directors, executive officers and key employees. Positions and experience with Zion include positions and experience with our predecessor, Zion Oil & Gas, Inc., a Florida corporation.

John M. Brown is the founder of Zion and has been a director, chairman of the board of directors and chief executive officer of Zion since its organization in April 2000. He also served as president of Zion until October 2001, when Mr. Soltero was elected to that position. Mr. Brown has extensive management, marketing and sales experience, having held senior management positions in two Fortune 100 companies - GTE Valenite, a subsidiary of GTE Corporation and a manufacturer of cutting tools, where he was employed from 1966-86, and Magnetek, Inc., a manufacturer of digital power supplies, systems and controls, where he was employed from 1988-89. Mr. Brown has been a director and principal stockholder in M&B Concrete Construction, Inc. since 1996. He also oversees the day-to-day administration and financial operations as an officer and director of M&B Concrete, Inc., M& B Contracting Inc., and M&B Poured Wall, Inc.

21


(collectively, the "M&B Companies"). The M&B Companies are located in Waterford, Michigan and primarily provide cement walls and floors for industrial buildings, office buildings and home developers throughout Michigan. Prior to founding Zion, Mr. Brown had been actively pursuing a license for oil and gas exploration in Israel for many years. He has led the efforts leading to Zion obtaining in May 2000 the Ma'anit License in the Joseph Project. Mr. Brown holds a BBA degree from Fullerton College.

Eugene A. Soltero has been a director of Zion since June 2001, and was elected president and chief operating officer in October 2001. Previously, he was a financial consultant to Zion since June 2000 and served as treasurer from February 2002 to January 2003. Mr. Soltero is also president and chief executive officer of Cimarron Resources, Inc., an independent private energy production and consulting company he formed in 1985. He served, during the period 1995-1999, as a director, chairman and chief executive officer of Cotton Valley Resources Corporation [ASE:KTN], an independent oil and gas producer with principal properties in Oklahoma and Texas, which is now Aspen Group Resources Corporation [OTCBB:ASPG and TSE:ASR]. During 1991-1994, he was chairman of the board, president and chief executive officer of Aztec Energy Corporation [NASDAQ:AZCE], an independent oil and gas exploration company with principal properties in Oklahoma. During 1989-1991 he was president and chief operating officer of American International Petroleum Corporation [NASDAQ:AIPN], a small integrated petroleum company with oil and gas production and gas gathering systems in Louisiana, a 30,000 barrels per day refinery in Louisiana and oil production and exploration on 500,000 acres of concessions in the country of Colombia. Mr. Soltero has served as chief operating officer and/or chief executive officer for private and public oil and gas exploration and production companies for the past 20 years, including directing the formation and growth of a number of start-up companies. Early in his career, he was trained at Sinclair Oil Corporation (a large independent international integrated petroleum company) in exploration and production management, (1965-69), served as manager of planning (1969-70) for Texas International Petroleum Corporation, (an independent oil and gas production company with principal interests in Louisiana and Argentina)and petroleum economist (1970-72) for DeGolyer and MacNaughton, petroleum consultants. For nine years (1972-81) he managed all the oil and gas subsidiaries of Moore McCormack Resources, an independent oil and gas exploration company in the United States with significant interests in gas gathering, transportation and trading as well as crude oil and refined products trading. Mr. Soltero is a member of the Society of Petroleum Engineers, and a former director of the Independent Petroleum Association of America and the Texas Independent Producers and Royalty Owners. He has also served as a director of the Independent Petroleum Refiners Association of America. He is a master's graduate of the Massachusetts Institute of Technology in business (where he was awarded the Sinclair Research Fellowship in Petroleum Economics) with an undergraduate bachelor of engineering degree from The Cooper Union. Mr. Soltero is a registered professional engineer in the State of Texas.

Glen H. Perry has been executive vice president of Zion since April 2000 and was elected a director in November 2000. He first started working with Mr. Brown and the Joseph Project in September 1999. During 1998 and 1999 Mr. Perry was a consultant to Delek Drilling, Ltd., with respect to its participation in the major gas discoveries offshore Israel. From 1993-98 he worked for National Petroleum Limited, an international oil and gas company with representative offices

22


in Geneva, Switzerland. In this capacity, Mr. Perry served as manager of project development, seeking viable projects and negotiating contracts in the C.I.S. Republics, and general director of an oil and gas project in the Republic of Georgia. Previously, he was an officer and director of Prairie Producing Company ("Prairie"), an independent oil company operating mainly in Louisiana and Texas, from 1985 until Prairie was sold in 1990 to UNOCAL for approximately $330 million. While with Prairie, Mr. Perry had responsibility for design, construction and operation of all operational projects, including production facilities, pipelines, and plants. In addition to all engineering, drilling and production functions, he also had responsibility for marketing. Mr. Perry joined Prairie in December 1976 as a production engineer, was appointed chief engineer in October 1979, and served as vice president, production and operations from 1985-89, and senior vice president from 1989-90. Prior to joining Prairie, Mr. Perry's experience was in drilling and production for Exxon Company, USA (now ExxonMobil Corporation) and Energy Reserves Group (now BHP). Mr. Perry holds a Masters in Petroleum Engineering from the University of Texas and a Bachelor of Science from the University of Tennessee.

Philip Mandelker has been general counsel of Zion since April 2000 and was elected as director in June 2001. He was elected secretary of Zion in February 2002. He holds a Doctor of Jurisprudence degree (1971, cum laude) from Columbia University School of Law and was of counsel to I. Amihud Ben-Porath, Hamou and Company, a law firm in Tel-Aviv, Israel, from May 2000 through April 2003, a position he also held in1994-96. He is currently of counsel to ADAM Law Firm in Tel Aviv. Mr. Mandelker is admitted to practice in both the United States and Israel. He has practiced in New York, Jerusalem and Tel-Aviv and has extensive experience with the oil and gas exploration industry in both the United States and Israel. While at the Israeli Ministry of Finance (1974-76), Mr. Mandelker acted inter alia as Legal Advisor to the Israeli Petroleum Commissioner and represented the Israeli Government in negotiating the Petroleum Concessions and Production Sharing Agreements in the Sinai Peninsula and Gulf of Suez. In New York between 1981 and 1993, as counsel to the firm of Rosenman and Colin (now KMZ Rosenman), Mr. Mandelker advised oil and gas exploration companies and sponsors of oil and gas drilling programs in structuring public and private investment vehicles; he has also advised investors in such programs. From 1992-94, Mr. Mandelker served as an advisory director of Aztec Energy Corp., then an independent oil and gas exploration and production company listed on NASDAQ. He has published and lectured on subjects related to investment in oil and gas exploration activities in Israel and in the United States. As Deputy and then Acting Legal Advisor to the Military Government of the Judea and Samaria Area (1978-80), he drafted a model oil and gas exploration and production concession agreement for use in the Area. From 1997-99, Mr. Mandelker was Chief Legal Advisor of the United Mizrahi Bank, Ltd., a major Israeli banking group headquartered in Tel-Aviv. Mr. Mandelker has been associated with Mr. Brown and the Joseph Project since February 2000.

Ralph F. DeVore has been a director of Zion since June 2001, and served as secretary and treasurer from that time until February 2002. Since 1984 he has served as president and director of Christian Commerce Corporation, a nonprofit private foundation which serves the community through Christian based education and counseling. Mr. DeVore holds a BS degree from Wayland Baptist University and an A. Div. Degree from Southwestern Baptist Theological Seminary. He brings over forty years of business experience to Zion having served in senior management

23


positions in a number of Houston-based companies specializing in innovative marketing/advertising and sales. Mr. DeVore was president and director of sales for Advertising Technology (marketing and advertising consultants, 1981-84), director of sales and director of operations for AmericaAd, Inc. (outdoor advertising and media sales, 1979-81), president and sales director of Triple R Outdoor Advertising, Inc. (consultants and lessors of outdoor advertising facilities, 1967-79), branch sales director of Liberty Sign Company (provider of outdoor signs, 1965-67), vice-president of sales for Beshear/Sheppard Outdoor Advertising Company (lessor of outdoor advertising ad space, 1961-65). He had early training as a branch manager for Sherman Williams Paint Company (manufacturer of protective coatings, 1959-61) and as a sales engineer for Federal Sign and Signal Corp. (a provider of on-site electrical outdoor signage, 1957-59). Mr. DeVore is also a director of Hal Lindsey Ministries, an international Christian ministry.

Z. Sheldon Fink has served as a director since July 2003. Since 2002 he has served as the chief executive officer of PBI Aqaba Industrial LLP, a developer of industrial real estate at Aqaba, Jordan. He has also been the chairman of IPPS Ltd., a developer of a seawater desalination plant, since 2001. For the period 1995 through 2000, Mr. Fink was chief executive officer of Ashcogen Ltd., an independent electric power generating company in Israel. During 1982-90 he served as chairman and chief executive officer of Carmel Containers Ltd. (an Israel-based designer and manufacturer of paper-based packaging and related products),and was responsible for that company's initial public offering on the American Stock Exchange. In that position, Mr. Fink supervised Carmel's general management and was responsible for finance and public reporting. From 1970-1982 Mr. Fink worked at E. Landau Law Offices in Jerusalem, first as an associate, then as a partner. He specialized in shipping law, energy law and private international law. Mr. Fink holds a Bachelor of Arts degree from Yeshiva University in New York and a Doctor of Jurisprudence degree from the Harvard Law School. He has been a member of the executive board of the Israel Manufacturers Association since 1990 and is currently chairman of the Association's rules committee and a member of its finance committee.

Eitan Lubitch has served as a director since July 2003. Since March of 2000 he has served as managing director and principal of Dar-Style Consultants & More Ltd., an independent consulting engineering firm in Tel Aviv. During the previous twenty-three years he was founder, principal stockholder, chairman and CEO of Ludan Engineering Co. Ltd., one of the leading multidisciplinary engineering organizations in Israel, employing, in its group, over 300 persons and owning subsidiaries in infrastructure, buildings and environmental software. Ludan's main customers operate plants in the process industries, specifically oil refineries, petrochemicals, chemicals, pharmaceuticals, food and microelectronics. In 1997 Ludan went public on the Tel Aviv Stock Exchange. Mr. Lubitch holds Bachelors and Masters of Science degrees in mechanical engineering from the Technion-Israel Institute of Technology. He has also taken advanced finance and management courses from the University of Tel-Aviv and the HAMIL-Israel Center for Management.

William H. Avery was elected Vice President - Finance and Treasurer in January 2003. For the past nine years he has practiced as independent attorney in transactional work, concentrating in the area of real property law, including oil and gas transactions. Before that he was a partner for

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seventeen years and an associate for four years at Storey, Armstrong, Stegar and Martin, a full-range Dallas law firm, concentrating his practice in the representation of financial institutions in loan transactions. In addition he has more than twenty years experience as an oil and gas property investor and investment manager for his own account and for members of his family. Mr. Avery holds a Bachelor of Business Administration degree in Finance from Southern Methodist University and a Doctor of Jurisprudence degree from Duke University Law School

Elisha Roih has served as Vice President - Administration of Israeli Operations of Zion since April 2000. Mr. Roih holds a BA degree in Political Science and Oriental Studies from Hebrew University, Jerusalem, and has continuing educational course certificates in Business Administration, Production Technology and Offshore Operations. Mr. Roih has over forty years experience in senior management positions in the Israeli petroleum industry. Most recently, between 1997-1998, he served as acting general manager of Lapidoth, Israel Oil Prospectors Company, Ltd. and its subsidiary Metsada-United Drilling Co. (oil and gas producers and oilfield service providers). During 1983-89 Lapidoth and Metsada-United were subsidiaries of Naphta-Israel Petroleum Corp. (an oil and gas exploration and production company), and Mr. Roih served during that period as general manager for all three companies. Prior to 1983, Mr. Roih served as: (a) deputy general manager of the Israel National Oil Company, the government-owned holding company that owned Naphta-Israel, Lapidoth, Metsada-United, and Oil Exploration (Investments) Ltd. and Southern Sinai Petroleum (both oil and gas exploration and production companies); (b) general manager of Southern Sinai Petroleum's exploration and production project in the Gulf of Suez; (c) operations manager for Sinai Oil Fields (another government-owned production company) in the Gulf of Suez and various management positions with Naphtha - Israel Petroleum Corporation. Between 1990-1996 and from 1998 to 2000, Mr. Roih was a management consultant to the petroleum industry in Israel, during which periods he also consulted for Mr. Brown in connection with the Joseph Project.

Dr. Eliezer Kashai, has been Vice President - Israeli Exploration of Zion since October 2000. Dr. Kashai studied geology in the University of Sciences, Budapest, Hungary, holds Masters and Ph.D. degrees from Hebrew University, Jerusalem and is a widely recognized authority on the Triassic formation of Israel. Dr. Kashai has over fifty years of geological experience in Israel working until his retirement in 1987 for the national petroleum companies of Israel, including almost thirty years for Lapidoth Israel Oil Prospectors Company, Ltd. and Oil Exploration (Investments) Ltd., where he served in progressively responsible positions. At Lapidoth during 1959-75, he served as senior geologist, assistant chief geologist, acting chief geologist and chief geologist. At Oil Exploration (Investments) Ltd. during 1975-87 he was first chief geologist, then deputy managing director responsible for all of that company's exploration efforts. Following his retirement in 1987 and through 1998, Dr. Kashai worked as an exploration consultant for various companies active in petroleum exploration in Israel, including Israel National Oil Company, Lapidoth, Naphta Petroleum, ABJAC-Mazal Ltd., Nordan Oil and Gas, and Sedot Neft, Ltd. where he was responsible for the original geological interpretation of Ma'anit. He began consulting for Mr. Brown in connection with the Joseph Project in late 1999 and for us in April 2000. Dr. Kashai has served as president of the Israel Geological Society and is responsible for five geological publications and nearly one hundred unpublished company reports on exploration projects, drilling recommendations, subsurface geological analysis and well evaluations.

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Information Regarding the Board of Directors and Committees

Our board of directors is divided into three classes of directors, with each class (except for the initial classes) elected to a three-year term every third year and holding office until their successors are elected and qualified. The class whose term of office will expire at our 2004 Annual Meeting of Shareholders consists of Philip Mandelker and Glen H. Perry. The class whose term of office will expire at our 2005 Annual Meeting of Shareholders consists of Eugene A. Soltero and Eitan Lubitch. The class whose term of office will expire at our 2006 Annual Meeting of Shareholders consists of John M. Brown, Ralph F. DeVore and Z. Sheldon Fink.

Of the seven current members of our board of directors, three meet the criteria of independence set by the SEC. These are Ralph F. DeVore, Eitan Lubitch and Z. Sheldon Fink.

As described below our board of directors has established two committees, an audit committee and a compensation committee. Members of the committees are appointed annually by the board of directors to serve at the discretion of the board until their successors are appointed or the earlier of their resignation or removal.

Audit Committee. Following the effective date of the merger of Zion and its predecessor Florida corporation on July 9, 2003 and with the expansion of our board of directors to seven with the appointment of Mr. Lubitch and Mr. Fink on July 11, 2003, the board of directors established an audit committee comprised of three directors as follows: Mr. Fink, Mr. DeVore and Mr. Soltero, our president and chief operating officer. Mr. Fink was elected to serve as the committee chairman. Both Mr. Fink and Mr. DeVore are independent. Mr. Fink and Mr. Soltero each satisfy the criteria of audit committee financial experts as set by the SEC.

The audit committee has been charged by our board of directors with the following responsibilities and granted the following authority:

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The audit committee has also been charged with recommending to our board of directors for adoption no later than October 31, 2003, a formal written audit committee charter that complies with the requirements of the Exchange Act, the rules and regulations of the SEC and the listing and corporate governance requirements of the NASD.

In establishing the audit committee, our board of directors provided that no later than 90 days from the date of effectiveness of this registration statement (the "Effective Date"), Mr. Soltero would be replaced as a member of the audit committee by a director meeting both the independence and financial expertise requirements of both the SEC and the NASD.

In establishing the audit committee to include Mr. Soltero, we relied on an exemption provided for new issuers under Exchange Act Rule 10A-3 section (b)(1)(iv)(A). Zion believes that Mr. Soltero's service as a member of the audit committee will not adversely affect the ability of the audit committee to act independently and to satisfy the other requirements of the Exchange Act Rule 10A-3 for the following reasons:

Compensation Committee. Our board of directors also established a compensation committee to be comprised of three directors, two of whom satisfy the independence requirements of the SEC and the third is John Brown, our chairman and chief executive officer. The independent directors are Eitan Lubitch and Ralph DeVore.

The compensation committee is charged with the following responsibilities:

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It is our intention, prior to October 31, 2003, to adopt a formal, written compensation committee charter that complies with the requirements of the Exchange Act, SEC rules and regulations and the listing and corporate governance requirements of the NASD. In establishing the compensation committee, our board of directors provided that if the listing and corporate governance rules of NASD require that all members of our compensation committee be independent directors, Mr. Brown's participation in the committee would be modified to comply with such requirements.

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table provides information regarding beneficial ownership of our common stock as of September 2, 2003, and as adjusted to reflect the sale of shares in this offering, by:

Except as otherwise indicated, to our knowledge, all persons listed below have sole voting power and investment power and record and beneficial ownership of their shares, except to the extent that authority is shared by spouses under applicable law. Except as noted below, all persons listed have an address in care of our principal executive offices.

The information contained in this table reflects "beneficial ownership" as defined in Rule 13d-3 of the Exchange Act. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock subject to options and warrants held by that person (and/or pursuant to proxies held by that person) that were exercisable on September 2, 2003, or became exercisable within 60 days following that date are considered outstanding. However, such shares are not considered outstanding for the purpose of computing the percentage ownership of any other person. Percentages in the table under "After Minimum Offering" "After Maximum Offering" also assume exercise of a person's warrants. Percentage of ownership is based on 4,566,268 shares of common stock outstanding as of September 2, 2003, and 5,766,268 and 9,566,268 shares of common stock outstanding after the completion of the minimum offering and maximum offering, respectively. As of September 2, 2003, we had 75 holders of record of our common stock.

The address of John Brown, Eugene Soltero, Glen Perry, Ralph DeVore, and William Avery is 6510 Abrams Rd., Suite 300, Dallas, TX 75214. The address of Philip Mandelker, Z. Sheldon Fink and Eitan Lubitch is 9 Yair Stern St., Herzliya, 46412 Israel.

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Amount and

Percentage of Outstanding Common Stock

Nature of Beneficial

After Minimum

After Maximum

Name

Ownership

Currently

Offering

Offering

John M. Brown

3,422,717

(1)

69.8%

56.1%

34.6%

Ralph DeVore

928,480

(2)

19.2%

15.4%

9.4%

Eugene A. Soltero

512,338

(3)

11.0%

8.8%

5.3%

Glen Perry

491,000

(4)

10.7%

8.5%

5.1%

Philip Mandelker

506,533

(5)

11.0%

8.8%

5.3%

William Avery

267,000

(6)

5.6%

4.5%

2.7%

Z. Sheldon Fink

33,500

(7)

0.7%

0.6%

0.3%

Eitan Lubitch

25,000

(8)

0.5%

0.4%

0.3%

All directors and executive officers as a group (9 persons)

4,650,235

(9)

89.8%

72.9%

45.7%

    1. Includes warrants to purchase 59,583 shares of common stock until December 31, 2004 at an average price of $1.22 per share and the following additional securities, of which additional securities Mr. Brown disclaims beneficial ownership: (a) 100,000 shares of common stock owned by Mr. Brown's wife; (b) 2,478,000 shares of common stock owned by others for which Mr. Brown holds voting proxies, including the 100,000 shares owned by his wife; and (c) warrants owned by others to purchase 275,834 shares of common stock until December 31, 2004 at an average price of $1.00 per share for which Mr. Brown holds voting proxies effective upon the purchase of such common stock.
    2. Includes warrants to purchase 31,583 shares of common stock until December 31, 2004 at an average price of $1.17 per share and the following additional securities, of which additional securities Mr. DeVore disclaims beneficial ownership: (a) 442,700 shares of common stock owned by others for which Mr. DeVore holds voting proxies; and (b) warrants owned by others to purchase 229,917 shares of common stock until December 31, 2004 at an average price of $1.12 per share for which Mr. DeVore holds voting proxies effective upon the purchase of such common stock.
    3. Includes warrants to purchase 37,250 shares of common stock until December 31, 2004 at an average price of $1.20 per share and an option to convert any outstanding amount of a $50,000 line of credit facility into shares of common stock at the average price of $1.00 per share.
    4. Includes warrants to purchase 25,000 shares of common stock until December 31, 2004 at an average price of $1.50 per share.
    5. Includes warrants to purchase 18,333 shares of common stock until December 31, 2004 at an average price of $1.37 per share and 400,000 shares of common stock owned by a trust for Mr. Mandelker and his family.
    6. Includes warrants to purchase 205,000 shares of common stock until December 31, 2004 at an average price of $1.01 per share.
    7. Includes options to purchase 25,000 shares of common stock until December 31, 2005 of the exercise price of $3.00 per share and warrants to purchase 2,500 shares of common stock until December 31, 2004 at an average price of $1.50 per share.
    8. 29


    9. Includes options to purchase 25,000 shares of common stock until December 31, 2005 of the exercise price of $3.00 per share.
    10. Includes warrants and options to purchase 589,250 shares of common stock until December 31, 2004 and warrants to purchase 50,000 shares of common stock until December 31, 2005.

 

Voting Agreements

Shareholders holding approximately 64% of the outstanding shares of our common stock prior to this offering have granted irrevocable proxies under two Stockholders' Voting Agreements. Shareholders holding approximately 54% of such shares have granted an irrevocable proxy to John M. Brown, our chairman of the board and chief executive officer (or his designee, Eugene Soltero, our president, in Mr. Brown's absence) to vote shares beneficially owned by them at any shareholders meeting. Shareholders holding approximately 10% of our common stock have granted an irrevocable proxy to Ralph F. DeVore (or Brenda DeVore in Mr. DeVore's absence) to vote shares beneficially owned by them at any shareholders meeting.

The voting agreements terminate on July 9, 2008 or earlier with respect to any shareholder given written notice by the holder of his proxy (Mr. Brown or Mr. DeVore, as the case may be). Under the terms of the voting agreements, Mr. Brown can vote a majority of the shares outstanding prior to this offering at any shareholders meeting. These voting agreements would therefore allow Mr. Brown to elect all our directors and approve any proposal at a shareholder's meeting. Including their own shares, Mr. Brown and Mr. DeVore now hold 68% and 15%, respectively, of our voting rights. In the event of a minimum offering, Mr. Brown and Mr. DeVore would hold 54% and 12%, respectively, of our voting rights. If we were successful in completing the maximum amount of the offering, Mr. Brown and Mr. DeVore would hold 32% and 7%, respectively, of our voting rights. Included in the totals above are 50,000 shares owned by Mr. DeVore for which Mr. Brown holds the voting rights.

Mr. Brown and Mr. DeVore also hold voting rights with respect to the shares of common stock they and others who are parties to the voting agreements may purchase according to warrants they hold. If Mr. Brown were to exercise all his warrants, and the holders of warrants who have given their proxies to Mr. Brown exercise all their warrants, then Mr. Brown would hold voting rights currently, after the minimum offering and after the maximum offering, in the amounts of 70%, 56% and 35%, respectively. If Mr. DeVore were to exercise all his warrants and the holders of warrants who have given their proxies to Mr. DeVore exercise all their warrants, then Mr. DeVore would hold voting rights currently, after the minimum offering and after the maximum offering, in the amounts of 19%, 15% and 9%, respectively.

DESCRIPTION OF SECURITIES

General

Our certificate of incorporation provides for the authorization of 20,000,000 shares of common stock, par value $.01 per share. As of September 2, 2003, our issued and outstanding capital securities consist of 4,566,268 shares of common stock, and options and warrants to acquire

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1,061,103 shares of common stock. After giving effect to this offering, our capitalization will consist of a minimum of 5,766,268 shares of common stock, a maximum of 9,566,268 shares of common stock and, in both cases, options and warrants to purchase 1,061,103 shares of common stock. Of the outstanding options and warrants, there are currently outstanding options and warrants to purchase 272,500 shares of common stock issued to officers and directors in connection with their compensation. Warrants to purchase 761,103 shares of common stock were issued primarily in connection with private placements, or directly issued for consulting services. 50,000 shares of common stock are reserved for an option to convert a note. We do not intend to issue any warrants or options to Placement Agents.

Common Stock

Our shareholders are entitled to one vote per share on all matters submitted to a vote of shareholders. They are entitled to receive dividends when and as declared by the board of directors out of legally available funds and to share ratably in our assets legally available for distribution upon liquidation, dissolution or winding up. Shareholders do not have subscription, redemption or conversion rights, or preemptive rights. The common stock will be, when issued and paid for, fully paid and nonassessable.

Our shareholders do not have cumulative voting rights, the effect of which is that the holders of more than half of all voting rights with respect to common stock can elect all of our directors. The board of directors is empowered to fill any vacancies on the board of directors created by expansion of the board or resignations, subject to quorum requirements.

Except as otherwise discussed below at "Business combination provision" and "Amendments", all shareholder action is taken by vote of a majority of voting shares of our capital stock present at a meeting of shareholders at which a quorum (a majority of the issued and outstanding shares of the voting capital stock) is present in person or by proxy. Directors are elected by a plurality vote.

Preferred Stock

Our predecessor Florida corporation had authorized 2,000,000 shares of preferred stock, of which it had issued 63,564 shares in a private placement and as stock dividends. Upon the merger of the Florida corporation into the Delaware subsidiary on July 9, 2003, all of the shares of outstanding preferred stock of the Florida corporation were converted into 762,768 shares of our common stock at the ratio of 12 shares of common stock for each outstanding share of preferred stock. Neither we nor any of the exchanging shareholders incurred any gain or loss as a result of the exchange. Of the 63,564 shares of preferred stock exchanged, 25,364 (40%) were held by eight officers, directors and/or holders of more than 5% of our outstanding stock. As a Delaware corporation, we have not authorized any preferred stock and would not be able to do so without an affirmative vote of the shareholders.

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Options and Warrants to Officers and Directors

Zion issued warrants to purchase 200,000 shares of common stock at $1.00 per share until December 31, 2004 to our vice-president, finance in connection with his employment. Zion issued options to purchase 50,000 shares of common stock at $3.00 per share until December 31, 2005 to two outside directors upon their election to the board of directors. While he was a director, but before he became an officer in 2001, Mr. Soltero, our president, was granted a warrant to purchase 10,000 shares of common stock at $1.00 per share until December 31, 2004. At the same time, similar warrants were granted to Dr. Kashai in the amount of 7,500 shares and to Mr. Roih in the amount of 5,000 shares. There are no other officer and director compensation related options or warrants outstanding. Our president holds an option to convert up to $50,000 in our notes payable to a private corporation controlled by him into shares of common stock at $1.00 per share. Any other warrants held by officers or directors were acquired by them in connection with the purchase of common stock or preferred stock (at the same price as unrelated third party purchasers) or for reduction of amounts due them for consulting services.

We will not issue options or warrants with an exercise price of less than 85% of the fair market value of Zion stock on the date of grant to officers, directors, employees, 5% shareholders or affiliates. Options and warrants granted to such persons will not exceed 15% of our outstanding shares.

Warrants

In addition to the options and warrants specifically listed above, we have issued and outstanding as of September 2, 2003 warrants to purchase 303,333 shares of common stock at $1.00 per share until December 31, 2004 and warrants to purchase 485,270 shares of common stock at $1.50 per share until December 31, 2004.

Certificate of Incorporation and Bylaws Provisions

The following summary describes provisions of our certificate of incorporation and bylaws which may have the effect of making more difficult or discouraging a tender offer, proxy contest or other takeover attempt that is opposed by our board of directors. These provisions include:

Classified board of directors and removal. Our certificate of incorporation provides that the board of directors shall be divided into three classes, designated Class I, Class II and Class III, with the classes to be as nearly equal in number as possible. The term of office of each class expires at the third annual meeting of shareholders for the election of directors following the

32


election of such class (except for the initial classes). Directors may be removed only for cause and only upon the affirmative vote of holders of at least 66 2/3% of our voting stock at a special meeting of shareholders called expressly for that purpose. The classification of directors could have the effect of making it more difficult for shareholders to change the composition of the board of directors. At least two annual meetings of shareholders, instead of one, are generally required to effect a change in a majority of the board of directors.

The classification provisions could also have the effect of discouraging a third party from initiating a proxy contest, making a tender offer or otherwise attempting to obtain control of Zion, even though such an attempt might be beneficial to us and our shareholders. The classification of the board of directors could thus increase the likelihood that incumbent directors will retain their positions. In addition, because the classification provisions may discourage accumulations of large blocks of stock by purchasers whose objective is to take control of Zion and remove a majority of the board of directors, the classification of the board of directors could tend to reduce the likelihood of fluctuations in the market price of the common stock that might result from accumulations of large blocks. Accordingly, shareholders could be deprived of opportunities to sell their shares of common stock at a higher market price than might otherwise be the case.

Shareholder action by written consent and special meetings. Our bylaws provide that shareholder action can be taken only at an annual or special meeting of shareholders and may not be taken by written consent in lieu of a meeting once our number of shareholders exceeded sixty, which occurred in the first quarter of 2003. Special meetings of shareholders can be called only upon a resolution adopted by a majority of the board of directors. Moreover, the business permitted to be conducted at any special meeting of shareholders is limited to the business brought before the meeting under the notice of meeting given by us. These provisions may have the effect of delaying consideration of a shareholder proposal until the next annual meeting. These provisions would also prevent the holders of a majority of our voting stock from unilaterally using the written consent or special meeting procedure to take shareholder action.

Advance notice provisions for shareholder nominations and shareholder proposals. Our bylaws establish an advance notice procedure for shareholders to make nominations of candidates for election as directors or bring other business before a meeting of shareholders. The shareholder notice procedure provides that only persons who are nominated by, or at the direction of, the board of directors, or by a shareholder who has given timely written notice containing specified information to our secretary prior to the meeting at which directors are to be elected, will be eligible for election as our directors. The shareholder notice procedure also provides that at a meeting of the shareholders only such business may be conducted as has been brought before the meeting by, or at the direction of, the chairman of the board of directors, or in the absence of the chairman of the board, the president, or by a shareholder who has given timely written notice containing specified information to our secretary of such shareholder's intention to bring such business before such meeting.

Although our bylaws do not give the board of directors any power to approve or disapprove shareholder nominations for the election of directors or proposals for action, they may have the

33


effect of precluding a contest for the election of directors or the consideration of shareholder proposals if the proper procedures are not followed, and of discouraging or deterring a third party from conducting a solicitation of proxies to elect its own slate of directors or to approve its own proposal, without regard to whether consideration of such nominees or proposals might be harmful or beneficial to Zion and our shareholders.

Business combination provision. Our certificate of incorporation contains a provision for approval of specified business combination transactions involving any person, entity or group that beneficially owns at least 10% of our aggregate voting stock. Such person, entity or group is sometimes referred to as a "related person". This provision requires the affirmative vote of the holders of not less than 66 2/3% of our voting stock to approve specified transactions between a related person and Zion, including:

This voting requirement will not apply to certain transactions, including any transaction approved by a majority vote of the directors (called "Disinterested Directors") who are not affiliated or associated with the related person described above, provided that there are at least three Disinterested Directors.

This provision could have the effect of delaying or preventing a change in control of Zion in a transaction or series of transactions.

Liability of directors and indemnification. Our certificate of incorporation provides that a director will not be personally liable to Zion or our shareholders for breach of fiduciary duty as a director, except to the extent that such exemption or limitation of liability is not permitted under Delaware General Corporation Law. Any amendment or repeal of such provisions may not adversely affect any right or protection of a director existing under our certificate of incorporation for any act or omission occurring prior to such amendment or repeal.

Our certificate of incorporation and bylaws provide that each person who at any time serves or served as one of our directors or officers, or any person who, while one of our directors or officers, is or was serving at our request as a director or officer of another corporation,

34


partnership, joint venture, trust or other enterprise, is entitled to indemnification and the advancement of expenses from Zion, to the fullest extent permitted by applicable Delaware law. However, as provided under applicable Delaware General Corporation Law, this indemnification will only be provided if the indemnitee acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to, the best interests of Zion.

Amendments. Our certificate of incorporation provides that we reserve the right to amend, alter, change, or repeal any provision contained in our certificate of incorporation, and all rights conferred to shareholders are granted subject to such reservation. The affirmative vote of holders of not less than 80% of our voting stock, voting together as a single class, is required to alter, amend, adopt any provision inconsistent with, or to repeal certain specified provisions of our certificate of incorporation. However, the 80% vote described in the prior sentence is not required for any alteration, amendment, adoption of inconsistent provision or repeal of the "business combination" provision discussed under the "Business combination provision" paragraph above which is recommended to the shareholders by two-thirds of our Disinterested Directors, and such alteration, amendment, adoption of inconsistent provision or repeal shall require the vote, if any, required under the applicable provisions of the Delaware General Corporation Law, our certificate of incorporation and our bylaws. In addition, our bylaws provide that shareholders may only adopt, amend or repeal our bylaws by the affirmative vote of holders of not less than 66-2/3% of our voting stock, voting together as a single class. Our bylaws may also be amended by the affirmative vote of two-thirds of our board of directors.

Transfer Agent and Registrar

Upon completion of this offering in the minimum number of securities, Zion's registrar and stock transfer agent will be Registrar and Transfer Company, Cranford, NJ.

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this offering, a minimum of 5,766,268 and a maximum of 9,566,268 shares of common stock will be outstanding. All shares of common stock sold in this offering will be freely transferable without restriction or further registration under the Securities Act, except that shares purchased by an affiliate of ours (in general, a person who is in a control relationship with us), will be subject to the resale limitations of Rule 144 under the Securities Act. The remaining 4,566,268 shares of common stock outstanding will be "restricted securities" as defined in Rule 144. In addition, we have granted warrants and options to purchase 1,061,103 shares of common stock. Sales of significant amounts of our common stock outstanding prior to this offering, or the perception that such sales could occur, could have an adverse impact on the market price of the common stock.

In general, under Rule 144 as currently in effect, if a period of at least one year has elapsed after the later of the date on which "restricted" shares were acquired from us or the date on which they were acquired from an "affiliate," then the holder of these shares, including an affiliate, is entitled to sell a number of shares within any three-month period that does not exceed the greater of:

35


Sales under Rule 144 are also subject to requirements pertaining to the manner of such sales, notices of such sales and the availability of current public information concerning Zion. Affiliates may sell shares not constituting "restricted" shares in accordance with the above volume limitations and other requirements but without regard to the one-year period. Under Rule 144(k), if a period of at least two years has elapsed between the later of the date on which "restricted" shares were acquired from us and the date on which they were acquired from an affiliate, a holder of such shares who is not an affiliate at the time of the sale and has not been an affiliate for at least three months prior to the sale would be entitled to sell the shares immediately without regard to the volume limitations and other conditions described above. This description of Rule 144 is not intended to be a complete description thereof.

 

INTEREST OF NAMED EXPERTS AND COUNSEL

No named expert or counsel was hired on a contingent basis or will receive any direct or indirect interest in Zion in connection with this offering. No named expert or counsel has ever been a promoter, underwriter, voting trustee, director, officer or employee of Zion.

 

BUSINESS AND PROPERTIES

We explore for oil and gas in Israel. Our principal assets are petroleum rights issued by the Ministry of National Infrastructures of the State of Israel, specifically an exploration license covering 387,700 Israeli dunam (approximately 95,800 acres), entitled License No. 298/Ma'anit-Joseph. We have named the project to explore the license the "Joseph Project."

We hold 100% of the working interest in our license, which means we are responsible for 100% of the costs of exploration and production. Our net revenue interest is 87.5%, which means we would receive 87.5% of the gross proceeds from the sale of oil and gas from the license if there is any commercial production. The 12.5% we don't receive is a royalty reserved by the State of Israel. The State may take its royalty in kind. If the State elects not to take the royalty in kind, then we would pay the royalty based upon our arranging the sales, if any, of all the oil and gas. Other than its option to take its 12.5% royalty in kind, the government has no right of participation in any portion of our project. No royalty would be payable to any landowner with respect to our license area as the State owns all the mineral rights. In the event commercial production is established, we will be setting aside a royalty (or equivalent net profits interest) of 6% for charitable contributions. See "PLAN OF OPERATION AND MANAGEMENT'S DISCUSSION-Charitable Trusts." In addition, our key employee incentive plan will receive a royalty (or equivalent net profits interest) of up to 1.5%. This means our effective net revenue interest will be no less than 80%.

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Our executive offices are located at 6510 Abrams Road, Suite 300, Dallas, Texas 75231 and our telephone number is (214) 221-4610. Our office in Israel is located at 9 Yair Stern St., Herzliya, Israel 46412 and the telephone number is +972 (9) 955-2619.

Background

In 1985, during a visit to Israel, John M. Brown (our founder and CEO) became inspired and dedicated to finding oil and gas in Israel, and he started the process that led to the Joseph Project. During the next fourteen years he made several trips each year to Israel, hired oil and gas consultants in Israel and Texas, met with Israeli government officials, made direct investments with local exploration companies, and assisted Israeli exploration companies in raising money for oil and gas exploration in Israel. This activity led Mr. Brown to form Zion Oil and Gas, Inc. in April 2000 in order to receive the award of a small onshore petroleum license from the Israeli government. Mr. Brown and 25 different persons who had assisted him during the fourteen-year period started Zion with an initial cash contribution of $2,400, for which they received 2,400,000 shares of common stock at the price of 1/10 of one cent per share. Upon its formation, Mr. Brown and the others contributed to Zion all of the technical, economic, legal and financial data they had accumulated over the years relating to oil and gas exploration in Israel. For accounting purposes, no monetary value was attached to the data and we are unable to provide you with any estimate of its cost of acquisition or current market or replacement value, if any.

Upon the award of our first petroleum right (the License No. 298/Ma'anit, which is referred to as the "Ma'anit License") in May 2000, the Israeli government gave us access to most of its data with respect to previous exploration in the area, including geologic reports, seismic records and profiles, drilling reports, well files, gravity surveys, geochemical surveys and regional maps. We also gathered information concerning prior and ongoing geological, geophysical and drilling activity relevant to our planned activities from a variety of other publicly accessible sources. The map on the inside cover of this prospectus shows the outline of our current Ma'anit-Joseph License. It also shows the location of the approximately 500 kilometers of seismic lines and relative locations of eight mid-range (to 7,500 feet) and deep (to 21,000 feet) wells in our immediate area. The Israeli government conducted most of the seismic surveys itself during the 1970's and 1980's in order to provide data to encourage oil companies to invest in exploratory drilling. Private and public Israeli, American and international companies conducted additional seismic survey and drilled most of the eight wells in the period since 1980. Our best estimate of the cost of the exploration activities in our license area to date (in actual dollars spent at the time) is shown in the table below. Most of the numbers are from sources that we consider verifiable, including reports to the Israeli government, press releases, filings with the Tel Aviv Stock Exchange and personal involvement of some of our officers. Some numbers we estimated based upon the scope of the completed work. The operator to the south of us (Givot Olam) has the right to keep its data confidential while its petroleum rights are in force, so our information about the three Meged wells drilled by Givot Olam comes primarily from Givot Olam's prospectuses, reports to and filings with the Israeli Securities Authority and the Tel Aviv Stock Exchange, as well as information published over the course of its operations on its website.

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Year

Company

Activity

Amount ($)

Notes

1975-80

Israeli Government

Gravity Studies

750,000

1

1978

Weeks Exploration

Area Geology

40,000

2

1980

Superior Oil

Basin Analysis

50,000

2

1977-82

Israeli Government

Seismic

2,500,000

3

1977-2002

Academic Groups

Various Technical Studies

200,000

2

1978-84

Energy Exploration

Drilled Asher-Atlit Well

25,000,000

4

1979-81

OEIL- Naphtha

Drilled Ga'ash Well

6,500,000

5

1983-85

OEIL

Basin Analysis

100,000

2

1993-2000

Givot Olam

Seismic, G&G, G&A

3,000,000

6

1993-4

Givot Olam

Drilled Meged #2 Well

9,200,000

6

1993-5

Modi'in Ltd. Partnership

Drilled David Well

17,800,000

7

1994

Sedot Neft

Drilled Ma'anit Well

5,000,000

8

1999

Givot Olam

Test Meged #2 Well

1,140,000

6

2000

Givot Olam

Drilled Meged #3 Well

7,010,000

6

2002-3

Givot Olam

Drilled Meged #4 Well

6,050,000

9

2000-3

Zion Oil & Gas, Inc.

Seismic, G&G, G&A

1,170,000

10

1975-2003

Totals

85,510,000

Notes:

  1. Engineering estimate by us, based upon approximately 1,000 square kilometers of gravity survey at an average price of $750 per square kilometer.
  2. Estimate by our executive vice-president based upon his personal experience and knowledge of costs of similar studies in the international petroleum industry, cost adjusted to the period in question.
  3. Engineering estimate by us, based upon approximately 500 kilometers of seismic lines upon and around our project area at an average acquisition and processing cost of $5,000 per kilometer, the average cost that Dr. Kashai and Elisha Roih observed for onshore seismic data acquisition in their companies at that time. Please note that we are counting only lines that we used in our analysis and not the additional 500 kilometers of lines that were used in our area to designate drilling locations for the other wells near our license.
  4. Oral report to us by Jack Sherman, the well site geologist on location at the time the well was being drilled. Mr. Sherman assisted Mr. Brown in his early investigation of oil and gas opportunities in Israel and served as our senior consulting geologist until his death in 2003. Oral confirmation by the general manager of the operator (Andy Sorrels) to Mr. Brown.
  5. Engineering estimate by us of the cost at the time for the drilling and testing of an 18,000-foot well in Israel that encountered no major problems during drilling.
  6. Prospectuses in Hebrew filed by Givot Olam with the Israeli Securities Authority in 1993, 1997, 1998, 1999, and 2003, and on file at the Tel Aviv Stock Exchange.
  7. Prospectus in Hebrew filed by Modi'in Ltd. Partnership with the Israeli Securities Authority in January 1996 and annual report for 1997, both on file at the Tel Aviv Stock Exchange.
  8. Prospectus in Hebrew filed by Sedot Neft with the Israeli Securities Authority in November 1993 and on file at the Tel Aviv Stock Exchange; joint venture agreement signed in February 1999 between Sedot Neft and a predecessor of Zion.
  9. Givot Olam 2002 annual report and March 31, and June 30, 2003 quarterly reports, all on file at the Tel Aviv Stock Exchange.
  10. Invoices and accounting records in our files.

38


Properties

Our properties consist of petroleum rights, seismic data and computer analyses acquired as follows:

Effective May 1, 2000 the Israeli government awarded us the three-year 28,800-acre "Ma'anit License" (#298) to conduct petroleum exploration activities (the dark shaded area in the center of the map shown on the following page).

39


 

To maintain the Ma'anit-Joseph License in good standing, the license's work program requires that we sign a drilling contract to drill a well to a depth of at least 4,000 meters by April 1, 2004 and commence a well to that depth by July 1, 2004. Reentry and deepening an existing well bore is considered to comply with the requirement. The dates are subject to extension for good cause by the Petroleum Commissioner through April 30, 2005. Compliance with the work program will entitle us to an

40


extension of the license by an additional two years, through April 30, 2007, subject to a new work program to be agreed upon. Declaration of a commercial discovery prior to the end of the license term, as may be extended, will entitle us to receive a 30-year lease (extendable on certain conditions for an additional 20 years) subject to compliance with a field development work program and production.

We intend to apply for a preliminary permit to conduct exploration activities on areas north and/or south of the license area in order to continue our exploration of the exploratory trend we
have developed under the Ma'anit License and Joseph Permit areas. If we receive such a permit, we will be subject to a monthly permit fee in the amount of approximately $1.00 per each 250 acres under permit.

We lease approximately 3,600 square feet of office space in Dallas under a lease which expires October 31, 2008, but which may be terminated at the end of three years with an early termination payment. The monthly rent is $4,104, $4,104, $4,104, $4,262 and $4,262 for each of the twelve-month periods ending October 31, 2004, 2005, 2006, 2007 and 2008 respectively, less any sublease payments received. Currently approximately 1,750 square feet (and access to the common areas) are subleased month-to-month for payments of $2,300 per month.

We also have use of office space in Herzliya on month-to-month terms in return for payments of approximately $400 per month. The space is owned by one of our officers.

Israel's Petroleum Law

Our business in Israel is subject to regulation by the State of Israel pursuant to the Petroleum Law, 5712-1952. The administration and implementation of the Petroleum Law is vested in the Minister of National Infrastructures (the "Minister"), the Petroleum Commissioner (the "Petroleum Commissioner") and an advisory commission (the "Petroleum Commission"). The following discussion includes brief statements of certain provisions of the Petroleum Law in effect at the date of this prospectus.

Petroleum resources are owned by the State of Israel, regardless of whether they are located on state lands or the offshore continental shelf. No person is allowed to explore or produce petroleum without being granted a specific right under the Petroleum Law. The law provides for three types of rights, two relevant to the exploration stage and the third for production.

Preliminary permit. The most basic right is the preliminary permit, which may be granted for a period not exceeding 18 months. The permit allows the prospector to conduct preliminary investigations, such as field geology, airborne magnetometer surveys and seismic data acquisition, but does not allow test drilling. The holder of a preliminary permit is entitled to request a priority right on the permit area, which, if granted, prevents an award of petroleum rights on the permit area to any other party. There are no restrictions as to size of the permit area or to the number of permits that may be held by one prospector. However, Israeli policy is to award an area no larger than that for which the applicant has a reasonable plan of operation and has shown evidence of the necessary financial resources to execute the plan.

41


License. The next level of petroleum right is the "license", bestowing an exclusive right for further exploration work and requiring the drilling of one or more test wells. The initial term of a license is up to three years and it may be extended for up to an additional four years. A license area may not exceed 400,000 dunams (approximately 98,843 acres). One dunam is equal to 1000 square meters (approximately .24711 of an acre). No one entity may hold more than twelve licenses or hold more than a total of four million dunam in aggregate license area.

Production lease. Upon discovery of petroleum in commercial quantities, a licensee has a statutory "right" to receive a production lease. The initial lease term is 30 years, extendable up to a maximum period of 50 years. A lease confers upon the lessee the exclusive right to explore for and produce petroleum in the lease area and requires the lessee to produce petroleum in commercial quantities (or pursue test or development drilling). The lessee is entitled to transport and market the petroleum produced, subject, however, to the right of the Government to require the lessee to supply local needs first, at market price.

Requirements and entitlements of holders of petroleum rights. The holder of a petroleum right (permit, license or lease) is required to conduct its operations with due diligence and in accordance with the accepted practice in the petroleum industry. The holder is required to submit progress and final reports; provided, however, the information disclosed in such reports remains confidential for as long as the holder owns a petroleum right on the area concerned.

The grant of a petroleum right does not automatically entitle its holder to enter upon the land to which the right applies or to carry out exploration and production work. Entry requires the consent of the private or public holders of the surface rights and of other public regulatory bodies (e.g. planning and building authorities, Nature Reserves Authority, municipal and security authorities, etc.). The holder of a petroleum right may request the Government to acquire, on its behalf, land needed for petroleum purposes. The petroleum right holder is required to obtain all other necessary approvals.

Proposed Changes in the Petroleum Law

On October 23, 2002, in conjunction with the 2003 Budget, a bill was submitted to the Israeli Knesset by the Government which, if it had been adopted, would have introduced major changes in the Petroleum Law and repealed many rights currently available to persons involved in petroleum exploration and production activities. Specifically, it proposed to change the regime pursuant to which petroleum rights were granted and held, to repeal certain rights of holders of petroleum rights to enter surface lands in order to conduct petroleum operations and receive allocations of water for drilling operations and to rescind exemptions granted to holders of petroleum rights and petroleum contractors from certain customs duties and sales and excise taxes. While this proposal was rejected in Knesset committee and was not passed in conjunction with the 2003 Budget, it may be resubmitted in the new session of the Knesset. If adopted, the effect of various of the proposed amendments could likely result in increasing our costs of conducting petroleum drilling and production operations in Israel and, in certain instances, where

42


reasonable arrangements could not be reached with holders of surface rights, might result in our inability to pursue certain operations.

The Petroleum Commissioner and staff of Ministry of National Infrastructures have also proposed a series of amendments to the Petroleum Law that are currently under study. Among the amendments proposed are: (1) repeal of the exemptions granted to holders of petroleum rights and petroleum contractors from certain customs duties, and purchase and excise taxes; (2) requiring holders of petroleum rights to post bonds to ensure the performance of work commitments and post-operations site remediation; (3) inclusion of environmental and safety

standards for petroleum exploration and production activities; (4) limitation of production leases to single geological structures rather than to geographically defined surface areas; (5) providing for forced pooling where reservoirs underlie lands subject to more than one petroleum right; (6) introduction in certain circumstances of a mandatory tender regime for the issuance of petroleum rights, including preliminary permits; (7) restriction of the term of a production lease to 25 years (currently a lease term is 30 years with a right to extend for additional periods up to a total of 50 years); (8) repeal of the automatic rights granted to holders of production leases to import, refine, export and trade in petroleum and petroleum products; (9) amendment of conditions for the granting of preliminary permits, introduction of limitations to data secrecy rights and provision for restructuring of the Petroleum Commission. It is not possible to predict whether or to what extent the proposals of the Ministry of National Infrastructures' staff will be adopted by the government and enacted into law or to what extent our operations will be affected by any or all of such amendments to the Petroleum Law as may ultimately be enacted, although it is likely that adoption of certain of the proposals would increase the costs of our operations and, in certain scenarios, may limit our ability to benefit from the entire economic life of our discoveries, if any. It should be noted that, as opposed to the defeated government initiative in the 2003 Budget legislation, the Ministry's proposal does not propose to change any of the rights of holders of Petroleum Rights to acquire necessary surface or water use rights.

Petroleum Taxation

Our activities in Israel will be subject to taxation both in Israel and in the United States. Under the U.S. Internal Revenue Code, we will be entitled to claim either a deduction or a foreign tax credit with respect to Israeli income taxes paid or incurred on our Israeli source oil and gas income. As a general rule, Zion anticipates it will be more advantageous for it to claim a credit rather than a deduction for applicable Israeli income taxes on its United States tax return. A tax treaty exists between the United States and Israel that would provide opportunity to use the tax credit. 

Exploration and development expenses. Under current Israeli tax laws, exploration and development expenses incurred by a holder of a petroleum right can, at the option of such holder, either be expensed in the year it occurs or capitalized and expensed (or amortized) over a period of years. Most of our expenses to date have been treated for Israeli income tax purposes as accumulated revenue expenses.

43


Depletion allowances. Under current Israeli tax laws, the holder of an interest in a petroleum license or lease is allowed a deduction for income tax purposes on account of the depletion of the petroleum reserve relating to such interest. This may be by way of percentage depletion or cost depletion, whichever is greater. Percentage depletion is at the rate of 27.5% of the gross income, but subject to a limit of 50% of the net income attributed to the relevant petroleum license or lease in that tax year. Cost depletion is the amount calculated by dividing the "adjusted cost" of the petroleum interest, being the cost less accrued depletion allowances to date, at the beginning of the tax year, by the number of units remaining in the estimated petroleum reservoir at the beginning of such year, and multiplying this sum by the number of units of petroleum produced from the interest and saved during the tax year.

Corporate tax. Under current Israeli tax laws, whether a company is registered in Israel or is a foreign company operating in Israel through a branch, it is subject to Israeli Companies Tax on its taxable income from Israeli sources at a flat rate of 36%.

Import duties. Insofar as similar items are not available in Israel, the Petroleum Law provides that the owner of a petroleum right may import into Israel, free of customs, purchase taxes and other import duties, all machinery, equipment, installations, fuel, structures, transport facilities etc. (apart from consumer goods and private cars) that are required for the petroleum exploration and production purposes.

Currency control. If the necessary taxes have been paid and a foreign currency source has been established for the relevant investment, foreign investors may repatriate principal and profits of investments without restriction.

Royalties on production. Under the Petroleum Law, the holder of a petroleum lease is required to pay a royalty of one-eighth in kind or cash (at the option of the Petroleum Commissioner) of the quantity of petroleum produced and saved from the leased area excluding the quantity of petroleum used by the lessee in its operations. Royalties are treated as revenue expenses.

Proposed Changes in Petroleum Taxation

On October 23, 2002, also in conjunction with the 2003 Budget, a bill was submitted to the Israeli Knesset by the Government which, if it had been adopted, would have led to a major restructuring of the Israeli system for taxing oil and gas operations and income. Pursuant to the proposal, the applicable taxes would have been imposed in accordance with rules to have been established by the Minister of Finance and would have been deductible against the Companies Tax. While this proposal was rejected in Knesset committee and was not passed in conjunction with the 2003 Budget, it may be resubmitted in the new session of the Knesset.

An alternative initiative to amend the fiscal regime applicable to oil and gas operations has been proposed by the Ministry of National Infrastructures and is currently under study. Under this proposal, the current royalty-based system would be replaced by a Petroleum Revenue Tax regime in which tax rates for on-shore production would vary between 0 - 30% (up to 75% for certain off-shore production), following recapture of costs, depending on the size of the

44


discovery. It is the position of the Ministry of National Infrastructures that any new fiscal regime should not apply to holders of outstanding exploration licenses and production leases and that such holders be governed by the existing fiscal regime ("grandfather rights"). The staffs of the Israeli Finance and Justice Ministries have taken issue with the Ministry of National Infrastructures on this point. Zion does not know and cannot predict how this dispute will be resolved or, if "grandfathered" status is not granted, how the courts would treat a challenge to any attempt to subject existing rights holders to the proposed new fiscal regime, which in many circumstances would result in substantially higher government takes than provided under the current regime.

Petroleum Revenue Tax regimes, as that currently proposed by the Ministry of National Infrastructures, are as a general matter not entitled to foreign tax credit for U.S. tax purposes unless specifically provided in a tax treaty between the United States and the taxing jurisdiction. The current U.S. - Israel Tax Treaty does not provide for a credit for any Israeli tax in the nature of a Petroleum Revenue Tax. Thus, if the proposal of the Ministry of National Infrastructures is adopted, and if the U.S. - Israel Tax Treaty is not amended to provide for such credits, to the extent we would be subjected to the new tax in Israel, our United States tax liability will likely be increased significantly. Moreover, if we were successful in discovering major reserves resulting in multiple payout, our tax liabilities in Israel might in certain circumstances be substantially greater than our combined royalty and Companies Tax liability in Israel under the current royalty-based regime.

The law relating to taxation of petroleum exploration and production operations and related transactions is not well developed in Israel, and many issues relating to the transactions described herein and in which we may be involved, including transactions relating to the transfer of certain interests to our Key Employee Incentive Fund and the Charitable Trusts. The Israeli tax liabilities for the Fund and Trusts have neither been reviewed by Israeli tax authorities nor been subject of judicial scrutiny. As a result, we cannot predict how the Israeli tax authorities or courts will rule in the event issues relating to our contemplated operations and transactions are presented to them.

Change in Accountants

During February 2002, our board of directors appointed Lane Gorman Trubitt, L.L.P. as our independent auditors and determined not to reappoint Harry Pevos, CPA. The change was made in contemplation of our initial public offering as we wanted to appoint independent auditors having experience with public companies and SEC reporting requirements. The opinions of Harry Pevos, CPA, on the audited financial statements since Zion's incorporation in April 2000 through December 31, 2000, did not contain an adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles. Since our incorporation, there were no disagreements with Harry Pevos, CPA, on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, nor have there been any other events that required reporting under SEC regulations.

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Employees

We currently employ six consultants and two employees. During the next twelve months, we expect to hire full-time employees and some of our consultants will change over to full-time employee status. Six additional full-time employees will also be needed. We also expect to hire several consultants for specific short-term services. None of our current employees are subject to any collective bargaining agreements and there have been no strikes. It is contemplated that in a year's time our staffing will be as follows, based upon the amounts raised in this offering:

Location

Position

No. (Minimum)    (Maximum)

Dallas, Texas USA

Administrative

3

5

 

Clerical

2

4

Tel Aviv, Israel

Administrative

1

2

 

Operations

3

4

 

Clerical

2

2

 

Consultants

3

4

We intend to establish a Key Employee Incentive Fund. At Zion's 2002 Annual Meeting, our shareholders approved the establishment of such a fund, in which 1.5% of the gross proceeds of our production would be set aside for distribution as bonuses to key employees and consultants. As currently approved by the Board of Directors, the funds would not become available for bonus distribution with respect to any single well until we have received back from production cash amounts equal to the amount of money we spent on the well. The plan is designed to attract, retain and motivate highly qualified oil and gas professionals who would have their personal financial interests aligned with ours.

Exploration Expenditures

During 2001 we spent $261,183 on direct exploration and $166,753 on general and administrative expenses in support of that exploration. During 2002 we spent $358,493 on direct exploration and $383,511 on general and administrative expenses in support of that exploration.

Environmental Legislation

There is no environmental legislation in Israel directed specifically to on-shore petroleum exploration activities. Conduct of petroleum exploration and drilling activities in compliance with "good oil field practices" will as a general matter meet the requirements of Israeli law regarding petroleum exploration activities. We intend to conduct all activities in compliance with "good oil field practices" and our proposed budgets and authorizations for expenditures have been and will be prepared on such basis. In the circumstances, no additional costs have been budgeted for the specific purpose of complying with environmental laws.

46


Summary of Material Corporate Events

Zion Oil & Gas, Inc. was incorporated in Florida in April 2000, and we were awarded our first petroleum right in Israel in May 2000, the Ma'anit License. In January 2002, a wholly-owned subsidiary with the same name was incorporated in Delaware. The Florida corporation was merged into the Delaware corporation in July 2003, the purpose of which was solely to reincorporate from Florida to Delaware in anticipation of this offering. We believe investors, investment bankers and attorneys are generally more familiar and comfortable with Delaware corporation law than any other state. Upon the reincorporation, all the outstanding shares of common stock in the Florida corporation were converted into common stock of the Delaware corporation on a one-to-one basis and all of the outstanding shares of preferred stock in the Florida corporation were converted into common stock of the Delaware corporation at the ratio of twelve shares of common stock for each share of preferred stock.

The shareholders at the February 2002 annual meeting gave our board of directors the authority to reverse split Zion's common stock. The board of directors did not exercise that authority and it expired at the next annual meeting of Zion, held June 30, 2003. The shareholders at the 2002 annual meeting also authorized our board of directors to establish two charitable trusts, one to support charitable projects in Israel and one to support charitable projects in the United States and other countries. See "Plan of Operation and Management's Discussion-Charitable Trusts."

In May 2002 we filed an amendment to our articles of incorporation changing the par value of our common stock from $0.001 per share to $0.01 per share.

 

PLAN OF OPERATION AND MANAGEMENT'S DISCUSSION

We intend to comply with the work program required by the license and either re-enter and deepen the existing Ma'anit #1 well bore (or drill an exploration test well) to a minimum depth of 4,000 meters (13,123 ft.). The well must be re-entered or started no later than July 1, 2004.

If the first well is commercially productive, we will install oil and gas separation facilities and storage tanks and initiate sales of oil. During 2005 and again in 2006, we intend to drill a second and third exploratory, development or step-out well to approximately 5,000 meters each. The results of those wells, when combined with the results of the first well, will dictate the future development of any oil and gas field that might be discovered.

In re-entering and deepening the Ma'anit # 1 and drilling additional exploratory wells, we intend to use oil industry service companies, as is the common practice in the industry. The service companies include drilling contractors, wireline evaluation services, engineering services, mud and chemical services, rock bit companies, and oil field tubular suppliers.

Land in Israel may be privately owned or owned by the State of Israel. The right to enter upon and use the surface of the land (the "surface rights") originate from the owner, but may be leased out long term for many different purposes including residential, industrial, commercial,

47


agricultural, pastoral, recreational, etc. All minerals lying under the land are owned by the State of Israel and administered by the government through the Ministry of National Infrastructures. The holder of the surface rights can charge an oil and gas company, such as us, a fee or rental to enter upon the land in order conduct exploratory drilling and production activities. The basis for negotiation of the fee is typically the market value of the rights to enter and use the lands for the required period of use. If the holder of surface rights refuses to lease the rights on reasonable terms, so that the oil and gas company is prohibited from conducting its exploration and production activities in an economically feasible manner, the oil and gas company has the right to demand that the Israeli government exercise eminent domain to acquire the required surface rights and lease them to the oil and gas company. If the government is required to exercise its right of eminent domain, all costs incurred by the government in acquiring the rights are borne by the oil and gas company.

Givot Olam Oil Exploration L.P., a publicly traded limited partnership listed on the Tel Aviv Stock Exchange, holds an exploration license just south of our Ma'anit-Joseph License. They have just drilled a well about 15 kilometers southeast of our proposed Joseph Reef location. The well was initially drilled to a depth of 4,680 meters (15,450 ft.) to the same Triassic-aged formation at approximately the same depth to which we intend to drill. According to announcements filed by Givot Olam with the Tel Aviv Stock Exchange, the entire target section of Triassic-aged formation through which Givot Olam drilled (some 500 meters or 1,650 ft.) was "hydrocarbon saturated," meaning that all of the rock drilled had its entire pore space filled with either oil and/or gas. Subsequently, Givot Olam deepened the well to a total depth of 4,919 meters (16,140 feet) and set casing to that depth. Well tests in the lower part of the Triassic aged formation recovered a small amount of oil (± 5 barrels) and formation water. A test in the uppermost section of the Triassic recovered 55 barrels of oil. Givot Olam did not report the actual depths of the two tests. Testing of the relevant intervals was completed in late July 2003. In an immediate report filed with the Tel-Aviv Stock Exchange on July 31, 2003, Givot Olam announced that a 20-meter zone of the Mohilla (a Triassic Age formation which we intend to drill in both the Ma'anit #1 reentry and the exploratory well intended to be drilled in the Joseph Reef) is potentially productive. Givot Olam announced that it is continuing to analyze the results of the Meged 4 tests to determine whether commercial production from the well is possible and, if so, how best to produce the well.

The source of the "hydrocarbon saturated" statement above is an Immediate Report filed by Givot Olam on April 8, 2003 with the Israel Securities Authority and the Tel-Aviv Stock Exchange (TASE). The Report is available (in Hebrew) on the Maya portal of the TASE website (www.tase.co.il). Other information concerning the results of the Meged 4 well drilling and testing are available in the Givot Olam 2002 Annual Report, dated March 11, 2003 (a copy of which is available in the TASE library) and in Immediate Reports (in Hebrew) filed by Givot Olam with the Israel Securities Authority and the TASE during 2003 on March 16, April 8, May 15, May 21, May 25, June 1, June 17, July 6, July 13, July 20, July 22, July 27, July 30, and July 31, (all posted on the Maya Portal of the TASE website.)

48


Basic Plan for Funds from Maximum Offering

Our basic plan of operation consists of the following steps, assuming we raise the maximum offering amount of $25,000,000

Approximate Cost ($)

1. Interview and hire key personnel for the pre-drilling and drilling periods.

325,000

2. Order the long lead-time items and start the permitting process to drill the well.

400,000

3. Enter into a drilling contract for a rig capable of drilling to 17,000 feet or more and acquire necessary surface rights and regulatory permits to commence drilling operations.

120,000

4. Apply for preliminary permits in areas of additional exploratory interest.

6,000

5. Re-enter the Ma'anit #1 and deepen it through two Triassic age targets, the tops of which are approximately 13,600 feet and 15,000 feet deep.

2,500,000

6. Take full hole cores or samples of the target formation during drilling for detailed laboratory analysis.

100,000

7. Using electric wireline tools investigate and evaluate the well for productivity.

100,000

8. Test the well after drilling.

100,000

9. If the cores, logs and test results indicate the presence of commercially producible oil and gas, run production casing and attempt to make the well into a commercial producer.

800,000

10. If the well is commercial, file an application with the Israeli Government to convert the license into a production lease. Upon approval, install separation facilities, tanks and gathering pipelines. Begin sales of oil and gas (see "Marketing" below).

300,000

11. Use all the data from the well to recalibrate and revise the computer studies and develop a reservoir simulation model.

300,000

12. If the well data does not significantly alter the prior interpretations, then proceed to step 14; otherwise go to step 13.

0

13. If the prior interpretations are significantly altered, then conduct new geological and geophysical reviews to obtain a better understanding of the area in light of the new data. Decide whether or not to move to a new area or drill in a different location in the same area. If the decision is made to abandon the license area, then move to the new permit area or somewhere else in Israel and begin the exploration process all over again.

300,000

14. Prepare the Joseph Reef location for drilling.

100,000

15. Acquire the necessary surface rights and apply for the relevant drilling permits.

20,000

16. Move in the drilling rig and drill through a Triassic Age target at approximately 14,000 feet.

4,680,000

17. Repeat steps 6-12.

1,700,000

18. Select a third location on the license based on the information from the first two wells.

0

Repeat steps 14-16.

6,800,000

49


 

Total Expenditures

18,651,000

 

At any time during any of the preceding steps, we might enter into negotiations to sell a portion of the Joseph Project (and our petroleum rights and prospect data) in order to spread our risk, conserve our capital and obtain co-owners with technical capability and local knowledge to supplement our efforts. There is no assurance that we will be able to attract any parties to join us.

You may wish to compare the table above with the "Use of Proceeds" table on page 14. You will note that items 1-9 above closely correlate with the case of raising the minimum amount. If we raise the maximum amount, all of the items above closely correlate with the second column of the "Use of Proceeds."

Minimum Offering Plan Modifications

If we only raise the minimum of $6,000,000 and we are unable to attract additional participants in the Joseph Project, we will only be able complete steps 1-8 before we no longer have sufficient funds to proceed. Our ability to take any subsequent steps would depend upon the result of coring, logging and testing of the well. (Logging of a well is the process of lowering different tools on a wireline to measure the physical, electrical, and radiation characteristics of the wellbore and the rock formations in the immediate vicinity of the wellbore.) If the results of our efforts are not encouraging, there is no assurance we would be able to raise enough money to maintain our license. In this case you would lose your investment.

If the first well is productive, then we plan to use the information to raise additional money to attempt to complete it as a producer and drill additional wells. There can be no assurance that we will be successful in such endeavors.

Marketing

If any of the exploratory wells are commercially productive, we will install oil and gas separation facilities and storage tanks. Initially, oil from the license area will be transported by truck to the oil refinery located near Haifa, a distance of approximately 40 kilometers. Under the terms of the Petroleum Law, we may be required by the Minister of National Infrastructures to first offer any oil and gas discovered to Israeli domestic purchasers at market prices. Our long-range plans include laying a 6-kilometer oil pipeline to join an existing crude oil transfer line between the refinery in Haifa and the refinery in Ashdod, Israel. We would sell gas initially to a local manufacturing plant located within 200 meters of the Ma'anit # 1 location. Long-range plans

include connecting the separation facility to a countrywide gas transportation line, now in final planning stages.

We believe we can sell any of the liquid hydrocarbons in Israel at prices commonly received in the Mediterranean basin. Those prices, net to the wellhead, are expected to approximate Israeli market prices, plus or minus allowances for quality.

50


At the present time, Israel can absorb any discovery of oil, condensate or gas liquids. The total energy and petrochemicals consumption of Israel in 2002 was estimated by Israeli government sources to be the equivalent of 132 million barrels of oil, 25% of which is for electric power generation. This leaves approximately 100 million barrels per year of demand for liquid hydrocarbons if all the electric power generation is from coal and the offshore gas discoveries. Even a giant oil field discovery (of which there can be no assurance) would have a project life of almost 50 years and would not result in maximum production in any single year in excess of 100 million barrels. At this time there is almost no competition for locally produced oil. Only one oil field is currently producing in Israel and it is near the end of its economic life with daily production of about 70 barrels of oil.

The current Israeli market for natural gas is in its infancy. There is now only a limited market in several regions of the country. The government is encouraging the power and industrial sectors to convert to gas energy and, jointly with the private sector, is in the final stages of planning and commencing the development of a natural gas pipeline infrastructure intended to connect the newly discovered off-shore gas fields and Egyptian sources to the potential market in Israel. We believe that the electrical generating sector (which is building combined cycle, gas-fired generating units), together with the industrial, commercial and future residential sectors when developed, should be able to absorb any gas discovery within a reasonable period.

The only contract signed for the supply and sale of natural gas in Israel is between the offshore gas producer/supplier Yam Tethys and the Israeli Electric Company ("IEC"). Pricing terms of the contract have not been released, other than that the price is tied to the weighted average price of a basket of fuels. It has been estimated that initial deliveries will commence in the third quarter of 2003. We believe we will be able to sell our natural gas, if any, to IEC at a commercial price estimated to average $2.40 per million British Thermal Unit ("BTU") under a standard industry contract. There is no assurance that we will be able to sell any gas we may discover in a timely manner or at the price we suggest.

Since the market for crude oil is currently limited in Israel to Oil Refineries, Ltd. ("ORL"), no special marketing strategy will be employed. If we are successful in our exploration effort, we are confident that we will enter into a long-term sales agreement with ORL, as the relationship will be beneficial to both parties. ORL will benefit from not having to rely upon imported oil purchased primarily at spot oil prices and we expect to enter into a long-term contract for the sale of our oil fixed to an agreed upon index as is normal practice in the oil industry. If we cannot reach agreement with ORL, we will have the option of exporting the crude oil. In this case, we would seek to enter into a long-term contract with an oil trading/shipping company.

Charitable Trusts

If we are successful in finding commercial quantities of oil and gas in Israel, we intend to donate a portion of our gross revenues to charities in Israel, the United States and elsewhere in the world. The donations will be made through entities we are in the process of establishing. These entities have not been as yet fully defined. For description purposes we call them charitable trusts, but

51


they may be tax-exempt corporations, foundations, associations or some other form of charitable entity. Independent of the form of organization, our board of directors has established the following parameters.

  1. There will be two separate and distinct organizations, one to be established in Israel and one in the United States, or such other jurisdictions as may be determined by Zion's board. Each of the organizations will have its own board of directors (or board of trustees) consisting of up to nine members each, a majority of which shall not be any of our officers, directors or shareholders owning more that 1% of Zion.
  2. At least two-thirds of the Israeli board will be resident citizens of Israel. Our founder, John Brown, will serve as the initial chairman.
  3. At least two-thirds of the other board will be resident citizens of the United States. John Brown will serve as the initial chairman of the board.
  4. The two entities will be set up with the objective that to the extent possible our donations to them will be tax deductible under both Israel and U.S. tax law.
  5. We will assign to each of the two entities an after payout overriding royalty of 3% (or equivalent net profits interest) in the Joseph Project petroleum rights and any other petroleum rights that we acquire in Israel. This means that 6% of the gross proceeds of oil and gas production would go to the two entities for charitable purposes, 3% to be used for charitable activities in Israel by one entity and 3% to be used for such purposes in the United States and internationally by the other.
  6. The funds to be distributed by the two entities may only be given to charities that meet the qualification of section 501(c) (3) of the United States Internal Revenue Code or the equivalent section of the Israel Income Tax Code.
  7. If we are unsuccessful in our exploration efforts, no funds will be available for donation.
  8. The general application of the funds will be to support projects for the restoration of the land and people of Israel and social and educational and rehabilitative projects in the United States and internationally. Our board will establish more specific guidelines at the time the entities are formed.

We plan to form these entities after the close of this offering, but before the first well reaches its anticipated target depth.

Our shareholders, in a resolution passed at the 2002 annual meeting, approved the concept in principle, as well as the specific sources of funds for the donations.

Milestones for the Plan of Operations

We have not been profitable since inception. We therefore list below in chronological order the events that in our opinion must or should occur or the milestones which in our opinion we must or should reach in order to become profitable.

52


Event or
Milestone

Expected manner of
occurrence or method
of achievement

Date or number of months
after receipt of proceeds
when should be accomplished

The re-entry, drilling, completion and testing of the Ma'anit #1 exploratory well on the license

The Ma'anit #1 is the first well of the exploration phase of Zion and is expected to be drilled by the Israeli drilling contractor, Lapidoth.

The work should be initiated within 3 months of the receipt of sufficient funds from this offering and completed 4 months after initiation.

If Ma'anit #1 is commercial, we would have to contract for and make the first sales of oil and/or gas

Contracts with Israeli purchasers

One year following the receipt of funds from this offering

The drilling and completion of the second well on the license

The location will be determined following the completion of the Ma'anit #1, and the well will most likely be drilled by Lapidoth based upon rig availability

One year to 16 months following the receipt of sufficient funds from this offering or otherwise, based upon rig availability

Initiation of sales from the second well, if it is successful

Addenda to the contracts with Israeli purchasers

16 to 20 months following the receipt of funds from this offering

Consequences of Delay

In the following paragraphs we set forth the probable consequences to us of delays in achieving each of the events or milestones within the above time schedule, and particularly the effect of any delays upon our liquidity in view of the then anticipated level of operating costs.

If this offering only raises the minimum amount, we will seek joint venture partners to participate in the drilling and completion (if needed) of the first well and the drilling of remaining wells. The partner would be required to take a sufficiently high interest to make up the difference in the amount of funds available and the cost of drilling the first well or the first and second wells. If the joint venture participation exceeds 50%, we may not be able to remain operator of the project, which means we would not necessarily control the timing of the project. We cannot assure you that we would be able to bring in joint venture partners in time to meet our work program obligations or, if we found the partners in time, that the terms and conditions of their participation would be favorable to us.

In the event that we are forced to "sell down" our interest in the project by bringing in a joint venture participant, the overall return to Zion would be reduced. However, a reduced interest would not mean that we would not be profitable. We would expend fewer funds due to our reduced interest and the promotion that a joint venture participant would pay. We therefore could become profitable sooner in this scenario, although our gross returns would be less.

In the event that the first wells are non-commercial, we would not become profitable until such time as we raised additional funds and drilled at least one successful commercial well. It is possible that all of our funds will be spent on unsuccessful wells, and we never become profitable.

After reviewing the nature and timing of each event or milestone, potential investors should reflect upon whether achievement of each within the estimated time frame is realistic and should assess the consequences of delays or failure in making an investment decision. A potential

53


investor should recognize that oil and gas exploration is risky and should not invest any more money in purchasing our common stock than he or she could afford to completely lose in the event of unsuccessful drilling.

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Some of the statements under "Prospectus Summary," "Risk Factors," " Plan of Operation and Management's Discussion," "Business and Properties," and elsewhere in this prospectus constitute forward-looking statements. These statements relate to future events or our future financial performance. In come cases, you can identify forward-looking statements by terminology such as "may," "should," "expects," "plans," "anticipates," "believes," "intends," "estimates," "predicts," "potential" or "continue" or the negative of such terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially. In evaluating these statements, you should specifically consider various factors, including the risks outlined under "Risk Factors." These factors may cause our actual results to differ materially from any forward-looking statement.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy or completeness of these statements. We are under no duty to update any of the forward-looking statements after the date of this prospectus to conform these statements to actual results.

 

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

During the past two years there have been no material transactions between Zion and any of our directors, officers, candidates for director, or shareholders, except as described in the following paragraphs.

John M. Brown may be deemed the promoter of Zion. Upon the formation of Zion, Mr. Brown purchased 520,000 shares of common stock at the price of 1/10 cent per share, which was the price at which 1,880,000 other shares were sold to 25 other people, including 100,000 shares to his wife and 50,000 shares to his son. At the same time Mr. Brown extended a $50,000 line of credit to Zion against which we initially borrowed approximately $25,000 to make our first license fee payment to the Israeli government and a down payment for our first seismic survey. The loan bore an interest rate of 7% per annum and we eventually borrowed to the maximum amount. During 2001, we repaid the outstanding $50,000 principal amount of the loan by delivering to Mr. Brown 50,000 shares of common stock and warrants to purchase 33,333 shares of common stock at the exercise price of $1.00 per share, in accordance with the same terms and conditions as the shares of common stock and warrants were being sold to unrelated third parties in private transactions during 2001. Mr. Brown waived the interest.

During 2002, Mr. Brown entered into a new loan agreement with Zion at a 7% interest rate and advanced $50,000 to us under the loan agreement. At the end of the year, Mr. Brown

54


participated in our private placement of Series A Convertible Preferred Stock and received 5,000 shares of the preferred stock and warrants to purchase 25,000 shares of common stock at $1.50 per share in exchange for cancellation of our $50,000 indebtedness. The exchange was made under the same terms and conditions as the sale at the same time by us to unrelated third parties of our preferred stock and $1.50 warrants. Mr. Brown waived the interest.

During the year 2000, M&B Concrete Construction, Inc. and M&B Concrete, Inc. (collectively, "M&B"), companies in which John Brown, our chairman and chief executive officer, is a director and principal shareholder, provided a "financial comfort letter" to the Israeli Petroleum Commissioner in connection with our application for our first license. M&B received no direct compensation for the letter, but the three shareholders of M&B, John Brown, his son Mark Brown, and Robert Jarvis, all participated in the initial purchase of shares of our common stock at the price of $0.001 per share. In October 2002, in connection with our application to consolidate our petroleum rights into a single license and extend its term, M&B provided the Petroleum Commissioner with a renewal and extension of the comfort letter for which we agreed to pay a fee to M&B of 50,000 shares of common stock and warrants to purchase 25,000 shares of common stock at $1.50 per share until December 31, 2004, which securities in the aggregate were valued at $50,000. M&B directed that the preferred stock and warrants be issued in equal amounts to Mark Brown and Robert Jarvis.

In July 2000, Zion entered into a financial advisory and services agreement with Ralph DeVore, before he was elected a director, whereby Mr. DeVore assisted us in a number of areas, including business structuring, investor relations, introductions to investment bankers and investors, and other related financial services. On December 31, 2000, Mr. DeVore was awarded a warrant (as provided in the agreement) giving him the right to purchase 80,000 shares of our common stock at $0.20 per share until December 31, 2004. In February 2001, the agreement was modified and extended through June 30, 2001. Mr. DeVore was elected a director in June 2001. In August 2001 the agreement was extended through September 30, 2001 and Mr. DeVore was awarded another warrant, this one (as provided in the agreement) giving him the right to purchase 40,000 shares of our common stock at $0.20 per share until December 31, 2004. As the 120,000 shares, upon purchase, would be restricted shares and there was no public market, the awards were valued at $0. Following the expiration of the agreement, Mr. DeVore continued to provide financial advisory services on an as needed basis. In 2002, for financial services rendered, he was paid $2,500 in the form of 2,500 shares of common stock and a warrant to purchase 1,250 shares for $1.50 per share until December 31, 2004. In 2003, for financial services rendered, he was paid $24,000, which he used to exercise his warrants to purchase 120,000 shares for $0.20 per share. For services as a director, Mr. DeVore has been compensated at the rate of $1,000 per month since January 2002.

In early 2002, Zion borrowed $50,590 under a loan facility with Cimarron Resources, Inc, which is owned by Eugene Soltero, the president of Zion. Cimarron obtained the monies to lend to Zion through a loan facility with Bank One. The interest charged to us is the Cimarron's interest cost which accrues at Bank One's prime rate (4.25% at December 31, 2002) plus 2.5%. The note is due on the earlier of (a) 30 days following the closing of an initial public offering by Zion; (b) the determination by the Board of Directors of Zion that Zion has raised funds in sufficient amounts

55


to enable Zion to conduct operations prior to the closing of an initial public offering without need for recourse to the loan facility; or (c) the date the principal amount of the monies advanced to Cimarron under the Bank One facility is due. The Cimarron note with Bank One is a demand note and may be called at any time. Mr. Soltero may convert any outstanding balance due under the note into shares of our common stock at the conversion price of $1.00 per share.

In February 2003, the Board of Directors voted to accept an offer by Ms. Irith Rappaport, a shareholder of Zion, to advance the sum of up to $100,000 to cover certain obligations of Zion relating to this offering, subject to the payment of a commitment fee in the form of 1,000 shares of preferred stock and a warrant (to purchase 5,000 shares of common stock at $1.50 per share until December 31, 2004) of Zion valued at $10,000, to her or her designees. This loan bears interest at the rate of 10% per annum and must be repaid at the earliest of (a) the closing of the minimum offering, (b) February 25, 2004, or (c) at such time or times as in the opinion of the directors of Zion, funds available to Zion so permit.

We believe that the foregoing transactions were on no less favorable terms than could have been obtained from unaffiliated third parties. Any future transactions between us and our affiliates will be approved by a majority of disinterested directors and will be on terms no less favorable to us than those which could be obtained from unrelated third parties.

Except for Elisha Roih and Dr. Eliezer Kashai, all our officers are paid (and/or payments were accrued) as consultants for providing services to Zion. The amounts they were paid are set forth in the officers compensation tables under "Executive Compensation." Portions of those amounts are also separately reflected in the notes to the audited financial statements because they were allocated to financing costs or professional fees that require special accounting treatment.

 

MARKET FOR SECURITIES

This is our initial public offering. Our common stock and warrants are not listed or traded on any stock exchange. We have applied to list our common stock on the NASDAQ Small Cap market conditional upon closing at least the minimum sale of $6,000,000. We cannot assure you that our common stock will be listed on any exchange.

EXECUTIVE COMPENSATION

Director Compensation

Directors who are not Company employees or officers receive $1,000 per month. Directors who are Company officers receive no extra compensation for service on the board

56


Executive Officer Compensation

The following table provides the compensation paid or to be paid to our executive officers, directly or indirectly, for services rendered in all capacities for the fiscal years ended December 31, 2002 and 2001 and the period from April 6, 2000 through December 31, 2000:

SUMMARY COMPENSATION TABLE

 

Long Term Compensation

 

 

Annual Compensation

Awards

Payouts

 

Name and Principle Position

Year

Salary ($)

Bonus ($)

Other Annual Compensation ($)

Restricted Stock Award(s) ($)

Securities Underlying Options/SARs (#)

LTIP Payouts ($)

All Other Compensation ($)

John Brown Chairman & CEO

2000

-

-

-

-

-

-

-

2001

7,500

-

-

-

-

-

-

2002

30,000

-

-

-

-

-

-

Eugene Soltero President & COO

2000

-

-

-

-

-

-

-

2001

25,000

-

-

-

310,000

-

-

2002

60,000

80,000

-

-

100,000

-

-

Glen Perry Executive VP

2000

10,000

-

-

-

-

-

-

2001

60,000

-

-

-

-

-

-

2002

60,000

-

-

-

-

-

-

Philip Mandelker General Counsel

2000

25,000

-

-

-

-

-

-

2001

63,750

-

-

-

-

-

-

2002

75,000

-

-

-

-

-

-

None of our executive officers receive personal benefits in addition to the basic compensation listed above. Each officer received such compensation for providing consulting services to Zion. Mr. Soltero received his compensation through his personal consulting company, Cimarron Resources, Inc. The others were directly compensated.

The following table provides information regarding options and warrants granted to our executive officers in fiscal 2002:

Option/Warrant Grants in Last Fiscal Year

Individual Grants

Name

Number of

Percent of Total

Exercise or

Expiration

Securities(1) Underlying

Options/Warrants Granted

Base Price Per

Date

Options/Warrants

to Officers and Employeed

Share

Granted

in Fiscal Year

Eugene A. Soltero

400,000(2)

89%

$0.20

12/31/2004

___________________

(1) Shares of common stock

(2) Options for 300,000 shares replaced previously issued options for 300,000 shares that were returned and

    canceled.

57


The following table provides information regarding the exercise of options during fiscal 2002 and the number of outstanding options related to the compensation of our executive officers as of December 31, 2002:

Aggregate Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values

Name

Shares Acquired on Exercise (#)

Value Realized ($)

Number of Securities Underlying Unexercised Options/SARs at FY-End (#)

Value of Unexercised In-the Money Options/SARs at FY-End ($)

 

 

Exercisable/Unexercisable

Exercisable/Unexercisable

Eugene Soltero

400,000

0(1)

10,000/0

0/0

(1) The value realized is $0 because the securities issued were restricted and there was no market for them and there was no public market available in the event the restrictions were lifted.

Mr. Soltero exercised the options referred to above to purchase 400,000 shares of common stock for $80,000 during the fiscal year 2002. There were no unexercised employment related options held by our executive officers as of December 31, 2002, except as shown above. Any options or warrants held by them were acquired in connection with their loan of funds to Zion or their purchase of equity securities from Zion under terms and conditions identical to the terms and conditions under which unrelated third parties made similar investments.

Long-Term Management Incentive Plan

In Zion's 2002 annual meeting, the shareholders approved the establishment of a long-term management incentive plan, which may be structured as an employees' royalty pool, to be funded by the equivalent of a 1.5% overriding royalty interest (after pay out of investment on a well by well basis) in the wells we drill. According to board resolutions, Mr. Brown, Mr. Soltero, Mr. Mandelker and Mr. Perry will be awarded each a 10% interest in the plan. Mr. Avery, Mr. Roih and Dr. Kashai will each be awarded a 5% interest in the plan, if, as and when the plan may be established.

Executive Employment Contracts

The Board of Directors has authorized the chairman and chief executive officer, on behalf of Zion, to enter into five-year employment agreements, effective July 1, 2003 with the executive officers set out below.

Executive Officer

2003 Annual Compensation

2004-2008 Annual Salary

John Brown

  $60,000

$120,000

Eugene Soltero

   120,000

   200,000

Glen Perry

   120,000

   200,000

Philip Mandelker(1)

   114,000

   200,000

58


(1) For such period as Mr. Mandelker is an employee of Zion. For such period that Mr. Mandelker continues to render services pursuant to a retainer agreement as outside counsel, he will be compensated on the basis of at least $9,500 per month during 2003 and $12,500 per month during 2004-8 and the law firm with which he is associated will be paid a monthly office services fee of $2,000.

Each of the agreements would be substantially in the same form (except to comply with the law of the country in which the officer is based) and are expected to contain:

Letters of intent to enter into these employment agreements have been signed by Zion and the officers and have been filed with the SEC. When the agreements are finalized, they will be filed with the SEC as well.

 

TAX CONSEQUENCES

We are not including in this prospectus a section on material federal income tax consequences for non-US investors because we have not entered into any agreements with Placement Agents outside the United States. If we do enter into any such agreements, we will file a post-effective amendment containing the names and addresses of any such Placement Agents as well as federal income tax information for non-US residents.

We are not including in this prospectus a section on material Israeli income tax consequences for US investors because the holders of our common stock will not be directly subject to any Israeli income taxes related to their holdings. All Israeli income taxes will be paid by us and either credited or expensed against any United States federal income tax liability we may incur.

 

LEGAL MATTERS

Alice A. Waters, Attorney at Law, Waxahachie, Texas, will pass on the validity of the issuance of the shares of common stock offered by this prospectus. Lowden Van Brauman LLP, Dallas, Texas, will pass on certain tax consequences of an investment in the shares.

59


EXPERTS

The audited financial statements included in this prospectus have been audited by Lane Gorman Trubitt, L.L.P., independent public accountants, as indicated in their report with respect thereto, and are included herein in reliance upon the authority of said firm as experts in accounting and auditing in giving said report.

 

WHERE YOU CAN FIND MORE INFORMATION

This prospectus is part of a registration statement we have filed with the SEC under the Securities, relating to our shares. As permitted by SEC rules, this prospectus does not contain all the information we have included in the registration statement and the accompanying exhibits and schedules we filed with the SEC. You may refer to the registration statement, exhibits and schedules for more information about us and our shares. You can read and copy the registration statement, exhibits and schedules at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You can obtain information about the operation of the SEC's Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. We will be required to file current reports, quarterly reports, annual reports, proxy statements and other information with the SEC. You may read and copy those reports, proxy statements and other information at the SEC's Public Reference Room and regional offices or through its Internet site. We intend to furnish our shareholders with annual reports that will include a description of our operations and audited consolidated financial statements certified by an independent public accounting firm.

 

 

60


 

FINANCIAL STATEMENTS

 

 

 

 

 

 

 

 

 

ZION OIL & GAS, INC.

 

FINANCIAL STATEMENTS AND REPORT

OF

INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
DECEMBER 31, 2002 AND 2001

 

 

 

 

 

 

 

 

 

 

 

 

F-1


 

 

 

 

 

 

ZION OIL & GAS, INC.

DECEMBER 31, 2002 AND 2001

CONTENTS

 

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

FINANCIAL STATEMENTS

BALANCE SHEETS

STATEMENTS OF OPERATIONS

STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

STATEMENTS OF CASH FLOWS

NOTES TO FINANCIAL STATEMENTS

 

F-2


Report of Independent Certified Public Accountants

Board of Directors and Stockholders
Zion Oil & Gas, Inc.

 

We have audited the accompanying balance sheets of Zion Oil & Gas, Inc. (a development stage company) as of December 31, 2002 and 2001, and the related statements of operations, changes in stockholders' equity, and cash flows for the each of the two years in the period ended December 31, 2002, and cumulative amounts since April 6, 2000 (inception). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we 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. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the 2002 and 2001 financial statements referred to above present fairly, in all material respects, the financial position of Zion Oil & Gas, Inc. as of December 31, 2002 and 2001, and the results of its operations and its cash flows for each of the two years then ended and cumulative amounts since inception, in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company is in its development stage and has insignificant operating revenue. In addition, the Company has limited capital resources and has initiated a new phase of activity, all of which raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also discussed in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

 

s/ Lane Gorman Trubitt L.L.P.
LANE GORMAN TRUBITT, L.L.P.

Dallas, Texas
April 14, 2003

F-3


 

ZION OIL & GAS, INC.

(A Development Stage Company)

BALANCE SHEETS

December 31,

ASSETS

2002

2001

CURRENT ASSETS

Cash and cash equivalents

$        32,136

$         47,188

Refundable value-added tax

7,109

3,724

Total current assets

39,245

50,912

UNPROVED OIL AND GAS PROPERTIES

694,535

336,042

PROPERTY AND EQUIPMENT

net of accumulated depreciation of $336 and $310

1,056

650

ASSETS HELD FOR SEVERANCE BENEFITS

2,557

1,355

Total assets

$        737,393

$         388,959

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES

Note payable to related party

$          50,590

$                   -

Accounts payable and accrued liabilities

243,219

61,561

Total current liabilities

293,809

61,561

PROVISION FOR SEVERANCE PAY, NET

3,328

4,041

STOCKHOLDERS' EQUITY

Preferred stock, par value $.01; 2,000,000 shares authorized

Series A cumulative convertible; 43,100 and 0 shares

issued and outstanding

431

-

Common stock, par value $.01 and $.0001; 20,000,000

and 10,000,000 shares authorized; 3,552,500 and

3,000,000 shares issued and outstanding

35,525

300

Additional paid-in capital

963,569

495,174

Deficit accumulated in development stage

-559,269

-172,117

Total stockholders' equity

440,256

323,357

Total liabilities and stockholders' equity

$       737,393

$          388,959

The accompanying notes are an integral part of these financial statements.

F-4


 

ZION OIL & GAS, INC.

(A Development Stage Company)

STATEMENTS OF OPERATIONS

Period from

Year Ended

Year Ended

April 6, 2000 (inception)

December 31, 2002

December 31, 2001

to December 31, 2002

SALES

$                      -

$                      -

$                       -

GENERAL AND ADMINISTRATIVE EXPENSES

            383,511

             166,753

             555,585

Net loss from operations

(383,511)

(166,753)

(555,585)

OTHER INCOME (EXPENSE)

Interest expense

             (3,641)

                     -

             (3,684)

Net loss before income tax

(387,152)

(166,753)

(559,269)

Income taxes

                     -

                     -

                      -

NET LOSS

$       (387,152)

$       (166,753)

$       (559,269)

NET LOSS PER SHARE OF COMMON STOCK -

BASIC AND DILUTED

$             (0.13)

$             (0.06)

$             (0.23)

WEIGHTED AVERAGE SHARES OUTSTANDING

- BASIC AND DILUTED

3,031,316

2,723,094

2,293,163

The accompanying notes are an integral part of these financial statements.

 

F-5


 

ZION OIL & GAS, INC.

(A Development Stage Company)

STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

Period from April 6, 2000 (inception) to December 31, 2002

Deficit

Accumulated

in

Preferred Stock

Common Stock

Additional

Development

Shares

Amount

Shares

Amount

Paid-in Capital

Stage

Total

Balances, April 6, 2000

-

$         -

-

$         -

$         -

$         -

$         -

Issued for cash ($0.001 per share)

-

-

2,400,000

240

2,160

-

2,400

Issuance of shares and warrants in a private

offering which closed in January 2001

($1 per share)

-

-

100,000

10

99,990

-

100,000

Costs associated with the issuance of shares

-

-

-

-

(22,250)

-

(22,250)

Net loss

         -

         -

        -

         -

             -

         (5,364)

         (5,364)

Balances, December 31, 2000

-

-

2,500,000

250

79,900

(5,364)

74,786

Issuance of shares and warrants in a private

offering which closed in January 2001

($1 per share)

-

-

135,000

13

134,987

-

135,000

Issuance of shares and warrants in a private

offering which closed in September 2001

($1 per share)

-

-

125,000

12

124,988

-

125,000

Payment of accounts payable through

issuance of shares and warrants

-

-

40,000

4

39,996

-

40,000

Payment of note payable through

issuance of shares and warrants

-

-

25,000

3

24,997

-

25,000

Issuance of shares and warrants in a private

offering which closed in November 2001

($1 per share)

-

-

175,000

18

174,982

-

175,000

Costs associated with the issuance of shares

-

-

-

-

(84,676)

-

(84,676)

Net loss

         -

         -

         -

         -

           -

   (166,753)

 (166,753)

Balances, December 31, 2001

-

-

3,000,000

300

495,174

(172,117)

323,357

(Continued on following page)

The accompanying notes are an integral part of these financial statements

F-6


ZION OIL & GAS, INC.

(A Development Stage Company)

STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

Period from April 6, 2000 (inception) to December 31, 2002

(Continued)

Deficit

Accumulated

in

Preferred Stock

Common Stock

Additional

Development

Shares

Amount

Shares

Amount

Paid-in Capital

Stage

Total

Change in par value of common shares

from $0.0001 per share to $0.01 per share

-

-

-

29,700

(29,700)

-

-

Issuance of shares and warrants in

a private offering which closed in

January 2002 ($1 per share)

-

-

20,000

200

19,800

-

20,000

Issuance of shares and warrants in

a private offering which closed in

November 2002 ($10 per share)

25,400

254

-

-

253,746

-

254,000

Payment of accounts payable through

issuance of shares and warrants

12,700

127

532,500

5,325

334,048

-

339,500

Payment of note payable through

issuance of shares and warrants

5,000

50

-

-

49,950

-

50,000

Costs associated with the issuance of shares

-

-

-

-

(159,449)

-

(159,449)

Net loss

         -

         -

         -

         -

               -

   (387,152)

   (387,152)

Balances, December 30, 2002

   43,100

$  431

3,552,500

$ 35,525

$   963,569

$ (559,269)

$   440,256

The accompanying notes are an integral part of these financial statements

F-7


 

ZION OIL & GAS, INC.

(A Development Stage Company)

STATEMENTS OF CASH FLOWS

Period from

April 6, 2000

Year Ended

Year Ended

(inception) to

31-Dec-02

31-Dec-01

31-Dec-02

CASH FLOWS FROM OPERATING ACTIVITIES

Net loss

$ (387,152)

$ (166,753)

$ (559,269)

Adjustments to reconcile net loss to net cash

used in operating activities

Depreciation

26

220

336

Change in assets and liabilities:

Refundable value-added tax

(3,385)

3,593

(7,109)

Accounts payable and accrued liabilities

396,387

49,203

497,948

Accrued interest

2,862

-

2,862

Severance pay

(1,915)

2,686

771

Net cash used in operating activities

6,823

(111,051)

(64,461)

CASH FLOWS FROM INVESTING ACTIVITIES

Acquisition of property and equipment

(432)

(270)

(1,392)

Investment in oil and gas properties

(358,493)

(261,183)

(694,535)

Net cash used in investing activities

(358,925)

(261,453)

(695,927)

CASH FLOWS FROM FINANCING ACTIVITIES

Loan proceeds - related party

90,550

25,000

141,428

Loan principal repayments - related party

(27,500)

(25,878)

(53,378)

Proceeds from sale of stock

274,000

410,000

786,400

Financing costs of issuing stock

-

(59,676)

(81,926)

Net cash provided by financing activities

337,050

349,446

792,524

NET INCREASE (DECREASE) IN CASH

(15,052)

(23,058)

32,136

Cash - Beginning of period

47,188

70,246

-

Cash - End of period

$       32136

$       47188

$       32136

SUPPLEMENTAL INFORMATION

Cash paid for interest

$           779

$              -

$          779

Cash paid for income taxes

-

-

-

Payment of accounts payable through

issuance of common stock

339,500

40,000

379,500

Payment of note payable through issuance

of common stock

50,000

25,000

75,000

Payment of accounts payable through

issuance of note payable

34,678

-

34,678

Financing costs paid through issuance of

common stock

-

25,000

25,000

Increase in accounts payable for

financing costs

159,449

-

159,449

The accompanying notes are an integral part of these financial statements.

F-8


Zion Oil & Gas, Inc.
NOTES TO FINANCIAL STATEMENTS

1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION

Nature of Operations

Zion Oil & Gas, Inc. (the Company), a Florida corporation, engages in the exploration and development of oil and gas reserves. The Company holds a petroleum exploration license on approximately 95,800 acres of unproved properties in north-central Israel called the "Joseph Project. The license contains portions of two petroleum rights originally issued to the Company by the state of Israel. The first, License No. 298, "Ma'anit", issued on May 1, 2000, covered an area of approximately 28,800 acres. The second, Preliminary Permit No. 176, "Joseph," with priority rights, issued on May 1, 2001, covered an area of approximately 137,250 acres. After the completion of the required geological and geophysical work on the two sites, the Company submitted a request, which was granted effective January 1, 2003, to exercise its right to convert the "Joseph" Permit into a petroleum exploration license and to merge the newly converted "Joseph" License into the "Ma'anit" License, changing its name to the "Ma'anit-Joseph License, and to extend the terms of the Ma'anit-Joseph License to April 30, 2005 (from its original termination date of April 30, 2003). In connection with the conversion and extension, the Company relinquished rights to approximately 70,200 acres. The Ma'anit- Joseph License maintains its original issue date of May 1, 2000 and contains a commitment to start the drilling or re-entry of a well before July 1, 2004. The Company holds net assets of $603,000 in Israel.

Operations in Israel are conducted through a branch office and the license is held directly in the name of the Company. The Company also owns 100% of Zion Oil & Gas, Inc. (a Delaware Corporation) into which it plans to merge in order to change its domicile from Florida to Delaware.

Basis of Presentation

The financial statements have been prepared on a going concern basis, which contemplates realization of assets and liquidation of liabilities in the ordinary course of business. Since the Company is in the development stage, it has limited capital resources, insignificant revenue, and a loss from operations. The appropriateness of using the going concern basis is dependent upon the Company's ability to obtain additional financing or equity capital and, ultimately, to achieve profitable operations. The uncertainty of these conditions raises substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Management plans to raise capital through the private placement of company stock, debt, and eventually, through public offerings. Management intends to use the proceeds from debt and/or equity sales to explore for and develop oil and gas reserves in Israel. The Company believes that these actions will enable the Company to carry out its business plan and ultimately to achieve profitable operations.

Management plans to raise capital through the private placement of company stock, debt, and eventually, through public offerings. Management intends to use the proceeds from debt and/or equity sales to explore for and develop oil and gas reserves in Israel. The Company believes that these actions will enable the Company to carry out its business plan and ultimately to achieve profitable operations.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Financial Statements in United States Dollars

The currency of the primary economic environment in which the operations of the Company are conducted is the United States dollar ("dollar"). Therefore, the Company uses the dollar as its functional and reporting currency. Certain of the dollar amounts in the financial statements may represent the dollar equivalent of other currencies, including the New Israeli Shekel ("NIS"), and may not be exchangeable for dollars.

F-9


Zion Oil & Gas, Inc.
NOTES TO FINANCIAL STATEMENTS

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Cash

The Company maintains its cash balance at three banks with one bank located in the United States and two banks located in Israel. Accounts at the bank located in the United States are insured by the Federal Deposit Insurance Corporation up to $100,000. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents.

For purposes of the statement of cash flows, the Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.

Oil and Gas Properties

The Company follows the full-cost method of accounting for oil and gas properties. Accordingly, all costs associated with acquisition, exploration and development of oil and gas reserves, including directly related overhead costs, are capitalized.

All capitalized costs of oil and gas properties, including the estimated future costs to develop proved reserves, are amortized on the unit-of-production method using estimates of proved reserves. Investments in unproved properties and major development projects are not amortized until proved reserves associated with the projects can be determined or until impairment occurs. If the results of an assessment indicate that the properties are impaired, the amount of the impairment is included in income from continuing operations before income taxes and the adjusted carrying amount of the unproved properties is amortized on the unit-of-production method. Abandonments of properties are accounted for as adjustments to capitalized costs with no loss recognized. During the years ending December 31, 2002 and 2001, no unproved property was found to be impaired.

The net capitalized costs are subject to a "ceiling test" which limits such costs to the aggregate of the estimated present value of future net revenues from proved reserves discounted at ten percent based on current economic and operating conditions, plus the lower of cost or fair market value of unproved properties.

The recoverability of amounts capitalized for oil and gas properties is dependent upon the identification of economically recoverable reserves, together with obtaining the necessary financing to exploit such reserves and the achievement of profitable operations.

Property and Equipment

Property and equipment other than oil and gas property and equipment is recorded at cost and depreciated over their estimated useful lives of five to ten years using accelerated methods. Depreciation charged to expense amounted to $26 and $220 for the years ended December 31, 2002 and 2001, respectively, and $336 for the period April 6, 2000 (inception) to December 31, 2002.

Long-Lived Assets

Long-lived assets, other than oil and gas properties, are periodically reviewed for impairment based on an assessment of future operations. The Company records impairment losses on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. Measurement of an impairment loss is based on the fair market value of the asset. Impairment for oil and gas properties is computed in the manner described above under "Oil and Gas Properties."

F-10


Zion Oil & Gas, Inc.
NOTES TO FINANCIAL STATEMENTS

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Income Taxes

Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due, if any, plus net deferred taxes related primarily to differences between the bases of assets and liabilities for financial and income tax reporting. Deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred tax assets include recognition of operating losses that are available to offset future taxable income and tax credits that are available to offset future income taxes. Valuation allowances are recognized to limit recognition of deferred tax assets where appropriate. Such allowances may be reversed when circumstances provide evidence that the deferred tax assets will more likely than not be realized.

Revenue Recognition

Revenue is accrued and recognized in the month the oil and gas is produced and sold. Reimbursement of costs from well operations is netted against the related oil and gas production expenses.

Stock-Based Compensation

Statement of Financial Accounting Standards No. 123 - Accounting for Stock-Based Compensation (SFAS 123), requires recognition of compensation expense for grants of stock, stock options, and other equity instruments based on fair value. If the grants are to employees, companies may elect to disclose only the pro forma effect of such grants on net income and earnings per share in the notes to financial statements and continue to account for the grants pursuant to APB Opinion No. 25, Accounting for Stock Issued to Employees. The Company has elected the pro forma disclosure alternative for employee grants.

Use of Estimates

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

3. PROVISION FOR SEVERANCE PAY

Under Israeli law and labor agreements, an Israeli employer is required to make severance payments to its dismissed Israeli employees who leave its employment under certain circumstances.

  1. The liability in respect of certain of the company's employees is discharged in part by participating in a defined contribution pension plan and making regular deposits with recognized pension funds. The deposits are based on certain components of the salaries of the said employees. The custody and management of the amounts so deposited are independent of the company's control and accordingly such amounts funded (included in expenses on a accrual basis) and related liabilities are not reflected in the balance sheet.
  2. Part of the liability is discharged by deposits made with severance pay funds.
  3. The liability for severance pay is calculated on the basis of the latest salary paid to each employee multiplied by the number of years of employment. The liability is covered by the amounts deposited including accumulated income thereon as well as by the unfunded provision.
  4. The income (expenses) in respect of severance pay for the year ended December 31, 2002 and 2001 and the period from april 6, 2000 to December 31, 2002 amounted to $(1,915), $2,686 and $771 respectively.
  5. Withdrawals from the funds may be made only upon termination of employment.
  6. The Company's liability for termination of the employer-employee relationship is composed as follows:

 

December 31, 2002

December 31, 2001

Provision for severance pay

$3,328

$4,041

Amounts funded including accumulated income

2,557

1,355

 

$ 771

$2,686

F-11


Zion Oil & Gas, Inc.
NOTES TO FINANCIAL STATEMENTS

4. STOCKHOLDERS' EQUITY

The Company has reserved 890,333 shares of common stock as of December 31, 2002 for the exercise of warrants. 165,000 warrants are exercisable at a price of $0.20 per share until December 31, 2004. 325,833 warrants are exercisable at a price of $1.00 per share until December 31, 2004. 399,500 warrants are exercisable at a price of $1.50 per share until the earlier of December 31, 2004 or the earliest exercise date of any warrant issued in connection with a public or private placement of equity securities of the Company of an amount of not less than $5,000,000.

During 2001, the Board of Directors granted options to purchase 300,000 shares of common stock at $1 per share to the president and chief operating officer of the Company, with options for 150,000 shares vesting on July 31, 2002 and expiring December 31, 2004 and options for the remaining 150,000 shares vesting on July 31, 2003 and expiring on December 31, 2005. Upon the extension of the term of employment for an additional twelve months, through July 31, 2004, options to purchase an additional 100,000 shares at $1 per share were to be granted, vesting on July 31, 2004 and expiring on December 31, 2006.

The following table summarizes the option and warrant activity for the periods ended December 31, 2002 and 2001:

Number

Average Weighted

of Shares

Exercise Price

Outstanding, January 1, 2001

50,000

$                      1.00

Granted to:

   Employees, officers and directors

521,416

0.82

   Others

261,917

1.17

   Expired/canceled

-

-

   Exercised

                           -

                           -

Outstanding, December 31, 2001

833,333

0.94

Granted to:

   Employees, officers and directors

521,750

0.39

   Others

235,250

1.5

   Expired/canceled

(300,000)

1

   Exercised

               (400,000)

0.2

Outstanding, December 31, 2002

                  890,333

1.08

If not previously exercised, warrants and options outstanding at December 31, 2002 will expire as follows:

Weighted Average

Year Ending December 31,

Number of Shares

Exercise Price

2003

-

$                  -   

2004

                890,333

1.08

Total

                890,333

  

F-12



Zion Oil & Gas, Inc.
NOTES TO FINANCIAL STATEMENTS

4. STOCKHOLDERS' EQUITY (CONTINUED)

Pro Forma Stock-Based Compensation Disclosures

The Company applies APB No. Opinion 25 and related interpretations in accounting for its stock options and warrants which are granted to employees. Accordingly, compensation cost has not been recognized for grants of options and warrants to employees and directors unless the exercise prices were less than the fair value of the Company's common stock on the grant dates. Had compensation cost been determined based on the fair value at the grant dates for awards under those plans consistent with the method of SFAS 123, the Company's net loss would have been changed to the pro forma amounts indicated below. The fair values generated by the Minimum Value model may not be indicative of the future benefit, if any, that may be received by the option or warrant holder.

 

Year Ended

Year Ended

Period April 6, 2000

December 31, 2002

December 31, 2001

(inception) to December 31, 2002

Net loss:

   As reported

$     (387,152)

$        (166,753)

$                     (559,269)

   Pro forma

$     (387,152)

$        (166,753)

$                     (559,269)

The fair value of each option granted was estimated on the date of grant using the Minimum Value option-pricing model with the following assumptions:

Risk-free interest rate

2.00%

Expected dividends

-

Expected terms (in years)

3.0

The Board of Directors of the Company has the authority to issue up to 2,000,000 shares of preferred stock in one or more series and to establish the voting powers, designations, preferences, participation in dividends, optional or other special rights, and qualifications, limitations or restrictions of each series of preferred stock issued.

At December 31, 2002, 43,100 shares of Series A cumulative, convertible preferred shares are issued and outstanding. Each share of the Series A preferred stock is convertible at any time into ten shares of the Company's common stock, or in connection with a subsequent public placement of securities of the Company in an amount of not less than $5,000,000 in gross proceeds, into the greater of (i) ten shares of common stock; or (ii) the number of shares of common stock which would equal $30 when multiplied by the issuing price of the public placement. Shares of Series A preferred stock not previously converted at the option of the holder will automatically be converted into shares of common stock on the fifth business day following the receipt by the Company of the first $5,000,000 in gross proceeds from a public placement. If such a conversion does not occur by November 30, 2004, each share of Series A preferred stock shall convert, at the election of the shareholder, into twenty shares of common stock. Stock dividends are payable annually to holders of Series A preferred stock, in shares of preferred stock at the rate of 0.1 share per share held. Upon conversion of the preferred stock to common stock, one full year's dividend will be paid.

5. RELATED PARTY TRANSACTIONS

Payments to officers and directors of the Company during the years ended December 31, 2002 and 2001 directly related to professional services in connection with the acquisition, exploration and development of oil and gas reserves totaled $164,839 and $136,620, respectively, and are included in unproved oil and gas property.

F-13


Zion Oil & Gas, Inc.
NOTES TO FINANCIAL STATEMENTS

Note payable to related party totaling $50,590 is comprised of borrowings under a loan facility with Cimarron Resources, Inc. (Cimarron) which is owned by the president of the Company. Cimarron obtained the monies to lend to the Company through a loan facility with Bank One. The note accrues interest at Bank One's Prime Rate (4.25% at December 31, 2002) plus 2.5% and is due the earlier of (a) 30 days following the closing of an initial public offering by the Company; (b) the determination by the Board of the Company that the Company has raised funds in sufficient amounts to enable to the Company to conduct operations prior to the closing of an initial public offering without need for recourse to the loan facility; or (c) the date the principal amount of the monies advanced to Cimarron under the Bank One Facility are due.

Included in accounts payable at December 31, 2002 and 2001 are payables to officers and directors of the Company totaling $175,370 and $21,100, respectively for salaries, consulting services, bonuses and reimbursement of expenses.

Financing costs of $71,000 and $74,907 were paid to officers and directors of the Company and are netted against additional paid-in capital as of December 31, 2002 and 2001, respectively.

Included in general and administrative expenses at December 31, 2002 and 2001 are fees and expenses totaling $113,286 and $45,777, respectively, paid to officers and directors for professional, legal, and accounting fees, meals, travel and miscellaneous expense reimbursement.

6. INCOME TAXES

The Company's deferred tax assets (liabilities) consist of the following:

December 31, 2002

December 31, 2001

Deferred tax assets (liabilities):

Net operating loss carry forwards

$                      464,050

$                     59,782

Unproved proved oil & gas properties

                      (250,166)

                              (-)

                      (213,884)

                      (59,782)

Less valuation allowance

                      (213,884)

                      (59,782)

    Net deferred tax assets

 $                                -

  $                              -

The difference from the expected income tax expense for the year ended December 31, 2002 at the statutory federal tax rate of 34% for the United States of America and 36% for Israel and the actual income tax expense is primarily the result of net operating loss carryforwards and temporary differences between financial statement and income tax recognition of depreciation and amortization.

The valuation allowance was established to reduce the deferred tax asset for the amounts that more likely than not will not be realized. This reduction is primarily necessary due to the uncertainty of the Company's ability to utilize all of the net operating loss carryforwards. The valuation allowance increased $154,102 and $59,782 in 2002 and 2001, respectively. At December 31, 2002, the Company has available net operating loss carryforwards of approximately $499,000 to reduce future U. S. taxable income. These carryforwards expire from 2020 to 2021.

Income earned from activities in Israel is subject to regular Israeli tax rates. For Israeli tax purposes, exploration costs on unproved properties are expensed. Losses can be carried forward indefinitely, linked to the increase in the Israeli Consumer Price Index. At December 31, 2002, the Company has available net operating loss carryforwards of approximately $815,000 to reduce future Israeli taxable income.

F-14


Zion Oil & Gas, Inc.
NOTES TO FINANCIAL STATEMENTS

7. COMMITMENTS AND CONTINGENCIES

Environmental Matters

The Company is engaged in oil and gas exploration and production and may become subject to certain liabilities as they relate to environmental cleanup of well sites or other environmental restoration procedures as they relate to the drilling of oil and gas wells and the operation thereof. Although environmental assessments are conducted on all purchased properties, in the Company's acquisition of existing or previously drilled well bores, the Company may not be aware of what environmental safeguards were taken at the time such wells were drilled or during such time the wells were operated. Should it be determined that a liability exists with respect to any environmental clean up or restoration, the liability to cure such a violation could fall upon the Company. No claim has been made, nor is the Company aware of any liability, which it may have, as it relates to any environmental clean up, restoration or the violation of any rules or regulations relating thereto. Liabilities for expenditures are recorded when environmental assessment and/or remediation is probable and the costs can be reasonably estimated.

Royalty Commitments

The Company is obligated, according to the Israeli Petroleum Law, 5712-1952 (the Petroleum Law), to pay royalties to the Government of Israel on oil and gas produced from the oil and gas properties of the Company located in Israel (except those reserves serving to operate the wells and related equipment and facilities).

The royalty rate stated in the Petroleum Law is 12.5% of the proved reserves as mentioned above.

The Company has initiated the establishment of a Key Employee Royalty Pool whereby a 1 1/2% overriding royalty or equivalent interest in the Joseph Project and such other oil and gas exploration and development rights as may in the future be acquired by the Company shall be assigned to Key Employees.

The Company has initiated the establishment of two charitable trusts based in Israel and in the United States for the purpose of supporting charitable projects and other charities in Israel and the United States. A 3% overriding royalty or equivalent interest in the Joseph Project and such other oil and gas exploration and development rights as may in the future be acquired by the Company shall be assigned to each charitable organization (6% overriding interest in the aggregate).

At December 31, 2002, the Company does not have any outstanding obligation in respect to royalty payments, since it is at the "exploration stage" and, to this date, no proven reserves have been found.

Lease Commitment

On December 3, 2001, the Company signed an "office services" agreement (the agreement) with Geophysical Institute of Israel (the Institute) whereby the Institute supplies parking spaces, office furniture and additional services. The agreement was for 13 months commencing December 2001, with an option to extend for two additional six-month terms. Annual payments due under this agreement, including option periods, were $31,884.

In conjunction with the agreement with the Institute, the Company has provided a bank guarantee in the amount of $10,000 for the period of the agreement plus 30 days.

The agreement was terminated by mutual agreement in August 2002 and the bank guarantee was released.

F-15


Zion Oil & Gas, Inc.
NOTES TO FINANCIAL STATEMENTS

7. COMMITMENTS AND CONTINGENCIES (CONTINUED)

Other Commitments

The Company signed an agreement with the Institute to supply geological and geophysical services for the area of Preliminary Permit No. 176, "Joseph" to conduct a seismic search in a 30 kilometer perimeter. All the related expenses are included in the agreement and will be provided by the Institute.

8. SUBSEQUENT EVENTS

On January 2, 2003 two officers and one outside director exercised options to purchase 215,000 shares of common stock for a total of $43,000 through the reduction or elimination of payables owed by the Company. Additionally, a vice-president of finance was retained with a compensation package including 50,000 shares of common stock and warrants to purchase 200,000 shares of common stock at $1 per share through December 31, 2004.

On February 25, 2003, the Company declared and paid a 10% preferred stock dividend to preferred stock shareholders of record as of December 31, 2002, prorated based on issuance date of the shares outstanding. A total of 746 preferred shares were issued relating to the stock dividend.

On February 25, 2003, the Company closed the sale of 10,500 shares of preferred stock together with warrants to purchase 52,500 shares of the Company's common stock at $1.50 per share. The company received $105,000 in cash from this sale. The Company also issued 4,654 shares of preferred stock and warrants to purchase 23,270 shares of the Company's common stock at $1.50 per share in exchange for a reduction in accounts payable owed by the Company of $46,540.

Effective February 25, 2003 the Company entered into a line of credit loan agreement with a shareholder of the Company in the maximum amount of $100,000 to be repaid out of the first $200,000 in receipts from a public offering, or within two years, which ever occurs first. Outstanding balances will accrue interest at 10% per annum. At the direction of the shareholder, a commitment fee of $10,000 was paid to two children of the shareholder in the form of 1,000 shares of preferred stock and warrants to purchase 5,000 shares of the Company's common stock.

 

F-16


 

 

 

 

ZION OIL & GAS, INC.
(A Development Stage Company)

 

FINANCIAL STATEMENTS
FOR THE
SIX MONTHS ENDING
JUNE 30, 2003

 

 

F-17


ZION OIL & GAS, INC.

(A Development Stage Company)

BALANCE SHEETS

June 30,

ASSETS

2003

(Unaudited)

2002

(Unaudited)

CURRENT ASSETS

     Cash and cash equivalents

$                 17,788

$                  2,776

     Prepaid expenses

3,459

15,000

     Refundable value-added tax

                        118

                   11,238

          Total current assets

                  21,365

                  29,014

UNPROVED OIL AND GAS PROPERTIES

737,783

465,794

PROPERTY AND EQUIPMENT

     net of accumulated depreciation of $398 and $362

4,788

1,175

OTHER ASSETS

     Equity offering costs (note 3)

116,887

-

     Assets held for severance benefits

                    3,103

                     1,850

          Total other assets

                119,990

                     1,850

               Total assets

$              883,926

$ 497,833

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES

     Notes payable to related parties

$              116,029

$                75,000

     Accounts payable and accrued liabilities

                422,168

                214,258

               Total current liabilities

                538,197

                289,258

PROVISION FOR SEVERANCE PAY, NET

9,333

2,404

STOCKHOLDERS' EQUITY

Preferred stock, par value $.01; 2,000,000 shares authorized

     Series A cumulative convertible; 63,564 and 0 shares

     issued and outstanding

636

-

Common stock, par value $.01; 20,000,000 shares authorized;

     3,767,500 and 3,021,000 shares issued and outstanding

37,675

30,210

Additional paid-in capital

1,148,507

485,284

Deficit accumulated in development stage

              (850,422)

              (309,323)

               Total stockholders' equity

                336,396

                206,171

               Total liabilities and stockholders' equity

$             883,926

$             497,833

The accompanying notes are an integral part of these statements

 

F-18


 

ZION OIL & GAS, INC.

(A Development Stage Company)

STATEMENTS OF OPERATIONS

Period from April 6, 2000

Six Months Ended

Six Months Ended

(inception)

June 30, 2003
(Unaudited)

June 30, 2002
(Unaudited)

to June 30, 2003
(Unaudited)

SALES

$                             -

$                           -

$                           -

GENERAL AND ADMINISTRATIVE EXPENSES

                   279,142

                 137,114

                   834,727

          Net loss from operations

(279,142)

(137,114)

(834,727)

OTHER INCOME (EXPENSE)

     Interest expense

                   (12,013)

                      (92)

                 (15,697)

Net loss before income tax

(291,155)

(137,206)

(850,424)

     Income taxes

                              -

                           -

                           -

NET LOSS

$              (291,155)

$           (137,206)

$           (850,424)

NET LOSS PER SHARE OF COMMON STOCK -

BASIC AND DILUTED (note 9)

$                    (0.08)

$                 (0.05)

$                 (0.33)

WEIGHTED AVERAGE SHARES

OUTSTANDING - BASIC AND DILUTED

                3,675,124

             3,008,006

             2,580,265

The accompanying notes are an integral part of these statements

 

F-19


ZION OIL & GAS, INC.

(A Development Stage Company)

STATEMENTS OF CASH FLOWS

Period from

April 6, 2000

Six Months Ended

Six Months Ended

(inception)

June 30, 2003

June 30, 2002

to June 30, 2002

(Unaudited)

(Unaudited)

(Unaudited)

CASH FLOWS FROM OPERATING ACTIVITIES

Net loss

$           ($291,155)

$         ($137,206)

$         ($850,424)

Adjustments to reconcile net loss to net cash

used in operating activities

Depreciation

62

78

398

Change in assets and liabilities:

Refundable value-added tax

6,991

(7,514)

(118)

Prepaid Expenses

(3,459)

(15,000)

(3,459)

Other Assets

(117,433)

(355)

(114,571)

Accounts payable and accrued liabilities

178,949

154,251

676,897

Severance payable

                 6,005

             (4,041)

             (6,776)

Net cash used in operating activities

           (220,040)

             (9,077)

          (284,501)

CASH FLOWS FROM INVESTING ACTIVITIES

Acquisition of property and equipment

(3,794)

(603)

(5,186)

Investment in oil and gas properties

             (43,248)

         (129,752)

         (737,783)

Net cash used in investing activities

             (47,042)

         (130,355)

         (742,969)

CASH FLOWS FROM FINANCING ACTIVITIES

Loan proceeds - related parties

75,439

75,000

216,867

Loan principal repayments - related party

(10,000)

-

(63,378)

Proceeds from sale of stock

244,540

21,000

1,030,940

Financing costs of issuing stock

(57,245)

               (980)

       (139,171)

Net cash provided by financing activities

              252,734

            95,020

       1,045,258

NET INCREASE (DECREASE) IN CASH

(14,348)

(44,412)

(17,788)

Cash - Beginning of period

               32,136

           47,188

                   -

Cash - End of period

$             17,788

$           2,776

$         17,788

Cash expense paid required to be listed separately:

Interest

$             12,013

$               92

$         12,792

Federal income tax

-

-

-

The accompanying notes are an integral part of these statements

 

F-20


 

Zion Oil & Gas, Inc.
NOTES TO FINANCIAL STATEMENTS (Unaudited)

1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION

Nature of Operations

Zion Oil & Gas, Inc. (the Company), a Florida corporation, engages in the exploration and development of oil and gas reserves. The Company holds a petroleum exploration license on approximately 95,800 acres of unproved properties in north-central Israel called the "Ma'anit-Joseph License", issued to the Company by the State of Israel. The primary term on the license expires April 30, 2005 and it contains a commitment to start the drilling or re-entry of a well before July 1, 2004.

Operations in Israel are conducted through a branch office and the license is held directly in the name of the Company. The Company also owns 100% of Zion Oil & Gas, Inc. (a Delaware Corporation) into which it plans to merge in order to change its domicile from Florida to Delaware.

Basis of Presentation

The financial statements have been prepared on a going concern basis, which contemplates realization of assets and liquidation of liabilities in the ordinary course of business. Since the Company is in the development stage, it has limited capital resources, insignificant revenue, and a loss from operations. The appropriateness of using the going concern basis is dependent upon the Company's ability to obtain additional financing or equity capital and, ultimately, to achieve profitable operations. The uncertainty of these conditions raises substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Management plans to raise capital through the private placement of company stock, debt, and eventually, through public offerings. Management intends to use the proceeds from debt and/or equity sales to explore for and develop oil and gas reserves in Israel. The Company believes that these actions will enable the Company to carry out its business plan and ultimately to achieve profitable operations.

Recent Accounting Pronouncements

The Financial Accounting Standards Board has released FAS 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities," and FAS 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." The Company believes that the impact of these new standards will not have a material effect on the Company's financial position, results of operations or disclosures.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Financial Statements in United States Dollars

The currency of the primary economic environment in which the operations of the Company are conducted is the United States dollar ("dollar"). Therefore, the Company uses the dollar as its functional and reporting currency. Certain of the dollar amounts in the financial statements may represent the dollar equivalent of other currencies, including the New Israeli Shekel ("NIS"), and may not be exchangeable for dollars.

Cash

The Company maintains its cash balance at three banks with one bank located in the United States and two banks located in Israel. Accounts at the bank located in the United States are insured by the Federal Deposit Insurance Corporation up to $100,000.

F-21


Zion Oil & Gas, Inc.
NOTES TO FINANCIAL STATEMENTS (Unaudited)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Oil and Gas Properties

The Company follows the full-cost method of accounting for oil and gas properties. Accordingly, all costs associated with acquisition, exploration and development of oil and gas reserves, including directly related overhead costs, are capitalized. All capitalized costs of oil and gas properties, including the estimated future costs to develop proved reserves, are amortized on the unit-of-production method using estimates of proved reserves. Investments in unproved properties and major development projects are not amortized until proved reserves associated with the projects can be determined or until impairment occurs. If the results of an assessment indicate that the properties are impaired, the amount of the impairment is included in income from continuing operations before income taxes and the adjusted carrying amount of the unproved properties is amortized on the unit-of-production method. Abandonments of properties are accounted for as adjustments to capitalized costs with no loss recognized. During the six months ending June 30, 2003, no unproved property was found to be impaired.

Property and Equipment

Property and equipment other than oil and gas property and equipment is recorded at cost and depreciated over their estimated useful lives of five to ten years using accelerated methods.

Stock-Based Compensation

Statement of Financial Accounting Standards No. 123 - Accounting for Stock-Based Compensation (SFAS 123), requires recognition of compensation expense for grants of stock, stock options, and other equity instruments based on fair value. If the grants are to employees, companies may elect to disclose only the pro forma effect of such grants on net income and earnings per share in the notes to financial statements and continue to account for the grants pursuant to APB Opinion No. 25, Accounting for Stock Issued to Employees. The Company has elected not to use the pro forma disclosure alternative for employee grants and recognizes compensation expense based on fair value.

Use of Estimates

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

3. EQUITY OFFERING COSTS

Costs associated with each specific private or public offering are accumulated until either the closing of the offering or its abandonment. If the offering is abandoned, the costs are expensed in the period the offering is abandoned. If the offering is completed and funds are raised, the accumulated costs are a reduction to the paid-in capital attributable to the offering. Equity offering costs at June 30, 2003 and June 30, 2002 amounted to $116,887 and $0. As of June 30, 2003, $10,800 of the equity offering costs were attributable to a private placement of common stock that closed on July 9, 2003 in the amount of $108,000; and $106,087 of the equity offering costs were attributable to the proposed public offering of common stock pursuant to a registration statement filed with the Securities and Exchange Commission on July 15, 2003.

F-22


Zion Oil & Gas, Inc.
NOTES TO FINANCIAL STATEMENTS (Unaudited)

4. PROVISION FOR SEVERANCE PAY

Under Israeli law and labor agreements, an Israeli employer is required to make severance payments to its dismissed Israeli employees who leave its employment under certain circumstances.

The Company's liability for termination of the employer-employee relationship is composed as follows:

 

June 30, 2003

June 30, 2002

Provision for severance pay

$9,333

$2,404

Amounts funded including accumulated income

  3,103

  1,850

 

$6,230

$ 554

5. STOCKHOLDERS' EQUITY

The Company has reserved 1,011,103 shares of common stock as of June 30, 2003 for the exercise of warrants and options. Warrants to purchase 525,833 shares of common stock are exercisable at a price of $1.00 per share until December 31, 2004. Warrants to purchase 485,270 shares of common stock are exercisable at a price of $1.50 per share until the earlier of December 31, 2004 or the earliest exercise date of any warrant issued in connection with a public or private placement of equity securities of the Company of an amount of not less than $5,000,000. Not counted in the numbers above is 50,000 shares of common stock reserved for an option to convert the outstanding balance (up to a maximum of $50,000) of a Company note to a company controlled by one of its officers. See "Note 6. RELATED PARTY TRANSACTIONS."

The following table summarizes the option and warrant activity for the six months ended June 30, 2003:

Number

Average Weighted

Of Shares

Exercize Price

Outstanding, January 1, 2003

890,333

$1.08

Granted to:

   Employees, officers and directors

200,000

 1.00

   Others

85,770

 1.50

   Expired/canceled

   Exercised

   (165,000)   

  0.20 

Outstanding, June 30, 2003

1,011,103

$1.26

If not previously exercised, warrants and options outstanding at March 31, 2003 will expire on December 31, 2004:

F-23


Zion Oil & Gas, Inc.
NOTES TO FINANCIAL STATEMENTS (Unaudited)

5. STOCKHOLDER'S EQUITY (CONTINUED)

Pro Forma Stock-Based Compensation Disclosures

Beginning with the 2003 fiscal year, the Company has elected to not apply APB No. Opinion 25 and related interpretations in accounting for its stock options and warrants that are granted to employees. Accordingly, compensation cost has been recognized for grants of options and warrants to employees and directors.

The fair value of each option granted was estimated on the date of grant using the Minimum Value option-pricing model with the following assumptions:

Risk-free interest rate

2.00%

Expected dividends

-

Expected terms (in years)

3.0

The Board of Directors of the Company has the authority to issue up to 2,000,000 shares of preferred stock in one or more series and to establish the voting powers, designations, preferences, participation in dividends, optional or other special rights, and qualifications, limitations or restrictions of each series of preferred stock issued.

At June 30, 2003, 63,564 shares of Series A cumulative, convertible preferred shares are issued and outstanding. Each share of the Series A preferred stock is convertible at any time into ten shares of the Company's common stock, or in connection with a subsequent public placement of securities of the Company in an amount of not less than $5,000,000 in gross proceeds, into the greater of (i) ten shares of common stock; or (ii) the number of shares of common stock which would equal $30 when multiplied by the issuing price of the public placement. Shares of Series A preferred stock not previously converted at the option of the holder will automatically be converted into shares of common stock on the fifth business day following the receipt by the Company of the first $5,000,000 in gross proceeds from a public placement. If such a conversion does not occur by November 30, 2004, each share of Series A preferred stock shall convert, at the election of the shareholder, into twenty shares of common stock. Stock dividends are payable annually to holders of Series A preferred stock, in shares of preferred stock at the rate of 0.1 share per share held. Upon conversion of the preferred stock to common stock, one full year's dividend will be paid. On February 25, 2003 a stock dividend of 4,310 shares of Series A preferred stock was paid to the holders of record on December 31, 2002.

6. RELATED PARTY TRANSACTIONS

Of the notes payable to related parties at June 30, 2003, $63,029 is comprised of borrowings under a loan facility with Cimarron Resources, Inc. (Cimarron) a company owned by the president of the Company. Cimarron obtained the monies to lend to the Company through a loan facility with Bank One. The note accrues interest at Bank One's Prime Rate (4.25% at June 30, 2003) plus 2.5% and is due the earlier of (a) 30 days following the closing of an initial public offering by the Company; (b) the determination by the Board of the Company that the Company has raised funds in sufficient amounts to enable to the Company to conduct operations prior to the closing of an initial public offering without need for recourse to the loan facility; or (c) the date the principal amount of the monies advanced to Cimarron under the Bank One Facility are due. The underlying note between Cimarron and Bank One is a demand note.

Of the notes payable to related parties at June 30, 2003, $53,000 is comprised of borrowings under a line of credit loan agreement with a shareholder of the Company in the maximum amount of $100,000 to be repaid out of the first $200,000 in receipts from a public offering, or within two years, which ever occurs first. Outstanding balances will accrue interest at 10% per annum. At the direction of the shareholder, a commitment fee of $10,000 was paid to two children of the shareholder in the form of 1,000 shares of preferred stock and warrants to purchase 5,000 shares of the Company's common stock.

F-24


 

Zion Oil & Gas, Inc.
NOTES TO FINANCIAL STATEMENTS (Unaudited)

7. INCOME TAXES

Income earned from activities in Israel is subject to regular Israeli tax rates. For Israeli tax purposes, exploration costs on unproved properties are expensed. Losses can be carried forward indefinitely, linked to the increase in the Israeli Consumer Price Index.

8. COMMITMENTS AND CONTINGENCIES

Environmental Matters

The Company is engaged in oil and gas exploration and may become subject to certain liabilities as they relate to environmental cleanup of well sites or other environmental restoration procedures as they relate to the drilling of oil and gas wells and the operation thereof. Although environmental assessments are conducted on all acquired properties, in the Company's acquisition of previously drilled well bores, the Company may not be aware of what environmental safeguards were taken at the time such wells were drilled.

Should it be determined that a liability exists with respect to any environmental clean up or restoration, the liability to cure such a violation could fall upon the Company. No claim has been made, nor is the Company aware of any liability, which it may have, as it relates to any environmental clean up, restoration or the violation of any rules or regulations relating thereto. Liabilities for expenditures are recorded when environmental assessment and/or remediation is probable and the costs can be reasonably estimated.

Royalty Commitments

The Company is obligated, according to the Israeli Petroleum Law, 5712-1952 (the Petroleum Law), to pay 12.5% royalties to the Government of Israel on oil and gas produced from the oil and gas properties of the Company located in Israel (except those reserves serving to operate the wells and related equipment and facilities).

The Company has initiated the establishment of a Key Employee Royalty Pool whereby a 1 1/2% overriding royalty or equivalent interest in the Joseph Project and such other oil and gas exploration and development rights as may in the future be acquired by the Company shall be assigned to Key Employees.

The Company has initiated the establishment of two charitable trusts based in Israel and in the United States for the purpose of supporting charitable projects and other charities in Israel and the United States. A 3% overriding royalty or equivalent interest in the Joseph Project and such other oil and gas exploration and development rights as may in the future be acquired by the Company shall be assigned to each charitable organization (6% overriding interest in the aggregate).

At June 30, 2003, the Company does not have any outstanding obligation in respect to royalty payments, since it is at the "exploration stage" and, to this date, no proved reserves have been found, or production initiated.

F-25


Zion Oil & Gas, Inc.
NOTES TO FINANCIAL STATEMENTS (Unaudited)

9. SUBSEQUENT EVENTS

Reincorporation Merger

Effective July 9, 2003 the Company was merged into its wholly owned Delaware subsidiary, Zion Oil & Gas, Inc. ("Zion Delaware"), the purpose of which was solely to reincorporate from Florida to Delaware in anticipation of a public offering. Upon the reincorporation, all the outstanding shares of common stock in the Corporation were converted into common stock of Zion Delaware on a one-to-one basis and all of the outstanding shares of preferred stock in the Corporation were converted into common stock of Zion Delaware at the ratio of twelve shares of common stock for each share of preferred stock. All of the outstanding warrants and options of the Corporation were converted into equivalent warrants and options of Zion Delaware. Net loss per share for the six months ended June 30, 2003 is presented in the statement of operations based on 4,566,268 equivalent shares of common stock outstanding after giving effect to the conversion of the preferred stock that occurred in the reincorporation merger.

Private Placement of Common Stock

Effective July 11, 2003, Zion Delaware completed a private placement of 36,000 shares of common stock to six investors at $3.00 per share for a total of $108,000.

Registration for a Public Offering

On July 15, 2003, Zion Delaware filed a registration statement with the U.S. Securities and Exchange Commission on Form SB-2 for an initial public offering of $6,000,000 to $25,000,000 at $5.00 per share.

 

F-26


Zion Oil & Gas, Inc.

SUBSCRIPTION AGREEMENT

 

The Investor named below, by payment of a check payable to ZION OIL & GAS, INC. - Escrow Account, hereby subscribes for shares of common stock, $.01 par value ("the Shares") indicated below (minimum purchase of 100 shares at a purchase price of $5.00 per Share) of Zion Oil & Gas, Inc. Shares must be purchased in increments of $500. By such payment, the named Investor acknowledges receipt of the Prospectus and any amendment, the terms of which govern the investment in the Shares.


A.
   INVESTMENT:
(1) No. of Shares purchased _________.
  Dollar Amount: $___________
(2) [
  ]Initial Purchase; or      [  ]Additional Purchase
(3) [
  ]Check Payment Enclosed:   Number:_________ Date:___/___/____; or
(4) [
  ]Wire Transfer:  Sending Bank:_______________________Wire #:_________ Date:___/___/____


B.   REGISTRATION:

(1) Registered Owner:    [  ]Mr.   [  ]Mrs.   [  ]Ms.   [  ]Dr.   [  ]Other _________

Name:________________________________________________________________

(2) Co-owner:   [  ]Mr.   [  ]Mrs.   [  ]Ms.   [  ]Dr.   [  ]Other _________

Name:________________________________________________________________

(3)
 Mailing Address: __________________________________________________

(4) Residence Address (if different from above):___________________________________________

(5) Telephone #:      (Home) (_____) _____ - ________ (Office) (_____) _____ - ________

(6) Email Address:__________________________________

(7) Birth Date:______ /______ /____ (8)Birth Date Co-Owner_____/_____/_______

(9) Please indicate Citizenship Status: [  ]U.S. Citizen               [  ]Other_____________________

(10) Social Security #:____/__/______ (11) Co-Owner SS#:____/__/_______

Corporate or Custodial Taxpayer ID      #: ________________

C.   OWNERSHIP:       [  ]Individual Ownership  [  ]IRA or Keogh  [  ]Joint Tenants with Rights of Survivorship  [  ]Trust/Date of Trust Established Pension/Trust  ___ / ___ / ___  (S.E.P.)
[
  ]Tenants in Common  [  ]Tenants by the Entirety  [  ]Corporate Ownership  [  ]Partnership
[
  ]Other ____________________________


Zion Oil & Gas, Inc.-Subscription Agreement, page 2


D.
   SIGNATURES: By signing below, I/we represent that I/we have relied on the information set forth in the Prospectus, as and if amended, and on no other statement whatever, whether written or oral.

Signatures - Registered Owner: ___________________   Co-Owner: _____________________________

E.
   PRINT NAMES OF CUSTODIAN OR TRUSTEE:
________________________Date:___________________

Authorized Signature: ________________________Witness Signature: __________________________

F.   RETURN OF PAYMENT SHOULD BE SENT TO (IF DIFFERENT FROM REGISTERED OWNER):
Name: _________________________________ c/o: __________________________________________

Address: _____________________________________________________________________________
Account #___________________________
       Phone: (_____) ______ - _____________

G.
   BENEFICIAL OWNER(S): All reports and financial statements will normally be sent to the registered owner at the address in Section B. If reports and financial statements are to be sent to the Beneficial Owner of an IRA or Keogh, insert name of the Beneficial Owner.

Name of Beneficial Owner Only: _______________________________
  Phone: (___)___- _______

Address: ____________________________________________________________________________


H.   BROKER-DEALER/REGISTERED REPRESENTATIVE DATA (broker-dealer use only):

Broker-Dealer NASD Firm Name: ________________________ Telephone Number: (___)_____- _____

Main Office Address: __________________________________________________________________

Authorized Signature: ______________________________________________ Date: ______________

Print or Type Name of Registered Representative:____________________________________________

Signature: _________________________________________________ Phone: (___)______- ________

Branch Office Address: _________________________________________________________________

SEND TO:       Zion Oil & Gas, Inc., 6510 Abrams Road, Suite 300, Dallas, Texas 75231
(214) 221-4610 FAX
      (214) 221-6510


 

1,200,000 Shares (Minimum)                      5,000,000 Shares (Maximum)

 

 

Zion Oil & Gas, Inc.

Shares of Common Stock

Par Value $.01 per Share

 

 

Purchase Price - $5.00 per Share

 

 

 

 

 

 

 

Until ______________ all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.


PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 24. Indemnification of Directors and Officers

Section 145 of the Delaware General Corporation Law and our certificate of incorporation and bylaws contain provisions for indemnification of our officers and directors, and under certain circumstances, our employees and other persons. The bylaws require us to indemnify such persons to the fullest extent permitted by Delaware law. Each such person will be indemnified in any proceeding if such person acted in good faith and in a manner that such person reasonably believed to be in, or not opposed to, our best interests. The indemnification would cover expenses, including attorney's fees, judgments, fines and amounts paid in settlement. Our bylaws also provide that we may purchase and maintain insurance on behalf of any of our present or past directors or officers insuring against any liability asserted against such person incurred in their capacity as a director or officer or arising out of such status, whether or not we would have the power to indemnify such person.

We have no other indemnification provisions in our Certificate of Incorporation, Bylaws or otherwise specifically providing for indemnification of directors, officers and controlling persons against liability under the Securities Act.

Item 25. Other Expenses of Issuance and Distribution

The following table sets forth a reasonable itemized statement of all anticipated out-of-pocket and overhead expenses (subject to future contingencies) to be incurred in connection with the distribution of the securities being registered, reflecting the minimum and maximum offering amounts. Each amount, except for the commission registration fee and listing fee, is estimated.

 

 

Minimum

Maximum

SEC Filing Fee

$    2,300

$    2,300

Accounting Fees and Expenses

10,000

10,000

Legal Fees and Expenses

115,000

150,000

Printing Fees and Advertising

30,000

60,000

Listing Fees

25,000

25,000

Fees of Transfer Agent and Registrar

10,000

35,000

Blue Sky Fees and Expenses

20,000

40,000

Travel and Public Relations

  27,700

  77,700

TOTAL

$ 240,000

$ 400,000

 

II-1


Item 26. Recent Sales of Unregistered Securities

1. Initial Issuance

Zion Oil & Gas, Inc. was formed as a Florida Corporation on April 6, 2000. Our first share issuance was made effective as of September 1, 2000, when Mr. John Brown and 25 different persons made their initial cash contribution of $2,400, for which they received 2,400,000 shares of common stock at the price of 1/10 of one cent per share (the par value at the time). John Brown knew personally all 25 persons, all of them were acquainted with the Joseph Project, and they all had assisted Mr. Brown in developing the project during a fourteen-year pre-formation period. Upon formation of Zion, Mr. Brown and the others contributed to Zion all of the technical, economic, legal and financial data they had accumulated over the years relating to oil and gas exploration in Israel. For accounting purposes, no monetary value was attached to the data. The names of the shareholders, shares received and the consideration are shown in the table below:

Domestic Purchasers

Shares

Consideration

Jane Anderson

5,000

$                5.00

Dorothy Berger

10,000

$              10.00

Jean Bowles

5,000

$                5.00

Joan Brown

100,000

$           100.00

John M. Brown

520,000

$           520.00

Mark Brown

50,000

$             50.00

Ralph DeVore

50,000

$             50.00

Peter Donlin

5,000

$                5.00

Jim Duncan

5,000

$                5.00

Don & Ivy Green

195,000

$           195.00

Norman & Rosemary Ingram

50,000

$              50.00

Robert Jarvis

50,000

$              50.00

Edwin L. Johnson

100,000

$            100.00

Eliezer Kashai

5,000

$                5.00

Ronald E. Lichtman

25,000

$              25.00

Philip Mandelker

450,000

$            450.00

David Patir

5,000

$                5.00

Glen H. Perry

450,000

$           450.00

Darwin K. Pratt

30,000

$              30.00

Elisha Roih

150,000

$            150.00

Jack Sherman

50,000

$             50.00

Carol Joan Skarvi Trust

50,000

$             50.00

Eugene Soltero

25,000

$             25.00

Ursula Veselka

5,000

$                5.00

Horst and/or Gerda Witt

5,000

$                5.00

Dorothy Wolfe

        5,000

$                5.00

   Totals

2,400,000

$        2,400.00

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The sales of securities above were made in reliance upon Section 4(2) of the Securities Act, which exempts from registration transactions that do not involve a public offering. Given the nominal cost of the founders' shares as noted above, all of the founding investors had the financial ability to assume the risk of their total investment in the shares which were acquired by them for their own account and not with a view to any distribution thereof to the public. The certificates evidencing the securities bear legends stating that the shares are not to be offered, sold or transferred other than pursuant to an effective registration statement under the Securities Act or an exemption from such registration requirements.

2. Private Offering Completed in January 2001.


In January 2001, we completed a private placement in which we issued 235,000 shares of our common stock and warrants (the "A Warrants") to purchase 117,500 shares of common stock to four investors for a total consideration of $235,000. The A Warrants are exercisable at $1.00 per share until December 31, 2004. None of the A Warrants have been exercised. The names of the shareholders, shares received, shares of common stock purchasable pursuant to the A Warrants received, and the consideration are shown in the table below:

Purchasers

Shares

A Warrants

Consideration

Carlton Cody

100,000

50,000

$          100,000

Varon Family Limited Partnership

100,000

50,000

$          100,000

John M. Brown

25,000

12,500

$            25,000

Darryl Burman

   10,000

   5,000

$            10,000

   Totals

235,000

117,500

$         235,000

The sales of securities above were made in reliance upon Section 4(2) of the Securities Act, which provide exemptions for transactions not involving a public offering. We determined that the purchasers of securities described above were sophisticated investors who had the financial ability to assume the risk of their total investment, acquired them for their own account and not with a view to any distribution thereof to the public. The certificates evidencing the securities bear legends stating that the shares are not to be offered, sold or transferred other than pursuant to an effective registration statement under the Securities Act or an exemption from such registration requirements.

3. Private Offering Completed in August 2001

In August 2001, we completed a private placement in which we issued 190,000 shares of our common stock and A Warrants to purchase 158,333 shares of common stock to nine investors for a total consideration of $235,000. None of the A Warrants have been exercised. The names of the shareholders, shares received, shares of common stock purchasable under the A Warrants received, and the consideration are shown in the table below:

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Purchaser

Shares

A Warrants

Consideration

John M. Brown

25,000

20,833

$               25,000

Darryl Burman

5,000

4,167

$                 5,000

Carlton Cody

75,000

62,500

$               75,000

Ralph DeVore

25,000

20,833

$               25,000

David Halperin

5,000

4,167

$                 5,000

Philip Mandelker

10,000

8,333

$               10,000

Irith Rappaport

25,000

20,833

$               25,000

Elisha Roih

5,000

4,167

$                 5,000

Eugene Soltero

   15,000

   12,500

$               15,000

   Totals

190,000

158,333

$             190,000

The sales of securities above were made in reliance upon Section 4(2) of the Securities Act, which provide exemptions for transactions not involving a public offering. Seven of the nine investors (five of whom are officers or directors) were already shareholders of Zion. We determined that the two new purchasers of securities described above were sophisticated investors who had the financial ability to assume the risk of their total investment, acquired them for their own account and not with a view to any distribution thereof to the public. The certificates evidencing all the securities above bear legends stating that the shares are not to be offered, sold or transferred other than pursuant to an effective registration statement under the Securities Act or an exemption from such registration requirements.

4. Private Offering Completed in May 2002.


In May 2002, we completed a private placement in which we issued 195,000 shares of our common stock and warrants (the "B Warrants") to purchase 97,500 shares of common stock to nine investors for a total consideration of $235,000. The B Warrants are exercisable at $1.50 per share until the earlier of: (a) December 31, 2004; or (b) the termination date of any warrants issued in connection with a public or private offering in excess of $5,000,000. None of the B Warrants have been exercised. The names of the shareholders, shares received, shares of common stock purchasable under the B Warrants received, and the consideration are shown in the table below:

Purchaser

Shares

B Warrants

Consideration

East-DeMarco Family Limited Partnership

75,000

37,500

$               75,000

Dr. David Feingold

50,000

25,000

$               50,000

Christian Michel Fenet

10,000

5,000

$               10,000

Danny Hayes

50,000

25,000

$               50,000

Bonnie Jean and Don G. Whiteneck, JTWROS

   10,000

   5,000

$               10,000

   Totals

195,000

97,500

$ 195,000

The sales of securities above were made in reliance upon Section 4(2) of the Securities Act, which provide exemptions for transactions not involving a public offering. We determined that the purchasers of securities described above were sophisticated investors who had the financial ability to assume the risk of their total investment, acquired them for their own account and not with

II-4


a view to any distribution thereof to the public. The certificates evidencing the securities bear legends stating that the shares are not to be offered, sold or transferred other than pursuant to an effective registration statement under the Securities Act or an exemption from such registration requirements.

5. Series A Convertible Preferred Offering Completed in August 2002.


In August 2002, we completed a private placement in which we issued 4,600 shares of our Series A Convertible Preferred Stock and B Warrants to purchase 46,000 shares of common stock to 6 investors for a total cash consideration of $46,000.

Each share of the preferred stock was convertible at any time into ten shares of the our common stock, or in connection with a subsequent public placement of our securities in an amount of not less than $5,000,000 in gross proceeds, into the greater of (i) ten shares of common stock; or (ii) the number of shares of common stock which would equal $30 when multiplied by the issuing price of the public placement. Under their terms, shares of preferred stock not previously converted at the option of the holder were to automatically be converted into shares of common stock on the fifth business day following the receipt by us of the first $5,000,000 in gross proceeds from a public placement. If such a conversion did not occur by November 30, 2004, each share of preferred stock was to convert, at the election of the shareholder, into twenty shares of common stock. Stock dividends were payable annually to holders of preferred stock, in shares of preferred stock at the rate of 0.1 share per share held. Upon conversion of the preferred stock to common stock, one full year's dividend was to be paid. On February 25, 2003 a stock dividend of 4,310 shares of preferred stock was paid to the holders of record on December 31, 2002. Only July 9, 2003 all outstanding shares of preferred stock were converted into shares of common stock in the reorganization merger of Zion Florida into Zion Delaware at the ratio of 12 shares of common stock for each share of preferred stock.

None of the B Warrants have been exercised. The names of the shareholders, shares received, shares of common stock purchasable under the B Warrants received, and the consideration are shown in the table below:

Purchasers:

Preferred

B Warrants

Consideration

Jane Anderson

1,000

10,000

$          10,000

John F. Chadbourne, Jr.

1,000

10,000

$             10,000

Ralph DeVore

250

2,500

$               2,500

Dr. David Feingold

1,000

10,000

$             10,000

Charles S. Kaliszewski

1,100

11,000

$             11,000

Eugene Soltero

   250

   2,500

$             2,500

   Totals

4,600

46,000

$             46,000

The sales of securities above were made in reliance upon Section 4(2) of the Securities Act, which provide exemptions for transactions not involving a public offering. Four of the six investors (two of whom are officers or directors) were already shareholders of Zion. We determined that the

II-5


two new purchasers of securities described above were sophisticated investors who had the financial ability to assume the risk of their total investment, acquired them for their own account and not with a view to any distribution thereof to the public. The certificates evidencing all the securities above bear legends stating that the shares are not to be offered, sold or transferred other than pursuant to an effective registration statement under the Securities Act or an exemption from such registration requirements.


6. Series A Convertible Preferred and Common Stock Offering Completed in September 2002.


In September 2002, we completed a private placement in which we issued 3,400 shares of our preferred stock, 21,500 shares of our common stock, and B Warrants to purchase 34,000 shares of common stock to 3 investors for a total consideration of $34,000. All 3,400 shares of preferred stock were converted into 40,800 shares of common stock in the reorganization merger. None of the B Warrants have been exercised. The names of the shareholders, shares of preferred and common stock purchased, and shares of common stock purchasable under the B Warrants received, and the consideration are shown in the table below:

Purchasers:

Preferred

Common

B Warrants

Consideration

Len Chapman

2,500

12,500

12,500

$          25,000

Scott R. Lowden

500

5,000

2,500

$            5,000

Ronald E. and Rebecca A. Merrill, JTWROS

   400

   4,000

   2,000

$            4,000

   Totals

3,400

21,500

17,000

$          34,000

The sales of securities above were made in reliance upon Section 4(2) of the Securities Act, which provide exemptions for transactions not involving a public offering. We determined that the purchasers of securities described above were sophisticated investors who had the financial ability to assume the risk of their total investment, acquired them for their own account and not with a view to any distribution thereof to the public. The certificates evidencing the securities bear legends stating that the shares are not to be offered, sold or transferred other than pursuant to an effective registration statement under the Securities Act or an exemption from such registration requirements.


7. Series A Convertible Preferred Offering Completed in February 2003.


In July 2002, we completed a private placement in which we issued 50,254 shares of our Series A Convertible Preferred Stock and B Warrants to purchase 251,270 shares of common stock to 22 investors for a total consideration of $502,540. Of the total consideration, $280,000 was paid in cash by 14 investors and $222,540 was a reduction of outstanding indebtedness owed by us to eight investors.

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Cash Purchasers:

Preferred

B Warrants

Consideration

Marjorie Avery

1,000

5,000

$            0,000

Dr. Paula Batterton

1,000

5,000

$          10,000

Andrew H. Braiterman & Ronne Mandelker, JTWROS

2,000

10,000

$         20,000

Michael A. Colton

1,000

5,000

$         10,000

East-DeMarco Family Limited Partnership

7,500

37,500

$         75,000

Z. Sheldon Fink

500

2,500

$           5,000

Michael B & Melody S. Massey, JTWROS

1,000

5,000

$         10,000

Connie Nichter

1,000

5,000

$        10,000

Charles D. Petry and Thelma L. Petry

1,500

7,500

$        15,000

R. D. Potach Inc Employees Profit Sharing Plan & Trust

7,500

37,500

$       75,000

Richard Jonathan Rinberg

1,000

5,000

$        10,000

Candace S. Stringer

1,000

5,000

$        10,000

Billy Traylor

1,000

5,000

$        10,000

Gerald Walpin

   1,000

   5,000

$        10,000

   Totals

28,000

140,000

$      280,000

 

Debt Exchange Purchasers

Preferred

B Warrants

Consideration

William Avery

1,000

5,000

$          10,000

I. Amihud Ben-Porath, Hamou & Co.

500

2,500

$            5,000

John M. Brown

7,750

38,750

$          77,500

Darwin's Beagle, Inc.

1,100

5,500

$          11,000

Ralph DeVore

1,400

7,000

$          14,000

Philip Mandelker

2,000

10,000

$          20,000

Glen H. Perry

6,000

30,000

$          60,000

Eugene Soltero

   2,504

   12,520

$          25,040

   Totals

22,254

111,270

$        222,540

The sales of securities above were made in reliance upon Section 4(2) of the Securities Act, which provide exemptions for transactions not involving a public offering. Ten of the 22 investors above were existing holders of Zion's equity securities, and five of those ten were officers or directors. We determined that the twelve new purchasers of securities described above were sophisticated investors who had the financial ability to assume the risk of their total investment, acquired them for their own account and not with a view to any distribution thereof to the public. The certificates evidencing all the securities above bear legends stating that the shares are not to be offered, sold or transferred other than pursuant to an effective registration statement under the Securities Act or an exemption from such registration requirements.

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8. Common Stock Offering Completed July 2003

In July 2003, we completed a private placement in which we issued 36,000 shares of our common stock to seven investors for a total consideration of $108,000. The names of the shareholders, shares received, and the consideration are shown in the table below:

Name

Shares

Consideration

Mark W. Shriver

3,666

$           10,998

Patrick J. & Kim Roncone JTWOS

7,000

$           21,000

Donald D. Ellis

7,334

$           22,002

Todd D. Bennett

5,000

$           15,000

Anne Cooper

5,000

$           15,000

Neri Laufer

5,000

$           15,000

Philip Mandelker

  3,000

$             9,000

   Totals

36,000

$         108,000

The sales of securities above were made in reliance upon Section 4(2) of the Securities Act, which provide exemptions for transactions not involving a public offering. One of the seven investors above is an officer and director of Zion. We determined that the six new purchasers of securities described above were sophisticated investors who had the financial ability to assume the risk of their total investment, acquired them for their own account and not with a view to any distribution thereof to the public. The certificates evidencing the securities bear legends stating that the shares are not to be offered, sold or transferred other than pursuant to an effective registration statement under the Securities Act or an exemption from such registration requirements.

9. Stock and Warrants for Services

During 2001 and 2002 we issued 27,500 A Warrants and 30,000 B Warrants for services, for which we recorded $0 consideration. 20,000 A Warrants were issued to David Halperin for agreeing to act as a director designee and for assisting us in analyzing the potential market for investors in Europe. 7,500 A Warrants were issued to Larry R. Gilmore for reviewing our seismic lines and assisting us in geophysical interpretation. 30,000 B Warrants were issued to I. Amihud Ben-Porath, Hamou & Co. for providing local assistance to our general counsel in Tel Aviv. None of the foregoing warrants have been exercised.

During 2002 and 2003 we issued 12,500 shares of common stock and 8,250 B Warrants for services recorded at $12,500. 12,000 shares of common stock and 8,000 B Warrants were issued to Charles Kaliszewski for $12,000 of financial consulting services performed in Texas and Argentina on our behalf. 500 shares of common stock and 250 B Warrants were issued to Paula Batterton for providing planning services for us in Houston.

II-8


The issuance of securities above were made in reliance upon Section 4(2) of the Securities Act, which provide exemptions for transactions not involving a public offering. We determined that the recipients of securities described above were sophisticated investors who had the financial ability to assume the risk of their total investment and acquired them for their own account and not with a view to any distribution thereof to the public. The certificates evidencing the securities bear legends stating that the shares are not to be offered, sold or transferred other than pursuant to an effective registration statement under the Securities Act or an exemption from such registration requirements.

10. M&B Comfort Letters

In November 2002, we issued 50,000 shares of common stock and B Warrants to purchase 25,000 shares of common stock to two of the principal shareholders of the M&B Companies in return for the issuance by the M&B Companies in October 2002 of a $2,000,000 comfort letter (extending and renewing a comfort letter originally issued in April 2000) to the Israeli Petroleum Commissioner on behalf of Zion. The securities were equally divided between Mark Brown and Robert Jarvis and were valued at $50,000.

The issuance of securities above were made in reliance upon Section 4(2) of the Securities Act, which provide exemptions for transactions not involving a public offering. We determined that the purchasers of securities described above (both of whom were existing shareholders) were sophisticated investors who had the financial ability to assume the risk of their total investment, acquired them for their own account and not with a view to any distribution thereof to the public. The certificates evidencing the securities bear legends stating that the shares are not to be offered, sold or transferred other than pursuant to an effective registration statement under the Securities Act or an exemption from such registration requirements.

11. Hal Lindsey Gift

In October 2002, we gave Hal Lindsey 50,000 shares of common stock upon the recommendation of our chairman, John Brown. Mr. Lindsey has been a supporter of Israeli development for more than forty years through the Hal Lindsey ministries and we wanted to recognize that support in our gift. The gift was recorded in our books as a $50,000 general and administrative expense.

The issuance of securities above were made in reliance upon Section 4(2) of the Securities Act, which provide exemptions for transactions not involving a public offering. We determined that Mr. Lindsey accepted the gift for his own account and not with a view to any distribution thereof to the public. The certificate evidencing the securities bears a legend stating that the shares are not to be offered, sold or transferred other than pursuant to an effective registration statement under the Securities Act or an exemption from such registration requirements.

II-9


12. The Chairman's Notes.

During 2000 John Brown extended a $50,000 line of credit to Zion against which we initially borrowed approximately $25,000 to make our first license fee payment to the Israeli government and a down payment for our first seismic survey. The loan bore an interest rate of 7% per annum and we eventually borrowed to the maximum amount. During 2001, we repaid the outstanding $50,000 principal amount of the loan by delivering to Mr. Brown 50,000 shares of common stock and warrants to purchase 33,333 shares of common stock at the exercise price of $1.00 per share, in accordance with the same terms and conditions as the shares of common stock and warrants were being sold to unrelated third parties in private transactions during 2001. These transactions were counted as cash purchases by Mr. Brown and included in #2 and #3 above. Mr. Brown waived the interest.

During 2002, Mr. Brown entered into a new loan agreement with Zion at a 7% interest rate and advanced $50,000 to us under the loan agreement. At the end of the year, Mr. Brown participated in our private placement of Series A Convertible Preferred Stock and received 5,000 shares of the preferred stock and warrants to purchase 25,000 shares of common stock at $1.50 per share in exchange for cancellation of our $50,000 indebtedness. The exchange was made under the same terms and conditions as the sale at the same time by us to unrelated third parties of our preferred stock and $1.50 warrants and is included in #4 above. Mr. Brown waived the interest.

The issuance of securities above were made in reliance upon Section 4(2) of the Securities Act, which provide exemptions for transactions not involving a public offering. John Brown, the purchaser of securities, is the founder, chairman and chief executive officer of Zion.

13. Cimarron Line of Credit.

We have issued a series of notes payable comprised of borrowings under a $50,000 loan facility with Cimarron Resources, Inc. (Cimarron) a company owned by the president Zion. Cimarron obtained the monies to lend us through a loan facility with Bank One, N.A. The notes pay interest monthly to Cimarron at Bank One's Prime Rate (4.25% at June 30, 2003) plus 2.5% and is due the earlier of (a) 30 days following the closing of this public offering; (b) the determination by our board of directors that we have raised funds in sufficient amounts to enable us to conduct operations prior to the closing of an initial public offering without need for recourse to the loan facility; or (c) the date the principal amount of the monies advanced to Cimarron under the Bank One facility are due. The underlying note between Cimarron and Bank One is a demand note. Cimarron has the option to convert the outstanding balance of the notes payable into shares of our common stock at the price of $1.00 per share.

The issuance of securities above were made in reliance upon Section 4(2) of the Securities Act, which provide exemptions for transactions not involving a public offering. Eugene Soltero, the control person of Cimarron, is the president and chief operating officer of Zion.

II-10


14. Rappaport Loan

In February 2003, we entered into a loan agreement with Ms. Irith Rappaport, a shareholder of Zion, to borrow the sum of up to $100,000 to cover certain obligations of Zion relating to this offering. We paid a commitment fee valued at $10,000 in the form of 1,000 shares of preferred stock and a B Warrant (to purchase 5,000 shares of common stock), to her designees (two of her children). This loan bears interest at the rate of 10% per annum and must be repaid at the earliest of (a) the closing of the minimum offering, (b) February 25, 2004, or (c) at such time or times as in the opinion of the directors of Zion, funds available to Zion so permit.

The issuance of securities above were made in reliance upon Section 4(2) of the Securities Act, which provide exemptions for transactions not involving a public offering. We determined that the purchaser of securities described above, an existing shareholder, was a sophisticated investor who had the financial ability to assume the risk of her total investment, acquired the securities for her children's accounts and not with a view to any distribution thereof to the public. The certificates evidencing the securities bear legends stating that the shares are not to be offered, sold or transferred other than pursuant to an effective registration statement under the Securities Act or an exemption from such registration requirements.

15. Options, Warrants and Shares Issued to Officers and Directors

In July 2000, Zion entered into a financial advisory and services agreement with Ralph DeVore, before he was elected a director, whereby Mr. DeVore assisted us in a number of areas, including business structuring, investor relations, introductions to investment bankers and investors, and other related financial services. On December 31, 2000, Mr. DeVore was awarded a warrant (as provided in the agreement) giving him the right to purchase 80,000 shares of our common stock at $0.20 per share until December 31, 2004. In February 2001, the agreement was modified and extended through June 30, 2001. Mr. DeVore was elected a director in June 2001. In August 2001 the agreement was extended through September 30, 2001 and Mr. DeVore was awarded another warrant, this one (as provided in the agreement) giving him the right to purchase 40,000 shares of our common stock at $0.20 per share until December 31, 2004. As the 120,000 shares, upon purchase, would be restricted shares and there was no public market, the awards were valued at $0. Following the expiration of the agreement, Mr. DeVore continued to provide financial advisory services on an as needed basis. In 2002, for financial services rendered, he was paid $2,500 in the form of 2,500 shares of common stock and a B Warrant to purchase 1,250 shares. In 2003, Mr. DeVore exercised his warrants to purchase 120,000 shares for $0.20 per share. The B Warrant has not been exercised.

In addition, during the years 2001 through 2003 we issued to certain officers and directors options to purchase common stock at $1.00 per share until December 1, 2004 (the "$1.00 Options"), options to purchase common stock at $0.20 per share until December 31, 2004 (the "$0.20 Options"), options to purchase common stock at $3.00 per share until December 31, 2005 (the "$3.00 Options") and A Warrants (some of which options and warrants have been canceled or exercised as shown in the "Disposition" column) to purchase the number of shares shown in the following table below. None of the A Warrants or the $3.00 options have been exercised.

II-11


All the options and warrants had a recorded value of $0 upon issuance because the underlying common stock would be restricted upon their issuance and there was no market for the shares of common stock.

Name

$1.00 Options

$0.20 Options

$3.00 Options

A Warrants

Date Issued

Disposition (if any)

Elisha Roih

5,000

8/15/2001

Eliezer Kashai

7,500

8/15/2001

Eugene Soltero

10,000

8/15/2001

Eugene Soltero

300,000

10/1/2001

Canceled 7/22/2002

Eugene Soltero

400,000

7/22/2002

Exercised 12/31/2002

Eliezer Kashai

45,000

10/10/2002

Exercised 1/2/2003

Z. Sheldon Fink

25,000

7/14/2003

Eitan Lubitch

25,000

7/14/2003

In January 2003 we issued 50,000 shares of common stock and an A Warrant to purchase 200,000 shares to William H. Avery in connection with his employment as vice-president of finance. The transaction was recorded as a $50,000 charge to general and administrative expenses. The A Warrant has not been exercised.

The issuance of the options and warrants, as well as the issuance of shares of common stock purchased upon exercise of the options above, were made in reliance upon Section 4(2) of the Securities Act, which provide exemptions for transactions not involving a public offering. All of the recipients and purchasers of the securities are officers or directors of Zion.

Item 27. Exhibits

The following documents are filed as exhibits to this registration statement:

Exhibit Number

Identification of Exhibit

3.1*

Amended and Restated Certificate of Incorporation of Zion Oil & Gas, Inc.

3.2*

Amended and Restated Bylaws of Zion Oil & Gas, Inc.

4.1

Specimen Certificate for Zion Common Stock, par value $.01 per share

5.1

Opinion of Alice A. Waters, Attorney at Law, regarding legality of

securities being registered

8.1

Opinion of Lowden Van Brauman, LLP, regarding Israeli tax impact to

United States Shareholders

9.1

Stockholders' and Voting Agreement (with John M. Brown)

9.2

Stockholders' and Voting Agreement (with Ralph DeVore)

10.1*

Ma'anit-Joseph License

10.2

Form of Placement Agent Agreement

10.3

Form of Escrow Agreement

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10.4

Employment Letters of Intent with Executive Officers

16.1

Letter on Change in Certifying Accountant

23.1

Consent of Alice A. Waters, Attorney at Law (included in the opinion filed

as Exhibit 5.1 to this registration statement)

23.2

Consent of Lane Gorman Trubitt, L.L.P.

23.3

Consent of Lowden Van Brauman, LLP

24.1*

Powers of Attorney

_____________________

*Previously Filed

 

Item 28. Undertakings.

The undersigned registrant hereby undertakes:

  1. To file, during any period in which it offers or sells securities, a post-effective amendment to this registration statement to: (i) include any prospectus required by Section 10(a)(3) of the Securities Act; (ii) reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information in the registration statement; and (iii) include any additional or changed material information on the plan of distribution. Notwithstanding the foregoing, any increase or decrease in the volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the SEC pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement.
  2. For determining liability under the Securities Act, to treat each post-effective amendment as a new registration statement of the securities offered, and the offering of the securities at that time to be the initial bona fide offering.
  3. To file a post-effective amendment to remove from registration any of the securities that remain unsold at the end of the offering.
  4. To provide to the Placement Agent(s) at each closing specified in the Selling Agreement certificates in such denominations and registered in such names as required by the Placement Agents to permit prompt delivery to each purchaser.
  5. II-13


  6. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that, in the opinion of the SEC, such indemnification is against public policy, as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
  7. For determining any liability under the Securities Act, to treat the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in the form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act as part of this registration statement as of the time the SEC declared it effective.

Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Act") may be permitted to our directors, officers and controlling persons pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable.

II-14


SIGNATURES

In accordance with the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form SB-2 and has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Dallas, State of Texas, on September 10, 2002.

ZION OIL & GAS, INC.
(Registrant)

 

By: /s/ JOHN M. BROWN        
        John M. Brown
        Chairman of the Board and Chief Executive         Officer
         (Principal Executive Officer)

By: /s/ E.A. SOLTERO        
        Eugene A. Soltero, President
        (Principal Financial and Accounting Officer)

In accordance with the requirements of the Securities Act of 1933, this registration statement has been signed below by the following persons in the capacities and on the dates indicated:

Signature

Title

Date

/s/ JOHN M. BROWN                
John M. Brown

Chairman of the Board and Chief Executive Officer

September 10, 2003

/s/ EUGENE A. SOLTERO        
Eugene A. Soltero

President, Chief Operating Officer and Director

September 10, 2003

GLEN H. PERRY                        
Glen H. Perry

Executive Vice President and Director

September 10, 2003

PHILIP MANDELKER               
Philip Mandelker

General Counsel and Director

September 10, 2003

RALPH F. DEVORE                   
Ralph F. DeVore

Director

September 10, 2003

  *                                                 
Eitan Lubitch

Director

September 10, 2003

                                                     
Z. Sheldon Fink

Director

September 10, 2003


          *    By: /s/ EUGENE A. SOLTERO
                      Eugene A. Soltero
                      Attorney-in-Fact

 

 

 



Dates Referenced Herein   and   Documents Incorporated by Reference

This ‘SB-2/A’ Filing    Date    Other Filings
10/31/08
7/9/084
10/31/07
4/30/07DEF 14A
12/31/0610KSB,  NT 10-K
10/31/06
12/31/0510KSB/A
10/31/05
4/30/05
12/31/0410-K,  10KSB,  10KSB/A,  NT 10-K
12/1/04
11/30/04
10/31/04
7/31/04
7/1/04
4/30/04
4/1/04
3/1/04
2/25/04
10/31/03
Filed on:9/11/03
9/10/03
9/2/03
7/31/03
7/15/03SB-2
7/11/03
7/9/03
7/1/03
6/30/03
4/30/03
4/14/03
4/8/03
3/31/03
3/11/03
2/25/03
1/2/03
1/1/03
12/31/02
12/30/02
10/23/02
9/10/02
7/31/02
6/30/02
12/31/01
12/3/01
9/30/01
6/30/01
5/1/01
1/1/01
12/31/00
9/1/00
5/1/00
4/6/00
 List all Filings 
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