GOTHIC ENERGY CORP, 10KSB, 2000-03-30

GOTHIC ENERGY CORP
10KSB, 2000-03-30
CRUDE PETROLEUM & NATURAL GAS

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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
Mark One:
[x] Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the fiscal year ended December 31, 1999; or

[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ to __________.

Commission File No. 0-19753

GOTHIC ENERGY CORPORATION
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(Name of Small Business Issuer in its Charter)

Oklahoma 22-2663839
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(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)

6120 South Yale Avenue - Suite 1200 - Tulsa, Oklahoma 74136
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(Address of Principal Executive Offices) (Zip Code)

(918) 749-5666
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(Issuer's Telephone Number, Including Area Code)

Securities registered under Section 12(b) of the Exchange Act:
Title of Each Class Name of Each Exchange on Which Registered
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None
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Securities Registered Pursuant to Section 12(g) of the Exchange Act:
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Common Stock, par value $.01 per share

Redeemable Common Stock Purchase Warrants expiring January 24, 2001
- --------------------------------------------------------------------------------
(Title of Each Class)

Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past twelve (12) months (or
for such shorter period that the Issuer was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. [x] Yes
[ ] No

Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B in this form, and no disclosure will be contained, to the
best of Issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB, or any amendment to
this Form 10-KSB.

State Issuer's revenues for its most recent fiscal year: $55,624,000

The aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of March 1, 2000, was $6,424,166. (Non-
affiliates have been determined on the basis of holdings set forth in the
information incorporated by reference under Item 11 of this Annual Report on
Form 10-KSB.)

The number of shares outstanding of each of the Issuer's classes of common
equity, as of March 1, 2000, was 18,685,765.

DOCUMENTS INCORPORATED BY REFERENCE

None
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TABLE OF CONTENTS
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Page
----
PART I
------
Item 1. Description of Business 3
Item 2. Description of Property 11
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 12

PART II
-------
Item 5. Market for Common Equity and Related Security Holder Matters 13

Item 6. Management's Discussion and Analysis or Plan of Operation 13
Item 7. Financial Statements 26
Item 8. Changes in and Disagreements on Accounting and Financial
Disclosure 26

PART III
--------
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act 27

Item 10. Executive Compensation 29
Item 11. Security Ownership of Certain Beneficial Owners and Management 31

Item 12. Certain Relationships and Related Transactions 33
Glossary 35

PART IV
-------
Item 13. Exhibits and Reports on Form 8-K 37
<PAGE>

PART I
------

Item 1 - Description of Business:
- --------------------------------

General

Gothic Energy Corporation is a holding company owning all of the
outstanding capital stock of Gothic Production Corporation. As used herein, the
term "Gothic Energy" refers to Gothic Energy Corporation (the parent corporation
only), "Production Corp." refers to Gothic Production Corporation, and Gothic
Energy and Production Corp. are referred to collectively as the "Company".

Production Corp., the wholly owned operating subsidiary of Gothic Energy,
is an independent energy company primarily engaged in the acquisition,
development, exploitation, exploration and production of natural gas and oil.
As of December 31, 1999, Production Corp. had proved reserves of 289.2 Bcf of
natural gas and 1.9 MMBbls of oil (300.7 Bcfe), with a PV-10 of approximately
$213.3 million as estimated by Production Corp's independent petroleum
engineers.

Production Corp's natural gas and oil reserves and acreage are principally
located in the Anadarko, Arkoma and Permian/Delaware basins, which are
historically prolific basins with multiple producing horizons and long-lived
reserves. These basins generally provide significant development and
exploitation potential through low-risk infill drilling and the implementation
of new workover, drilling and recompletion technologies. Production Corp. is
currently engaged in implementing a comprehensive development and exploitation
program designed to increase its natural gas and oil production, earnings, cash
flow and net asset value by enhancing proved producing reserves and converting
proved undeveloped reserves to proved producing reserves. Production Corp. has
identified, as of March 1, 2000, 214 development and exploitation projects
within its properties. In July 1997, the Company initiated a comprehensive
development program and as of March 1, 2000 had successfully drilled 118 wells,
111 of which have been completed and are producing and, at March 1, 2000, an
additional 14 wells were in various stages of completion. Through March 1,
2000, Production Corp. has not engaged in any material exploration activities
but intends to devote a limited amount of capital in the future to pursue
seismic controlled exploration opportunities.

At December 31, 1999, Production Corp. held an interest in approximately
465,000 gross acres (approximately 241,000 net acres) and had an interest in
1,005 gross wells (503 net wells). Production Corp. serves as operator of 578
of the wells in which it has an interest. Operated wells account for
approximately 63% of the PV-10 value of Production Corp's proved reserves as of
December 31, 1999. Production Corp. had estimated proved reserves of 300.7 Bcfe
with a PV-10 of $213.3 million as of December 31, 1999. These reserves, of which
87% were classified as proved developed, had an estimated average reserve life
of approximately 10.6 years and 96% were natural gas. For the year ended
December 31, 1999, Production Corp. had revenues of $55.6 million, EBITDA of
$40.7 million and a net loss of $17.3 million.

Business Strategy

The Company's objective, through Production Corp., is to increase its
reserves, production, earnings, cash flow and net asset value through a growth
strategy that includes (i) developing, exploiting and exploring its properties
(ii) maintaining a low operating cost structure, and (iii) acquiring strategic
natural gas and oil properties in a disciplined manner.

. Development, Exploitation and Exploration. Production Corp. seeks to
maximize the value of its natural gas and oil properties through
development drilling, workovers, recompletions, reductions in operating
costs and enhanced operating efficiencies. Production Corp. has, as of
March 1, 2000, identified 214 development and exploitation projects within
its properties, of which 154 have been assigned proved undeveloped
reserves. In 2000, Production Corp., based on currently projected revenues
and financing, intends to spend approximately $23.0 million to drill 70 to
80 gross wells, most of which are on proved undeveloped locations.
Production Corp. also continually evaluates and pursues exploitation
opportunities, including workover and recompletion projects. Production
Corp. expects it will spend approximately $2.0 million in 2000 on these
projects. Additionally, Production Corp. expects it will spend
approximately $3.0

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million in 2000 on seismic controlled exploration projects. Production
Corp. believes geological and geophysical data, including 3D and 2D seismic
surveys acquired in the Amoco Acquisition, will enable it to reduce costs
and risks associated with drilling activities throughout its Anadarko basin
properties.

. Maintain Low Cost Operations. Production Corp. is able to control
directly operating and drilling costs as the operator of wells comprising
approximately 63% of the PV-10 value of proved reserves as of December 31,
1999. In addition, Production Corp. has been able to reduce per unit
operating costs by eliminating unnecessary field and corporate overhead
costs and by divesting marginal and non-strategic properties with limited
development potential. Lease operating expenses, net of production taxes,
have decreased 70%, from $0.74 per Mcfe of production in 1997 to $0.22 per
Mcfe for the year ended December 31, 1999. Further, general and
administrative expenses per Mcfe of production have decreased 40%, from
$0.30 per Mcfe to $0.18 per Mcfe over the same period. Production Corp.
intends to maintain the reduced operating costs associated with well
operations through the use of advanced wireless technology licensed to
Production Corp. as part of the Amoco Acquisition. This technology enables
Production Corp. to remotely monitor well operations, thereby reducing the
need for on-site monitoring personnel. Production Corp. has deployed this
technology throughout many of its producing properties in the Anadarko and
Arkoma basins.

. Strategic Acquisitions. Production Corp. has increased its reserves
through acquisitions, having added, since 1994, 424.9 Bcfe through 14
acquisitions at a total acquisition cost of $339.9 million, or an average
cost of $0.80 per Mcfe. The properties acquired were producing natural gas
and oil properties located primarily in Oklahoma, Texas, New Mexico and
Kansas. There were no significant acquisitions in 1999 and none are
budgeted for 2000. Production Corp. focuses its acquisition efforts on
producing natural gas properties within strategic geographic areas with (i)
relatively long-lived natural gas production, (ii) quantifiable development
and exploitation potential, (iii) low risk exploration potential, (iv)
historically low operating expenses or the potential to reduce operating
expenses, (v) close proximity to Production Corp.'s existing production or
in areas where Production Corp. has the ability to develop operating
economies of scale and (vi) geological, geophysical and other technical and
operating characteristics with which management of Production Corp. has
expertise.

Natural Gas and Oil Reserves

The following table sets forth certain information on the total proved
natural gas and oil reserves, and the PV-10 of estimated future net revenues of
total proved natural gas and oil reserves as of December 31, 1999 for Production
Corp. based on the report of Lee Keeling and Associates, Inc. The calculations
which Lee Keeling and Associates, Inc. used in preparation of such report were
prepared using geological and engineering methods generally accepted by the
petroleum industry and in accordance with SEC guidelines.

<TABLE>
<CAPTION>
As of December 31, 1999
-----------------------------------------------------------------------------------
Natural Gas PV-10%
Natural Gas Oil Equivalent (in thousands)
------------- ---------------- ------------- ----------------
(MMcf) (MBbls) (Mmcfe)
<S> <C> <C> <C> <C>
Proved developed reserves 251,631 1,683 261,726 $193,292
Proved undeveloped reserves 37,560 239 38,996 20,040
------------- ---------------- ------------- ----------------
Total proved reserved 289,191 1,922 300,722 $213,332
============= ================ ============= ================
</TABLE>
Prices used in calculating future net revenue of proved reserves as of
December 31, 1999 and related PV-10 were $1.89 per Mcf of natural gas and $24.33
per barrel of oil based on average prices received by Production Corp. during
December 1999. Production Corp. has not filed any estimates of proved natural
gas and oil reserves with any federal authority or agency other than the
Securities and Exchange Commission.

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Principal Areas of Operations

The following table sets forth the principal areas of operation and
estimated proved natural gas and oil reserves, PV-10 of the estimated future net
revenues and percent of total PV-10 of Production Corp. at December 31, 1999.

Natural % of
Oil and Natural Gas Total
Field Condensate Gas Equivalent PV-10% PV-10%
- --------------------------------- ------------ --------- ------------ -------------- ------------
(MBbls) (MMcf) (MMcfe) (in thousands)

Anadarko Basin:
<S> <C> <C> <C> <C> <C>
Springer Field................... 47 22,818 23,100 $ 15,099 7.1%
Northwest Okeene/Cedardale Field. 412 34,368 36,840 27,820 13.0%
Cement Field..................... 229 64,466 65,840 40,512 19.0%
Mocane Laverne & Hugoton Fields.. 52 10,990 11,302 7,449 3.5%
Carter-Knox...................... 8 2,020 2,068 83 -
Watonga-Chickasha................ 508 79,598 82,645 63,505 29.8%
Arkoma Basin:
Arkoma Field..................... - 27,541 27,541 19,701 9.2%
Potato Hills..................... - 13,082 13,082 15,388 7.2%
Permian/Delaware Basin:
Johnson Ranch/Brushy Draw........ 666 10,455 14,451 12,534 5.9%
Pecos Slope...................... - 23,853 23,853 8,950 4.2%

Hedging Effects................... - - - 2,291 1.1%
----- ------- ------- -------- -----
Totals............................ 1,922 289,191 300,722 $213,332 100.0%
===== ======= ======= ======== =====
</TABLE>

Drilling Activity

The following table sets forth development drilling results for the years
ended December 31, 1997, 1998 and 1999. There were no exploratory wells drilled
during those years.

<TABLE>
<CAPTION>
1997 1998 1999
----------------------- ------------------- ---------------------
Gross Net Gross Net Gross Net
--------- ------------ --------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Productive 17.0 9.9 44.0 20.4 41.0 14.5
Drilling and completing --- --- --- --- 15.0 5.6
Non-Productive --- --- 2.0 1.8 5.0 2.9
---- --- ---- ---- ---- ----
Total 17.0 9.9 46.0 22.2 61.0 23.0
==== === ==== ==== ==== ====
</TABLE>

In the third quarter of 1997, the Company initiated a comprehensive
development program and, as of March 1, 2000, had successfully drilled 118
wells, of which 111 have been completed and are producing and, at March 1, 2000,
14 additional wells were at various stages of completion. In 2000, Production
Corp., based on currently projected revenues and financing, intends to spend
approximately $23.0 million to drill 70 to 80 gross wells, most of which are on
proved undeveloped locations. Production Corp. also continually evaluates and
pursues exploitation opportunities, including workover and recompletion
projects. Production Corp. expects it will spend approximately $2.0 million in
2000 on these projects. Additionally, Production Corp. expects it will spend
approximately $3.0 million in 2000 on seismic controlled exploration projects.
Production Corp. believes geological and geophysical data, including 3D and 2D
seismic surveys acquired in the Amoco Acquisition, will enable it to reduce
costs and risks associated with drilling activities throughout its Anadarko
basin properties.

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The final determination with respect to any potential drilling locations
and the expected time frame for the drilling of any well will depend on a number
of factors, including (i) the results of exploration efforts and the review and
analysis of the seismic or other data, (ii) the availability of sufficient
capital resources by Production Corp. for drilling prospects, and (iii) economic
and industry conditions at the time of drilling, including prevailing and
anticipated prices for natural gas and oil and the availability of drilling rigs
and crews. There can be no assurance that any wells will, if drilled, encounter
reservoirs of commercial quantities of natural gas or oil.

Operating Control Over Production Activities

Production Corp. operates 578 of the 1,005 wells in which it owns an
interest, representing approximately 63% of its PV-10 as of December 31, 1999.
The non-operated properties are being operated by unrelated third parties
pursuant to operating agreements which are, for the most part, standard to the
industry. Decisions about operations regarding non-operated properties may be
determined by the outside operator rather than Production Corp. If Production
Corp. declines to participate in additional activities proposed by the outside
operator, under certain operating agreements, Production Corp. will not receive
revenues from, and/or will lose its interest in, the activity in which it
declines to participate.

Pursuant to the Amoco Acquisition, the Company received a license to use
advanced well automation technology developed by Amoco. This technology is a
wireless application that allows Production Corp. to remotely monitor
production, well pressure and temperature along with other well control factors
on a real-time basis. Further, the technology helps to regulate the well's
productivity and makes periodic adjustments to allow the well to flow more
efficiently. Production Corp. believes that the application of this wireless
technology has allowed Production Corp. to employ fewer personnel to monitor
well activity and operate wells more economically. This technology is currently
being utilized on almost all operated properties in the Anadarko and Arkoma
basins as well as on a few significant non-operated properties Production Corp.
owns an interest in.

Title to Natural Gas and Oil Properties

Production Corp. has acquired interests in producing and non-producing
acreage in the form of working interests, royalty interests and overriding
royalty interests. Substantially all of Production Corp.'s property interests
are held pursuant to leases from third parties. The leases grant the lessee the
right to explore for and extract natural gas and oil from specified areas.
Consideration for a lease usually consists of a lump sum payment (i.e., bonus)
and a fixed annual charge (i.e., delay rental) prior to production (unless the
lease is paid up) and, once production has been established, a royalty based
generally upon the proceeds from the sale of natural gas and oil. Once wells are
drilled, a lease generally continues so long as production of natural gas and
oil continues. In some cases, leases may be acquired in exchange for a
commitment to drill or finance the drilling of a specified number of wells to
predetermined depths. Some of Production Corp.'s non-producing acreage is held
under leases from mineral owners or a government entity which expire at varying
dates. Production Corp. is obligated to pay annual delay rentals to the lessors
of certain properties in order to prevent the leases from terminating. Because
substantially all of Production Corp's undeveloped acreage is held by
production, annual delay rentals are generally nominal.

Title to leasehold properties is subject to royalty, overriding royalty,
carried, net profits and other similar interests and contractual arrangements
customary in the natural gas and oil industry, and to liens incident to
operating agreements, liens relating to amounts owed to the operator, liens for
current taxes not yet due and other encumbrances. In addition, in certain areas
Production Corp's interests in producing properties are subject to certain
agreements and other instruments that have not been recorded in real property
records. The effect of these unrecorded instruments has been confirmed based
upon a review of historical cost and revenue information, including joint
interest billings, division orders, check stubs and other production accounting
information reflecting such unrecorded interests. Production Corp. believes
that such burdens and unrecorded instruments neither materially detract from the
value of its interest in the properties, nor materially interfere with the use
of such properties in the operation of its business.

While updated title opinions may not always be received prior to the
acquisition of a producing natural gas and oil property, title opinions on
significant producing properties have historically been obtained in connection
with pledging Production Corp's producing properties under bank loan agreements.
On undeveloped leases, title opinions are usually not obtained until immediately
prior to the drilling of a well on a property. Accordingly,

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Production Corp's proved undeveloped reserves may be the subject of
significantly less title investigation. It is contemplated, however, that
investigations will be made in accordance with standard practices in the
industry before the acquisition of producing properties and before exploratory
drilling.

Production and Sales Prices

Production Corp's production of natural gas and oil is derived solely from
within the United States. Production Corp. is not obligated to provide a fixed
and determinable quantity of oil and/or natural gas in the future under existing
contracts or agreements with customers. However, from time to time, Production
Corp. does enter into hedging agreements with respect to its natural gas and oil
production.

In January 2000, Production Corp. entered into a hedge agreement covering
50,000 MMBTU of natural gas per day at a fixed price of $2.435 per MMBTU. This
hedge is in effect from April 2000 through October 2000. In February 2000,
Production Corp. entered into a hedge agreement covering 20,000 MMBTU of natural
gas per day at a fixed price of $2.535 per MMBTU for April 2000 and $2.555 per
MMBTU for May 2000. This hedge is in effect for the months of April and May
2000 and the commodity reference price for both contracts is the Panhandle
Eastern Pipeline Company, Texas, Oklahoma Mainline Index, ("Panhandle Eastern").

The collars represent approximately 70% of Production Corp's current daily
natural gas production. Collar arrangements limit the benefits Production Corp.
will realize if actual prices rise above the ceiling price. These arrangements
provide for Production Corp. to exchange a floating market price for a fixed
range contract price. Payments are made by Production Corp. when the floating
price exceeds the fixed range for a contract month and payments are received
when the fixed range price exceeds the floating price. The commodity reference
price for both contracts is Panhandle Eastern.

In August 1999, Production Corp. entered into a hedge agreement covering
10,000 barrels of oil per month at a fixed price of $20.10 per barrel. This
hedge is in effect from September 1999 through August 2000.

Production Corp. does not refine or process the natural gas and oil it
produces, but sells the production to unaffiliated natural gas and oil
purchasing companies in the area in which it is produced. Production Corp.
sells crude oil on a market price basis and sells natural gas under contracts to
both interstate and intrastate natural gas pipeline companies.

Marketing of Production

Production Corp's production of natural gas and oil is marketed to third
parties consistent with industry practices. Typically, oil is sold at the
wellhead at field posted prices, and gas is sold under contract at negotiated
prices based upon factors normally considered in the industry, such as distance
from the well to the pipeline, well pressure, estimated reserves, quality of gas
and prevailing supply/demand conditions.

Typically, gas production is sold to various pipeline companies. The basic
terms of all the contracts are essentially the same in that Production Corp.
makes gas production available to the pipeline companies at certain given points
of delivery on their pipelines and the pipeline company accepts such gas and
delivers it to the end user. The pipeline company then has the obligation to
pay Production Corp. a price for the gas which is based on published indices of
average pipeline prices or upon a percentage of the pipeline resale value.

In January 1998 the Company entered into a ten-year marketing agreement
with Continental Natural Gas Company ("Continental"), now CMS Continental
Natural Gas, whereby the majority of the natural gas associated

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with the Amoco Acquisition will be sold to Continental at current market prices
adjusted for marketing and transportation fees.

The Company's revenues, earnings and cash flows are highly dependent upon
current prices for natural gas and oil received by Production Corp. In December
1999, natural gas and oil prices received by Production Corp. for its production
were $1.89 per Mcf and $24.33 per Bbl, respectively. In general, prices of
natural gas and oil are dependent upon numerous factors beyond the control of
Production Corp. including supply and demand, competition, imports and various
economic, political, environmental and regulatory developments, and accordingly,
future prices of natural gas and oil may be different from prices in effect at
December 31, 1999. As of March 1, 2000, the price received by Production Corp.
for natural gas had risen to $2.31 per Mcf. In view of the many uncertainties
affecting the supply and demand for crude oil, natural gas and refined petroleum
products, the Company is unable to accurately predict future natural gas and oil
prices and demand or the overall effect they will have on the Company.

During the year ended December 31, 1999, Production Corp. sold
approximately 56% of its gas production to Continental and 47% of its oil
production to Duke Energy, Inc.

Competition

The natural gas and oil industry is highly competitive in all of its
phases. Production Corp. encounters competition from other natural gas and oil
companies in all areas of its operations, including the acquisition of producing
properties and the marketing of natural gas and oil. Many of these companies
possess greater financial and other resources than Production Corp. Competition
for acquisition of producing properties is affected by the amount of funds
available to Production Corp., information about producing properties available
to Production Corp. and any standards established from time to time by
Production Corp. for the minimum projected return on investment. Because
gathering systems are the only practical method for the intermediate
transportation of natural gas, competition is presented by other pipelines and
gas gathering systems. Competition may also be presented by alternative fuel
sources, including heating oil and other fossil fuels. Because the primary
markets for natural gas liquids are refineries, petrochemical plants and fuel
distributors, prices are generally set by or in competition with the prices for
refined products in the petrochemical, fuel and motor gasoline markets.

Regulation

The natural gas and oil business is regulated extensively by federal, state
and local authorities. Various governmental agencies, both federal and state,
have promulgated rules and regulations binding on the natural gas and oil
industry and its individual members, some of which carry substantial penalties
for the failure to comply. The regulatory burdens on the natural gas and oil
industry increase its cost of doing business and, consequently, affect its
profitability. Because such laws and regulations are frequently amended or
reinterpreted, Production Corp. is unable to predict the future cost of
complying with such regulations. Production Corp. believes that it is in
material compliance with its regulatory obligations.

The States of Oklahoma and Texas and many other states require permits for
drilling operations, drilling bonds and reports concerning operations and impose
other requirements relating to the exploration and production of natural gas and
oil. These states also have statutes or regulations addressing conservation
matters, including provisions for the unitization or pooling of natural gas and
oil properties, the establishment of maximum rates of production from wells and
the regulation of spacing, plugging and abandonment of such wells.

Environmental Matters. Production Corp's operations and properties are
subject to extensive and changing federal, state and local laws and regulations
relating to environmental protection, including the generation, storage,
handling, emission, transportation and discharge of materials into the
environment, and relating to safety and health. The recent trend in
environmental legislation and regulation generally is toward stricter standards,
and this trend will likely continue. These laws and regulations may require the
acquisition of a permit or other authorization before construction or drilling
commences and for certain other activities; limit or prohibit construction,
drilling and other activities on certain lands lying within wilderness and other
protected areas; and impose substantial liabilities for pollution resulting from
Production Corp's operations. The permits required for various areas of
Production Corp's operations are subject to revocation, modification and renewal
by issuing authorities. Governmental authorities

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have the power to enforce compliance with their regulations, and violators are
subject to fines or injunction, or both. In the opinion of management,
Production Corp. is in substantial compliance with current applicable
environmental laws and regulations, and Production Corp. has no material
commitments for capital expenditures to comply with existing environmental
requirements. Nevertheless, changes in existing environmental laws and
regulations or in interpretations thereof could have a significant impact on
Production Corp., as well as the natural gas and oil industry in general. The
Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA")
and comparable state statutes impose strict, joint and several liabilities on
owners and operators of sites and on persons who dispose of or arrange for the
disposal of "hazardous substances" found at such sites. Although CERCLA
currently excludes petroleum from its definition of "hazardous substance," state
laws affecting Production Corp.'s operations impose clean-up liability relating
to petroleum and petroleum related products. It is not uncommon for the
neighboring landowners and other third parties to file claims for personal
injury and property damage allegedly caused by the hazardous substances released
into the environment. The Resource Conservation and Recovery Act ("RCRA") and
comparable state statutes govern the disposal of "solid waste" and "hazardous
waste" and authorize imposition of substantial fines and penalties for
noncompliance. Although RCRA classifies certain oil field wastes as "non-
hazardous," such exploration and production wastes could be reclassified as
hazardous wastes, thereby making such wastes subject to more stringent handling
and disposal requirements.

Federal regulations require certain owners or operators of facilities that
store or otherwise handle oil, such as Production Corp., to prepare and
implement spill prevention, control countermeasure and response plans relating
to the possible discharge of oil into surface waters. The Oil Pollution Act of
1990 contains numerous requirements relating to the prevention of and response
to oil spills into waters of the United States. For onshore facilities that may
affect waters of the United States, the Environmental Protection Agency ("EPA")
requires an operator to demonstrate $10.0 million in financial responsibility,
and for offshore facilities the financial responsibility requirement is at least
$35.0 million. Regulations are currently being developed under federal and
state laws concerning oil pollution prevention and other matters that may impose
additional regulatory burdens on Production Corp. In addition, the Clean Water
Act and analogous state laws require permits to be obtained to authorize
discharge into surface waters or to construct facilities in wetland areas. With
respect to certain of its operations, Production Corp. is required to maintain
such permits or meet general permit requirements. The EPA recently adopted
regulations concerning discharges of storm water runoff. This program requires
covered facilities to obtain individual permits, participate in a group or seek
coverage under an EPA general permit. Production Corp. believes that it will be
able to obtain, or be included under, such permits, where necessary, and to make
minor modifications to existing facilities and operations that would not have a
material effect on Production Corp.

Production Corp. has acquired leasehold interests in numerous properties
that for many years have produced natural gas and oil. Although the previous
owners of these interests may have used operating and disposal practices that
were standard in the industry at the time, hydrocarbons or other wastes may have
been disposed of or released on or under the properties. In addition, some of
Production Corp's properties are or have been operated by third parties over
whom Production Corp. has or had no control. Notwithstanding Production Corp's
lack of control over properties operated by others, the failure of the operator
to comply with applicable environmental regulations may, in certain
circumstances, adversely impact Production Corp.

Marketing and Transportation. In the past, the transportation and sale for
resale of natural gas in interstate commerce has been regulated pursuant to the
Natural Gas Act of 1938, the Natural Gas Policy Act of 1978 (the "NGPA"), and
the regulations promulgated thereunder by the Federal Energy Regulatory
Commission (the "FERC"). Since 1978, maximum selling prices of certain
categories of natural gas sold in the "first sales," whether sold in interstate
or intrastate commerce, has been regulated pursuant to the NGPA. The term
"first sales" means the first time gas is sold as a severed hydrocarbon after it
is produced from the ground. The NGPA established various categories of natural
gas and provided for graduated deregulation of price controls of several
categories of natural gas. There is currently no price regulation for "first
sales" of gas. On July 26, 1989, the Natural Gas Wellhead Decontrol Act was
enacted. This act amended the NGPA to remove both price and non-price controls
from natural gas sold in "first sales" as of January 1, 1993. Under current
market conditions, deregulated gas prices under new contracts tend to be
substantially lower than most regulated price ceilings prescribed by the NGPA.
The effect of termination of these price controls cannot be determined

The FERC regulates interstate natural gas transportation rates and service
conditions, which affect the marketing of gas produced by Production Corp., as
well as the revenues received by Production Corp. for sales of

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such production. Since the mid-1980s, FERC has issued a series of orders,
culminating in Order Nos. 636, 636-A and 636-B ("Order 636"), that have
significantly altered the marketing and transportation of natural gas. Order 636
mandates a fundamental restructuring of interstate pipeline sales and
transportation service, including the unbundling by interstate pipelines of the
sale, transportation, storage and other components of the city-gate sales
services such pipelines previously performed. One of FERC's purposes in issuing
the order was to increase competition within all phases of the natural gas
industry. Numerous parties have filed petitions for review of Order 636, as well
as orders in individual pipeline restructuring proceedings. In July 1996, Order
636 was generally upheld on appeal, and the portions remanded for further action
do not appear to materially affect Production Corp. Because Order 636 may be
modified as a result of the appeals, it is difficult to predict the ultimate
impact of the orders on Production Corp. and its gas marketing efforts.
Generally, Order 636 has eliminated or substantially reduced the interstate
pipelines' traditional role as wholesalers of natural gas and has substantially
increased competition and volatility in natural gas markets.

The price Production Corp. receives from the sale of natural gas liquids
and oil is affected by the cost of transporting products to markets. Effective
January 1, 1995, FERC implemented regulations establishing an indexing system
for transportation rates for oil pipelines, which, generally, would index such
rates to inflation, subject to certain conditions and limitations. Production
Corp. is not able to predict with certainty the effect, if any, of these
regulations on its operations. However, the regulations may increase
transportation costs or reduce wellhead prices for natural gas liquids and oil.

Operational Hazards and Insurance

The Company maintains various types of insurance to cover its operations,
including $2.0 million of general liability insurance and an additional $5.0
million of excess liability insurance. The Company's insurance does not cover
every potential risk associated with the drilling and production of natural gas
and oil. Coverage is not obtainable for certain types of environmental hazards.
The occurrence of a significant adverse event, the risks of which are not fully
covered by the Company's insurance, could have a material adverse effect on the
Company's financial condition and results of operations. Moreover, no assurance
can be given that the Company will be able to maintain adequate insurance in the
future at reasonable rates.

Employees

As of March 1, 2000 the Company, through Production Corp., had a total of
33 employees consisting of 19 production and land personnel, and 14 financial,
accounting and administrative personnel, two of whom are executive officers.

Executive Office

The Company leases approximately 13,600 square feet of space in Tulsa,
Oklahoma for its corporate and administrative offices. The annual rental is
approximately $225,000 and the lease expires December 31, 2004. The Company
believes this facility is adequate for its present requirements.

Incorporation

Both Gothic Energy and Production Corp. are Oklahoma corporations. Gothic
Energy was originally incorporated on November 19, 1985 under the laws of the
State of New Jersey and was reincorporated as a Delaware corporation on June 23,
1994. On December 4, 1996, Gothic Energy was reincorporated as an Oklahoma
corporation by merging the Delaware Corporation with and into a wholly owned
subsidiary incorporated for that purpose under the laws of the State of
Oklahoma. Production Corp. was incorporated on March 26, 1998 and acquired
substantially all the assets of Gothic Energy on April 27, 1998. The Company's
principal office is at 6120 South Yale Avenue, Suite 1200, Tulsa, Oklahoma
74136, and its telephone number is (918) 749-5666.

10
<PAGE>

Item 2 - Description of Property:
- --------------------------------

Acreage

The following table shows the approximate gross and net acres of leasehold
interests of Production Corp. on December 31, 1999.

<TABLE>
<CAPTION>
Developed Undeveloped
Acreage Acreage
-------------------- ---------------------
Field Gross Net Gross Net
- --------------------------------------------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Anadarko Basin
Springer Field................................... 7,200 4,680 150 75
Northwest Okeene/Cedardale Field................. 66,560 51,906 1,920 274
Cement Field..................................... 48,640 29,184 3,385 980
Mocane Laverne & Hugoton Fields.................. 93,518 49,485 420 420
Watonga-Chickasha................................ 135,680 69,196 8,157 4,127

Arkoma Basin
Arkoma Field..................................... 74,240 18,560 - -
Potato Hills..................................... 5,754 795 6,980 2,523

Permian/Delaware Basin
Johnson Ranch/Brushy Draw........................ 160 120 - -
Pecos Slope...................................... 12,000 9,000 - -
------- ------- ------ -----
Totals......................................... 443,752 232,926 21,012 8,399
======= ======= ====== =====
</TABLE>
Productive Well Summary

The following table sets forth by field the respective interests in
productive wells owned by Production Corp. as of December 31,1999.
<TABLE>
<CAPTION>
Gross Net
Field Well Count Well Count
- ---------------------------------------------------- ------------- --------------
Anadarko Basin:
<S> <C> <C>
Springer Field................................. 35 14
Northwest Okeene/Cedardale Field............... 189 92
Cement Field................................... 72 18
Mocane Laverne & Hugoton Fields................ 100 56
Watonga-Chickasha.............................. 355 179
Arkoma Basin:
Arkoma Field................................... 139 35
Potato Hills................................... 3 1
Permian/Delaware Basin:
Johnson Ranch/Brushy Draw...................... 7 3
Pecos Slope.................................... 105 105
----- ---
Totals.......................................... 1,005 503
===== ===
</TABLE>

<PAGE>

Natural Gas and Oil Production

The following table shows the approximate net natural gas and oil
production attributable to the Company for the years ended December 31, 1997,
1998 and 1999.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Natural gas (MMcf)............................. 6,583 24,455 25,477
Oil (MBbls).................................... 176 257 158
Natural gas equivalent (MMcfe)................. 7,639 25,997 26,425
</TABLE>

Item 3 - Legal Proceedings:
- --------------------------

Gothic Energy is a plaintiff in an action instituted on December 22, 1999
in the United States District Court for the Northern District of Oklahoma
against Jefferies & Company, Inc. ("Jefferies") seeking actual and punitive
damages against Jefferies for intentional interference with contractual
relations and business opportunity wherein Gothic Energy claims Jefferies
improperly and wrongfully interfered in the closing of the acquisition of the
Amoco assets in January 1998. Jefferies has filed a counterclaim against Gothic
Energy seeking indemnification under an alleged letter agreement between Gothic
Energy and Jefferies for attorney's fees and expenses of litigation, among other
things. The litigation is presently in the discovery stage, and management is
unable to predict its ultimate outcome.

Neither Gothic Energy nor Production Corp. are parties to any other
proceedings other than ordinary litigation incidental to their business, the
outcome of which management believes will not have a material adverse effect on
their financial position or results of operations.

Item 4 - Submission of Matters to a Vote of Security Holders:
- ------------------------------------------------------------

On October 5, 1999 Gothic Energy held its Annual Meeting of Shareholders to
elect three directors of Gothic Energy to hold office until the next Annual
Meeting of Shareholders in 2000 and the election and qualification of their
successors and to consider and vote on a proposal to approve the adoption of a
1999 Stock Incentive Plan.

John Fleming, Brian Bayley and Michael Paulk were elected to serve as
directors until the 2000 Annual Meeting of Shareholders and until their
successors are elected and qualified. The proposal to approve the adoption of
the 1999 Stock Incentive Plan was not passed by the requisite shareholder vote.

<PAGE>

PART II
-------

Item 5 - Market for Common Equity and Related Security Holder Matters:
- ---------------------------------------------------------------------

Gothic Energy's Common Stock is quoted on the OTC Bulletin Board under the
symbol GOTH. The following table sets forth the high and low bid quotations on
the OTC Bulletin Board for Gothic Energy's Common Stock by calendar quarter for
the period January 1,1996 through March 1, 2000.

Bid
--------------------------
Calendar Quarter High Low
-------------------------------- ----------- -----------
1998:
First Quarter $3.063 $1.813
Second Quarter 2.375 1.188
Third Quarter 1.594 0.563
Fourth Quarter 0.719 0.219

1999:
First Quarter 0.719 0.375
Second Quarter 0.813 0.422
Third Quarter 0.531 0.406
Fourth Quarter 0.438 0.156

2000:
First Quarter $0.453 $0.141
(through March 1)

The foregoing amounts, represent inter-dealer quotations without adjustment
for retail markups, markdowns or commissions and do not represent the prices of
actual transactions. On March 1, 2000, the closing bid quotations for the
Common Stock, as reported on the OTC Bulletin Board, was $0.344.

As of March 1, 2000, Gothic Energy had 153 shareholders of record and
believes that it has in excess of 500 beneficial holders. Gothic Energy has
never paid a cash dividend on its Common Stock and management has no present
intention of commencing to pay dividends on its Common Stock. Under the terms
of various loan documents, Gothic Energy is prohibited from paying cash
dividends on its Common Stock.

Item 6 - Management's Discussion and Analysis or Plan of Operation:
- ------------------------------------------------------------------

The discussion in this section of this Annual Report is intended to comply
with the so called "plain-English" rule adopted by the Commission relating to
the language used.

A Discussion of Our Results of Operations

General

As a consequence of our holding company structure, all of our natural gas
and oil acquisition, development, exploitation, exploration and production
activities are conducted through Production Corp., the wholly-owned operating
subsidiary of Gothic Energy. The sole material asset of Gothic Energy, our
parent corporation, is the outstanding capital stock of Production Corp. During
1999, our parent corporation incurred $179,000 of general and administrative
costs and had approximately $10.0 million of interest expense and related note
amortization costs on its outstanding 14-1/8% Senior Secured Discount Notes due
2006. Additionally, Gothic Energy recognized $8.7

-13-
<PAGE>

million in preferred dividends and amortization of preferred discount on its
Series B Convertible Preferred Stock during 1999.

The following discussion of our operating results describes the operations
of our operating subsidiary, Production Corp., unless we state otherwise.

Our results of operations have been significantly affected by the
acquisition of producing natural gas and oil properties over the last three
years as well as a re-capitalization we completed in April 1998. During 1998,
we completed the acquisition of a major amount of natural gas and oil assets
from Amoco Corporation for a purchase price of $242.0 million. The Amoco
acquisition added approximately 240.0 Bcfe of proved reserves with a PV-10 of
approximately $230.1 million to our reserves as of December 31,1997.

Our profitability and revenues are dependent, to a significant extent, upon
prevailing spot market prices for natural gas and oil. Prices are subject to
wide fluctuations in response to changes in supply of and demand for natural gas
and oil, market uncertainty and a variety of additional factors that are beyond
our control. Such factors include political conditions, weather conditions,
government regulations, the price and availability of alternative fuels and
overall economic conditions.

We incurred a net loss of $129.7 million in 1998, due principally to a
decline in natural gas and oil prices during that year. This commodity price
decline required that we write down the carrying value of our natural gas and
oil properties by $76.0 million. More significantly, the commodity price
decline continued to affect our ongoing revenues and cash flows during early
1999, contributing to a net loss of $17.3 million for the year ended
December 31, 1999.

It is our intention to continue to spend available cash flow (EBITDA less
cash interest payable on bank debt and on Senior Secured Notes) on the
development of our natural gas and oil properties. With the continued
volatility of commodity prices, we will continue to utilize hedging programs.
We believe this should help to stabilize cash flow, which is necessary to ensure
our ability to generate sufficient reserves to replace current production, but
limits the benefit of increases in commodity prices above the hedge price.
Should commodity prices fall below current levels, we would be limited in our
ability to increase production and maintain cash flow at a level sufficient to
meet our ongoing financial covenants under our Credit Facility. Recently, the
price of natural gas and oil has increased, but there is no assurance that
prices will continue to increase or remain at the current level. Further,
the borrowing base amount available under our Credit Facility was redetermined
in October 1999 and was reduced from $25.0 million to $20.0 million. On
March 27, 2000, the borrowing base amount was further reduced to $15.0 million.
There is no assurance that our lender will maintain the available amount at this
current level.

Gothic Energy is currently engaged in efforts to restructure its balance
sheet. It has been engaged in negotiations with both Chesapeake Energy
Corporation ("Chesapeake") with respect to Gothic Energy's Senior Redeemable
Preferred Stock, Series B ("Preferred Stock") held by Chesapeake and the holders
of its 14-1/8% Senior Secured Discount Notes due 2006 (the "Discount Notes") in
that regard. The terms of the Preferred Stock held by Chesapeake provide for
the payment of dividends at a rate per annum of 12% of the aggregate liquidation
preference payable in additional shares of Preferred Stock, provided that after
April 1, 2000, at Gothic Energy's option, the dividends payable may be paid in
cash. In lieu of cash interest payments, the principal amount of Discount Notes
accrete at a rate per annum of 14-1/8% compounded semi-annually to an aggregate
principal amount of $104.0 million at May 1, 2002. Thereafter, the Discount
Notes accrue interest at the rate of 14-1/8% per annum, payable in cash semi-
annually in arrears on May 1 and November 1 of each year. In an effort to
eliminate this continuing erosion of the interests of Gothic Energy's common
equity by the payment of dividends in kind on the shares of Preferred Stock and
enlargement of the outstanding principal of its Discount Note indebtedness,
Gothic Energy had, in the latter half of 1999, been seeking to refinance these
securities. As a consequence of the reduced levels of market prices for natural
gas and oil throughout the latter half of 1998 and into 1999 and the resulting
impact on the Company's revenues and financial condition, Gothic Energy was
unsuccessful in pursuing its efforts to refinance these securities.

On February 29, 2000, Gothic Energy and Production Corp. entered into an
agreement with Chesapeake to purchase an option to redeem the 61,007 shares of
outstanding Preferred Stock, plus accrued dividends, and 2,439,246 shares of
Common Stock held by Chesapeake. The consideration for the purchase of the
option is the

-14-
<PAGE>

turn-over to Chesapeake of the operations of certain wells and Production Corp.
resigning as operator of those wells and the extension of a right of first
refusal under a Participation Agreement with Chesapeake until April 30,2006. A
closing under the option and the redemption of the shares will be held upon the
fulfillment of various closing conditions including, among others approval by
certain lenders of the Company.

Gothic Energy is currently in negotiations with the holders of the Discount
Notes intended to result in the conversion of that indebtedness into equity
securities of Gothic Energy. Inasmuch as those negotiations are ongoing, there
can be no assurance as to the success of those efforts or the terms on which the
indebtedness of Gothic Energy may be exchanged. It is expected, however, that
the exchange of that indebtedness will result in material dilution to the
holders of Gothic Energy's Common Stock. Gothic Energy is seeking to enter into
agreements with the holders of the Discount Notes to exchange their Discount
Notes for shares of Common Stock which agreements are expected to be subject to
the fulfillment of various closing conditions. Implementation of the closing by
Gothic Energy under the option with Chesapeake and the exchange of the Discount
Notes is also expected to be accompanied by efforts to raise additional equity
capital through a rights offering or by other means. Gothic Energy is currently
engaged in a review of the various means by which the implementation of a
restructuring can be accomplished. Gothic Energy is unable to predict the
success of these restructuring efforts, the terms on which or means by which its
balance sheet may be improved, and the extent of any dilution to be sustained by
the holders of its outstanding Common Stock.

Natural Gas and Oil Production, Revenue and Price History

The table below reflects certain of our summary operating data for the
periods presented:

1997 1998 1999
------- ------- -------
Net Production:
Oil (Mbls) 176 257 158
Natural Gas (Mmcf) 6,583 24,455 25,477
Natural Gas Equivalent (Mmcfe) 7,639 25,997 26,425

Oil and Natural Gas Sales:
Oil $ 3,551 $ 3,469 $ 2,671
Natural Gas 13,867 47,245 50,296
------- ------- -------
Total $17,418 $50,714 $52,967
======= ======= =======
Average Sales Price:
Oil (Bbl) $ 20.18 $ 13.50 $ 16.91
Natural gas (Mcf) 2.11 1.93 1.97
Natural gas equivalent (Mcfe) 2.28 1.95 2.00
Expenses ($ per Mcfe):
Lease Operating (1) $ 0.74 $ 0.33 $ 0.22
General and Administrative 0.30 0.14 0.18
Depreciation, Depletion and
Amortization (2) 0.72 0.91 0.77

- --------------------

(1) These amounts are net of production taxes.
(2) These amounts represent depreciation, depletion and amortization of oil
and natural gas properties only.

A Comparison of Operating Results For The Years Ended December 31, 1999 and
December 31, 1998

Our revenues were $55.6 million for the year 1999 as compared to $53.0
million for the year 1998. This represents a 5% increase in total revenue for
1999. Natural gas and oil sales for the year ended 1999 increased $2.3 million
to $53.0 million compared to $50.7 million in 1998, or an increase of 5%. Of
the 1999 revenues, $2.7 million was from oil sales and $50.3 million was from
natural gas sales. In 1998, we had $3.5 million from oil sales and $47.2
million from natural gas sales. The increase in our natural gas and oil sales
was primarily the result of higher commodity prices for both natural gas and oil
in 1999 compared to 1998. Our oil sales in 1999 were based

-15-
<PAGE>

on the sale of 158,000 barrels at an average price of $16.91 per barrel as
compared to 257,000 barrels at an average price of $13.50 per barrel in 1998.
Natural gas sales in 1999 were based on the sale of 25.5 Bcf at an average price
of $1.97 per mcf compared to 24.5 Bcf at an average price of $1.93 per mcf in
1998.

We incurred lease operating expenses during 1999 of $9.6 million compared
with lease operating expenses of $12.1 million for 1998. Our lease operating
expenses include approximately $3.9 million and $3.5 million in production taxes
which we incurred from our share of production in 1999 and 1998, respectively.
The decrease in lease operating expenses is primarily due to certain non-
recurring costs associated with the Amoco Acquisition transition which were
incurred during the first quarter of 1998 and the sale of oil properties in the
Johnson Ranch and Brushy Draw areas in early 1999 which had high operating
costs. Our lease operating expenses and production taxes as a percentage of
natural gas and oil sales decreased to 18% in 1999 as compared to 24% in 1998.
Lease operating expenses per Mcfe decreased to $0.22 for 1999 compared to $0.33
in 1998. Both of these decreases we believe are due to our more wide spread use
of telemetry and other more efficient means of operating our properties that we
acquired as part of our transaction with Amoco in early 1998.

Our depreciation, depletion and amortization expense was $21.0 million for
1999 as compared to $24.0 million for 1998. The decrease resulted primarily
from the write-down of natural gas and oil properties in the latter half of
1998, which created a smaller depletable base.

Our general and administrative costs were $4.7 million for 1999 as compared
to $3.8 million for 1998. This increase was primarily the result of personnel
we added and other costs we incurred related to the Amoco acquisition and the
administrative costs incurred in operating and developing the wells acquired.
The costs per Mcfe increased from $0.14 in 1998 to $0.18 in 1999. We also
incurred investment banking and related fees in 1999 of $638,000 in connection
with our efforts to restructure our balance sheet

We account for our oil and gas exploration and development activities using
the full cost method of accounting prescribed by the Securities and Exchange
Commission ("Commission"). Accordingly, all our productive and non-productive
costs incurred in connection with the acquisition, exploration and development
of natural gas and oil reserves are capitalized and depleted using the units-of-
production method based on proved oil and gas reserves. We capitalize our costs
including salaries and related fringe benefits of employees directly engaged in
the acquisition, exploration and development of natural gas and oil properties,
as well as other directly identifiable general and administrative costs
associated with these activities. These costs do not include any costs related
to production, general corporate overhead, or similar activities. Our natural
gas and oil reserves are estimated annually by independent petroleum engineers.
Our calculation of depreciation, depletion and amortization ("DD&A") includes
estimated future expenditures that we believe we will incur in developing our
proved reserves and the estimated dismantlement and abandonment costs, net of
salvage values. In the event the unamortized cost of the natural gas and oil
properties we are amortizing exceeds the full cost ceiling as defined by the
Commission, we charge the amount of the excess to expense in the period during
which the excess occurs. The full cost ceiling is based principally on the
estimated future discounted net cash flows from our natural gas and oil
properties. Changes in our estimates or declines in prevailing natural gas and
oil prices could cause us to reduce in the near term our carrying value of our
natural gas and oil properties. A write-down arising out of these conditions is
referred to throughout our industry as a full cost ceiling write-down.

During the year ended December 31, 1998, we made a $76.0 million pre-tax
provision for impairment of our natural gas and oil properties because of the
drop in natural gas and oil prices during the last half of 1998. Our full cost
ceiling at December 31, 1998 was based on natural gas prices received at the
time of $1.81 per Mcf and oil prices received of $10.50 per Bbl. This provision
resulted from a full cost ceiling write-down. The write-down is shown in our
balance sheet as a reduction of the cost of natural gas and oil properties. We
had no full cost ceiling write-down during 1999.

We evaluate natural gas and oil reserve acquisition opportunities in light
of many factors only a portion of which may be reflected in the amount of proved
natural gas and oil reserves that we propose to acquire. In determining the
purchase price to be offered, we do not solely rely on proved oil and gas
reserves or the value of such reserves determined in accordance with Rule 4-10
of Regulation S-X adopted by the Commission. Factors we consider include the
probable reserves of the interests intended to be acquired, anticipated
efficiencies and cost reductions that we believe can be made in us operating the
producing properties, the additional reserves that we

-16-
<PAGE>

believe can be proven relatively inexpensively based on our knowledge of the
area where the interests are located and existing producing properties we own.
We may also consider other factors if appropriate. We may conclude that an
acquisition is favorable even if there may be a full cost ceiling write-down
associated with it based on other factors we believe are important. We do not
perform a ceiling test for specific properties acquired because the ceiling test
is performed at each quarter and at year end for all of our properties included
in our cost center and is based on prices for natural gas and oil as of that
date which may be higher or lower than the prices used when evaluating potential
acquisitions. We review the transaction in the light of proved and probable
reserves, historic and seasonal fluctuations in the prices of natural gas and
oil, anticipated future prices for natural gas and oil, the factors described
above as well as other factors that may relate to the specific properties under
review.

Our interest and debt issuance costs were $38.0 million for 1999 as
compared to $35.4 million for 1998. This increase was primarily because of
higher debt levels associated with our 11 1/8% Senior Secured Notes which were
issued in April 1998 by Production Corp., interest on our 14-1/8% Senior Secured
Discount Notes which Gothic Energy issued in April 1998, and amortization of the
costs incurred to complete the sale of these notes and amendments to our bank
credit facility. We incurred interest costs of $26.1 million related to our 11
1/8% Senior Secured Notes, $9.7 million related to our 14 1/8% Senior Secured
Discount Notes, $397,000 with our bank, and $1.8 million as amortization of loan
costs.

We recorded an extraordinary loss on the early extinguishment of debt in
the amount of $31.5 million during 1998. The 1998 amount reflects the payment
of $20.8 million in consent fees, $6.3 million in the write-off of unamortized
discount and debt issuance costs and $4.4 million in unamortized bank loan
costs. We obtained consents to the amendment of the terms of our 12 1/4%
Senior Notes in early 1998 prior to repaying the notes and also prepaid our bank
credit facility in April 1998.

Our profitability and revenues are dependent, to a significant extent, upon
prevailing spot market prices for natural gas and oil. Natural gas and oil
prices and markets have been volatile. Prices are subject to wide fluctuations
in response to changes in supply of and demand for natural gas and oil, market
uncertainty and a variety of additional factors that are beyond our control.
Such factors include political conditions, weather conditions, government
regulations, the price and availability of alternative fuels and overall
economic conditions. Natural gas prices have fluctuated significantly over the
past twelve months.

We use the sales method for recording natural gas sales. Our oil and
condensate production is sold, title passed, and revenue recognized at or near
our wells under short-term purchase contracts at prevailing prices in accordance
with arrangements, which are customary in our industry. Our gas sales are
recorded as revenues when the gas is metered and title transferred pursuant to
the gas sales contracts. During such times as our sales of gas exceed our pro
rata ownership in a well, such sales are recorded as revenues unless total sales
from the well have exceeded our share of estimated total gas reserves underlying
the property at which time the excess is recorded as a gas balancing liability.
Such imbalances are incurred from time to time in the ordinary course of our
business in the operation of our gas wells as a consequence of operational
factors. Certain of such gas balancing liabilities were assumed as part of the
acquisition of natural gas and oil properties.

At December 31, 1999, we had deferred charges related to gas balancing of
$1.5 million and a gas balancing liability of $3.6 million, including $900,000
of deferred credits. The balances that existed at December 31, 1999, except for
possible immaterial amounts, were not the result of producing operations we
conducted but related to the assets we acquired. It is not our policy to operate
wells in such a manner that imbalances are created. We expect that the
imbalances that existed at December 31, 1999 will be settled upon abandonment of
the wells or will be reflected in the price if the respective well interest is
sold prior to then.

-17-
<PAGE>

Matters Relating to Our Liquidity and Capital Resources

General

Since 1994, our principal sources of cash have been bank borrowings, the
sale of equity and debt securities and cash flow from operations. The following
reflects our comparative cash flows for the years ended December 31, 1998 and
1999:

Year Ended December 31,
--------------------------------
1998 1999
-------- --------
(in thousands)
--------------------------------

Net cash provided by operating
activities $ 11,567 $13,707
Net cash used in investing
activities 191,375 22,241
Net cash provided by financing
activities 165,375 8,828

Our net cash provided by operations increased to $13.7 million for 1999 as
compared to net cash provided of $11.6 million for 1998. The improved operating
cash flows for 1999 relate primarily to the increase in income from operations
before non-cash charges, partially offset by increased interest costs and a
reduction of other liabilities.

We used $22.2 million of net cash in investing activities for 1999 compared
to net cash used of $191.4 million in 1998. The 1999 cash used for investing
activities includes property development costs of approximately $21.1 million
and approximately $3.4 million in cash paid for property and equipment
acquisitions. These uses were partially offset by proceeds of $2.2 million
received from the sale of substantially all of our Johnson Ranch properties.
The 1998 cash used for investing activities includes approximately $218.7
million paid for property acquisitions and $18.4 million for development costs,
including the Amoco Acquisition, offset by approximately $44.7 million received
from property sales.

Our net cash provided by financing activities for 1999 was $8.8 million
compared to $165.4 million provided in 1998. The 1999 amount includes net
proceeds from our credit facility of $9.0 million, partially offset by the
payment of $172,000 in bank and other loan fees. The 1998 amount includes
proceeds from long-term debt, related to the Amoco acquisition and the
subsequent recapitalization, of $431.3 million and proceeds from the issuance of
our Series A and Series B Preferred Stock of $73.5 million, partially offset by
the redemption of the Series A Preferred Stock and accrued dividends for $40.8
million, payment of $38.5 million in 12 1/4% Senior Notes consent fees and
other bank and offering fees and payments of short and long-term debt of $259.9
million.

How We Have Financed Our Activities

We have had a series of credit facilities in existence with Bank One,
Texas, N.A. commencing in January 1996. Borrowings under these credit
facilities were used to finance the payment of all or a substantial portion of
the purchase price for the acquisitions of natural gas and oil properties we
acquired since early 1996. The proceeds from the sale of equity securities
financed substantially all of the balance. At present, the credit facility,
with Production Corp. as the borrower and the parent corporation as the
guarantor, (the "Credit Facility"), permits borrowings from time to time in the
amount of up to $15.0 million. Interest on borrowings is payable monthly at the
bank's base rate, as determined from time to time. All outstanding borrowings
are due on April 30, 2001, the maturity date, when the Credit Facility ends
unless extended or renewed. Borrowings under the Credit Facility are secured by
a senior lien on the natural gas and oil assets owned by Gothic Production. As
of December 31, 1999, $9.0 million was outstanding under this Credit Facility.
At March 27, 2000 $8.5 million was available for borrowing under the Credit
Facility.

-18-
<PAGE>

and negative covenants, including, among others, (i) prohibitions against
additional indebtedness unless approved by the lenders, subject to certain
exceptions, (ii) prohibitions against the creation of liens on the assets of
Production Corp., subject to certain exceptions, (iii) prohibitions against cash
dividends, (iv) prohibitions against hedging positions unless consented to by
Bank One, (v) prohibitions on asset sales, subject to certain exceptions, (vi)
restrictions on mergers or consolidations, (vii) a requirement to maintain a
ratio of current assets to current liabilities of 1.0 to 1.0, and (viii) a
minimum interest coverage ratio of not less than 1.25 to 1.0 for the quarter
ended June 30, 1999, 1.50 to 1.0 for the quarter ended September 30, 1999, 1.75
to 1.0 for the quarter ended December 31, 1999 and 2.0 to 1.0 for each remaining
quarter starting with the quarter ending March 31, 2000. The Credit Facility
includes covenants prohibiting distributions and loans or advances to third
parties, subject to certain exceptions. If Production Corp. is required to
purchase or redeem any portion of the 11 1/8% Senior Secured Notes, or if any
portion of the 11 1/8% Senior Secured Notes become due, the Borrowing Base is
subject to reduction. Production Corp. is required to escrow interest payments
due on the Senior Secured Notes at such times as its borrowings under the Credit
Facility equal or exceed 75% of the Borrowing Base. Events of default include
the non-payment of principal, interest or fees, a default under other
outstanding indebtedness, a breach of the representations and warranties
contained in the loan agreement, material judgements, bankruptcy or insolvency,
a default under certain covenants not cured within a grace period, and a change
in the management or control of the Company.

Our bank credit facility and outstanding notes contain numerous affirmative
and negative covenants. We must be in compliance with the Credit Facility in
order to borrow funds. In addition, the breach of certain covenants could cause
our outstanding indebtedness to the bank to become immediately due and payable.
We are also required to be in compliance with the affirmative and negative
covenants under our outstanding notes. If we fail to remain in compliance with
these covenants under our notes the indebtedness may become immediately due and
payable. If either our bank indebtedness or outstanding notes should become
immediately due and payable, under the cross-default terms of these debt
instruments, the other outstanding indebtedness would become immediately due and
payable. This could result in an aggregate of $319.9 million of indebtedness,
as of December 31, 1999 being immediately due and payable.

Future Capital Requirements and Resources

Our capital requirements relate to the acquisition, exploration,
enhancement, development and operation of natural gas and oil properties. In
general, because our natural gas and oil reserves are depleted by production
over time, the success of our business strategy is dependent upon a continuous
acquisition, exploitation, enhancement, and development program. In order to
achieve profitability and generate cash flow, we are dependent upon acquiring or
developing additional natural gas and oil properties or entering into joint
natural gas and oil well development arrangements. At year-end, we had $9.0
million outstanding under our credit facility. Under our bank credit facility,
we have a current borrowing base of $15.0 million with $8.5 million available
for borrowing.

The Effect on Us of Changes in Prices and Inflation

Our revenues and the value of our natural gas and oil properties are
affected by changes in the prevailing prices for natural gas and oil. Natural
gas and oil prices are subject to seasonal and other fluctuations that are
beyond our control and ability to predict.

From time to time, we hedge the natural gas prices we receive through the
use of commodity swap agreements in an effort to reduce the effects of the
volatility of the price of natural gas and crude oil on our operations. These
agreements involve the receipt of fixed-price amounts in exchange for variable
payments based on Panhandle Eastern prices and specific volumes. Through the use
of commodity price swap agreements, we can fix the price we receive for
specified amounts of production to the commodity swap price. The differential
to be paid or received, under the swap agreement, is accrued in the month of the
related production and recognized as a component of natural gas and crude oil
sales. We do not acquire, hold or issue financial instruments for trading
purposes.

While the use of hedging arrangements limits our downside risk on downward
price movements, it may also limit our future gains from upward movements. All
hedging is accomplished under agreements based upon industry standard forms. We
address market risk by selecting instruments whose value fluctuations correlate

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<PAGE>

strongly with the underlying commodity being hedged. We have not been required
to provide collateral relating to our hedging activities.

Although certain of our costs and expenses are affected by the level of
inflation, inflation has not had a significant effect on our results of
operations during 1999.

Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private
Securities Litigation Reform Act of 1995

With the exception of historical matters, the matters we have discussed
above and elsewhere in this Annual Report are "forward-looking statements" as
defined under the Securities Exchange Act of 1934, as amended, that involve
risks and uncertainties. The forward-looking statements we discuss in this
Annual Report appear in various places including under the headings: (i) "A
Discussion of Our Results of Operations - General" as to our ability to borrow
under our bank Credit Facility throughout 2000, our ability to obtain waivers
from the bank and our ability to successfully negotiate a conversion of our
Discount Notes into equity and to otherwise improve the balance sheet of Gothic
Energy, (ii) "A comparison of Operating Results For The Year Ended December 31,
1999 and December 31, 1998" relating to our dependence for profits and revenues
on prevailing spot market prices for oil and gas, (iii) "Changes in Prices and
Inflation" as to the impact of inflation on us, and (iv) "Matters Relating to
Our Liquidity and Capital Resources" as to our capital requirements, business
strategy, our ability to remain in compliance with the terms of our Credit
Facility, our ability to continue as a going concern, ability to attain and
maintain profitability and cash flow, our ability to increase our reserves of
natural gas and oil through drilling activities, our dependence upon the
acquisition of and ability to acquire additional oil and gas properties or
entering into joint oil and gas well development arrangements, access to debt
and equity capital and availability of joint venture development arrangements,
estimates as to our needs for additional capital and the times at which
additional capital will be required, expectations as to our sources for this
capital and funds, our ability to successfully implement our business strategy,
ability to identify and integrate successfully any additional producing oil and
gas properties we acquire and whether such properties can be operated
profitably, ability to maintain compliance with covenants of our various loan
documents and other agreements pursuant to which we have issued securities and
obtain waivers when and as required, our ability to borrow funds or maintain
levels of borrowing availability under our credit arrangements, statements about
Proved Reserves or borrowing availability based on Proved Reserves and future
net cash flows and their present value.

We want to caution readers that the risk factors described below, as well
as those described elsewhere in this Annual Report, or in our other filings with
the Commission, in some cases have affected, and in the future could affect, our
actual results and could cause our actual consolidated results during 2000 and
beyond, to differ materially from those expressed in any forward-looking
statements made by or on our behalf.

Substantial Indebtedness

At December 31, 1999, we had $319.9 million of long-term indebtedness as
compared to a negative stockholders' equity of $101.0 million. This level of
indebtedness may pose substantial risks to us and the holders of our securities.
These risks would include the possibility that we may not generate sufficient
cash flow to pay the principal of and interest on our indebtedness and the risk
of default thereunder. Our historical earnings were insufficient to cover our
fixed charges, including preferred dividends, by $108.9 million and $26.0
million for 1998 and 1999, respectively. If we are unsuccessful in increasing
our proved reserves or realizing production from our proved undeveloped
reserves, our future net revenue from existing proved reserves may not be
sufficient to pay the principal of and interest on our indebtedness in
accordance with their terms. Our levels of indebtedness may also adversely
affect our ability to incur additional indebtedness and finance our future
operations and capital needs, and may limit our ability to pursue other business
opportunities. The agreements under which our indebtedness is outstanding
contain financial and other restrictive covenants which could limit our
operating and financial flexibility and, if violated, would result in an event
of default which could preclude our access to credit under our bank credit
facility or otherwise have a material adverse effect on us. A default under our
bank credit facility or other loan documents could lead to a foreclosure against
the assets that collateralize such indebtedness. In addition, the terms of our
indebtedness contain provisions whereby a default under one loan agreement may
also constitute a default under other indebtedness. If we should default under
the terms of one loan agreement such default could also

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<PAGE>

constitute an event of default under other indebtedness which could result in
all of such indebtedness becoming immediately due and payable. There are
currently no defaults under any of our outstanding indebtedness.

Auditors Report; Uncertainty as to Going Concern; Financial Statement
Presentation

The report of our independent accountants, PricewaterhouseCoopers LLP,
dated February 21, 2000, contains an additional paragraph wherein they point out
that we have suffered recurring losses from operations and we have a working
capital and a net capital deficiency. The report states that these matters
raise substantial doubt about our ability to continue as a going concern. Our
financial statements have been prepared assuming we will continue as a going
concern. Our financial statements do not include any adjustments that would be
necessary if we were not to continue as a going concern.

Our ability to continue as a going concern makes us substantially dependent
on our ability to meet our obligations to pay interest on our outstanding
indebtedness. During 2000 management intends to use borrowings under its credit
facility to meet a portion of our cash interest payments. If we are unable to
remain in compliance with the minimum interest coverage ratio described above
under "Substantial Indebtedness" or possibly other covenants in our credit
facility, we may be unable to borrow funds under the credit facility. Our
inability to borrow funds under our credit facility could cause us to be unable
to pay interest on our other outstanding indebtedness. A failure to pay interest
on our other outstanding indebtedness would be a default causing all of that
indebtedness to be immediately due and payable. Under cross-default provisions
under our existing agreements relating to our indebtedness, a default under one
loan is likely to result in a default under all our loans. This would make all
our indebtedness immediately due and payable. We expect to remain in compliance
with our debt covenants or obtain the necessary waivers from the bank throughout
2000 and be able to borrow the necessary funds that may be required to meet our
interest payments.

Volatility of Natural Gas and Oil Prices; Full Cost Write Down

Our revenues, profitability, cash flow, ability to service debt and future
growth will be substantially dependent on prevailing prices for natural gas and
oil. The amounts of and prices obtainable for our natural gas and oil
production will be affected by market factors beyond our control. These include
the extent of domestic production, the level of imports of foreign natural gas
and oil, the general level of market demand on a regional, national and
worldwide basis, domestic and foreign economic conditions that determine levels
of industrial production, political events in foreign oil producing regions, and
variations in governmental regulations and tax laws or the imposition of new
governmental requirements upon the natural gas and oil industry, among other
factors. Prices for natural gas and oil are subject to worldwide fluctuation in
response to relatively minor changes in supply of and demand for natural gas and
oil, market uncertainty and a variety of additional factors that are beyond our
control. Any significant decline in natural gas and oil prices would have a
material adverse effect on us, including our inability to fund planned
operations and capital expenditures, write downs of the carrying value of our
natural gas and oil properties, and our inability to meet debt service
requirements resulting in defaults under bank loans and other indebtedness. In
addition, the marketability of our natural gas and oil production will depend in
part upon the availability, proximity and capacity of gathering systems,
pipelines and processing facilities.

Restrictions Imposed by Lenders

The instruments governing our indebtedness impose significant operating and
financial restrictions on us. Such restrictions will affect, and in many
respects significantly limit or prohibit, among other things, our ability to
incur additional indebtedness, pay dividends, repay indebtedness prior to its
stated maturity, sell assets or engage in mergers or acquisitions. These
restrictions could also limit our ability to affect future financings, make
needed capital expenditures, withstand a future downturn in our business or the
economy in general, or otherwise conduct necessary corporate activities. Our
failure to comply with these restrictions could lead to a default under the
terms of such indebtedness. In the event of default, the holders of such
indebtedness could elect to declare all of those funds borrowed to be due and
payable together with accrued and unpaid interest. In such event, there can be
no assurance that we would be able to make such payments or borrow sufficient
funds from alternative sources to make any such payment. If our wholly owned
operating subsidiary, Production Corp. were unable to repay all amounts declared
due and payable under its bank credit facility or its Senior Secured Notes, the
lenders could proceed against the collateral granted by Production Corp. to
satisfy the indebtedness and other obligations due and payable. If the

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<PAGE>

bank credit facility indebtedness or the Senior Secured Notes of Production
Corp. were to be accelerated to become immediately due and payable, there can be
no assurance that the assets of Production Corp. would be sufficient to repay in
full such indebtedness and our other indebtedness. Even if additional financing
could be obtained, there can be no assurance that it would be on terms that are
favorable or acceptable to us. In addition, the obligations under the bank
credit facility and Production Corp's Senior Secured Notes are secured by
substantially all of the assets of Production Corp. The pledge of such
collateral to existing lenders could impair our ability to obtain favorable
financing from other sources.

Ability to Manage Growth

Although individual members of our management have significant experience
in the natural gas and oil industry, we have been engaged in the natural gas and
oil business for approximately five years and have a limited operating history
upon which investors may base their evaluation of our performance. As a result
of our brief operating history over five years, our operating results from
historical periods are not readily comparable and, as a consequence of the Amoco
acquisition, are not expected to be indicative of future results. There can be
no assurance that we will experience growth in, or maintain our current level
of, revenues, natural gas and oil reserves or production. Our natural gas and
oil operations to date have focused on the acquisition and development of
producing natural gas and oil properties. Our business plan and reserve reports
include the drilling of approximately 70 to 80 gross wells during 2000 at an
estimated cost of approximately $23.0 million.

Any future growth of our natural gas and oil reserves, production and
operations may place significant demands on our operational, administrative and
financial resources, and the increased scope of operations may present
challenges to us due to increased management time and resources required. Our
future performance and profitability may depend in part on our ability to
successfully integrate the operational, financial and administrative functions
of acquired properties into our operations, to hire additional personnel and to
implement necessary enhancements to our management systems to respond to changes
in our business. There can be no assurance that we will be successful in these
efforts. Our inability to integrate acquired properties, to hire additional
personnel or to enhance our management systems could have a material adverse
effect on our results of operations.

Limitation on the Payment of Funds to us by Production Corp.

Our cash flow, and consequently the ability of Gothic Energy to pay
dividends and to service cash interest payments on its Discount Notes and the
repayment of the principal of the Discount Notes is dependent upon the cash
flows of Production Corp. and the payment of funds by Production Corp. to Gothic
Energy, as its parent corporation, in the form of loans, dividends, or
otherwise. The terms of our outstanding indebtedness impose, and agreements
entered into in the future may impose, significant restrictions on the payment
of dividends and the making of loans by Production Corp. to Gothic Energy.
Under the terms of our outstanding indebtedness, subject to certain
restrictions, Production Corp. is permitted to pay dividends to us equal to the
semi-annual interest payments due on our Discount Notes; provided that upon a
notice of default or event of default under the terms of our outstanding
indebtedness, Production Corp. will be prohibited from paying such dividends
until the date such default or event of default is cured or waived.
Accordingly, in such an event, repayment of the Discount Notes may depend upon
our ability to effect an offering of capital stock or to refinance the Discount
Notes. A default under the Discount Notes or any other outstanding indebtedness
would have a material adverse effect on holders of our common stock.

Risk of Hedging Activities

In an attempt to reduce our sensitivity to energy price volatility, we use
swap arrangements that generally result in a fixed price for sales of its
natural gas and oil production over periods of up to 12 months. If our reserves
are not produced at rates equivalent to the hedged position, we would be
required to satisfy our obligations under hedging contracts on potentially
unfavorable terms without the ability to hedge that risk through sales of
comparable quantities of our own production. Hedging contracts limit the
benefits we will realize if actual prices rise above the contract prices. In
addition, hedging contracts are subject to the risk that the other party may
prove unable or unwilling to perform its obligations under such contracts. Any
significant non-performance could have a material adverse financial effect on
us. These arrangements provide for us to exchange a floating market price for a
fixed contract price. Payments are made by us when the floating price exceeds
the fixed price for a contract month and payments are received when the fixed
price exceeds the floating price. Settlements on these swaps are based on the

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<PAGE>

difference between the approximate average closing Panhandle Eastern price for a
contract month and the fixed contract price for the same month.

In April 1999, we entered into a hedge agreement in the form of a costless
collar with respect to the production of 50,000 MMBTU of natural gas per day
during the period of May through October 1999. The costless collar placed a
floor of $1.80 per MMBTU and a ceiling of $2.26 per MMBTU for the effective
price we received for natural gas. If the Panhandle Eastern price of natural
gas fell below $1.80 per MMBTU during the term of the collar agreement, we were
paid the difference by the other party to the agreement on account of gas we
sell below $1.80 per MMBTU. If the Panhandle Eastern price of natural gas rose
above $2.16 per MMBTU during the term of the collar agreement, we paid the
difference to the other party to the agreement on account of gas we sold above
$2.26 per MMBTU. Additionally, in July 1999 we entered into a similar costless
collar agreement with respect to the production of 50,000 MMBTU per day during
the period of November 1999 through March 2000 which places a floor of $2.30 per
MMBTU and a ceiling of $3.03 per MMBTU.

In January 2000, we entered into a hedge agreement covering 50,000 MMBTU
per day at a fixed price of $2.435 per MMBTU. This hedge is in effect from
April 2000 through October 2000. In February 2000, we entered into a hedge
agreement covering 20,000 MMBTU per day at a fixed price of $2.535 per MMBTU for
the month of April 2000 and $2.555 per MMBTU for the month of May 2000. This
hedge is in effect for the months of April and May 2000. The commodity
reference fixed price for all gas contracts is Panhandle Eastern.

These collars represent approximately 70% of our current daily natural gas
production. In August 1999, we entered into a hedge agreement covering 10,000
barrels of oil per month at a fixed price of $20.10 per barrel. This hedge is
in effect from September 1999 through August 2000.

Need to Replace Reserves

Our success is substantially dependent on our ability to replace and expand
our natural gas and oil reserves through the exploitation and development of our
properties and the acquisition of producing properties. These activities
involve substantial risk. Without successful acquisition or drilling ventures,
we will be unable to replace the reserves being depleted by production, and our
assets and revenues, including the reserves, will decline. Our strategy
includes increasing our reserve base through continued exploitation of our
existing properties, exploration of new and existing properties and acquisitions
of producing properties. There can be no assurance that our acquisition and
development activities will result in the replacement of, or additions to, our
reserves. Similarly, there can be no assurance that we will have sufficient
capital to engage in our acquisition or development activities. Successful
acquisition of producing properties generally requires accurate assessments of
recoverable reserves, future natural gas and oil prices, operating costs,
potential environmental and other liabilities and other factors. Such
assessments are necessarily inexact, and as estimates their accuracy is
inherently uncertain.

Acquisition Risks

Our growth since we commenced natural gas and oil operations has been
largely the result of acquisitions of producing properties. We expect to
continue to evaluate and pursue acquisition opportunities available on terms our
management considers favorable. The successful acquisition of producing
properties requires an assessment of recoverable reserves, future natural gas
and oil prices, operating costs, potential environmental and other liabilities
and other factors beyond our control. This assessment is necessarily inexact and
its accuracy is inherently uncertain. In connection with such an assessment, we
perform a review of the subject properties we believe to be generally consistent
with industry practices. This review, however, will not reveal all existing or
potential problems, nor will it permit a buyer to become sufficiently familiar
with the properties to assess fully their deficiencies and capabilities.
Inspections may not be performed on every well, and structural and environmental
problems are not necessarily observable even when an inspection is undertaken.
We generally assume pre-closing liabilities, including environmental
liabilities, and generally acquire interests in the properties on an "as is"
basis. With respect to our acquisitions to date, we have no material commitments
for capital expenditures to comply with existing environmental requirements.
There can be no assurance that our acquisitions will be successful. Any
unsuccessful acquisition could have a material adverse effect on us.

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<PAGE>

Drilling and Operating Risks

The growth of our natural gas and oil reserves is currently substantially
dependent on the success of our drilling activities. Drilling activities are
subject to many risks, including the risk that no commercially productive
reservoirs will be encountered. There can be no assurance that new wells we
drill will be productive or that we will recover all or any portion of our
investment. Drilling for natural gas and oil may involve unprofitable efforts,
not only from dry wells, but from wells that are productive but do not produce
sufficient net revenues to return a profit after drilling, operating and other
costs. The cost of drilling, completing and operating wells is often uncertain.
Our drilling operations may be curtailed, delayed or canceled as a result of
numerous factors, many of which are beyond our control. These include economic
conditions, mechanical problems, title problems, weather conditions, compliance
with governmental requirements and shortages or delays of equipment and
services. Our drilling activities may not be successful and, if unsuccessful,
such failure may have a material adverse effect on our future results of
operations or financial condition.

In addition to the substantial risk that wells drilled will not be
productive, hazards such as unusual or unexpected geologic formations,
pressures, downhole fires, mechanical failures, blowouts, cratering, explosions,
uncontrollable flows of natural gas, oil or well fluids, pollution and other
physical and environmental risks are inherent in natural gas and oil exploration
and production. These hazards could result in substantial losses to us due to
injury and loss of life, severe damage to and destruction of property and
equipment, pollution and other environmental damage and suspension of
operations. As a protection against operating hazards, we maintain insurance
coverage against some, but not all, potential losses, as is common in the
natural gas and oil industry. We do not fully insure against all risks
associated with our business either because such insurance is not available or
because the cost thereof is considered prohibitive. The occurrence of an event
that is not covered, or not fully covered, by insurance could have a material
adverse effect on our financial condition and results of operations.

Uncertainty of Estimates of Reserves and Future Net Revenues; Significant
Undeveloped Reserves

There are numerous uncertainties inherent in estimating quantities of
proved reserves, including many factors beyond our control. Information as to
our reserves represents estimates based on reports prepared by our independent
petroleum engineers, as well as internally generated reports. Petroleum
engineering is not an exact science. Information relating to proved natural gas
and oil reserves is based upon engineering estimates derived after analysis of
information we furnished or the operator of the property furnished. Estimates
of economically recoverable natural gas and oil reserves and of future net cash
flows necessarily depend upon a number of variable factors and assumptions.
These include historical production from the area compared with production from
other producing areas, the assumed effects of regulations by governmental
agencies and assumptions concerning future natural gas and oil prices, future
operating costs, severance and excise taxes, capital expenditures and workover
and remedial costs. All of these may in fact vary considerably from actual
results. Natural gas and oil prices, which fluctuate over time, may also affect
proved reserve estimates. For these reasons, estimates of the economically
recoverable quantities of natural gas and oil attributable to any particular
group of properties, classifications of such reserves based on risk of recovery
and estimates of the future net cash flows expected from the properties which
are prepared by different engineers or by the same engineers at different times
may vary substantially. Actual production, revenues and expenditures with
respect to our reserves will likely vary from estimates, and such variances may
be material. Approximately 9% of our estimated PV-10 of proved reserves and 13%
of our estimated Bcfe of proved reserves as of December 31, 1999 are classified
as undeveloped. Either changes in estimates of proved undeveloped reserves or
the inability to fund development could result in substantially reduced
reserves. In addition, the timing of receipt of estimated future net revenues
from proved undeveloped reserves will be dependent upon the timing and
implementation of drilling and development activities estimated by us for
purposes of the reserve report.

Future Capital Requirements

We have made, and will continue to make, substantial capital expenditures
for the acquisition, development and production of natural gas and oil reserves,
particularly since a portion of our proved reserves consists of proved
undeveloped reserves which require significant capital expenditures to develop.
We have budgeted capital expenditures of approximately $23.0 million for the
year ending December 31, 2000. We are not contractually committed to expend
these funds. We currently expect that available cash, cash flows from
operations, proceeds

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from the private or public sale of debt or equity securities, borrowings under
the Credit Facility, and sales of certain natural gas and oil properties will be
sufficient to fund our debt service requirements and planned capital
expenditures for our existing properties through 2000. However, we may need to
raise additional capital to fund acquisitions and the development of properties
acquired, which capital may not be available to us.

Under the terms of our transaction with Chesapeake entered into in April
1998 and as in effect at December 31, 1999, both Chesapeake and we are permitted
to designate acreage for development drilling by giving written notice to the
other party. In order for us to participate in any drilling proposals submitted
by Chesapeake in the acreage which is the subject of our participation
agreement, we will need to have available sufficient funds or borrowing
availability to participate in the proposed drilling activity. While certain
terms of the participation agreement limited the number of wells to be proposed
by either party to the amount that would require capital expenditures by either
party of $25.0 million in 1999, there is no such limit for 2000 or subsequent
years. In the event we should not have funds available at the time, our
interest in the well could be forfeited. (See Item 12 - Certain Relationship and
Related Transactions, related to subsequent modifications to the Chesapeake
agreement.)

We may seek additional capital, if required, from traditional reserve base
borrowing, equity and debt offerings or joint ventures to further develop and
exploit our properties and to acquire additional properties, subject to the
limitations contained in the terms of our outstanding indebtedness. Our ability
to access additional capital will depend on our continued success in developing
our natural gas and oil reserves and the status of the capital markets at the
time such capital is required. Accordingly, there can be no assurance that
capital will be available to us from any source or that, if available, it will
be at prices or on terms acceptable to us. Should we be unable to access the
capital markets or should sufficient capital not be available, the development
and exploitation of our properties could be delayed or reduced and, accordingly,
natural gas and oil revenues and operating results may be adversely affected.

Reliance on Key Personnel

We are dependent upon the services of our Chief Executive Officer and
President, Michael Paulk. The loss of his services could have a material
adverse effect on us. We have entered into an employment agreement with Mr.
Paulk, with a current expiration date of December 31, 2002.

Governmental Regulation

Our operations are affected by extensive regulation under various federal,
state and local laws and regulations relating to the exploration for and
development, production, gathering and marketing of natural gas and oil and the
release of materials into the environment. In particular, our natural gas and
oil exploration, development and production and our activities in connection
with storage and transportation of liquid hydrocarbons are subject to stringent
environmental regulation by governmental authorities. Such regulations have
increased the costs of planning, designing, drilling, installing, operating and
abandoning natural gas and oil wells and other related facilities.

Although we believe that our operations are in general compliance with all
such laws and regulations, including applicable environmental laws and
regulations, risks of substantial costs and liabilities are inherent in natural
gas and oil operations. There can be no assurance that significant costs and
liabilities will not be incurred in the future. Moreover, it is possible that
other developments, such as increasingly strict environmental laws, regulations
and enforcement policies thereunder, and claims for damages to property,
employees, other persons and the environment resulting from our operations,
could result in substantial costs and liabilities in the future.

The discharge of natural gas, oil or other pollutants into the air, soil or
water may give rise to significant liabilities on our part to the government and
third parties. It may require us to incur substantial costs of remediation.
Moreover, we have agreed to indemnify sellers of producing properties purchased
by us, including Amoco Corporation, among others, against environmental claims
associated with such properties. No assurance can be given that existing
environmental laws or regulations, as currently interpreted or reinterpreted in
the future, or future laws or regulations will not materially adversely affect
our results of operations and financial condition or that material indemnity
claims will not arise against us with respect to properties we acquired.

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<PAGE>

Competition

The natural gas and oil industry is highly competitive. We compete with
other companies in acquisitions and the development, production and marketing of
natural gas and oil with major oil companies, other independent natural gas and
oil concerns, and individual producers and operators. Many of these competitors
have substantially greater financial and other resources than we have.
Furthermore, the natural gas and oil industry competes with other industries in
supplying the energy and fuel needs of industrial, commercial and other
consumers.

Item 7 - Financial Statements:
- -----------------------------

The response to this Item is included in a separate section of this report.
See page F-1.

Item 8 - Changes in and Disagreements on Accounting and Financial Disclosure:
- ----------------------------------------------------------------------------

During the two fiscal years ended December 31, 1999, the Company has not
filed any Current Report on Form 8-K reporting any change in accountants in
which there was a reported disagreement on any matter of accounting principles
or practices, financial statement disclosure or auditing scope or procedure.

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PART III
--------

Item 9 - Directors, Executive Officers, Promoters and Control Persons;
- ----------------------------------------------------------------------
Compliance with Section 16(a) of Exchange Act:
- ---------------------------------------------

Directors and Executive Officers. The Directors and executive officers of
the Company, certain significant employees, their ages and positions with the
Company are as follows:

Name Age Position With Company
---- --- ---------------------

John J. Fleming 60 Chairman of the Board and Director
Michael K. Paulk 51 President and Director
Steven P. Ensz 48 Vice-President, Finance and Chief Financial
Officer
Brian E. Bayley 47 Director
Bennett G. Shelton 43 Vice-President of Land and Contract
Administration
Richard O. Mulford 46 Vice-President of Operations
Robert G. Snead 61 Exploitation Manager
John Coughlon 42 Exploration Manager
David Evans 43 Petroleum Engineer
R.L. Hilbun 51 Full-Time Consultant, Drilling and
Completion Engineer
R. Andrew McGuire 33 Controller

John J. Fleming: Mr. Fleming was elected a Director of the Company in
October 1994. Mr. Fleming is currently President of Bonanza Energy Ltd.,
engaged in oil and gas exploration and diversified investments. From August
1995 through December 1999, he was Chairman, President and Chief Executive
Officer of Profco Resources Ltd., engaged in oil and gas exploration. In
December 1998, it merged with GHP Exploration Ltd. to form TransAtlantic
Petroleum Corp. Mr. Fleming was Chairman of the Board of American Natural
Energy Corporation ("ANEC") from August 1993 to July 1994. He has been involved
in the oil and gas industry as president, chairman or chief executive officer of
a number of corporations for more than the past fifteen years. Mr. Fleming is
also a Director of Imco Recycling Inc., Newfoundland Capital Corporation, CHC
Helicopter Corporation, TransAtlantic Petroleum Corp., Poco Petroleum Ltd.,
Southwestern Gold Corporation and Canabrava Diamond Corporation.

Michael K. Paulk: Mr. Paulk was elected President and Director of the
Company in October 1994. Mr. Paulk has been engaged in the oil and gas industry
for more than fifteen years. He was President of ANEC from its inception in
1985 until his resignation in September 1994 after its acquisition by Alexander
Energy Corporation in July 1994.

Steven P. Ensz: Mr. Ensz has been Vice-President, Finance and Chief
Financial Officer of the Company since March 18, 1998 and is responsible for the
financial activities of the Company. From July 1991 to February 1998, he was
Vice-President, Finance of Anglo-Suisse, Inc., an oil and natural gas
exploration and producing company. From December 1983 to June 1991, he held
various positions within the energy industry, including President of Waterford
Energy, an independent oil and gas producer. Prior to December 1983, he was a
partner with Oak, Simon & Ott, CPAs. He is a certified public accountant.

Brian E. Bayley: Mr. Bayley was elected a Director of the Company in
February 1996. He has been President of Quest Management Corp., a private
management company, since December 1996, and of Quest Ventures Ltd., a private
merchant banking company, since December 1996. Prior to April 1997, Mr. Bayley
held a variety of positions with Quest Oil & Gas Inc., including Vice President,
Corporate Administration from September 1986 to October 1990, President and
Chief Executive Officer from October 1990 to October 1996, and Secretary from
October 1996 to April 1997. He was a Director from November 1990 to April 1997.
Mr. Bayley is a Director of a number of other corporations, none of which are
reporting companies under the Securities Exchange Act of 1934, as amended.

Bennett G. Shelton: Mr. Shelton was elected Vice President of Land and
Contract Administration on December 9, 1998. Prior there, he was employed by
the Company as Land Contracts Manager since May 1995.

-27-
<PAGE>

From August 1994 to May 1995, he was a Senior Landman with AEOK and prior
thereto he was a Land and Acquisition Manager with ANEC. Prior to April 1991, he
was a staff landman with Santa Fe Minerals, Inc. for approximately ten years.

Richard O. Mulford: Mr. Mulford was elected Vice President of Operations
on December 9, 1998. From April 1995 to November 1998, he was employed as
Operations Manager of the Company since April 1995. From April 1985 to April
1995, he was a Production Superintendent with ANEC and has been employed in the
oil and natural gas industry since 1978.

Robert G. Snead: Mr. Snead, who has served as Exploitation Manager for the
Company on a full-time consulting basis since April 1997, was hired as a full-
time employee effective September 1, 1997. Between early 1994 and April 1997,
he was employed as an independent geologist and from 1985 to 1994 was the Senior
Vice-President/ Exploration Manager of LOGO, Inc., an oil and natural gas well
operating company.

John Coughlon: Mr. Coughlon has been employed by the Company as
Exploration Manager since March 1998. Prior thereto, he was, commencing in
December 1994, employed by Amoco Production Company, most recently as Senior
Staff Geologist. From October 1993 to December 1994 he served as Geological
Consultant/Principle of Tower Energy Corporation and prior thereto he was from
July 1987 to October 1993 Senior Geologist for Nicor Oil & Gas and from April
1980 to July 1987 he was employed by Mobil Oil Corp.

David Evans: Mr. Evans was hired by the Company as a petroleum engineer in
November 1997. Prior thereto, he was Production Manager for Petroleum
Properties Management Co. from March 1996 to October 1997. From April 1992 to
March 1996, he was Engineering Manager for AEOK and from September 1987 to April
1992 he was Vice-President of Exploration and Production for Bradmar Petroleum
Corporation.

R.L. Hilbun: Mr. Hilbun is a full-time consultant to the Company serving
as a drilling and completion engineer. He has served in this capacity since
March 1997. Prior thereto, commencing in 1982, he was Vice-President,
Operations of PSEC, Inc., a natural gas and oil well operating company. He has
been employed in the natural gas and oil industry since 1970.

R. Andrew McGuire: Mr. McGuire has been employed by the Company as
Controller since November 1994. From February 1991 to October 1994, he was
employed as Accounting Manager of ANEC. From May 1988 to February 1991, he was
employed by OXY-USA, Inc., a subsidiary of Occidental Petroleum Corp., as an
accountant. Mr. McGuire is a certified public accountant.

Director and Officer Securities Reports

The Federal securities laws require Gothic Energy's Directors and executive
officers, and persons who own more than ten percent (10%) of a registered class
of Gothic Energy's equity securities to file with the Securities and Exchange
Commission initial reports of ownership and reports of changes in ownership of
any equity securities of Gothic Energy. Copies of such reports are required to
be furnished to Gothic Energy. To Gothic Energy's knowledge, based solely on a
review of the copies of such reports and other information furnished to Gothic
Energy, all persons subject to these reporting requirements filed the required
reports on a timely basis with respect to Gothic Energy's year ended December
31, 1999.

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<PAGE>

Item 10 - Executive Compensation:
- --------------------------------

The following table sets forth the annual and long-term compensation paid
during the Company's three fiscal years ended December 31, 1999 to the Company's
chief executive officer and the Company's other most highly compensated
executive officers who received compensation exceeding $100,000 and who served
in such capacities at December 31, 1999:

<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation
- ----------------------------------------------------------------------------------------------------------------------
Compensation
--------------------------------------
Other Long-Term
Name and Annual Awards/ All Other
Principal Position Year Salary Bonus Comp. Option (#) Comp.
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>

Michael K. Paulk 1999 $189,000 $180,000 -0- 375,000 $179,000(1)
1998 180,000 125,000 -0- 375,000 -0-
1997 150,000 75,000 -0- -0- -0-
Steven P. Ensz(2) 1999 157,500 130,000 -0- 375,000 -0-
1998 118,750 100,000 -0- 125,000 -0-
Richard O. Mulford 1999 109,000 15,000 -0- 70,000 -0-
1998 72,000 10,000 -0- 50,000 -0-
1997 66,000 5,500 -0- 40,000 -0-
Bennett G. Shelton 1999 109,000 15,000 -0- 75,000 -0-
1998 72,000 10,000 -0- 50,000 -0-
1997 66,000 5,500 -0- 40,000 -0-
</TABLE>
- --------------------
(1) On September 14, 1999, the Board of Directors of the Company authorized the
forgiveness of the repayment of a note owing by Mr. Paulk to the Company.
(2) Mr. Ensz was employed by the Company in March 1998.

Option Grants in Year Ended December 31, 1999.
- ----------------------------------------------

The following table provides information with respect to the above named
executive officers regarding options granted to such persons during the
Company's year ended December 31, 1999.

% of Total Options/ Market
Number of Securities SARs Granted to Exercise or Price on
Name Underlying SARs/ Employees in Base Price Expiration Date of
Options Granted (#) Fiscal Year ($/Share) Date Grant

- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Michael K. Paulk 250,000(1) 19% $0.53 02/03/2004 $0.53
125,000(2) 10% 0.15 12/31/2004 0.15
Steven P. Ensz 250,000(1) 19% 0.53 02/03/2004 0.53
125,000(2) 10% 0.15 12/31/2004 0.15
Richard O. Mulford 70,000(3) 5% 0.40 07/22/2004 0.40
Bennett G. Shelton 75,000(3) 6% 0.40 07/22/2004 0.40
</TABLE>
- --------------------
(1) Of which, options to purchase 125,000 shares become exercisable on February
3, 2000 and options to purchase the remaining 125,000 shares become
exercisable on February 3, 2001, provided, however, such options become
immediately fully exercisable in the event of a "change of control," as
defined, of the Company.
(2) Of which, options to purchase 62,500 shares become exercisable on December
31, 2000 and options to purchase the remaining 62,500 shares become
exercisable on December 31, 2001, provided, however, such

-29-
<PAGE>

options become immediately fully exercisable in the event of a "change of
control," as defined, of the Company.
(3) Of which, options to purchase 35,000 shares and 37,500 shares,
respectively, become exercisable on July 22, 2000 and options to purchase
the remaining 35,000 shares and 37,500 shares, respectively, become
exercisable on July 22, 2001, provided, however, such options become
immediately fully exercisable in the event of a "change of control," as
defined, of the Company.

Stock Option Holdings at December 31, 1999.
- ------------------------------------------

The following table provides information with respect to the above named
executive officers regarding Company options held at the end of the Company's
year ended December 31, 1999 (such officers did not exercise any options during
the most recent fiscal year).
<TABLE>
<CAPTION>
Value of Unexercised
Number of Unexercised Options In-the-Money Options
at December 31,1999 at December 31, 1999 (1)

Name Exercisable Unexercisable Exercisable Unexercisable
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>

Michael K. Paulk 312,500 562,500 -0- -0-
Steven P. Ensz 62,500 437,500 -0- -0-
Richard O. Mulford 105,000 95,000 -0- -0-
Bennett G. Shelton 100,000 100,000 -0- -0-
</TABLE>

- --------------------
(1) Based on the closing sales price on December 31,1999 of $0.15.

Employment Agreements

The Company has entered into an employment agreement with Michael Paulk
effective January 1, 1999 pursuant to which he is employed as the President of
the Company. Mr. Paulk currently receives a base salary of $225,000 per year.
In addition, he is to receive a cash bonus as may be determined by the Company's
Board of Directors. Mr. Paulk is also entitled to participate in such incentive
compensation and benefit programs as the Company makes available. The term of
Mr. Paulk's agreement is for a period of three years and at the end of the first
year and at the end of each succeeding year the agreement is automatically
extended for one year such that at the end of each year there will automatically
be three years remaining on the term of the agreement. Mr. Paulk can terminate
the agreement at the end of the initial term and any succeeding term on not less
than six months notice. In the event the employment agreement is terminated by
the Company (other than for cause, as defined), Mr. Paulk is entitled to receive
a payment representing all salary due under the remaining full term of his
agreement and the Company is obligated to continue his medical insurance and
other benefits provided under the agreement in effect for a period of one year
after such termination. In the event of a change in control, as defined, of the
Company, Mr. Paulk has the right to terminate his employment agreement with the
Company within sixty days thereafter, whereupon the Company would be obligated
to pay to him a sum equal to three years his base salary under the agreement
plus a lump sum payment of $250,000.

The Company has also entered into an employment agreement with Steven P. Ensz
effective January 1, 1999 pursuant to which he is employed as the Vice President
and Chief Financial Officer of the Company. Mr. Ensz currently receives a base
salary of $187,500 per year. In addition, he is to receive a cash bonus as may
be determined by the Company's Board of Directors. Mr. Ensz is also entitled to
participate in such incentive compensation and benefit programs as the Company
makes available. The term of Mr. Ensz' agreement is for a period of three years
and at the end of the first year and at the end of each succeeding year the
agreement is automatically extended for one year such that at the end of each
year there will automatically be three years remaining on the term of the
agreement. Mr. Ensz can terminate the agreement at the end of the initial term
and any succeeding term on not less than six months notice. In the event the
employment agreement is terminated by the Company (other than for cause, as
defined), Mr. Ensz is entitled to receive a payment representing all salary due
under the remaining full term of his agreement and the Company is obligated to
continue his medical insurance and other benefits provided under the agreement
in effect for a period of one year after such termination. In the event of a
change in control, as defined, of the Company, Mr. Ensz has the right to
terminate his employment agreement with

-30-
<PAGE>

the Company within sixty days thereafter, whereupon the Company would be
obligated to pay to him a sum equal to three years his base salary under the
agreement plus a lump sum payment of $200,000.

Directors Compensation

Each outside Director of Gothic Energy received a fee of $15,000 for
serving in that capacity during 1999 and each Director is reimbursed for his
out-of-pocket expenses in attending meetings.

Item 11 - Security Ownership of Certain Beneficial Owners and Management:
- ------------------------------------------------------------------------

Set forth below is information concerning the Common Stock ownership of all
persons known by Gothic Energy to own beneficially 5% or more of Gothic Energy's
Common Stock, and the Common Stock ownership of each Director of Gothic Energy
and all Directors and officers of Gothic Energy as a group, as of March 1, 2000.
As of March 1, 2000, Gothic Energy had 18,685,765 shares of Common Stock
outstanding.

Name and Address of Beneficial
Holder, Identity of Group (1)(2) Amount (3) Percent of Class
---------------------------------- -------------- ----------------

Michael Paulk 1,049,891(4) 5.4%
John Fleming 712,500(5) 3.7%
Brian E. Bayley 712,500(6) 3.7%

Stratum Group, L.L.C. (7) 1,000,000(8) 5.1%
650 Fifth Avenue
New York, New York 10019

Carl C. Icahn (7) 1,600,000 8.6%
High River Limited Partnership (7)
Riverdale LLC (7)
Little Meadow Corp. (7)
100 South Bedford Road
Mount Kisco, New York 10549

Amoco Corporation (7) 1,500,000(9) 7.4%
200 East Randolph Drive
Chicago, Illinois 60601

Chesapeake Energy Corporation(10) 2,394,125 12.8%
6100 North Western Avenue
Oklahoma City, Oklahoma 73118

OppenheimerFunds, Inc. (11) 1,265,913 6.3%
Two World Trade Center, 34th Floor
New York, New York 10048

All Officers and Directors as a 3,374,891 15.4%
Group (6 persons)

- --------------------
(1) This tabular information is intended to conform with Rule 13d-3 promulgated
under the Securities Exchange Act of 1934 relating to the determination of
beneficial ownership of securities. The tabular information gives effect
to the exercise of warrants or options exercisable within 60 days of the
date of this table owned in each case by the person or group whose
percentage ownership is set forth opposite the respective percentage and is
based on the assumption that no other person or group exercise their
option.
(2) The address of Mr. Paulk is c/o the Company, 6120 South Yale Avenue, Suite
1200, Tulsa, Oklahoma 74136. The address of Mr. Fleming is 1500, 340 12th
Avenue SW, Calgary, Alberta T2R 1L5. The address of Mr. Bayley is c/o
Quest Management Corp., 1095 West Pender Street-Suite 850, Vancouver,
British Columbia, Canada V6E 2M6.

-31-
<PAGE>

(3) Except as otherwise noted, shares beneficially owned by each person as of
March 1, 2000 were owned of record and each person had sole voting and
investment power with respect to all shares beneficially held by such
person.
(4) Includes (i) 312,500 shares issuable upon exercise of options at an
exercise price of $0.40 per share and (ii) 187,500 shares issuable upon
exercise of options at an exercise price of $0.40 per share, which become
exercisable on April 28, 2000. Also includes 250,000 shares issuable on
exercise of options at an exercise price of $0.53 per share, of which
options to purchase 125,000 shares become exercisable on February 4, 2000
and options to purchase the remaining 125,000 shares become exercisable on
February 4, 2001. Also includes 125,000 shares issuable on exercise of
options at an exercise price of $0.15 per share, of which options to 62,500
shares become exercisable on December 31, 2000 and options to purchase the
remaining 62,500 shares become exercisable on December 31, 2001. In the
event of a "change of control" of Gothic Energy, as defined in the option
agreements, such remaining options become immediately exercisable.
(5) Includes 100,000 shares issuable on exercise of options at an exercise
price of $0.40 per share which are exercisable during the five-year period
beginning July 11, 1995, 50,000 shares issuable on exercise of options at
an exercise price of $0.40 per share which are exercisable during the five-
year period beginning July 16, 1996, 150,000 shares issuable on exercise of
options at an exercise price of $0.40 per share which are exercisable
during the five year period beginning April 28, 1998, and 250,000 shares
issuable on exercise of options at an exercise price of $0.53 per share
which are exercisable during the five-year period beginning February 4,
1999. Also includes 162,500 shares issuable on exercise of options at an
exercise price of $0.15 per share, of which 81,250 shares become
exercisable on December 31, 2000 and options to purchase the remaining
81,250 shares become exercisable on December 31, 2001.
(6) Includes 150,000 shares issuable on exercise of options at an exercise
price of $0.40 per share which are exercisable during the five-year period
beginning July 16, 1996, 150,000 shares issuable on exercise of options at
an exercise price of $0.40 per share which are exercisable during the five-
year period beginning April 28, 1998, and 250,000 shares issuable on
exercise of options at an exercise price of $0.53 per share which are
exercisable during the five-year period beginning February 4, 1999. Also
includes 162,500 shares issuable on exercise of options at an exercise
price of $0.15 per share, of which 81,250 shares become exercisable on
December 31, 2000 and options to purchase the remaining 81,250 shares
become exercisable on December 31, 2001.
(7) Based on information contained in Schedule 13D provided by such person.
(8) Issuable on exercise of common stock purchase warrants at $2.67 per share,
as adjusted. The general partner of Stratum Group, L.P. is Stratum
Finance, L.L.C. and the members of Stratum Finance, L.L.C. are Energy
Investment Partners, a New York general partnership, Joseph M. Rinaldi,
Michael W. Walker, Richard E. Bani, John C. Alvardo, Curt S. Taylor, and
Betsy D. Cotton. Stratum Finance, L.L.C. is managed by Energy Investment
Partners, which has four votes, Joseph M. Rinaldi, who has one vote, and
Michael W. Walker, appointed by the natural person members of Stratum
Finance, L.L.C., who has one vote. Energy Investment Partners has three
general partners, SGLLC Partners, L.P. ("SGLLC"), SGLLC Partners Offshore,
L.P. ("Offshore") and The Beacon Group Energy Investment Fund, L.P.
("Fund"). The sole general partner of each of SGLLC and Offshore is SG-GP,
L.P. whose sole general partner is Energy Fund GPI, Inc. ("GPI"). The sole
general partner of Fund is Beacon Energy Investors, L.P. ("Investors").
The sole general partner of Investors is BEIGP, Inc. ("BEIGP"). The names
of the officers and Directors of both GPI and BEIGP are Geoffrey Boisi,
John McWilliams, Preston Miller, Harold Pote, Faith Rosenfeld, Robert
Semmens, David Remmington, Thomas Mendell and Frank Murray.
(9) Issuable on exercise of common stock purchase warrants at $2.59 per share,
as adjusted.
(10) In addition, as of March 1, 2000, Chesapeake holds 61,007 shares of Senior
Redeemable Preferred Stock Series B with a liquidation value of $1,000 per
share. Commencing April 30, 2000, such shares are convertible into a number
of shares of Gothic Energy Common Stock determined by dividing the
liquidation value by the conversion price currently of $2.04167 per share.
The Company entered into an option agreement on February 28,2000 to redeem
the shares of Common Stock and Preferred Stock held by Chesapeake, the
consummation of which is subject to the fulfillment of certain conditions.
(11) Based on information contained in Schedule 13G/A provided by such person.

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<PAGE>

Item 12 - Certain Relationships and Related Transactions:
- --------------------------------------------------------

At December 31, 1999, Mr. Paulk was indebted to the Company in the amount
of $179,000 under an interest bearing promissory note dated September 1, 1997
due, as extended, on January 31, 2000. On September 14, 1999, the Board of
Directors of the Company authorized the forgiveness of the repayment of this
note.

On January 23, 1998, the Company completed the Amoco Acquisition pursuant
to which, among other things, the Company issued to Amoco a five-year common
stock purchase warrant to purchase 1.5 million shares of Common Stock
exercisable at $3.00 per share.

On April 27, 1998, Production Corp. completed a transaction, entered into
on March 31, 1998, with Chesapeake Energy Corporation ("Chesapeake") pursuant to
which it (i) executed a participation agreement granting to Chesapeake a 50%
interest in substantially all of Production Corp's undeveloped acreage, (ii)
sold for $20.0 million a 50% interest in Production Corp's natural gas and oil
properties in the Arkoma basin, and (iii) sold 50,000 shares of Gothic Energy's
Series B Preferred Stock and a common stock purchase warrant. The Series B
Preferred Stock had a liquidation preference of $50.0 million and a dividend
rate per annum equal to 12 1/2% of the aggregate liquidation preference payable
in additional shares of Series B Preferred Stock, provided that, after April 1,
2000, at Gothic Energy's option, dividends may be paid in cash. On June 30,
2008, the Series B Preferred Stock is mandatorily redeemable in shares of Common
Stock valued at the fair market value on the date of redemption. Gothic Energy
has the option at any time prior to April 30, 2000 to redeem the Series B
Preferred Stock, in whole or in part, at 105% of the liquidation preference
payable in cash out of the net proceeds of a public or private offering of any
equity security. After April 30, 2000, the Series B Preferred Stock can be
redeemed, in whole or in part, at a redemption price equal to the liquidation
preference. After April 20, 2000, the Series B Preferred Stock is convertible
into a number of shares of Common Stock determined by dividing the liquidation
preference by the higher of $2.04167 or the fair market value on the date the
Series B Preferred Stock is converted. Notwithstanding the foregoing, no holder
or group can convert the Series B Preferred Stock to the extent that the
conversion of such shares would cause such holder or group to own more than
19.9% of Gothic Energy's outstanding Common Stock. The shares of Series B
Preferred Stock have no voting rights except as required by Oklahoma law. At
December 31, 1999, reflecting dividends paid, Chesapeake held 59,216 shares of
Series B Preferred Stock. The Series B Preferred Stock ranks senior to all
classes of Common Stock and other series and classes of preferred stock with
respect to dividend rights and rights on liquidation, winding up and
dissolution.

On August 17, 1999, Chesapeake fully exercised the common stock purchase
warrant issued in April 1998 and purchased 2,394,125 shares of Gothic Energy's
common stock. The shares were issued pursuant to the cashless exercise
provisions of the warrant that permitted Chesapeake to surrender the right to
exercise the warrant for a number of shares of Gothic Energy's common stock have
a market value equivalent to the total exercise price. The total exercise price
was $23,941.25 or $0.01 per share. An aggregate of 45,121 warrants were
surrendered in payment of the total exercise price.

Pursuant to the Participation Agreement between Production Corp. and
Chesapeake, Production Corp. sold Chesapeake the right through April 30, 2003 to
participate in up to 50% of Production Corp's interest in the development of any
of Production Corp's non-producing leasehold interests (other than the Arkoma
basin and certain New Mexico properties). Chesapeake also was sold the right to
participate in up to 50% of Production Corp's interest in any subsequently
acquired properties. During the year ended December 31, 1999, Chesapeake
elected to participate to the extent of 50% of Production Corp's interest in the
development of 29 non-producing properties and no acquired properties.

On February 29, 2000, the Company and Chesapeake entered into agreements
which will substantially revise the Production Corp./Chesapeake Joint Venture
("JV") Development Agreement originally entered into on March 31, 1998, and will
provide for Gothic Energy to redeem, without any additional consideration, its
Series B Preferred Stock and Common Stock held by Chesapeake (the "Securities")
as part of a plan of restructuring. The redemption of the Securities and
various revisions to the JV are subject to material conditions including
approval by certain lenders of the Company.

-33-
<PAGE>

The revised agreement and Securities redemption include the following
significant terms:

. Extension of the JV for three years with an immediate exclusion of the
state of Texas south of latitude 34o North from the provisions of the JV.

. Granting a right of first refusal to Chesapeake on any property
dispositions made by Production Corp.

. Segregation of first development rights, with Production Corp. having the
first right to future drilling, completion and operating activities in its
core operating area in the Watonga-Chickasha Trend and also to its
undeveloped acreage in Potato Hills, Carter Knox, Cottonwood Creek,
Oklahoma and Pecos Slope, New Mexico. Chesapeake will have first right in
all other areas containing JV acreage. Additionally, Chesapeake will assume
operations of 28 wells which were drilled in the JV by Chesapeake but had
been operated since first production by Production Corp.

. A permanent assignment to Chesapeake of the undeveloped leasehold interest
originally assigned to Chesapeake on March 31, 1998 that was subject to
reassignment to the Company by Chesapeake in 2003.

. A permanent assignment to Chesapeake of Production Corp's remaining JV
undeveloped leasehold in 16 counties located in the Anadarko and Arkoma
basins in Oklahoma and Kansas. The acreage in this assignment excludes 15
proved undeveloped locations retained by Production Corp. Production Corp's
remaining 50% interest in undeveloped acreage outside the 16 county areas
will not be conveyed to Chesapeake, and specifically, undeveloped acreage
in Watonga-Chickasha Trend and the Cement Field is not being conveyed.

. Chesapeake will have the right to acquire all of Production Corp's
participation in wells in the 16 county area (excluding the participation
in the 15 proved undeveloped locations retained by Production Corp.) that
are drilled between February 1, 2000 and the closing of this transaction.
Chesapeake's cost to acquire these wells will be the reimbursement of
Production Corp's unrecovered cost of drilling, completing and operating
the wells.

. Redemption by Gothic Energy of its entire issue of Series B Preferred Stock
having a liquidation preference of approximately $61 million, at February
29, 2000, and of 2.4 million shares of Gothic Energy's common stock.

-34-
<PAGE>

. GLOSSARY

Wherever used herein, the following terms shall have the meanings
specified.

Bbl--One stock tank barrel, or 42 US gallons liquid volume, used herein in
reference to crude oil or other liquid hydrocarbons.

Bcf--One billion cubic feet.

Bcfe--One billion cubic feet of natural gas equivalent.

Behind Pipe--Hydrocarbons in a potentially producing horizon penetrated by
a well bore the production of which has been postponed pending the production of
hydrocarbons from another formation penetrated by the well bore. These
hydrocarbons are classified as proved but non-producing reserves.

Boe--Barrels of oil equivalent (converting six Mcf of natural gas to one
Bbl of oil).

Developed Acreage--Acres which are allocated or assignable to producing
wells or wells capable of production.

Development Well--A well drilled within the proved area of a natural gas
and oil reservoir to the depth of a stratigraphic horizon known to be
productive.

Dry Well--A well found to be incapable of producing either oil or natural
gas in sufficient quantities to justify completion as an oil or natural gas
well.

EBITDA--Earnings (excluding discontinued operations, extraordinary items,
charges resulting from changes in accounting and significant non-recurring
revenues and expenses) before interest expense, provision for (or benefit for)
income taxes, depletion, depreciation and amortization expenses, and the
provision for impairment of natural gas and oil properties. EBITDA is not a
measure of cash flow as determined by generally accepted accounting principles.
EBITDA information has been included in this Prospectus because EBITDA is a
measure used by certain investors in determining historical ability to service
indebtedness. EBITDA should not be considered as an alternative to, or more
meaningful than, net income or cash flows as determined in accordance with
generally accepted accounting principles as an indicator of operating
performance or liquidity.

Exploratory Well--A well drilled to find and produce oil or natural gas in
an unproved area, to find a new reservoir in a field previously found to be
productive of oil or natural gas in another reservoir, or to extend a known
reservoir.

Gross Acres or Gross Wells--The total acres or wells, as the case may be,
in which a working interest is owned.

Infill Well--A well drilled between known producing wells to better exploit
the reservoir

Mbbl--One thousand Bbl.

Mmbbl--One million Bbl.

Mboe--One thousand barrels of oil equivalent.

Mcf--One thousand cubic feet.

Mcfe--One thousand cubic feet of natural gas equivalent, using the ratio of
one Bbl of crude oil to six Mcf of natural gas.

Mmcf--One million cubic feet.

-35-
<PAGE>

Mmcfe--One million cubic feet of natural gas equivalent.

Natural Gas and Oil Lease--An instrument by which a mineral fee owner
grants to a lessee the right for a specific period of time to explore for
natural gas and oil underlying the lands covered by the lease and the right to
produce any natural gas and oil so discovered generally for so long as there is
production in economic quantities from such lands.

Net Acres or Net Wells--The sum of the fractional working interests owned
in gross acres or gross wells.

NYMEX--New York Mercantile Exchange.

Overriding Royalty Interest--A fractional undivided interest in a natural
gas and oil property entitling the owner to a share of natural gas and oil
production, in addition to the usual royalty paid to the owner, free of costs of
production.

PDNP--Proved developed, non-producing or behind the pipe reserves.

Productive Well--A well that is producing oil or natural gas or that is
capable of production.

Proved Developed Reserves--Reserves that can be expected to be recovered
through existing wells with existing equipment and operating methods.

Proved Reserves--The estimated quantities of crude oil, natural gas and
natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions.

Proved Undeveloped Reserves or PUD--Reserves that are expected to be
recovered from new wells on undrilled acreage, or from existing wells where a
relatively major expenditure is required for completion.

PV-10--The discounted future net cash flows for proved natural gas and oil
reserves computed on the same basis as the Standardized Measure, but without
deducting income taxes, which is not in accordance with generally accepted
accounting principles. PV-10 is an important financial measure for evaluating
the relative significance of natural gas and oil properties and acquisitions,
but should not be construed as an alternative to the SEC PV-10 (as determined in
accordance with generally accepted accounting principles).

Reserve Life--The estimated productive life of a proved reservoir based
upon the economic limit of such reservoir producing hydrocarbons in paying
quantities assuming certain price and cost parameters. For purposes of this
Report, reserve life is calculated by dividing the Proved Reserves (on an Mcfe
basis), as of December 31, 1999 by projected production volumes for the 12
months ending December 31, 2000.

Royalty Interest--An interest in a natural gas and oil property entitling
the owner to a share of natural gas and oil production free of costs of
production.

Secondary Recovery--A method of natural gas and oil extraction in which
energy sources extrinsic to the reservoir are utilized.

Standardized Measure--The estimated future net cash flows from proved
natural gas and oil reserves computed using prices and costs at the dates
indicated, after income taxes and discounted at 10%.

Undeveloped Acreage--Lease acreage on which wells have not been drilled or
completed to a point that would permit the production of commercial quantities
of natural gas and oil regardless of whether such acreage contains proved
reserves.

Working Interest--The operating interest which gives the owner the right to
drill, produce and conduct operating activities on the property and a share of
production, subject to all royalties, overriding royalties and other burdens and
to all costs of exploration, development and operations and all risks in
connection therewith.

-36-
<PAGE>

PART IV
-------

Item 13 - Exhibits and Reports on Form 8-K:
- ------------------------------------------

<TABLE>
<CAPTION>
Exhibit Description
- ------------------------- --------------------------------------------------------------------------------

<S> <C>
3.1 Certificate of Incorporation of the Company filed October 11,1996 (1)

3.2 Certificate of Ownership and Merger of the Company filed October 22, 1996 (1)

3.4 By-Laws of the Company (1)

4.1 Specimen Stock Certificate

4.2 Warrant Agreement between Company and American Stock Transfer & Trust Company, as
Warrant Agent, including form of Redeemable Warrant (2)

10.1 1989 Incentive Stock Option and Non-Statutory Plan, as amended (1)

10.2 1996 Omnibus Incentive Plan (1)

10.3 1996 Non-Employee Stock Option Plan (1)

10.2.1 Employment Agreement dated as of January 1, 1999 between the Company and Michael
Paulk

10.2.2 Employment Agreement dated as of January 1, 1999 between the Company and Steven
P. Ensz

10.3 Warrant Certificate to purchase 1,000,000 Shares of Company's Common Stock at
$3.25 per share issued to Stratum (3)

10.4 Registration Rights Agreement dated as of September 9, 1997 among the Company,
Gothic Energy of Texas, Inc., Gothic Gas Corporation, Oppenheimer & Co., Inc,
Banc One Capital Corporation and Paribas Corporation. (4)

10.5 Warrant Agreement between the Company and American Stock Transfer & Trust
Company, as Warrant Agent, dated as of September 9, 1997(4)

10.6 Common Stock Purchase Warrant issued to Norse Exploration, Inc., and Norse
Pipeline, Inc. (5)

10.7 Purchase and Sale Agreement dated November 25, 1997 between Amoco Production
Company, as Seller, and Gothic Energy Corporation, as Buyer (6)

10.8 Securities Purchase Agreement dated as of January 23, 1998(7)

10.9 Warrant Agreement between the Company and American Stock Transfer & Trust
Company, dated as of January 23, 1998(7)

10.10 Registration Rights Agreement dated as of January 23, 1998(7)

10.11 Common Stock Registration Rights Agreement dated as of January 23, 1998(7)
</TABLE>

-37-
<PAGE>

<TABLE>
<S> <C>
10.12 Warrant to Purchase Common Stock of the Company expiring November 24, 2002(7)

10.13 Securities Purchase Agreement dated as of March 31, 1998 by and among Gothic
Energy Corporation, Chesapeake Gothic Corp. and Chesapeake Acquisition
Corporation (filed as Exhibit 10.2 to Current Report on Form 8-K dated March 31,
1998)(8)

10.14 Sale and Participation Agreement dated March 31, 1998 between Chesapeake Gothic
Corporation, Gothic Energy of Texas, Inc. and Gothic Production Corporation
(filed as Exhibit 10.3 to Current Report on Form 8-K dated March 31, 1998)(8)

10.15 Oil and Gas Asset Purchase Agreement dated March 31, 1998 among Chesapeake Gothic
Corp., Chesapeake Acquisition Corporation and Gothic Energy Corporation (filed as
Exhibit 10.4 to Current Report on Form 8-K dated March 31, 1998)(8)

10.16 Indenture dated as of April 21, 1998 between GPC and The Bank of New York, as
Trustee, with respect to the 11-1/8% Senior Secured Notes due 2005(8)

10.17 Registration Rights Agreement dated as of April 21, 1998 by and among GPC,
Gothic, Donaldson, Lufkin & Jenrette Securities Corporation and CIBC Oppenheimer
Corp. (8)

10.18 Securities Purchase Agreement dated as of April 21, 1997 among Gothic and the
Purchasers named therein with respect to 104,000 Units of Securities of Gothic (8)

10.19 Indenture dated as of April 21, 1998 between Gothic and The Bank of New York, as
Trustee, with respect to the 14-1/8% Senior Secured Discount Notes due 2006(8)

10.20 Warrant Agreement dated as of April 21, 1998 between Gothic and American Stock
Transfer & Trust Company, as Warrant Agent (8)

10.21 Notes Registration Rights Agreement dated as of April 21, 1998 among Gothic and
the Purchasers named therein (8)

10.22 Warrant Registration Rights Agreement dated as of April 21, 1998 among Gothic and
the Purchasers named therein (8)

10.23 Certificate of Designation for the Senior Redeemable Preferred Stock, Series B (8)

10.24 Warrant to Purchase Common Stock dated April 27, 1998 issued to Chesapeake Gothic
Corp.(8)

10.25 Securities Purchase Agreement dated as of March 31, 1998 by and among Gothic
Energy Corporation, Chesapeake Gothic Corp. and Chesapeake Acquisition
Corporation (9)
</TABLE>

-38-
<PAGE>

<TABLE>
<S> <C>
10.26 Sale and Participation Agreement dated March 31, 1998 between Chesapeake Gothic
Corporation, Gothic Energy of Texas, Inc. and Gothic Production Corporation (9)

10.27 Oil and Gas Asset Purchase Agreement dated March 31, 1998 among Chesapeake Gothic
Corp., Chesapeake Acquisition Corporation and Gothic Energy Corporation (9)

10.28 Option Purchase Agreement dated February 28, 2000 between Gothic Energy
Corporation, Gothic Production Corporation and Chesapeake Exploration Limited
Partnership.

21.0 Subsidiaries of the registrant:

Name State or Jurisdiction of Incorporation
- ------------------------- ------------------------------------------------------------------------------------
Gothic Production Oklahoma
Corporation

23.0 Consent of PricewaterhouseCoopers LLP

27.0 Financial Data Schedule.
</TABLE>
__________________________

* Filed herewith.

(1) Filed as an exhibit to Annual Report on Form 10-KSB for the year ended
December 31, 1997
(2) Filed as an exhibit to Registration Statement on Form SB-2 (File No. 33-
99190)
(3) Filed as an exhibit to Current Report on Form 8-K for May 31, 1995
(4) Filed as an exhibit to Current Report on Form 8-K for September 9, 1997
(5) Filed as an exhibit to Current Report on Form 8-K for February 18,1997
(6) Filed as an exhibit to Current Report on Form 8-K/A for November 25, 1997
(7) Filed as an exhibit to Current Report on Form 8-K/A for January 23, 1998
(8) Filed as an exhibit to Current Report on Form 8-K for April 27,1998.
(9) Filed as an exhibit to Current Report on Form 8-K for March 31, 1998.

-39-
<PAGE>

SIGNATURES
----------

Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.

Gothic Energy Corporation

By: /s/ Michael K. Paulk
-----------------------------
Michael K. Paulk, President

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated.

Signature Title Date
- --------- ----- ----

/s/ Michael K. Paulk President (Principal March 27, 2000
- ------------------------- Executive Officer and Director)
Michael K. Paulk

/s/ Steven P. Ensz Vice-President, Finance and Chief March 27,2000
- ------------------------- Financial Officer (Principal
Steven P. Ensz Financial and Accounting Officer)

/s/ John J. Fleming Director March 27, 2000
- -------------------------
John J. Fleming

/s/ Brian E. Bayley Director March 27, 2000
- -------------------------
Brian E. Bayley

-40-
<PAGE>

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
<S> <C>
Report of Independent Accountants......................................................................... F-2

Consolidated Balance Sheet, December 31, 1999............................................................. F-3

Consolidated Statement of Operations, Years ended December 31, 1998 and 1999.............................. F-4

Consolidated Statement of Stockholders' Equity (Deficit), Years ended December 31, 1998 and 1999.......... F-5

Consolidated Statement of Cash Flows, Years ended December 31, 1998 and 1999.............................. F-6

Notes to Consolidated Financial Statements................................................................ F-7
</TABLE>

F-1
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and
Stockholders of Gothic Energy Corporation

In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows present fairly, in all material respects, the financial position of Gothic
Energy Corporation and Subsidiary at December 31, 1999, and the results of their
operations and their cash flows for the years ended December 31, 1998 and 1999,
in conformity with accounting principles generally accepted in the United
States. 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 audits. We conducted our audits of these financial
statements in accordance with auditing standards generally accepted in the
United States which require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.

The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
Note 2 to the financial statements, the Company has suffered recurring losses
from operations and has a working capital and a net capital deficiency that
raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 2. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.

PricewaterhouseCoopers LLP
Tulsa, Oklahoma
February 21, 2000

F-2
<PAGE>

GOTHIC ENERGY CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
December 31, 1999
(dollars in thousands, except par value)

<TABLE>
<CAPTION>
ASSETS
------
1999
---------
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents........................................................... $ 2,583
Natural gas and oil receivables..................................................... 8,163
Receivable from officers and employees.............................................. 77
Other............................................................................... 624
---------
TOTAL CURRENT ASSETS.............................................................. 11,447
PROPERTY AND EQUIPMENT:
Natural gas and oil properties on full cost method:
Properties being amortized........................................................ 258,818
Unproved properties not subject to amortization................................... 5,473
Equipment, furniture and fixtures................................................... 6,123
Accumulated depreciation, depletion and amortization................................ (54,170)
---------
PROPERTY AND EQUIPMENT, NET......................................................... 216,244
OTHER ASSETS, NET.................................................................... 10,706
---------
TOTAL ASSETS...................................................................... $ 238,397
=========

LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
----------------------------------------------
CURRENT LIABILITIES:
Accounts payable trade.............................................................. $ 4,630
Revenues payable.................................................................... 6,047
Accrued interest.................................................................... 4,357
Other accrued liabilities........................................................... 893
---------
TOTAL CURRENT LIABILITIES......................................................... 15,927
LONG-TERM DEBT, NET.................................................................. 319,857
GAS IMBALANCE LIABILITY.............................................................. 3,648
COMMITMENTS AND CONTINGENCIES (NOTES 1, 2 AND 8)
STOCKHOLDERS' EQUITY (DEFICIT):
Series B Preferred stock, par value $.05, authorized 165,000 shares; 59,216 shares
issued and outstanding............................................................ 45,612
Common stock, par value $.01, authorized 100,000,000 shares; issued and
outstanding 18,685,765 shares...................................................... 187
Additional paid in capital.......................................................... 42,987
Accumulated deficit................................................................. (189,821)
---------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT).............................................. (101,035)
---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT).............................. $ 238,397
=========
</TABLE>

See accompanying notes to consolidated financial statements

F-3
<PAGE>

GOTHIC ENERGY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
For The Years Ended December 31, 1998 and 1999
(in thousands, except per share amounts)

<TABLE>
<CAPTION>
1998 1999
--------- --------
<S> <C> <C>
REVENUES:
Natural gas and oil sales...................................................... $ 50,714 $ 52,967
Well operations................................................................ 2,319 2,657
--------- --------
Total revenues................................................................. 53,033 55,624

COSTS AND EXPENSES:
Lease operating expense........................................................ 12,129 9,605
Depletion, depreciation and amortization....................................... 24,001 20,969
General and administrative expense............................................. 3,823 4,675
Investment banking and related fees............................................ - 638
Provision for impairment of natural gas and oil properties..................... 76,000 -
--------- --------
Operating income (loss).......................................................... (62,920) 19,737
Interest expense and amortization of debt issuance costs......................... (35,438) (37,988)
Interest and other income........................................................ 433 942
Loss on sale of investments...................................................... (305) -
--------- --------
LOSS BEFORE EXTRAORDINARY ITEM................................................... (98,230) (17,309)
LOSS ON EARLY EXTINGUISHMENT OF DEBT............................................. 31,459 -
--------- --------
NET LOSS......................................................................... (129,689) (17,309)
PREFERRED DIVIDEND ($125.76 and $120.32 PER PREFERRED SHARE)..................... 5,599 6,820
PREFERRED DIVIDEND--AMORTIZATION OF PREFERRED DISCOUNT........................... 5,095 1,847
--------- --------
NET LOSS AVAILABLE FOR COMMON SHARES............................................. $(140,383) $(25,976)
========= ========
LOSS PER COMMON SHARE BEFORE EXTRAORDINARY ITEM, BASIC
AND DILUTED.................................................................... $ (6.70) $ (1.51)
========= ========
NET LOSS PER COMMON SHARE, BASIC AND DILUTED..................................... $ (8.63) $ (1.51)
========= ========

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING....................................... 16,262 17,219
========= ========
</TABLE>

See accompanying notes to consolidated financial statements

F-4
<PAGE>

GOTHIC ENERGY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
For the Years Ended December 31, 1998 and 1999
(in thousands, except per share data)

<TABLE>
<CAPTION>
Common Preferred Additional
Shares Shares Common Preferred Paid-In Accumulated
Outstanding Outstanding Stock Stock Capital Deficit
----------- ----------- ------ --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, AT DECEMBER 31, 1997................ 16,262 -- $162 $ -- $36,043 $ (23,462)
Issuance of Series A Preferred stock......... -- 37 -- 33,909 (20) --
Warrants issued in connection with
Series A Preferred.......................... -- -- -- -- 941 --
Warrants issued in connection
with Amoco acquisition...................... -- -- -- -- 1,153 --
Redemption of Series A Preferred............. -- (37) -- (33,909) -- --
Issuance of Series B Preferred stock......... -- 50 -- 31,527 -- --
Warrants issued in connection
with Series B Preferred..................... -- -- -- -- 4,879 --
Preferred Stock dividend - Series A.......... -- -- -- -- -- (1,412)
Preferred dividend - amortization
of discount - Series A...................... -- -- -- -- -- (3,864)
Preferred Stock dividend - Series B.......... -- 4 -- 4,187 -- (4,187)
Preferred dividend - amortization
of discount - Series B...................... -- -- -- 1,231 -- (1,231)
Net loss..................................... -- -- -- -- -- (129,689)
Realized loss on available for sale
investments................................. -- -- -- -- -- --
Advance to officer........................... -- -- -- -- -- --
----------- ----------- ------ --------- ---------- -----------
BALANCE, AT DECEMBER 31, 1998................ 16,262 54 162 36,945 42,996 (163,845)
Preferred Stock dividend - Series B.......... -- 6 -- 6,820 -- (6,820)
Preferred dividend - amortization
of discount - Series B....................... -- -- -- 1,847 -- (1,847)
Issuance of common stock as employee
severance................................... 30 -- -- -- 16 --
Issuance of common stock on
warrant conversion........................... 2,394 -- 25 -- (25) --
Forgiveness of officer note receivable....... -- -- -- -- -- --
Net loss..................................... -- -- -- -- -- (17,309)
----------- ----------- ------ --------- ---------- -----------
BALANCE, AT DECEMBER 31, 1999................ 18,686 60 $ 187 $ 45,612 $ 42,987 $ (189,821)
=========== =========== ====== ========= ========== ===========
<CAPTION>

Accumulated
Other Total
Comprehensive Note Stockholders'
Income Receivable Equity
------------- ---------- -------------
<S> <C> <C> <C>
BALANCE, AT DECEMBER 31, 1997................ $ (121) $ (169) $ 12,453
Issuance of Series A Preferred stock......... -- -- 33,889
Warrants issued in connection with
Series A Preferred.......................... -- -- 941
Warrants issued in connection
with Amoco acquisition...................... -- -- 1,153
Redemption of Series A Preferred............. -- -- (33,909)
Issuance of Series B Preferred stock......... -- -- 31,527
Warrants issued in connection
with Series B Preferred..................... -- -- 4,879
Preferred Stock dividend - Series A.......... -- -- (1,412)
Preferred dividend - amortization
of discount - Series A...................... -- -- (3,864)
Preferred Stock dividend - Series B.......... -- -- --
Preferred dividend - amortization
of discount - Series B...................... -- -- --
Net loss..................................... -- -- (129,689)
Realized loss on available for sale
investments................................. 121 -- 121
Advance to officer........................... -- (10) (10)
------------- ---------- -------------
BALANCE, AT DECEMBER 31, 1998................ -- (179) (83,921)
Preferred Stock dividend - Series B.......... -- -- --
Preferred dividend - amortization
of discount - Series B....................... -- -- --
Issuance of common stock as employee
severance................................... -- -- 16
Issuance of common stock on
warrant conversion........................... -- -- --
Forgiveness of officer note receivable....... -- 179 179
Net loss..................................... -- -- (17,309)
------------- ---------- -------------
BALANCE, AT DECEMBER 31, 1999................ $ -- $ -- $ (101,035)
============= ========== =============
</TABLE>

See accompanying notes to consolidated financial statements

F-5
<PAGE>

GOTHIC ENERGY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
For The Years Ended December 31, 1998 and 1999
(in thousands)

<TABLE>
<CAPTION>
1998 1999
--------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss...................................................................... $(129,689) $(17,309)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH PROVIDED
BY OPERATING ACTIVITIES:
Depreciation, depletion and amortization...................................... 24,001 20,969
Amortization of discount and loan costs....................................... 1,994 1,769
Provision for impairment of natural gas and oil properties.................... 76,000 -
Accretion of interest on discount notes....................................... 6,023 9,678
Loss on early extinguishment of debt.......................................... 31,459 -
Other......................................................................... - 179
CHANGES IN ASSETS AND LIABILITIES:
Increase in accounts receivable............................................... (4,009) (949)
Increase in other current assets.............................................. (143) (403)
Increase in accounts and revenues payable..................................... 5,605 1,438
Increase (decrease) in gas imbalance and other liabilities.................... 65 (2,532)
Increase in accrued liabilities............................................... 411 639
Decrease (increase) in other assets........................................... (150) 228
--------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES....................................... 11,567 13,707
NET CASH USED BY INVESTING ACTIVITIES:
Collection of note receivable from officer and director....................... 167 -
Purchase of available-for-sale investments.................................... (462) -
Proceeds from sale of investments............................................. 1,359 -
Proceeds from sale of property and equipment.................................. 44,678 2,228
Purchase of property and equipment............................................ (218,738) (3,413)
Property development costs.................................................... (18,379) (21,056)
--------- --------
NET CASH USED BY INVESTING ACTIVITIES........................................... (191,375) (22,241)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings........................................... 60,000 -
Payments of short-term borrowings............................................. (60,000) -
Proceeds from long-term borrowings............................................ 431,290 31,000
Payments of long-term borrowings.............................................. (259,884) (22,000)
Redemption of preferred stock, net............................................ (40,809) -
Proceeds from sale of preferred stock, net.................................... 73,475 -
Payment of loan and offering fees............................................. (38,535) (172)
Other......................................................................... (162) -
--------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES....................................... 165,375 8,828
NET CHANGE IN CASH AND CASH EQUIVALENTS......................................... (14,433) 294
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.................................. 16,722 2,289
--------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD........................................ $ 2,289 $ 2,583
========= ========

SUPPLEMENTAL DISCLOSURE OF INTEREST PAID........................................ $ 23,063 $ 26,541
========= ========
</TABLE>

See accompanying notes to consolidated financial statements

F-6
<PAGE>

GOTHIC ENERGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. GENERAL AND ACCOUNTING POLICIES

Organization and Nature of Operations--The consolidated financial
statements include the accounts of Gothic Energy Corporation, ("Gothic Energy"),
a "holding company", and its subsidiary, Gothic Production Corporation
("Production Corp.") since its formation in April of 1998, (collectively
referred to as the "Company"). All significant intercompany balances and
transactions have been eliminated. Production Corp., the wholly owned subsidiary
of Gothic Energy, is an independent energy company primarily engaged in the
business of acquiring, developing and exploiting natural gas and oil reserves in
Oklahoma, Texas, New Mexico and Kansas.

Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
In addition, accrued and deferred lease operating expenses, gas imbalance
liabilities, natural gas and oil reserves (see Note 13) and the tax valuation
allowance (see Note 7) also include significant estimates which, in the near
term, could materially differ from the amounts ultimately realized or incurred.

Cash Equivalents--Cash equivalents include cash on hand, amounts held in
banks, money market funds and other highly liquid investments with a maturity of
three months or less at date of purchase.

Concentration of Credit Risk--Financial instruments which potentially
subject Production Corp. to concentrations of credit risk consist principally of
derivative contracts (see "Hedging Activities" below), cash, cash equivalents
and trade receivables. Production Corp.'s accounts receivable are primarily from
the purchasers (See Note 10--Major Customers) of natural gas and oil products
and exploration and production companies which own interests in properties
operated by Production Corp. The industry concentration has the potential to
impact Production Corp's overall exposure to credit risk, either positively or
negatively, in that the customers may be similarly affected by changes in
economic, industry or other conditions. Production Corp. generally does not
require collateral from customers and Production Corp. had an account receivable
from one customer of approximately $2,300,000 at December 31, 1999. The cash and
cash equivalents are with major banks or institutions with high credit ratings.
At December 31, 1999, Production Corp. had a concentration of cash of $5,758,000
with one bank, which was in excess of federally insured limits.

Fair Value of Financial Instruments--The following disclosure of the
estimated fair value of financial instruments is made in accordance with the
requirements of Statement of Financial Accounting Standards No. 107,
"Disclosures About Fair Value of Financial Instruments". The estimated fair
value amounts have been determined by the Company using available market
information. Considerable judgment is required in interpreting market data to
develop the estimates of fair value. The use of different market assumptions or
valuation methodologies may have a material effect on the estimated fair value
amounts.

The carrying values of items comprising current assets and current
liabilities approximate fair values due to the short-term maturities of these
instruments. The Company estimates the fair value of Production Corp's 11 1/8%
Senior Secured Notes and Gothic Energy's 14 1/8% Senior Secured Discount Notes
using estimated market prices. The Company's carrying amount for such debt at
December 31, 1999, was $235,000,000 and $75,857,000, respectively, compared to
an approximate fair value of $197,400,000 and $35,880,000, respectively. The
carrying value of other long-term debt approximates its fair value as interest
rates are primarily variable, based on prevailing market rates.

Hedging Activities - Production Corp. has involvement with derivative
financial instruments, as defined in Statement of Financial Accounting Standards
No. 119 "Disclosure About Derivative Financial Instruments and Fair Value of
Financial Instruments", and does not use them for trading purposes. Production
Corp's objective is to hedge

F-7
<PAGE>

GOTHIC ENERGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

a portion of its exposure to price volatility from producing natural gas. These
arrangements may expose Production Corp. to credit risk from its counterparty.

In April 1999, Production Corp. entered into a hedge agreement in the form
of a costless collar with respect to the production of 50,000 MMBTU of natural
gas per day during the period of May through October 1999. The costless collar
placed a floor of $1.80 per MMBTU and a ceiling of $2.26 per MMBTU for the
effective price of natural gas received by Production Corp. Additionally, in
July 1999 Production Corp. entered into a similar costless collar agreement with
respect to the production of 50,000 MMBTU per day during the period of November
1999 through March 2000 which places a floor of $2.30 per MMBTU and a ceiling of
$3.03 per MMBTU. The collars represent approximately 70% of Production Corp's
current daily natural gas production. Collar arrangements limit the benefits
Production Corp. will realize if actual prices rise above the ceiling price.
These arrangements provide for Production Corp. to exchange a floating market
price for a fixed range contract price. Payments are made by Production Corp.
when the floating price exceeds the fixed range for a contract month and
payments are received when the fixed range price exceeds the floating price.
The commodity reference price for both contracts is the Panhandle Eastern
Pipeline Company, Texas, Oklahoma Mainline Index. In August 1999, Production
Corp. entered into a hedge agreement covering 10,000 barrels of oil per month at
a fixed price of $20.10 per barrel. This hedge is in effect from September 1999
through August 2000. Gains and losses on such natural gas and oil contracts are
reflected in revenues when the natural gas or crude oil is sold. If the open
gas collar noted above had been settled on December 31, 1999, Production Corp.
would have recognized a gain of $769,000. If the open crude oil hedge noted
above had been settled on December 31, 1999, Production Corp. would have
recognized a loss of $282,000.

Additionally, in January 2000, Production Corp. entered into a hedge
agreement covering 50,000 MMBTU per day at a fixed price of $2.435 per MMBTU.
This hedge is in effect from April 2000 through October 2000. In February 2000,
Production Corp. entered into a hedge agreement covering 20,000 MMBTU per day at
a fixed price of $2.535 per MMBTU for April 2000 and $2.555 per MMBTU for May
2000. This hedge is in effect for the months of April and May 2000. The
commodity reference price for both contracts is the Panhandle Eastern Pipeline
Company, Texas, Oklahoma Mainline Index.

Natural Gas and Oil Properties--Production Corp. accounts for its natural
gas and oil exploration and development activities using the full cost method of
accounting prescribed by the Securities and Exchange Commission (''SEC'').
Accordingly, all productive and non-productive costs incurred in connection with
the acquisition, exploration and development of natural gas and oil reserves are
capitalized and depleted using the units-of-production method based on proved
natural gas and oil reserves. Production Corp. capitalizes costs including
salaries and related fringe benefits of employees and/or consultants directly
engaged in the acquisition, exploration and development of natural gas and oil
properties, as well as other directly identifiable general and administrative
costs associated with such activities. Such costs do not include any costs
related to production, general corporate overhead, or similar activities.

Production Corp.'s natural gas and oil reserves are estimated annually by
independent petroleum engineers. Production Corp's calculation of depreciation,
depletion and amortization ("DD&A") includes estimated future expenditures to
be incurred in developing proved reserves and estimated dismantlement and
abandonment costs, net of salvage values. The average composite rate used for
DD&A of natural gas and oil properties was $0.91 and $0.77 per Mcfe in 1998 and
1999, respectively. DD&A of natural gas and oil properties amounted to
$23,600,000 and $20,444,000 in 1998 and 1999, respectively.

In the event the unamortized cost of natural gas and oil properties being
amortized exceeds the full cost ceiling as defined by the SEC, the excess is
charged to expense in the period during which such excess occurs. The full cost
ceiling is based principally on the estimated future discounted net cash flows
from Production Corp's natural gas and oil properties. Production Corp. recorded
a $76,000,000 provision for impairment of natural gas and oil properties during
the year ended December 31, 1998. No such provision was recorded in 1999. As
discussed in Note 13, estimates of natural gas and oil reserves are imprecise.
Changes in the estimates or declines in natural gas and oil prices could cause
Production Corp. in the near-term to reduce the carrying value of its natural
gas and oil properties.

F-8
<PAGE>

GOTHIC ENERGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Sales and abandonments of properties are accounted for as adjustments of
capitalized costs with no gain or loss recognized unless a significant amount of
reserves is involved. Since all of Production Corp's natural gas and oil
properties are located in the United States, a single cost center is used.

Equipment, Furniture and Fixtures--Equipment, furniture and fixtures are
stated at cost and are depreciated on the straight-line method over their
estimated useful lives which range from three to seven years.

Debt Issuance Costs--Debt issuance costs, including the original issue
discount, associated with Production Corp's 11 1/8% Senior Secured Notes Due
2005 and Gothic Energy's 14 1/8% Senior Secured Discount Notes Due 2006, are
amortized and included in interest expense using the effective interest method
over the term of the notes. The unamortized portion of debt issuance costs
associated with Production Corp's Credit Facility is included in other assets
and amortized and included in interest expense using the straight-line method
over the term of the Facility. Amortization of debt issuance costs for the years
ended December 31, 1998 and 1999 amounted to $1,994,000 and $1,769,000,
respectively.

Natural Gas and Oil Sales and Natural Gas Balancing--Production Corp. uses
the sales method for recording natural gas sales. Production Corp's oil and
condensate production is sold, title passed, and revenue recognized at or near
its wells under short-term purchase contracts at prevailing prices in accordance
with arrangements which are customary in the oil industry. Sales of gas
applicable to Production Corp's interest in producing natural gas and oil leases
are recorded as revenues when the gas is metered and title transferred pursuant
to the gas sales contracts covering its interest in gas reserves. During such
times as Production Corp's sales of gas exceed its pro rata ownership in a well,
such sales are recorded as revenues unless total sales from the well have
exceeded Production Corp's share of estimated total gas reserves underlying the
property at which time such excess is recorded as a gas imbalance liability. At
December 31, 1999, total sales exceeded Production Corp's share of estimated
total gas reserves on 32 wells by $2,752,000 (1,449,000 Mcf), based on the year-
end "spot market" price of natural gas. The gas imbalance liability has been
classified in the balance sheet as non-current, as Production Corp. does not
expect to settle the liability during the next twelve months.

Production Corp. has recorded deferred charges for estimated lease operating
expenses incurred in connection with its underproduced gas imbalance position.
At December 31, 1999, cumulative total gas sales volumes for underproduced wells
were less than Production Corp's pro-rata share of total gas production from
these wells by 4,435,000 Mcf, resulting in prepaid lease operating expenses of
$1,464,000, which are included in other assets in the accompanying balance
sheet. The rate used to calculate the deferred charge is the average annual
production costs per Mcf.

Production Corp. has recorded accrued charges for estimated lease operating
expenses incurred in connection with its overproduced gas imbalance position. At
December 31, 1999, cumulative total gas sales volumes for overproduced wells
exceeded Production Corp's pro-rata share of total gas production from these
wells by 2,717,000 Mcf, resulting in accrued lease operating expenses of
$897,000, which are included in the gas imbalance liability in the accompanying
balance sheet. The rate used to calculate the accrued liability is the average
annual production costs per Mcf.

Income Taxes--The Company applies the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109").
Under SFAS No. 109, deferred tax liabilities or assets arise from the
temporary differences between the tax basis of assets and liabilities, and their
basis for financial reporting, and are subject to tests of realizability in the
case of deferred tax assets. A valuation allowance is provided for deferred tax
assets to the extent realization is not judged to be more likely than not.

Loss per Common Share - Loss per common share before extraordinary item and
net loss per common share are computed in accordance with Statement of Financial
Accounting Standards No. 128 ("FAS 128"). Presented on the Consolidated
Statement of Operations is a reconciliation of loss available to common
shareholders. There is no difference between actual weighted average shares
outstanding, which are used in computing basic loss per share and diluted
weighted average shares, which are used in computing diluted loss per share
because the effect of outstanding options and warrants would be antidilutive.
Warrants and options to purchase approximately

F-9
<PAGE>

GOTHIC ENERGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

20,775,000 and 19,940,000 shares were outstanding as of December 31, 1998 and
1999 and were excluded from the computation of diluted loss per share due to
their anti-dilutive impact.

Stock Based Compensation--The Company applies Accounting Principles Board
Opinion No. 25 in accounting for its stock option plans. Under this standard, no
compensation expense is recognized for grants of options which include an
exercise price equal to or greater than the market price of the stock on the
date of grant. Accordingly, based on the Company's grants in 1998 and 1999, no
compensation expense has been recognized.

Recently issued Financial Accounting Pronouncements - In June 1998, the
FASB issued Statement No. 133, "Accounting for Derivative Instruments and
Hedging Activities". FAS 133, as amended, is effective for all fiscal quarters
of fiscal years beginning after June 15, 2000 (January 1, 2001 for the Company).
FAS 133 standardizes the accounting for derivative instruments by requiring that
all derivatives be recognized as assets and liabilities and measured at fair
value. Upon the Statement's initial application, all derivatives are required
to be recognized in the statement of financial position as either assets or
liabilities and measured at fair value. In addition, all existing hedging
relationships must be designated, reassessed, documented and the accounting
conformed to the provisions of FAS 133. Production Corp. is evaluating the
impact on its financial position and results of operations of adopting FAS 133.

NOTE 2. GOING CONCERN

The Company incurred a net loss of $129,689,000 in 1998, due principally to
a decline in commodity prices during that year. This commodity price decline
required Production Corp. to write down the carrying value of its natural gas
and oil properties by $76,000,000. More significantly, the commodity price
decline continued to affect the ongoing revenues and cash flows of Production
Corp. during early 1999, resulting in a net loss of $17,309,000 for the year
ended December 31, 1999.

It is the intention of Production Corp. to continue to spend available cash
flow (EBITDA less cash interest payable on Senior Secured Notes) on the
development of natural gas and oil properties. With the continued volatility of
commodity prices, hedging programs will continue to be utilized by Production
Corp. This should help to stabilize cash flow, which is necessary to ensure
Production Corp's ability to generate sufficient reserves to replace current
production, but limits the benefit of increases in commodity prices above the
hedge price. Should commodity prices fall below current levels, Production
Corp. would be limited in its ability to increase production and related cash
flow to a level sufficient to meet its ongoing financial covenants under its
Credit Facility. The price of natural gas and oil has recently been increasing,
but there is no assurance that it will continue to increase or remain at the
current level. Further, the borrowing base amount available under Production
Corp's Credit Facility was redetermined in October 1999 and was reduced to
$20,000,000. The next scheduled redetermination date is April 1, 2000 and there
is no assurance that Production Corp's lender will maintain the available amount
at this current level.

NOTE 3. SUBSEQUENT EVENTS

On February 29, 2000, the Company and Chesapeake Energy Corporation
("Chesapeake") entered into agreements which will substantially revise the
Production Corp./Chesapeake Joint Venture ("JV") Development Agreement
originally entered into on March 31, 1998, and will provide for Gothic Energy to
redeem, without any additional consideration, its Series B Preferred Stock and
Common Stock held by Chesapeake, (the "Securities"), as part of a plan of
restructuring. The redemption of the Securities and various revisions to the JV
are subject to material conditions including approval by certain lenders of the
Company.

The revised agreement and Securities redemption include the following
significant terms:

. Extension of the JV for three years with an immediate exclusion of the
state of Texas south of latitude 34o North from the provisions of the
JV.

. Granting a right of first refusal to Chesapeake on any property
dispositions made by Production Corp.

F-10
<PAGE>

GOTHIC ENERGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

. Segregation of first development rights, with Production Corp. having
the first right to future drilling, completion and operating activities
in its core operating area in the Watonga-Chickasha Trend and also to
its undeveloped acreage in Potato Hills, Carter Knox, Cottonwood Creek,
Oklahoma and Pecos Slope, New Mexico. Chesapeake will have first right
in all other areas containing JV acreage. Additionally, Chesapeake will
assume operations of 28 wells which were drilled in the JV by Chesapeake
but had been operated since first production by Production Corp.

. A permanent assignment to Chesapeake of the undeveloped leasehold
interest originally assigned to Chesapeake on March 31, 1998 that was
subject to reassignment to Production Corp. by Chesapeake in 2003.

. A permanent assignment to Chesapeake of Production Corp's remaining JV
undeveloped leasehold in 16 counties located in the Anadarko and Arkoma
basins in Oklahoma and Kansas. The acreage in this assignment excludes
15 proved undeveloped locations retained by Production Corp. Production
Corp's remaining 50% interest in undeveloped acreage outside the 16
county areas will not be conveyed to Chesapeake, and specifically,
undeveloped acreage in Watonga-Chickasha Trend and the Cement Field is
not being conveyed.

. Chesapeake will have the right to acquire all of Production Corp's
participation in wells in the 16 county area (excluding the
participation in the 15 proved undeveloped locations retained by
Production Corp.) that are drilled between February 1, 2000 and the
closing of this transaction. Chesapeake's cost to acquire these wells
will be the reimbursement of Production Corp's unrecovered cost of
drilling, completing and operating the wells.

. Redemption by Gothic Energy of its entire issue of Series B Preferred
Stock having a liquidation preference of approximately $61,000,000 and
of 2,394,125 shares of Gothic Energy's common stock.

NOTE 4. FINANCING ACTIVITIES

Credit Facility

On April 27, 1998, Production Corp., with Gothic Energy as guarantor,
entered into a credit facility, with Bank One (the "Credit Facility"). The
Credit Facility consists of a revolving line of credit, with an initial
Borrowing Base of $25,000,000. Borrowings are limited to being available for
the acquisition and development of natural gas and oil properties, letters of
credit and general corporate purposes. The Borrowing Base will be redetermined
at least semi-annually. Upon completion of the October 1, 1999 redetermination,
the borrowing base was reduced to $20,000,000. The principal is due at
maturity, April 30, 2001. Interest is payable monthly calculated at the Bank
One Base Rate, as determined from time to time by Bank One. Production Corp.
may elect to calculate interest under a London Interbank Offered Rate ("LIBOR")
plus 1.5% (or up to 2.0% in the event the loan balance is greater than 75% of
the Borrowing Base). Production Corp. is required to pay a commitment fee on
the unused portion of the Borrowing Base equal to 1/2 of 1% per annum. Under
the Credit Facility, Bank One holds first priority liens on substantially all of
the natural gas and oil properties of Production Corp., whether currently owned
or hereafter acquired. As of December 31, 1999, Production Corp. had $9,000,000
outstanding under the Credit Facility.

The Credit Facility requires, among other things, semi-annual engineering
reports covering oil and natural gas reserves on the basis of which semi-annual
and other redeterminations of the borrowing base and monthly commitment
reduction are made. The Credit Facility, as amended on May 7, 1999, also
includes various affirmative and negative covenants, including, among others,
(i) prohibitions against additional indebtedness unless approved by the lenders,
subject to certain exceptions, (ii) prohibitions against the creation of liens
on the assets of Production Corp., subject to certain exceptions, (iii)
prohibitions against cash dividends, (iv) prohibitions against hedging positions
unless consented to by Bank One, (v) prohibitions on asset sales, subject to
certain exceptions, (vi) restrictions on mergers or consolidations, (vii) a
requirement to maintain a ratio of current assets to current liabilities of 1.0
to 1.0, and (viii) a minimum interest coverage ratio of not less than 1.25 to
1.0 for the quarter ended June 30, 1999, 1.5 to 1.0 for the quarter ended
September 30, 1999, 1.75 to 1.0 for the quarter ended December 31, 1999 and

F-11
<PAGE>

GOTHIC ENERGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

2.0 to 1.0 for each remaining quarter starting with the quarter ending March 31,
2000. The Credit Facility includes covenants prohibiting distributions, loans or
advances to third parties, subject to certain exceptions. If Production Corp. is
required to purchase or redeem any portion of the 11 1/8% Senior Secured Notes,
or if any portion of the 11 1/8% Senior Secured Notes become due, the Borrowing
Base is subject to reduction. Production Corp. is required to escrow interest
payments due on the Senior Secured Notes at such times as its borrowings under
the Credit Facility equal or exceed 75% of the Borrowing Base. Events of default
include the non-payment of principal, interest or fees, a default under other
outstanding indebtedness, a breach of the representations and warranties
contained in the loan agreement, material judgements, bankruptcy or insolvency,
a default under certain covenants not cured within a grace period, and a change
in the management or control of the Company.

11-1/8% Senior Secured Notes Due 2005

The 11-1/8% Senior Secured Notes Due 2005 ("Senior Secured Notes") issued
by Production Corp. are fully and unconditionally guaranteed by Gothic Energy.
The aggregate principal amount of Senior Secured Notes outstanding is
$235,000,000 issued under an indenture dated April 21, 1998 (the "Senior Note
Indenture"). The Senior Secured Notes bear interest at 11-1/8% per annum
payable semi-annually in cash in arrears on May 1 and November 1 of each year
commencing November 1, 1998. The Senior Secured Notes mature on May 1, 2005.
All of the obligations of Production Corp. under the Senior Secured Notes are
collateralized by a second priority lien on substantially all of Production
Corp's natural gas and oil properties, subject to certain permitted liens.

Production Corp. may, at its option, at any time on or after May 1, 2002,
redeem all or any portion of the Senior Secured Notes at redemption prices
decreasing from 105.563%, if redeemed in the 12-month period beginning May 1,
2002, to 100.00% if redeemed in the 12-month period beginning May 1, 2004 and
thereafter plus, in each case, accrued and unpaid interest thereon.
Notwithstanding the foregoing, at any time prior to May 1, 2002, Production
Corp. may, at its option, redeem all or any portion of the Senior Secured Notes
at the Make-Whole Price (as defined in the Senior Note Indenture) plus accrued
or unpaid interest to the date of redemption. In addition, in the event
Production Corp. consummates one or more Equity Offerings (as defined in the
Senior Note Indenture) on or prior to May 1, 2001, Production Corp., at its
option, may redeem up to 33-1/3% of the aggregate principal amount of the Senior
Secured Notes with all or a portion of the aggregate net proceeds received by
Production Corp. from such Equity Offering or Equity Offerings at a redemption
price of 111.125% of the aggregate principal amount of the Senior Secured Notes
so redeemed, plus accrued and unpaid interest thereon to the redemption date;
provided, however, that following such redemption, at least 66-2/3% of the
original aggregate principal amount of the Senior Secured Notes remains
outstanding.

Following the occurrence of any Change of Control (as defined in the Senior
Note Indenture), Production Corp. will offer to repurchase all outstanding
Senior Secured Notes at a purchase price equal to 101% of the aggregate
principal amount of the Senior Secured Notes, plus accrued and unpaid interest
to the date of repurchase.

The Senior Note Indenture under which the Senior Secured Notes were issued
contains certain covenants limiting Production Corp. with respect to or imposing
restrictions on the incurrence of additional indebtedness, the payment of
dividends, distributions and other restricted payments, the sale of assets,
creating, assuming or permitting to exist any liens (with certain exceptions) on
its assets, mergers and consolidations (subject to meeting certain conditions),
sale leaseback transactions, and transactions with affiliates, among other
covenants.

Events of default under the Senior Note Indenture include the failure to
pay any payment of principal or premium when due, failure to pay for 30 days any
payment of interest when due, failure to make any optional redemption payment
when due, failure to perform any covenants relating to mergers or
consolidations, failure to perform any other covenant or agreement not remedied
within 30 days of notice from the Trustee under the Senior Note Indenture or the
holders of 25% in principal amount of the Senior Secured Notes then outstanding,
defaults under other indebtedness of Production Corp. or Gothic Energy causing
the acceleration of the due date of such indebtedness having an outstanding
principal amount of $10,000,000 or more, the failure of Production Company to be
a wholly owned subsidiary of Gothic Energy, and certain other bankruptcy and
other court proceedings, among other matters.

F-12
<PAGE>

GOTHIC ENERGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

14 1/8% Senior Secured Discount Notes Due 2006

The 14 1/8% Senior Secured Discount Notes Due 2006 (the "Discount Notes")
were issued by Gothic Energy under an indenture (the "Discount Note Indenture")
dated April 21, 1998 in such aggregate principal amount and at such rate of
interest as generated gross proceeds of $60,155,000. Gothic Energy also issued
seven-year warrants to purchase, at an exercise price of $2.40 per share,
825,000 shares of Gothic Energy's Common Stock with the Discount Notes. The
estimated fair value of such warrants was approximately $554,000 on the date of
issuance. The Discount Notes were issued at a substantial discount from their
principal amount and accrete at a rate per annum of 14 1/8%, compounded semi-
annually, to an aggregate principal amount of $104,000,000 at May 1, 2002.
Thereafter, the Discount Notes accrue interest at the rate of 14 1/8% per annum,
payable in cash semi-annually in arrears on May 1 and November 1 of each year,
commencing November 1, 2002. The Discount Notes mature on May 1, 2006 and are
collateralized by a first priority lien against the outstanding shares of
capital stock of Production Corp. The carrying amount of the Discount Notes as
of December 31, 1999 was $75,857,000.

Gothic Energy may, at its option, at any time on or after May 1, 2003,
redeem all or any portion of the Discount Notes at redemption prices decreasing
from 107.063% if redeemed in the 12-month period beginning May 1, 2003 to
100.00% if redeemed in the 12-month period beginning May 1, 2005 and thereafter
plus, in each case, accrued and unpaid interest thereon. Notwithstanding the
foregoing, at any time prior to May 1, 2003, Gothic Energy may, at its option,
redeem all or any portion of the Discount Notes at the Make-Whole Price (as
defined in the Discount Note Indenture) plus accrued or unpaid interest to the
date of redemption. In addition, in the event Gothic Energy consummates one or
more Equity Offerings (as defined in the Discount Note Indenture) on or prior to
May 1, 2001, Gothic Energy, at its option, may redeem up to 33-1/3% of the
Accreted Value (as defined in the Discount Note Indenture) of the Discount Notes
with all or a portion of the aggregate net proceeds received by Gothic Energy
from such Equity Offering or Equity Offerings at a redemption price of 114.125%
of the Accreted Value of the Discount Notes so redeemed, plus accrued and unpaid
interest thereon to the redemption date; provided, however, that following such
redemption, at least 66-2/3% of the Accreted Value of the Discount Notes remains
outstanding.

Following the occurrence of any Change of Control (as defined in the
Discount Note Indenture), Gothic Energy will offer to repurchase all outstanding
Discount Notes at a purchase price equal to, prior to May 1, 2002, 101% of the
Accreted Value of the Discount Notes on the date of repurchase, plus accrued and
unpaid interest to the date of repurchase and thereafter, 101% of the aggregate
principal amount of the Discount Notes plus accrued and unpaid interest and
Liquidated Damages, if any, to the date of repurchase.

The Discount Note Indenture under which the Discount Notes were issued
contains certain covenants limiting Gothic Energy with respect to or imposing
restrictions on the incurrence of additional indebtedness, the payment of
dividends, distributions and other restricted payments, the sale of assets,
creating, assuming or permitting to exist any liens (with certain exceptions) on
its assets, mergers and consolidations (subject to meeting certain conditions),
sale leaseback transactions, and transactions with affiliates, among other
covenants.

Events of default under the Discount Note Indenture include the failure to
pay any payment of principal or premium when due, failure to pay for 30 days any
payment of interest when due, failure to make any optional redemption payment
when due, failure to perform any covenants relating to mergers or
consolidations, failure to perform any other covenant or agreement not remedied
within 30 days of notice from the Trustee under the Discount Note Indenture or
the holders of 25% in principal amount of the Discount Notes then outstanding,
defaults under other indebtedness of Gothic Energy causing the acceleration of
the due date of indebtedness having an outstanding principal amount of
$10,000,000 or more, the failure of Production Corp. to be a wholly owned
subsidiary of Gothic Energy, and certain other bankruptcy and other court
proceedings, among other matters.

NOTE 5. STOCKHOLDERS' EQUITY

In January 1999, Gothic Energy issued 30,000 shares of its common stock as
part of a severance package to a former employee. On August 17, 1999,
Chesapeake Energy Corporation fully exercised the common stock purchase warrant
issued to it in April 1998 and purchased 2,394,125 shares of Gothic Energy's
common stock. The warrant had been issued to Chesapeake as part of the
transaction involving the sale to Chesapeake of shares of

F-13
<PAGE>

GOTHIC ENERGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Gothic Energy's Series B Senior Redeemable Preferred Stock, a 50% interest in
Production Corp's Arkoma basin natural gas and oil properties and a 50% interest
in substantially all of Production Corp's undeveloped acreage. The shares were
issued pursuant to the cashless exercise provisions of the warrant that
permitted Chesapeake to surrender the right to exercise the warrant for a number
of shares of Gothic Energy's common stock having a market value equivalent to
the total exercise price. The total exercise price was $23,941.25 or $0.01 per
share. An aggregate of 45,121 warrants were surrendered in payment of the total
exercise price. The shares of common stock were issued pursuant to the exemption
from the registration requirements of the Securities Act of 1933, as amended,
afforded by section 4 (2) thereof.

Preferred Stock Offering

Series B Preferred Stock and Warrant. On April 27, 1998, as part of the
Recapitalization, Gothic Energy issued 50,000 shares of Series B Preferred Stock
with an aggregate liquidation preference of $50,000,000 and the warrant to
purchase 2,439,246 shares of Gothic Energy's Common Stock, discussed above. The
estimated fair value of such warrant was $4,879,000 on the date of issuance.
The Series B Preferred Stock, with respect to dividend rights and rights on
liquidation, winding-up and dissolution, ranks senior to all classes of Common
Stock of Gothic Energy and senior to all other classes or series of any class of
preferred stock. Holders of the Series B Preferred Stock are entitled to
receive dividends payable at a rate per annum of 12% of the aggregate
Liquidation Preference of the Series B Preferred Stock payable in additional
shares of Series B Preferred Stock; provided that after April 1, 2000, at Gothic
Energy's option, it may pay the dividends in cash. Dividends are cumulative and
will accrue from the date of issuance and are payable quarterly in arrears.

At any time prior to April 30, 2000, the Series B Preferred Stock may be
redeemed at the option of Gothic Energy in whole or in part, at 105% of the
Liquidation Preference payable in cash out of the net proceeds from a public or
private offering of any equity security, plus accrued and unpaid dividends
(whether or not declared), which shall also be paid in cash. At any time on or
after April 30, 2000, the Series B Preferred Stock may be redeemed at the option
of Gothic Energy in whole or in part, in cash at a redemption price equal to the
Liquidation Preference.

Gothic Energy is required to redeem the Series B Preferred Stock on June
30, 2008 at a redemption price equal to the Liquidation Preference payable in
cash or, at the option of Gothic Energy, in shares of Common Stock valued at the
fair market value at the date of such redemption.

Except as required by Oklahoma law, the holders of Series B Preferred Stock
are not entitled to vote on any matters submitted to a vote of the stockholders
of Gothic Energy.

The Series B Preferred Stock is convertible at the option of the holders on
or after April 30, 2000 into the number of fully paid and non-assessable shares
of Common Stock determined by dividing the Liquidation Preference by the higher
of (i) $2.04167 or (ii) the fair market value on the date the Series B Preferred
Stock is converted. Notwithstanding the foregoing, no holder or group shall be
able to convert any shares of Series B Preferred Stock to the extent that the
conversion of such shares would cause such holder or group to own more than
19.9% of the outstanding Common Stock of Gothic Energy. (See Note 3)

Other Warrants

In connection with past financing arrangements and as compensation for
consulting and professional services, Gothic Energy has issued other warrants to
purchase its common stock.

F-14
<PAGE>

GOTHIC ENERGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

A summary of the status of Gothic Energy's warrants as of December 31,
1997, 1998 and 1999, and changes during the years ended December 31, 1998 and
1999 is presented below:

<TABLE>
<CAPTION>
Warrants Outstanding Warrants Exercisable
---------------------------- -------------------------
Weighted
Weighted Average
Number Average Number Exercise
Outstanding Price Exercisable Price
----------- --------- ----------- ----------
<S> <C> <C> <C> <C>
Balance at December 31, 1997 11,404,531 $2.54 11,404,531 $2.54
Warrants granted 5,940,024 1.06
----------

Balance at December 31, 1998 17,344,555 $2.00 17,344,555 $2.00
Warrants exercised/expired (2,639,246) (.20)
----------

Balance at December 31, 1999 14,705,309 $2.33 14,705,309 $2.33
==========
</TABLE>

The following table summarizes information about Gothic Energy's warrants,
which were outstanding, and those which were exercisable, as of December 31,
1999:

<TABLE>
<CAPTION>
Warrants Outstanding Warrants Exercisable
-------------------- -----------------------
Weighted Weighted Weighted
Price Number Average Average Number Average
Range Outstanding Life Price Exercisable Price
------------ ----------- --------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C>
$.34 - $3.00 14,705,309 2.0 years $2.33 14,705,309 $ 2.33

</TABLE>

NOTE 6. STOCK OPTIONS

Incentive Stock Option Plan--Gothic Energy has an incentive stock option
and non-statutory option plan (the ''Plan''), which provides for the issuance of
options to purchase up to 2,500,000 shares of Common Stock to key employees and
Directors. The incentive stock options granted under the Plan are generally
exercisable for a period of ten years from the date of the grant, except that
the term of an incentive stock option granted under the Plan to a stockholder
owning more than 10% of the outstanding common stock must not exceed five years
and the exercise price of an incentive stock option granted to such a
stockholder must not be less than 110% of the fair market value of the common
stock on the date of grant. The exercise price of a non-qualified option granted
under the Plan may not be less than 40% of the fair market value of the common
stock at the time the option is granted. As of December 31, 1998 and 1999,
options to purchase 2,095,000 and 2,500,000 shares of common stock,
respectively, had been issued under the Plan. Half of the options are
exercisable after the completion of one year of future service as an employee or
director with the remaining options being exercisable upon completion of the
second year of future service. No non-qualified options have been issued under
the Plan.

Omnibus Incentive Plan--On August 13, 1996 at the Annual Shareholders'
Meeting, the shareholders approved the 1996 Omnibus Incentive Plan and the 1996
Non-Employees Stock Option Plan. The 1996 Omnibus Incentive Plan provides for
compensatory awards of up to an aggregate of 1,000,000 shares of Common Stock of
Gothic Energy to officers, directors and certain other key employees. Awards may
be granted for no consideration and consist of stock options, stock awards,
stock appreciation rights, dividend equivalents, other stock-based awards (such
as phantom stock) and performance awards consisting of any combination of the
foregoing. Generally, options will be granted at an exercise price equal to the
lower of (i) 100% of the fair market value of the shares of Common Stock on the
date of grant or (ii) 85% of the fair market value of the shares of Common Stock
on the date of exercise. Each option will be exercisable for the period or
periods specified in the option agreement, which will generally not exceed 10
years from the date of grant. As of December 31, 1999, options to purchase
1,000,000 shares of common stock had been issued under the Omnibus Incentive
Plan.

Non-Employee Stock Option Plan--The 1996 Non-Employee Stock Option Plan
provides a means by which non-employee Directors of the Company and consultants
to the Company can be given an opportunity to purchase stock in Gothic Energy.
The Plan provides that a total of 1,000,000 shares of Gothic Energy's Common

F-15
<PAGE>

GOTHIC ENERGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Stock may be issued pursuant to options granted under the Non-Employee Plan,
subject to certain adjustments. The exercise price for each option granted under
the Non-Employee Plan will not be less than the fair market value of the Common
Stock on the date of grant. Each option will be exercisable for the period or
periods specified in the option agreement, which can not exceed 10 years from
the date of grant. Options granted to Directors will terminate thirty (30) days
after the date the Director is no longer a Director of Gothic Energy. As of
December 31, 1998 and 1999, options to purchase 600,000 and 1,000,000 shares of
common stock, respectively, had been issued under the Non-Employee Plan.

A summary of the status of Gothic Energy's stock options as of December 31,
1997, 1998 and 1999, and changes during December 31, 1998 and 1999, is presented
below:

<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------- -----------------------------
Weighted
Weighted Average
Number Average Number Exercise
Outstanding Price Exercisable Price
---------------- ----------------- -------------- -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1997 2,690,000 $1.17 1,850,000 $1.52
Options granted 1,285,000 .40
Options forfeited (545,000) .40
---------

Balance at December 31, 1998 3,430,000 $1.00 1,927,500 $1.47
Options granted 2,185,000 .39
Options forfeited (380,000) .40
---------
Balance at December 31, 1999 5,235,000 $0.79 2,807,500 $1.13
=========
</TABLE>

The following table summarizes information about Gothic Energy's stock
options which were outstanding, and those which were exercisable, as of December
31, 1999:

<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------- -----------------------------
Weighted Weighted Weighted
Price Number Average Average Number Average
Range Outstanding Life Price Exercisable Price
------------ --------------- ------------ ------------ -------------- -------------
<S> <C> <C> <C> <C> <C>
$1.50 -$3.30 735,000 1.2 years $3.21 735,000 $3.21
$0.15 -$0.53 4,500,000 3.5 years $0.40 2,072,500 $0.40
--------- ---------
5,235,000 2,807,500
========= =========
</TABLE>

Gothic Energy applies Accounting Principles Board Opinion No. 25 in
accounting for stock options granted to employees, including directors, and
Statement of Financial Accounting Standards No. 123 (''SFAS No. 123'') for stock
options and warrants granted to non-employees. No compensation cost has been
recognized in 1998 or 1999.

Had compensation been determined on the basis of fair value pursuant to
SFAS No. 123, net loss and loss per share would have been increased as follows:

<TABLE>
<CAPTION>
1998 1999
----------- ----------
(in thousands)
<S> <C> <C>
Net loss available for common shares:
As reported............................................................. $(140,383) $(25,976)
========= ========
Pro Forma............................................................... $(141,232) $(26,439)
========= ========
Basic and diluted loss per share:
As reported............................................................. $ (8.63) $ (1.51)
========= ========
Pro Forma............................................................... $ (8.68) $ (1.54)
========= ========
</TABLE>

The fair value of each option granted is estimated using the Black Scholes
model. Gothic Energy's stock volatility was 0.81 and 0.95 in 1998 and 1999,
respectively, based on previous stock performance. Dividend yield was estimated
to remain at zero with an average risk free interest rate of 4.81 percent and
5.59 percent in 1998

F-16
<PAGE>

GOTHIC ENERGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

and 1999, respectively. Expected life was three years for options issued in both
1998 and 1999 based on the vesting periods involved and the make up of
participating employees within each grant. Fair value of options granted during
1998 and 1999 under the Stock Option Plan were $643,000 and $646,000,
respectively.

NOTE 7. INCOME TAXES

Deferred tax assets and liabilities are comprised of the following at
December 31, 1999 (in thousands):

<TABLE>

<S> <C>
Deferred tax assets:
Gas balancing liability........................................................ $ 1,386
Net operating loss carryforwards............................................... 42,371
Depletion carryforwards........................................................ 257
Tax over book basis of natural gas and oil properties.......................... 14,423
Accrued wages.................................................................. 119
-------
Gross deferred tax assets...................................................... 58,556
Deferred tax liabilities:
Deferred lease operating expenses.............................................. (556)
-------
Gross deferred tax liabilities................................................. (556)
Net deferred tax assets........................................................... 58,000
Valuation allowance............................................................ 58,000
-------
$ -
=======
</TABLE>

Net operating losses of approximately $104,679,000 are available for future
use against taxable income. These net operating loss carryforwards (''NOL'')
expire in the years 2010 through 2019.

In addition, an acquisition in January, 1996 made available approximately
$6,147,000 of net operating loss carryforwards and $675,000 of depletion
carryforwards generated prior to the acquisition. However, the loss
carryforwards and depletion carryforwards are limited annually under Internal
Revenue Code Section 382 due to a change in ownership. The net operating loss
carryforwards expire in the years 2000 through 2010 and the depletion
carryforwards can be carried forward indefinitely.

Pursuant to Section 382 of the Internal Revenue Code of 1986, as amended,
in the event that a substantial change in the ownership of the Company were to
occur in the future (whether through the sale of stock by a significant
shareholder or shareholders, new issuances of stock by the Company, conversions,
a redemption, recapitalization, reorganization, any combination of the foregoing
or any other method) so that ownership of more than 50% of the value of the
Company's capital stock changed during any three-year period, the Company's
ability to utilize its NOL's could be substantially limited.

Realization of the net deferred tax asset is dependent on generating
sufficient taxable income in future periods. The Company has recorded a 100%
valuation allowance, as it is more likely than not that realization will not
occur in the future.

NOTE 8. COMMITMENTS AND CONTINGENCIES

The Company has entered into an employment agreement with its President
effective January 1, 1999. The President currently receives a base salary of
$225,000 per year. In addition, he is to receive a cash bonus as may be
determined by the Company's Board of Directors. The President is also entitled
to participate in such incentive compensation and benefit programs as the
Company makes available. The term of the agreement is for a period of three
years and at the end of the first year and at the end of each succeeding year
the agreement is automatically extended for one year such that at the end of
each year there will automatically be three years remaining on the term of the
agreement. The President can terminate the agreement at the end of the initial
term and any succeeding term on not less than six months notice. In the event
the employment agreement is terminated by the Company (other than for cause, as
defined), the President is entitled to receive a payment representing all salary
due under the remaining full term of his agreement and the Company is obligated
to continue his medical insurance and other benefits provided under the
agreement in effect for a period of one year after such termination. In the
event of a change in

F-17
<PAGE>

GOTHIC ENERGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

control, as defined, of the Company, the President has the right to terminate
his employment agreement with the Company within sixty days thereafter,
whereupon the Company would be obligated to pay to him a sum equal to three
years of his base salary under the agreement, plus a lump sum payment of
$250,000.

The Company has also entered into an employment agreement with its Chief
Financial Officer effective January 1, 1999. The Chief Financial Officer
currently receives a base salary of $187,500 per year. In addition, he is to
receive a cash bonus as may be determined by the Company's Board of Directors.
The CFO is also entitled to participate in such incentive compensation and
benefit programs as the Company makes available. The term of the agreement is
for a period of three years and at the end of the first year and at the end of
each succeeding year the agreement is automatically extended for one year such
that at the end of each year there will automatically be three years remaining
on the term of the agreement. The CFO can terminate the agreement at the end of
the initial term and any succeeding term on not less than six months notice. In
the event the employment agreement is terminated by the Company (other than for
cause, as defined), the CFO is entitled to receive a payment representing all
salary due under the remaining full term of his agreement, and the Company is
obligated to continue his medical insurance and other benefits provided under
the agreement in effect for a period of one year after such termination. In the
event of a change in control, as defined, of the Company, the CFO has the right
to terminate his employment with the Company within sixty days thereafter,
whereupon the Company would be obligated to pay to him a sum equal to three
years base salary, plus a lump sum payment of $200,000.

The Company leases its corporate offices and certain office equipment and
automobiles under non-cancelable operating leases. Rental expense under non-
cancelable operating leases was $190,000 and $240,000 for the years ended
December 31, 1998 and 1999, respectively.

Remaining minimum annual rentals under non-cancelable lease agreements
subsequent to December 31, 1999 are as follows:

2000........................................ 327,000
2001........................................ 295,000
2002........................................ 282,000
2003........................................ 267,000
2004........................................ 247,000

The Company is not a defendant in any pending legal proceedings other than
routine litigation incidental to its business. While the ultimate results of
these proceedings cannot be predicted with certainty, the Company does not
believe that the outcome of these matters will have a material adverse effect on
the Company's financial position or results of operations.

NOTE 9. BENEFIT PLAN

Production Corp. maintains a 401(k) Plan for the benefit of its employees.
The Plan was implemented in October 1997. The Plan permits employees to make
contributions on a pre-tax salary reduction basis. Production Corp. makes
limited matching contributions to the Plan, and may also make other
discretionary contributions. Production Corp's contributions for 1998 and 1999
were $62,000 and $85,000, respectively.

NOTE 10. MAJOR CUSTOMERS

During the year ended December 31, 1999, the Company was a party to
contracts whereby it sold 56% of its natural gas production to CMS Continental
Natural Gas Corporation ("Continental"), and 47% of its oil production to Duke
Energy, Inc. The Company has a ten-year marketing agreement, whereby the
majority of the natural gas associated with the Amoco Acquisition will be sold
to Continental, at market prices, under this agreement.

NOTE 11. RELATED PARTY TRANSACTIONS

During 1997, Gothic Energy made advances totaling $336,000 to two officers
and directors of Gothic Energy. In February 1998, $168,000 was received in
connection with a severance agreement. The balance outstanding on the remaining
advance was $179,000 as of December 31, 1998 and this amount was forgiven by
Gothic Energy during 1999.

F-18
<PAGE>

NOTE 12. SUMMARIZED FINANCIAL INFORMATION

Production Corp. was organized in March 1998 as a wholly owned subsidiary
of Gothic Energy. On April 27, 1998, Gothic Energy transferred to Production
Corp. its ownership of all its natural gas and oil properties. Following is the
summarized financial information related to the Company as of December 31, 1999
and for the years ended December 31, 1998 and 1999. (in thousands):

<TABLE>
<CAPTION>
As of December 31, 1999
------------------------------------------------------------
Gothic Energy
Gothic Energy Gothic Production Corporation
Corporation Corporation Consolidated
------------- ----------------- -------------
<S> <C> <C> <C>
Current assets $ - $ 11,447 $ 11,447
Non-current assets 1,772(2) 225,178 226,950
Current liabilities - 15,927 15,927
Non-current liabilities 75,857(3) 247,648 323,505
</TABLE>

<TABLE>
<CAPTION>
For the year ended December 31, 1999
------------------------------------------------------------
Gothic Energy
Gothic Energy Gothic Production Corporation
Corporation Corporation Consolidated
------------- ----------------- -------------
<S> <C> <C> <C>
Total revenues $ - $ 55,624 $ 55,624
Operating costs and
expenses 179(4) 35,708 35,887
Interest expense and
amortization of debt
issuance cost 9,958 28,030 37,988
Net loss (10,137) (7,172) (17,309)
</TABLE>

<TABLE>
<CAPTION>
For the year ended December 31, 1998
------------------------------------------------------------
Gothic Energy
Gothic Energy Gothic Production Corporation
Corporation Corporation(1) Consolidated
------------- ----------------- -------------
<S> <C> <C> <C>
Total revenues $ 21,033 $ 32,000 $ 53,033
Operating costs and
expenses 16,172 23,781 39,953
Provision for impairment
of natural gas and oil
properties - 76,000 76,000
Interest expense and
amortization of debt
issuance cost 16,821 18,617 35,438
Loss before
extraordinary item (12,408) (85,822) (98,230)
Net loss (43,842) (85,847) (129,689)

</TABLE>

(1) Since the Recapitalization on April 27, 1998
(2) Includes unamortized debt issuance costs
(3) Includes 14 1/8% Senior Secured Discount Notes
(4) Officer compensation

F-19
<PAGE>

GOTHIC ENERGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

NOTE 13. SUPPLEMENTARY NATURAL GAS AND OIL INFORMATION

Financial Data

The following supplemental historical and reserve information is presented
in accordance with Financial Accounting Standards Board Statement No. 69,
"Disclosures About Oil and Gas Producing Activities".

Capitalized Costs--The aggregate amounts of capitalized costs relating to
natural gas and oil producing activities, net of valuation allowances, and the
aggregate amounts of the related accumulated depreciation, depletion, and
amortization at December 31, 1999 were as follows:

<TABLE>
<CAPTION>
1999
--------------
(in thousands)
<S> <C>
Proved properties...................................................... $258,818
Unproved properties, not subject to depreciation, depletion and
amortization (1)..................................................... 5,473
Less: Accumulated depreciation, depletion, and amortization............ (53,137)
--------
Net natural gas and oil properties.................................. $211,154
========
</TABLE>

(1) Production Corp. expects to evaluate the unproved properties during the
next two years.

Costs Incurred--Costs incurred in natural gas and oil property acquisition,
exploration and development activities for the years ended December 31, 1998 and
1999 were as follows:

<TABLE>
<CAPTION>
1998 1999
------------ ------------
(in thousands)
<S> <C> <C>
Proved property acquisition........................................... $225,103 $ 1,499
Unproved property acquisition......................................... 2,109 2,611
Development costs..................................................... 16,270 18,445
-------- -------
Total costs incurred............................................... $243,482 $22,555
======== =======
</TABLE>

NATURAL GAS AND OIL RESERVES DATA (UNAUDITED)

Estimated Quantities--Natural gas and oil reserves cannot be measured
exactly. Estimates of natural gas and oil reserves require extensive judgments
of reservoir engineering data and are generally less precise than other
estimates made in connection with financial disclosures.

Proved reserves are those quantities which, upon analysis of geological and
engineering data, appear with reasonable certainty to be recoverable in the
future from known natural gas and oil reservoirs under existing economic and
operating conditions. Proved developed reserves are those reserves which can be
expected to be recovered through existing wells with existing equipment and
operating methods. Proved undeveloped reserves are those reserves which are
expected to be recovered from new wells on undrilled acreage or from existing
wells where a relatively major expenditure is required.

Estimates of natural gas and oil reserves require extensive judgments of
reservoir engineering data as explained above. Assigning monetary values to such
estimates does not reduce the subjectivity and changing nature of such reserve
estimates. Indeed, the uncertainties inherent in the disclosure are compounded
by applying additional estimates of the rates and timing of production and the
costs that will be incurred in developing and producing the reserves. The
information set forth herein is therefore subjective and, since judgments are
involved, may not be comparable to estimates submitted by other natural gas and
oil producers. In addition, since prices and costs do not remain static and no
price or cost escalations or de-escalations have been considered, the results
are not necessarily indicative of the estimated fair market value of estimated
proved reserves nor of estimated future cash flows and significant revisions
could occur in the near term. Accordingly, these estimates are expected to
change as future information becomes available. All of Production Corp's
reserves are located onshore in the states of Oklahoma, Texas, New Mexico,
Arkansas and Kansas.

F-20
<PAGE>

GOTHIC ENERGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The following unaudited table, which is based on reports of Lee Keeling and
Associates, Inc., sets forth proved natural gas and oil reserves:

<TABLE>
<CAPTION>
1998 1999
----------------------- ---------------------
Bbls Mcf Bbls Mcf
--------- ---------- --------- ----------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Proved Reserves:
Beginning of year..................................................... 3,585 127,460 1,761 306,668
Revisions of previous estimates....................................... (872) 39,577 319 6,598
Purchases of reserves in place........................................ 1,362 233,007 - 1,402
Production............................................................ (257) (24,455) (158) (25,477)
Sales of reserves in place............................................ (2,057) (68,921) - -
------ ------- ----- -------
End of year 1,761 306,668 1,922 289,191
====== ======= ===== =======
Proved Developed:
Beginning of year..................................................... 2,503 91,690 1,523 254,762
End of year........................................................... 1,523 254,762 1,683 251,631

</TABLE>

Standardized Measure of Discounted Future Net Cash Flows--Future net cash
inflows are based on the future production of proved reserves of natural gas and
crude oil as estimated by Lee Keeling and Associates, Inc., independent
petroleum engineers, by applying current prices of natural gas and oil to
estimated future production of proved reserves. The average prices used in
determining future cash inflows for natural gas and oil as of December 31, 1999,
were $1.89 per mcf, and $24.33 per barrel, respectively. Future net cash flows
are then calculated by reducing such estimated cash inflows by the estimated
future expenditures (based on current costs) to be incurred in developing and
producing the proved reserves and by the estimated future income taxes.

Estimated future income taxes are computed by applying the appropriate
year-end statutory tax rate to the future pretax net cash flows relating to
Production Corp's estimated proved natural gas and oil reserves. The estimated
future income taxes give effect to permanent differences and tax credits and
allowances.

Included in the estimated standardized measure of future cash flows are
certain capital projects (future development costs). Production Corp. estimates
the capital required to develop its undeveloped natural gas and oil reserves
during 2000 to be approximately $23,000,000. Production Corp's planned financial
arrangements are discussed in Notes 2 and 4. If such capital is not employed,
the estimated future cash flows will be negatively impacted.

The following table sets forth Production Corp's unaudited estimated
standardized measure of discounted future net cash flows.

<TABLE>
<CAPTION>
December 31, December 31,
1998 1999
---------------- ----------------
(in thousands)
<S> <C> <C>
Cash Flows Relating to Proved Reserves:
Future cash inflows.............................................................. $ 573,604 $ 596,216
Future production costs.......................................................... (141,253) (139,458)
Future development costs......................................................... (37,028) (26,969)
Future income tax expense........................................................ (47,264) (30,113)
--------- ---------
348,059 399,676
Ten percent annual discount factor............................................... (169,297) (201,291)
--------- ---------
Standardized Measure of Discounted Future Net Cash Flows......................... $ 178,762 $ 198,385
========= =========
</TABLE>

F-21
<PAGE>

GOTHIC ENERGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The following table sets forth changes in the standardized measure of
discounted future net cash flows:

<TABLE>
<CAPTION>
December 31, December 31,
1998 1999
------------ ------------
(in thousands)
<S> <C> <C>
Standardized measure of discounted future cash flows-beginning of period............ $ 94,102 $178,762
Sales of natural gas and oil produced, net of Operating expenses.................... (38,585) (43,362)
Purchases of reserves-in-place...................................................... 231,184 1,000
Sales of reserves-in-place.......................................................... (62,933) -
Revisions of previous quantity estimates and Changes in sales prices and
production costs................................................................. (54,416) 44,109
Accretion of discount............................................................... 9,410 17,876
-------- --------
Standardized measure of discounted future Cash flows-end of period.................. $178,762 $198,385
======== ========
</TABLE>

F-22

<PAGE>

EXHIBIT 10.28
-------------

OPTION PURCHASE AGREEMENT
-------------------------

THIS AGREEMENT is made this 28th day of February, 2000, between GOTHIC
ENERGY CORPORATION, an Oklahoma corporation ("GEC"), GOTHIC PRODUCTION COMPANY,
an Oklahoma corporation ("GPC" and, jointly and severally with GEC, the
"Buyer"), and CHESAPEAKE EXPLORATION LIMITED PARTNERSHIP, an Oklahoma limited
partnership, successor in interest by merger to Chesapeake Gothic Corp. (the
"Seller").

R E C I T A L S :

WHEREAS, the Seller owns (a) 61,007.474 shares of GEC's Senior Redeemable
Preferred Stock, Series B, $0.05 par value per share, (b) the right to receive
accrued and unpaid dividends on such Preferred Stock payable in kind, and (c)
2,394,125 shares of GEC's Common Stock, $0.01 par value per share (collectively,
the "GEC Securities");

WHEREAS, the Seller and one or more of the wholly owned subsidiaries of
Chesapeake Energy Corporation (collectively, the "CEC Parties"), and the Buyer
and the Buyer's affiliated entities (collectively, the "Gothic Parties") are
parties to that certain Sale and Participation Agreement dated as of March 31,
1998, as amended (the "Participation Agreement") pursuant to which: (a) the
Seller acquired an undivided fifty percent (50%) interest in certain oil, gas
and related assets from the Gothic Parties, (b) the CEC Parties and the Gothic
Parties provided for the maintenance, joint development and operation of the
Existing Acreage, the Related Interests and the Acquisition Acreage (as those
terms are defined in the Participation Agreement), and (c) an area of mutual
interest was created among the CEC Parties and the Gothic Parties covering lands
located in the States of Arkansas, Kansas, New Mexico (excluding the Pecos Slope
Acreage), Oklahoma and Texas;

WHEREAS, the Buyer desires to purchase an option to acquire all of the
Seller's GEC Securities (the "Option") pursuant to the Option Agreement in the
form at Schedule "A" attached as a part hereof (the "Option Agreement") which
the Seller is willing to sell to the Buyer in exchange for certain modifications
to the Participation Agreement and the performance of certain other agreements
and documents set forth herein, all subject to the terms and conditions set
forth in this Agreement;

WHEREAS, one or more of the Discount Noteholders (as hereinafter defined)
have made the execution and delivery of this Agreement and the Option a
condition precedent to the Discount Noteholders entering into agreements to
convert the debt held by such parties to equity of the Buyer.

NOW, THEREFORE, in consideration of the mutual covenants herein contained
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties agree as follows:

1. Purchase and Sale. Subject to the terms and conditions set forth in this
-----------------
Agreement, the Seller hereby agrees to sell the Option and the Buyer hereby
agrees to purchase the Option and perform the Purchase Consideration.

2. Purchase Consideration. Upon satisfaction or waiver of the conditions
----------------------
precedent set forth in paragraph 3 hereof in accordance with the terms thereof,
and in consideration for the sale of the Option to the Buyer and as a condition
precedent to the effectiveness of such grant, the Buyer will cause the Gothic
Parties to take the following actions (the"Purchase Consideration") on the
Closing Date (as hereinafter defined):

2.1 Operations. The Gothic Parties will take all actions necessary to
----------
turn over to the CEC Parties operations on: (a) the wells identified
at Schedule "2.1" attached as a part hereof; and (b) all wells which
have been or are currently being developed under the Participation
Agreement and all other wells now or hereafter proposed which are
located in: (i) Meade and Clark Counties, Kansas, and (ii) Texas,
Beaver, Harper, Ellis, Woods, Woodward, Dewey, Major, Blaine (Township
19N only), Custer, Grady, Pittsburg, Haskell, Latimer (except for
Sections 19-36 of Township 3N Range 20E) and LeFlore Counties,
Oklahoma, by permanently resigning as operator and waiving any rights
under the Participation Agreement to become operator of such wells in
the future. On
<PAGE>

the Closing Date the Gothic Parties will execute and deliver
resignation of operator letters in form and substance satisfactory to
the Seller and will vote all of the Gothic Parties' interests in such
properties for the Chesapeake Parties as successor operator (the
"Operator Documents").

2.2 Extensions and Right of First Refusal. The Gothic Parties take all
-------------------------------------
actions necessary to: (a) extend the term of the reassignment
obligation under paragraph 1.3 of the Participation Agreement until
April 30, 2006; (b) extend the Termination Date (as defined in
paragraph 14 of the Participation Agreement) until April 30, 2006, for
the portion of the Participation Area included in the States of
Arkansas, Kansas and Oklahoma and the portion of the State of Texas
located north of latitude 34 degrees N; (c) amend the default and
remedies provisions under paragraph 13 of the Participation Agreement;
and (d) grant the CEC Parties preferential purchase and related rights
with respect to sales of assets covered by the Participation
Agreement. In order to evidence such extension, the parties will
execute and deliver the Amendment Documents (as defined below)
simultaneously with the execution of this Agreement.

3. Conditions Precedent to Option Grant. Unless waived in writing by the
------------------------------------
Buyer and the Seller, the sale of the Option pursuant to this Agreement is
subject to the satisfaction of all of the following conditions precedent on or
before March 14, 2000 (the "Condition Satisfaction Period"), unless extended in
writing by the Seller:

3.1 Authorization. The terms of this Agreement and the Option will have
-------------
been duly authorized by the respective Boards of Directors of the
Buyer and the Seller.

3.2 Consents. The Buyer and the Seller will have received required
--------
written consents to the terms and conditions of this Agreement from
the holders of the Buyer's 14 1/8% Senior Secured Discount Notes (the
"Discount Noteholders"), Bank One, Texas, N.A., and any other
necessary parties.

3.3 No Actions. No actions will have been taken or threatened to prevent
----------
any party from entering into of this Agreement, performing this
Agreement or seeking other relief as a result of this Agreement.

3.4 Discount Noteholders. The Discount Noteholders and the Gothic Parties
--------------------
will have executed and delivered the instruments necessary to evidence
the agreement of the Discount Noteholders to convert all of the notes
held by the Discount Noteholders into equity of the Buyer.

3.5 Additional Documents. The Gothic Parties and the CEC Parties will
--------------------
have each executed and delivered to the other parties such additional
documents and instruments as might be reasonably requested by the
Buyer or the Seller to consummate this Agreement.

3.6 JIB Payments. The Gothic Parties and the CEC Parties will have each
------------
paid current all joint interest billings owing to the parties as
required by the Joint Operating Agreements attached to the
Participation Agreement.

4. Closing. Unless extended in writing by the Seller, the transactions
-------
contemplated by this Agreement will be consummated on the date (the "Closing
Date") which is two (2) business days after the date all of the conditions under
paragraph 3 of this Agreement have been satisfied in full or waived in writing
by the Buyer and the Seller.

4.1 Seller's Deliveries. Subject to the terms and conditions of this
-------------------
Agreement and the performance of the Buyer's obligations under
paragraph 4.2 of this Agreement, on the Closing Date the Seller will
deliver or cause to be delivered to the Buyer the following items (all
documents will be duly executed and acknowledged where required):

4.1.1 Option. The Option and the Amendment Documents (as hereinafter
------
defined);

-2-
<PAGE>

4.1.2 Evidence of Authority. Such resolutions, certificates of good
---------------------
standing, incumbency certificates and other evidence of
authority with respect to the Seller as might be reasonably
requested by the Buyer;

4.1.3 Additional Documents. Such additional documents as might be
--------------------
reasonably requested by Gothic to consummate this Agreement.

4.2 Buyer's Deliveries. On the Closing Date, the Buyer will deliver or
------------------
cause to be delivered to the Seller the following items (all documents
will be duly executed and acknowledged where required):

4.2.1 Purchase Consideration. The Gothic Parties will have each
----------------------
executed and delivered to the Seller the Second Amendment to
Participation Agreement in the form of Schedule "4.2.1"
attached hereto as a part hereof and the other documents
contemplated thereby (the "Amendment Documents"), the Operator
Documents and any other documents required to evidence the
Purchase Consideration;

4.2.2 Evidence of Authority. Such corporate resolutions,
---------------------
certificates of good standing, incumbency certificates and
other evidence of authority with respect to each of the Gothic
Parties as might be reasonably requested by the Seller;

4.2.3 Additional Documents. Such additional documents as might be
--------------------
reasonably requested by the Seller to consummate this
Agreement.

5. Seller Representations and Warranties. The Seller hereby represents and
-------------------------------------
warrants to the Buyer that:

5.1 Title. The Seller has good and valid title to the GEC Securities,
-----
free and clear of all liens, claims and encumbrances.

5.2 Authority and Reliance. The Seller has taken all necessary action to
----------------------
authorize the execution, delivery and performance of this Agreement,
the Amendment Documents, the Operator Documents and the Option
Agreement and has adequate power, authority and legal right to enter
into, execute, deliver and perform this Agreement and to issue the
Option as contemplated hereby.

5.3 Consents. No consent, approval, license, qualification or formal
--------
exemption from, nor any filing, declaration or registration with, any
court, governmental agency or regulatory authority or any securities
exchange is required in connection with the execution, delivery or
performance by the Seller of this Agreement.

5.4 Litigation. There is no action, suit, investigation or proceeding,
----------
governmental or otherwise, pending or, to the best knowledge of the
Seller, threatened to which any of the CEC Parties is or would be a
party which seeks to restrain, enjoin, prevent the consummation of or
otherwise challenge this Agreement or the Seller's granting of the
Option or questions the legality or validity of any such transactions
or seeks to recover damages or obtain other relief in connection with
any such transactions.

6. Buyer Representations and Warranties. The Buyer hereby represents and
------------------------------------
warrants to the Seller that:

6.1 Authority and Reliance. The Buyer has taken all necessary action to
----------------------
authorize the execution, delivery and performance of this Agreement,
the Amendment Documents, the Operator Documents and the Option
Agreement and has all requisite corporate power, authority and legal
right to enter into, execute, deliver and perform this Agreement, the
Amendment Documents, the Operator Documents and the Option Agreement.
The Buyer further represents and warrants that,

-3-
<PAGE>

in purchasing the Option, the Buyer has relied upon independent
investigations made by the Buyer or the Buyer's representatives, that
the Buyer has had sufficient opportunities to make inquiries of the
Seller and that the Buyer and such representatives have been given the
opportunity to examine all documents concerning the terms and
conditions of the Option. The Buyer represents and warrants that the
Buyer is experienced in the oil and gas business, has knowledge and
experience in business and financial matters and is competent to
evaluate the value of the Option and the benefits and risks relating
to the purchase of the Option and the Buyer has determined that the
consideration being given by the Buyer is the fair value equivalent of
the consideration being received by the Buyer for the granting of the
Option.

6.2 Consents. The Buyer has obtained and provided to the Seller all
--------
consents, approvals or waivers necessary or appropriate for the Buyer
to enter into this Agreement and to consummate the transactions
contemplated hereby. No other authorization, consent, approval,
license, qualification or formal exemption from, nor any filing,
declaration or registration with, any court, governmental agency or
regulatory authority or any securities exchange is required in
connection with the execution, delivery or performance by the Gothic
Parties of this Agreement.

6.3 Litigation. There is no action, suit, investigation or proceeding,
----------
governmental or otherwise, pending or, to the best knowledge of the
Buyer, threatened to which any of the Gothic Parties is or would be a
party which seeks to restrain, enjoin, prevent the consummation of or
otherwise challenge this Agreement or the Buyer's purchase of the
Option or questions the legality or validity of any such transactions
or seeks to recover damages or obtain other relief in connection with
any such transactions.

7. Default; Failure of Conditions. In the event either party fails to perform
------------------------------
such party's obligations hereunder (except as excused by another party's
default) (the "Defaulting Party") such failure will constitute an event of
default under this Agreement and the other party (the "Other Party") will have
the right to exercise any and all remedies available at law or in equity unless
such default is waived by the Other Party or cured by the Defaulting Party
within five (5) business days after receipt of notice of such default. The
remedies provided by this Agreement are cumulative and will not exclude any
other remedy to which the Other Party might be entitled under this Agreement or
applicable law. In the event the Other Party elects to selectively and
successfully enforce the Other Party's rights under this Agreement, such action
will not be deemed a waiver or discharge of any other remedy. During the
pendency of any default or disputes, this Agreement will be deemed to be in full
force. Notwithstanding anything herein to the contrary, on the occurrence of a
default or other breach of this Agreement by the Buyer, the Seller may terminate
the Option and the Option Agreement in the sole and absolute discretion of the
Seller.

8. Standstill. Each of the parties irrevocably agree that the negotiation,
----------
preparation, execution and delivery of this Agreement and any preliminary
discussions with any person regarding this Agreement, the Option or any similar
transaction will not and did not violate any standstill, nonsolicitation or
similar agreement including, without implied limitation, paragraph 5.4 of the
Securities Purchase Agreement among the Buyer, Chesapeake Acquisition
Corporation and Chesapeake Gothic Corp. dated March 31, 1998 (the "Securities
Purchase Agreement"), and relating to the purchase of the GEC Securities by
affiliates of the Seller. The Buyer hereby releases, acquits and forever
discharges the CEC Parties and the CEC Parties' directors, officers,
shareholders, partners, members, employees, agents, attorneys, parent
corporations, subsidiary corporations, affiliates and such parties' respective
successors and assigns from any and all claims, whether asserted or assertable,
known or unknown, and all actions, debts, suits, causes of action, both at law
and in equity, demands, defenses, offsets, liabilities, losses, obligations or
damages directly or indirectly related to any violation or alleged violation of
the Securities Purchase Agreement arising out of any action, inaction, contact,
discussions or matter prior to the date of this Agreement including, without
implied limitation, any violation or alleged violation of any standstill or
confidentiality agreement set forth in the Securities Purchase Agreement or
otherwise.

9. Deferral of Operations Turnovers. Notwithstanding anything to the
--------------------------------
contrary in this Agreement or in the Participation Agreement, during the
Condition Satisfaction Period, the Seller will not be required to turnover

-4-
<PAGE>

operations on any wells located in the areas described in paragraph 2.1 of this
Agreement including, without limitation, the Della 1-9 well.

10. Miscellaneous. It is further agreed as follows:
-------------

10.1 Time. Time is of the essence of this Agreement.
----

10.2 Notices. Any notice, demand or communication required or permitted
-------
to be given by any provision of this Agreement will be in writing and
will be deemed to have been given and received when delivered
personally or by telefacsimile to the party designated to receive
such notice, or on the date following the day sent by overnight
courier, or on the third (3rd) business day after the same is sent by
certified mail, postage and charges prepaid, directed to the
following addresses or to such other or additional addresses as any
party might designate by written notice to the other parties:

To the Buyer: Gothic Energy Corporation
6120 South Yale Avenue, Suite 1200
Tulsa, Oklahoma 74136
Attn: Michael K. Paulk
Telephone (918) 749-5666
Fax No. (918) 749-5882

With a copy to: Pray, Walker, Jackman, Williamson & Marlar
900 OneOk Plaza
100 West 5th Street
Tulsa, Oklahoma 74103-4218
Attn: Ira L. Edwards, Jr.
Telephone (918) 581-5500
Fax No. (918) 581-5599

To the Seller: Chesapeake Energy Corporation
6100 North Western Avenue
Oklahoma City, Oklahoma 73118
Attn: Aubrey K. McClendon
Telephone (405) 879-9226
Fax No. (405) 848-8588

With a copy to: Self, Giddens & Lees, Inc.
2725 Oklahoma Tower
210 Park Avenue
Oklahoma City, Oklahoma 73102
Attn: Ray Lees
Telephone (405) 232-3001
Fax: (405) 232-5553

10.3 Press Release. Except to the extent required by applicable
-------------
disclosure requirements, all press releases relating to this
Agreement and the transactions contemplated by this Agreement will be
approved by the Buyer and the Seller prior to dissemination.

10.4 Choice of Law. This Agreement will be interpreted, construed and
-------------
enforced in accordance with the laws of the State of Oklahoma and
will be deemed for such purposes to have been made, executed and
performed in Oklahoma County, Oklahoma. All claims, disputes and
other matters

-5-
<PAGE>

in question arising out of or relating to this Agreement will be
decided by proceedings instituted and litigated in the District Court
of Oklahoma County, Oklahoma, or the United States District Court for
the Western District of Oklahoma.

10.5 Headings. The paragraph headings contained in this Agreement are for
--------
reference purposes only and are not intended to affect in any way the
meaning or interpretation of this Agreement.

10.6 No Oral Agreements. There are no unwritten oral agreements,
------------------
understandings, warranties or representations with respect to the
subject matter of this Agreement.

10.7 Assignment. It is agreed that neither party may assign such party's
----------
rights nor delegate such party's duties under this Agreement without
the express written consent of the other party to this Agreement.

10.8 Amendment. Neither this Agreement, nor any of the provisions hereof
---------
can be changed, waived, discharged or terminated, except by an
instrument in writing signed by the party against whom enforcement of
the change, waiver, discharge or termination is sought.

10.9 Severability. If any clause or provision of this Agreement is
------------
illegal, invalid or unenforceable under any present or future law,
the remainder of this Agreement will not be affected thereby. It is
the intention of the parties that if any such provision is held to be
illegal, invalid or unenforceable, there will be added in lieu
thereof a provision as similar in terms to such provisions as is
possible to cause such provision to be legal, valid and enforceable.

10.10 Attorney Fees. If any party institutes an action or proceeding
-------------
against any other party relating to the provisions of this Agreement,
the party to such action or proceeding which does not prevail will
reimburse the prevailing party therein for the reasonable expenses of
attorneys' fees and disbursements incurred by the prevailing party.

10.11 Waiver. Waiver of performance of any obligation or term contained
------
in this Agreement by any party, or waiver by one party of the other's
default hereunder must be in writing and will not operate as a waiver
of performance of any other obligation or term of this Agreement or
constitute a future waiver of the same obligation or a waiver of any
future default.

IN WITNESS WHEREOF, the Seller and the Buyer have executed this
Agreement as of the date first above written.

GOTHIC ENERGY CORPORATION, an Oklahoma corporation

By
-----------------------------------
Michael K. Paulk, President

GOTHIC PRODUCTION COMPANY, an Oklahoma corporation

By
-----------------------------------
Michael K. Paulk, President

(jointly and severally referred to herein as the
"Buyer")

-6-
<PAGE>

CHESAPEAKE EXPLORATION LIMITED PARTNERSHIP, an
Oklahoma limited partnership

By: Chesapeake Operating, Inc., General
Partner

By
------------------------------
Aubrey K. McClendon,
Chief Executive Officer

(the "Seller")

-7-
<PAGE>

OPTION AGREEMENT
----------------

THIS AGREEMENT is made this ____ day of __________, 2000, between GOTHIC
ENERGY CORPORATION, an Oklahoma corporation ("GEC"), GOTHIC PRODUCTION COMPANY,
an Oklahoma corporation ("GPC"and, jointly and severally with GEC, "Gothic"),
and CHESAPEAKE EXPLORATION LIMITED PARTNERSHIP, an Oklahoma limited partnership,
successor in interest by merger to Chesapeake Gothic Corp. ("Chesapeake").

R E C I T A L S :

WHEREAS, Chesapeake owns (a) __________________ shares of GEC's Senior
Redeemable Preferred Stock, Series B, $0.05 par value per share, (b) the right
to receive accrued and unpaid dividends on such Preferred Stock payable in kind,
and (c) 2,394,125 shares of GEC's Common Stock, $0.01 par value per share
(collectively, the "GEC Securities");

WHEREAS, Chesapeake or one or more of the wholly owned subsidiaries of
Chesapeake Energy Corporation (collectively, the "CEC Parties"), and Gothic and
its affiliated entities (collectively, the "Gothic Parties") are parties to that
certain Sale and Participation Agreement dated as of March 31, 1998, as amended
(the "Participation Agreement") pursuant to which: (a) Chesapeake acquired an
undivided fifty percent (50%) interest in certain oil, gas and related assets
from the Gothic Parties, (b) the CEC Parties and the Gothic Parties provided for
the maintenance, joint development and operation of the Existing Acreage, the
Related Interests and the Acquisition Acreage (as those terms are defined in the
Participation Agreement), and (c) an area of mutual interest was created among
the CEC Parties and the Gothic Parties covering lands located in whole or in
part in the States of Arkansas, Kansas, New Mexico (excluding the Pecos Slope
Acreage), Oklahoma and Texas; and

WHEREAS, Gothic has purchased an option to acquire all of Chesapeake's GEC
Securities which Chesapeake has granted, such option to be evidenced by and
subject to the terms and conditions set forth in this Agreement.

NOW, THEREFORE, in consideration of receipt of the consideration set forth
in that certain Option Purchase Agreement of even date herewith, the mutual
covenants herein contained and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties agree as
follows:

1. Option Agreement. Chesapeake hereby grants to Gothic the right and option
to purchase all of the GEC Securities owned by Chesapeake (the "Option") in
strict accordance with the terms and conditions of this Agreement.

2. Term. Unless Fully Exercised in strict accordance with all of the terms and
conditions set forth in this Agreement, unless extended in writing by
Chesapeake, the Option will expire on the

Final Schedule Schedule "A"
- --------------
Page 1 of 17 Pages
<PAGE>

earlier of: (i) __________, 2000, at 5:00 p.m. Oklahoma City, Oklahoma time; or
(ii) thirty (30) days after the confirmation order of the plan of bankruptcy for
Gothic (the "Option Period"), and all rights and obligations of Chesapeake and
the Gothic Parties under this Agreement will expire and terminate without any
further notice or action. The Option will be deemed "Fully Exercised" if, and
only if, each of the following actions is completed before the expiration of the
Option Period: (a) receipt by Chesapeake of the exercise notice under paragraph
of this Agreement; (b) satisfaction in full by the Gothic Parties of all
conditions precedent set forth in this Agreement; and (c) full and complete
performance by the Gothic Parties of the Exercise Consideration (as defined
below) including, without implied limitation, the execution, delivery and
recordation (where appropriate) of the Conveyance Documents and the Restated
Participation Agreement (as those terms are defined below).

3. Exercise. Gothic may exercise the Option at any time prior to the
expiration of the Option Period by delivery to Chesapeake of a written notice
advising Chesapeake of Gothic's intent to exercise the Option. On receipt of
such notice of intent to exercise: (a) this Agreement will be deemed a legally
binding agreement by Gothic to purchase the GEC Securities from Chesapeake prior
to the expiration of the Option Period on the terms and conditions stated in
this Agreement; and (b) this Agreement will be deemed to be a legally binding
agreement by Chesapeake to sell the GEC Securities to Gothic prior to the
expiration of the Option Period under the terms and conditions stated in this
Agreement. Notwithstanding the foregoing, Chesapeake will have no obligation to
assign or deliver any interest in the GEC Securities to Gothic until the Option
is Fully Exercised.

4. Exercise Consideration. The payment of the "Exercise Consideration" means
the performance by Gothic of all of the following agreements in accordance
herewith:

4.1 Sale and Conveyance. As a portion of the Exercise Consideration the
Gothic Parties will convey and assign to the CEC Parties all of the
Gothic Parties' right, title and interest in and to the Properties (as
defined below) free and clear of any and all liens, claims and
encumbrances. The Properties assigned to the CEC Parties will be
assigned pursuant to the form of assignment at Schedule "(a)" attached
as a part hereof with appropriate schedules attached to describe the
Properties as set forth in Schedule "4.1(b)" attached hereto as a part
hereof (the "Property Schedules") and the Properties located within
the CHK Area (as hereinafter defined) will be released from the terms
of the Participation Agreement in all respects.

4.2 Participation Agreement. The Gothic Parties and the CEC Parties will
enter into the Amended and Restated Participation Agreement in the
form of Schedule "" attached as a part hereof (the "Restated
Participation Agreement") which will amend and replace the
Participation Agreement to the extent set forth in the Restated
Participation Agreement.

4.3 Definitions. For purposes of this Agreement the term "Properties"
means the following: (a) any right to any reconveyance in favor of the
Gothic Parties under

Final Schedule Schedule "A"
- --------------
Page 2 of 17 Pages
<PAGE>

paragraph 1.3 of the Participation Agreement, any reversion or any
other interest owned by the Gothic Parties under the Participation
Agreement in the fifty percent (50%) interest in the Existing Acreage,
the Related Interests and the Acquisition Acreage (as those terms are
defined in the Participation Agreement) previously conveyed to the CEC
Parties together with any related interests or property rights
acquired by the CEC Parties so that the CEC Parties own such interest
in any and all acreage, interests and property rights acquired in
connection with the Participation Agreement free and clear of all re-
assignment obligations, reversionary interests or any other terms or
obligations under the Participation Agreement; (b) except for the
Gothic Wellbore Interests (as defined below) but specifically
including any other wells participated in by the Gothic Parties
pursuant to paragraph 5.8 of this Agreement, all of the Gothic
Parties' right, title and interest in all oil, gas and mineral
interests of every kind and character within the CHK Area (as defined
below) together with any related interests and property rights
including, without limitation, any interest in farmout agreements,
contribution agreements, exploration agreements, access agreements,
the Existing Acreage, the Related Interests, the Acquisition Acreage
and other agreements to acquire such interests which are owned by the
Gothic Parties in the CHK Area; and (c) the right to operations of all
wells in the CHK Area including, without limitation, any well
containing the Gothic Wellbore Interests. For purposes of this
Agreement: (y) the term "CHK Area" means: (i) Meade and Clark
Counties, Kansas, and (ii) Texas, Beaver, Harper, Ellis, Woods,
Woodward, Dewey, Major, Blaine (Townships in 19N only), Custer, Grady
(Townships in 7N, 8N and 9N only), Pittsburg, Haskell, Latimer
(excluding Sections 25, 34, 35 and 36 in Township 3 North, Range 19
East, Sections19, 22, 23, 24, 26, 27, 28, 29, 30, 31, 32, 33, 34, 35
and 36 in Township 3 North, Range 20 East and Sections 19, 20, 27, 28,
31, 32, 33, and 34 in Township 3 North, Range 21 East) and LeFlore
Counties, Oklahoma; and (z) the term "Gothic Wellbore Interests" means
the Gothic Parties' interests in the following wellbores (but
excluding any interest in any acreage within the applicable
governmental production unit): (i) any wellbores in the CHK Area which
were producing in paying quantities as of February 1, 2000, and (ii)
the next wellbores to be drilled in the designated quarter section of
the governmental spacing units as described in Schedule "4.3" attached
hereto as a part hereof which includes four (4) locations in Custer
County, Oklahoma, six (6) locations in Pittsburg County, Oklahoma,
four (4) locations in Latimer County, Oklahoma and one (1) location in
Major County, Oklahoma.

5. Conditions Precedent to Exercise. Unless waived in writing by Chesapeake
in Chesapeake's sole discretion, the right of Gothic to exercise the Option is
subject to the satisfaction of all of the following conditions precedent:

5.1 Plan of Reorganization. A plan of reorganization for Gothic will have
been confirmed under the United States Bankruptcy Code, as amended, on
terms and conditions which approve, without modification, this
Agreement, the Restated Participation Agreement and all of the other
instruments, agreements,

Final Schedule Schedule "A"
- --------------
Page 3 of 17 Pages
<PAGE>

conveyances, certificates, memoranda and other documents to be entered into upon
the exercise of the Option and the consummation of the provisions of this
Agreement (the "Conveyance Documents").

5.2 Approvals. Chesapeake and Gothic will have received written consents
and approvals to the terms and conditions of this Agreement and the
Conveyance Documents in form and substance satisfactory to Chesapeake
from the holders of the Gothic's 14 1/8% Senior Secured Discount
Notes, the holders of the Gothic's Senior Notes, Bank One, Texas,
N.A., and any other necessary parties deemed necessary or prudent by
Chesapeake.

5.3 Lien Releases. Chesapeake will have received lien releases and other
documents required to assure Chesapeake that the Properties and the
other interests to be acquired by the CEC Parties under the Conveyance
Documents will be free and clear of all liens, claims and
encumbrances.

5.4 Conveyance Documents. The Conveyance Documents will have been duly
executed, acknowledged (where appropriate) and delivered by the Gothic
Parties and the CEC Parties, the Conveyance Documents will include a
certificate making and reaffirming each of the representations,
warranties, covenants and agreements set forth in this Agreement, and
the covenants and conditions precedent set forth therein will have
been satisfied.

5.5 Litigation. No actions, suits or litigation will have been threatened
or filed seeking to prevent the consummation of the transactions
contemplated by the Conveyance Documents or seeking damages or other
relief as a result of the Conveyance Documents or the consummation of
the transactions contemplated thereby and: (a) no preliminary or
permanent injunction or other order will have been issued by any court
of competent jurisdiction or any regulatory body preventing
consummation of the transactions contemplated by this Agreement or the
Conveyance Documents; (b) no action will have been commenced or
threatened against Chesapeake, Gothic or any of their respective
affiliates, associates, officers or directors seeking damages arising
from, to prevent or challenge the transactions contemplated by this
Agreement and the Conveyance Documents; (c) all representations and
warranties of Gothic contained herein will be true and correct in all
material respects on and as of the date of the exercise of the Option;
and (d) the Gothic Parties will have performed or satisfied on and as
of the date of the exercise of the Option, all obligations, covenants,
agreements and conditions contained in this Agreement and the
Conveyance Documents to be performed or complied with by the Gothic
Parties.

5.6 Lease Maintenance. The Gothic Parties will have maintained in full
force and effect all of the oil, gas and mineral leases, farmout
agreements, joint development agreements, joint operating agreements
and other oil and gas related

Final Schedule Schedule "A"
- --------------
Page 4 of 17 Pages
<PAGE>

interests covered by the Participation Agreement in full force and
effect and will not have rejected or terminated any of such interests
or breached any of the terms or conditions applicable thereto.

5.7 No Default. The Gothic Parties will have not defaulted under this
Agreement, the Participation Agreement or the Option Purchase
Agreement, each of the Gothic Parties' representations and warranties
will be true and correct in all material respects and there will not
have occurred any event that would constitute an event of default with
the passage of time.

5.8 Participation. The Gothic Parties will not have proposed any wells to
be drilled in or on any governmental production unit (as defined in
the Participation Agreement) containing any of the Properties in the
CHK Area as to which drilling operations had not commenced prior to
February 1, 2000 and, with respect to any wells (other than the Gothic
Wellbore Interests) proposed by the Chesapeake Parties or third
parties spudded after February 1, 2000 ("Interim Wells"), in the event
the Gothic Parties elect to participate therein, all of the interests
of the Gothic Parties in such Interim Wells and the governmental
spacing units with respect thereto will, at Chesapeake's election, be
included in the Properties to be conveyed to Chesapeake pursuant to
paragraph 10.2.1 of this Agreement. In the event the Gothic Parties
elect not to participate in any such Interim Wells, the Gothic Parties
will have farmed out, assigned or otherwise conveyed to the Chesapeake
Parties, the Gothic Parties' interests in any such Interim Wells and
the governmental spacing units pursuant to the Participation
Agreement.

5.9 JIB Payments. The Gothic Parties will have paid current all joint
interest billings owing to the CEC Parties as required by the Joint
Operating Agreements attached to the Participation Agreement.

5.10 Motion to Affirm. Within forty-five (45) days after the filing of the
petition in bankruptcy for one or more of the Gothic Parties, the
Gothic Parties will have filed a motion and will thereafter diligently
pursue entry of an order in such bankruptcy proceeding to irrevocably
affirm this Agreement, the Option, the Conveyance Documents, the
Participation Agreement and the Restated Participation Agreement in
all respects.

6. Chesapeake Representations and Warranties. Chesapeake hereby represents
and warrants to Gothic that as of the date of this Agreement and until the
Option is exercised in accordance with the terms and conditions of this
Agreement or the Option Period has expired without the Option being exercised:

6.1 Ownership. Chesapeake has and will have good and valid title to the
GEC Securities, free and clear of all liens, claims and encumbrances.
No person or entity other than the CEC Parties has or will have any
interest in the GEC

Final Schedule Schedule "A"
- --------------
Page 5 of 17 Pages
<PAGE>

Securities either of record or beneficially.

6.2 Authority. Chesapeake has taken all necessary action to authorize the
execution, delivery and performance of this Agreement and has adequate
corporate power, authority and legal right to enter into, execute,
deliver and perform this Agreement and to consummate the transactions
contemplated hereby.

6.3 Absence of Liabilities. Except as approved by Gothic in writing prior
to the Closing Date: (a) Chesapeake has no debt, liability, obligation
or commitment, absolute or contingent, known or unknown, relating to
or connected with the GEC Securities; (b) the GEC Securities will not
be subject to or liable for any claim, debt, liability, lien,
encumbrance, obligation, guaranty or commitment of Chesapeake on the
Closing Date; and (c) any such claims, debts, liabilities, obligations
or commitments will be the sole responsibility of Chesapeake and
Chesapeake hereby agrees to indemnify and hold harmless Gothic from
all such matters.

6.4 Consents and Approvals. No notice to, filing with, or authorization,
consent or approval of any governmental entity, person or other entity
is necessary for the consummation of the transactions contemplated by
this Agreement. The execution, delivery, performance and consummation
of this Agreement does not and will not: (a) violate, conflict with or
constitute a default or an event that, with notice or lapse of time or
both, would be a default, breach or violation under any term or
provision of any instrument, agreement, contract, commitment, license,
promissory note, conditional sales contract, indenture, mortgage, deed
of trust, lease or other agreement, instrument or arrangement to which
Chesapeake is a party or by which Chesapeake or, to the best of
Chesapeake's knowledge, the GEC Securities are bound; (b) violate,
conflict or constitute a breach of any statute, regulation or judicial
or administrative order, award, judgment or decree to which Chesapeake
is a party or to which Chesapeake or, to the best of Chesapeake's
knowledge the GEC Securities are bound; or (c) result in the creation
or imposition of any adverse claim or interest, lien, encumbrance,
charge, equity or restriction of any nature whatever, upon or
affecting Chesapeake, or to the best of Chesapeake's knowledge, the
GEC Securities or Gothic.

7 Gothic Representations and Warranties. Gothic hereby represents and
warrants to Chesapeake that as of the date of this Agreement and as of the
Closing Date:

7.1 Authority and Reliance. Gothic has taken all necessary action to
authorize the execution, delivery and performance of this Agreement
and has all requisite corporate power, authority and legal right to
enter into, execute, deliver and perform this Agreement and to
consummate the transactions contemplated hereby and to own, lease, and
operate its properties and to conduct its business as now being
conducted. Gothic represents and warrants that Gothic is experienced
in the

Final Schedule Schedule "A"
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Page 6 of 17 Pages
<PAGE>

oil and gas business and has knowledge and experience in business and
financial matters and, with respect to investments generally and, in
particular, investments generally comparable to the Option and the GEC
Securities, Gothic is competent to evaluate the value of each of the
GEC Securities and the Exercise Price and the benefits and risks
relating to this Agreement and Gothic has determined that the
consideration being given by Gothic is the fair value equivalent of
the consideration being received by Gothic for the purchase and
exercise of the Option. If Gothic exercises the Option, Gothic's
representations and warranties hereunder will extend fully to the
exercise of the Option as if made on the date the Option is exercised.

7.2 Consents. Gothic has obtained and provided to Chesapeake all consents,
approvals or waivers necessary or appropriate for Gothic to enter into
this Agreement and to consummate the transactions contemplated hereby.
No other authorization, consent, approval, license, qualification or
formal exemption from, nor any filing, declaration or registration
with, any court, governmental agency or regulatory authority or any
securities exchange is required in connection with the execution,
delivery or performance by the Gothic Parties of this Agreement.

7.3 Litigation. There is no action, suit, investigation or proceeding,
governmental or otherwise, pending or, to the best of Gothic's
knowledge, threatened to which any of the Gothic Parties is or would
be a party or of which the Properties, the Properties or other assets
of the Gothic Parties is or would be subject.

7.4 Properties. All of the oil, gas and related interests of every kind
and character owned by the Gothic Parties or any of the Gothic
Parties' direct or indirect subsidiaries which are located in the CHK
Area are described in Schedule "7.4" attached as a part hereof.

8. Covenants. Unless waived in writing, the parties agree to the following
during the Option Period:

8.1 Conduct of Businesses. Prior to the exercise of the Option or
expiration of the Option Period, the Gothic Parties will operate in a
businesslike manner in accordance with prior practices and will
maintain and preserve all of the assets and businesses of the Gothic
Parties including the Properties.

8.2 Properties. The Gothic Parties have not and will not: (a) transfer,
sell, mortgage, pledge, encumber or dispose of any assets covered by
this Agreement or the Restated Participation Agreement, except for the
existing mortgages which have been subordinated to the interests of
Chesapeake pursuant to the Participation Agreement; or (b) except in
the ordinary course of business consistent with past business
practices, make or permit any amendment or termination of any material
contract, agreement or commitment affecting the assets covered by this

Final Schedule Schedule "A"
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<PAGE>

Agreement or the Restated Participation Agreement.

8.3 Consents. The parties will use their best efforts to obtain, all
licenses, permits, consents, approvals, authorizations, qualifications
and orders of governmental authorities and parties to contracts with
the Gothic Parties as are necessary for the consummation of the
transactions contemplated by this Agreement or are reasonably
requested by Chesapeake.

8.4 Litigation. Promptly on learning thereof, each party to this Agreement
will notify the other party of any litigation, suit or administrative
proceeding that could reasonably be expected to have a material
adverse affect on the ability of the parties to consummate the
transactions contemplated by this Agreement or the Conveyance
Documents, or otherwise adversely affect any of the businesses,
affairs, assets, prospects, operations or conditions, financial or
otherwise, of the parties, whether or not the claim is considered to
be covered by insurance. Gothic and Chesapeake each agree to not to
agree to or join in the pursuit of any injunctive relief prohibiting
the transactions contemplated by this Agreement.

8.5 Plan of Reorganization. Gothic will not propose or consent to any plan
of reorganization which materially conflicts with any of the terms and
conditions of this Agreement, the Conveyance Documents or the Restated
Participation Agreement and will not dispute or seek to modify or
rescind this Agreement in any bankruptcy proceeding or other action
affecting Gothic. The Gothic Parties will simultaneously provide to
Chesapeake copies of all notices, filings and other documents relating
to the Gothic Parties bankruptcy, reorganization or any proposed plan
of reorganization including, without limitation, all communications
to, from or among any of the Gothic Parties, any formal or informal
committees of creditors or security holders or any creditors of the
Gothic Parties, whether before or after the filing of bankruptcy.

8.6 GEC Securities. Chesapeake will not transfer, sell, pledge, encumber
or dispose of any of the GEC Securities.

9. Representations and Warranties for the Properties. As an inducement to
Chesapeake to enter into this Agreement and accept the assignment of the
interests in the Properties, Gothic represents and warrants to Chesapeake that
as of the date of this Agreement and the Closing Date:

9.1 No Assumption of Obligations. Except as approved by Chesapeake in
writing prior to the Closing Date, the execution and consummation of
this Agreement will not obligate Chesapeake with respect to (or result
in the assumption by Chesapeake of) any obligation of Gothic arising
prior to the Closing Date under or with respect to, any liability,
agreement or commitment relating to the Properties including, without
implied limitation, to pay to or share with any third

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<PAGE>

party any portion of the Hydrocarbons attributable to the Properties.
The term "Hydrocarbons" means and includes oil, gas, casinghead gas,
condensate, natural gas liquids and all components of the foregoing.

9.2 Absence of Liabilities. Except as approved by Chesapeake in writing
prior to the Closing Date: (a) Gothic has no debt, liability,
obligation or commitment, absolute or contingent, known or unknown,
relating to or connected with the Properties; (b) neither Chesapeake
nor the Properties will be subject to or liable for any claim, debt,
liability, lien, encumbrance, obligation, guaranty or commitment on
the Closing Date; and (c) any such claims, debts, liabilities,
obligations or commitments will be the sole responsibility of Gothic
and Gothic hereby agrees to indemnify and hold harmless Chesapeake
from all such matters. Gothic has complied and will continue to comply
with all applicable federal, state or local statutes, laws and
regulations.

9.3 Contracts. Gothic has delivered to Chesapeake true copies (or
descriptions, in the case of oral agreements) of all of the contracts
and agreements relating to the Properties including, without
limitation, all marketing and production sales contracts. Except as
approved by Chesapeake in writing prior to the Closing Date, no such
marketing or production sales contracts will in any way prevent or
hinder Chesapeake in taking in kind Chesapeake's share of production
from the Properties. There are no other material contracts,
commitments or agreements in effect related to the Properties that
have not been disclosed to Chesapeake in writing. To the best of
Gothic's knowledge: (a) such contracts and agreements are in full
force and effect; (b) no event of default or event which would become
an event of default with the giving of notice or passage of time has
occurred; and (c) no condition presently exists which would give any
party to any such contract the right to terminate such contract. There
are no other material contracts, commitments or agreements in effect
related to the Properties.

9.4 Consents and Approvals. No notice to, filing with, or authorization,
consent or approval of any governmental entity, person or other entity
is necessary for the consummation of the transactions contemplated by
this Agreement. The execution, delivery, performance and consummation
of this Agreement does not and will not: violate, conflict with or
constitute a default or an event that, with notice or lapse of time or
both, would be a default, breach or violation under any term or
provision of any instrument, agreement, contract, commitment, license,
promissory note, conditional sales contract, indenture, mortgage, deed
of trust, lease or other agreement, instrument or arrangement to which
Gothic is a party or by which Gothic or, to the best of Gothic's
knowledge, the Properties are bound; violate, conflict or constitute a
breach of any statute, regulation or judicial or administrative order,
award, judgment or decree to which Gothic is a party or to which
Gothic or, to the best of Gothic's knowledge the Properties are bound;
or result in the creation or imposition of any adverse claim or
interest, lien,

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<PAGE>

encumbrance, charge, equity or restriction of any nature whatever,
upon or affecting Gothic, or to the best of Gothic's knowledge, the
Properties or Chesapeake.

9.5 Litigation. To the best of Gothic's knowledge there is: (a) no action,
suit or proceeding pending, threatened or contemplated against Gothic
or the Properties; and (b) no proceeding, investigation, charge, audit
or inquiry threatened or pending before or by any federal, state,
municipal or other governmental court, department, commission, board,
bureau, agency or instrumentality which might result in an adverse
effect on Gothic or the Properties. Gothic hereby agrees to indemnify
and hold harmless Chesapeake with respect to any and all litigation
and proceedings.

9.6 Title. Gothic owns, possesses and holds good and defensible title
beneficially and of record in and to the respective Properties free
and clear of all claims, liens, encumbrances, conditions,
restrictions, calls on production, obligations to pay to or share with
third parties any revenue or other matter adversely affecting the
value or ownership of the Properties. All of the oil, gas and related
interests of every kind and character owned by Gothic or any of
Gothic's affiliates which are located in the CHK Area are described in
the Conveyance Documents. Gothic is entitled to receive not less than
the "Net Revenue Interest" set forth in the Conveyance Documents of
all Hydrocarbons produced, saved and marketed from the Properties
without reduction, suspension or termination of such interest
throughout the duration of the productive life of such Properties and
is in no event obligated to bear any of the costs and expenses related
to the maintenance, development or operation (including, without
limitation, the costs and expenses of plugging and abandoning any
wells and removal and salvage of any equipment and facilities) of the
Properties throughout the productive life of the Properties in excess
of the "Working Interest" set forth in Conveyance Documents. To the
best of Gothic's knowledge, there are no suspended revenues or any
basis to suspend revenues from the Properties. To the best of Gothic's
knowledge, there does not exist any lien, claim, encumbrance,
restriction or other matter which might cause Chesapeake to not
receive for its own account free and clear of all liens, claims and
encumbrances the percentage of the fair market value of all
Hydrocarbons produced, saved or used from each of the Properties after
the Closing Date equal to the Net Revenue Interest designated in the
Conveyance Documents.

9.7 Foreign Person. Gothic is not a "foreign person" as that term is
defined under the Internal Revenue Code of 1986.

9.8 Oil and Gas Leases in Good Standing. Except as approved by Chesapeake
in writing prior to the Closing Date, to the best of Gothic's
knowledge all oil and gas leases which are material singly or in the
aggregate are in full force and effect, and Gothic is not in default
thereunder.

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<PAGE>

9.9 Taxes. All ad valorem, property, production, severance and similar
taxes and assessments based on or measured by the ownership of
property comprising the Properties or the production or removal of
hydrocarbons or the receipt of proceeds therefrom have been timely
paid when due and are not in arrears.

9.10 Contracts, Consents and Preferential Rights. Gothic has disclosed to
Chesapeake in writing after the date hereof by reference to this
paragraph: (a) all partnership, joint venture, farmin/farmout, dry
hole, bottom hole, acreage contribution, area of mutual interest,
purchase and/or acquisition agreements of which any terms remain
executory which materially affect the Properties; (b) all other
executory contracts to which Gothic is a party which materially
affect any item of the Properties; (c) all governmental or court
approvals and third party contractual consents required in order to
consummate the transactions contemplated by this Agreement; (d) all
agreements pursuant to which third parties have preferential rights
or similar rights to acquire any portion of the Properties upon the
sale contemplated by this Agreement; and (e) all other contracts and
agreements which are in any single case of material importance to the
Properties.

9.11 Tax Partnerships. None of the Properties is treated for income tax
purposes as being owned by a partnership.

9.12 Environmental Conditions. Gothic is not aware, and has not received
notice from any person, entity or governmental body, agency or
commission, of any release, disposal, event, condition, circumstance,
activity, practice or incident concerning any land, facility, asset
or property that: (a) interferes with or prevents compliance or
continued compliance by Gothic (or by Chesapeake after the Closing
Date) with any federal, state or local law, regulation, code or
ordinance or the terms of any license or permit issued pursuant
thereto; or (b) gives rise to or results in any common law or other
liability of Gothic to any person, entity or governmental body,
agency or commission for damage or injury to natural resources,
wildlife, human health or the environment which would have a material
adverse effect on Gothic in each case. Gothic is not aware of any
civil, criminal or administrative action, lawsuit, demand,
litigation, claim, hearing, notice of violation, investigation or
proceeding, pending or threatened, against Gothic or operator of any
of the lands, facilities, assets and properties owned or formerly
owned, operated, leased or used by Gothic as a result of the
violation or breach of any federal, state, or local law, regulation,
code or ordinance or any duty arising at common law to any person,
entity or governmental body, singly or in the aggregate, which if
determined adversely would have a material adverse effect on Gothic.

9.13 Plugging Status. To the best of Gothic's knowledge, all wells on the
Properties that have been permanently plugged and abandoned have been
so plugged and

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<PAGE>

abandoned in accordance in all material respects with all applicable
requirements of each governmental authority having jurisdiction over
Gothic and the Properties.

9.14 Affiliate Transactions. There are no transactions affecting any of
the Properties between Gothic and any of Gothic's affiliates. As used
in this Agreement, "affiliate" means, with respect to any person or
entity, each other person or entity directly or indirectly
controlling controlled by or under common control with such person.

9.15 Full Disclosure. This Agreement, any schedule referenced in or
attached to this Agreement, any document furnished to Chesapeake
under this Agreement and any certification furnished to Chesapeake
under this Agreement does not contain any untrue statement of a
material fact and does not omit to state a material fact necessary to
make the statements made, in the circumstances under which they were
made, not misleading. All of the representations, warranties and
covenants in this Agreement: (a) are true and correct as of the date
made; (b) will be true and correct as of the Closing Date; and (c)
will survive and not be waived, discharged, released, modified,
terminated or affected by any due diligence by Chesapeake.

10. Closing. Unless the Option Period has expired or the closing is extended
in writing by Gothic and Chesapeake, the transactions contemplated by this
Agreement will be consummated on the date (the "Closing Date") which is five (5)
business days after the later of: (a) the notice of intent to exercise under
paragraph of this Agreement; or (b) the date all of the conditions under this
Agreement have been satisfied in full.

10.1 Chesapeake's Deliveries. Subject to the terms and conditions of this
Agreement, on the Closing Date Chesapeake will deliver or cause to be
delivered to Gothic the following items (all documents will be duly
executed and acknowledged where required):

10.1.1 GEC Securities. Conditioned on the Option being Fully
Exercised, the GEC Securities due under paragraph of this
Agreement together with stock powers with all signatures
guaranteed in the form attached hereto as Schedule "10.1.1";

10.1.2 Evidence of Authority. Such resolutions, certificates of
good standing, incumbency certificates and other evidence of
authority with respect to Chesapeake as might be reasonably
requested by Gothic;

10.1.3 JIB Payments. Current payment of all joint interest billings
owing to the Gothic Parties as required by the Joint
Operating Agreements attached to the Participation
Agreement;

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<PAGE>

10.1.4 Closing Memorandum. A memorandum setting forth the items
delivered and accounting for the payments made on the
Closing Date;

10.1.5 Additional Documents. Such additional documents as might be
reasonably requested by Gothic to consummate this Agreement;
and

10.1.6 Interim Wells. In the event Chesapeake elects to include the
Gothic Parties' interests in the Interim Wells in the
Properties pursuant to paragraph 5.8 hereof, Chesapeake will
pay to the Gothic Parties an amount equal to the Gothic
Parties' unrecovered drilling costs for such Interim Wells.

10.2 Gothic's Deliveries. On the Closing Date, Gothic will deliver or
cause to be delivered to Chesapeake the following items (all
documents will be duly executed and acknowledged where required):

10.2.1 Assignments. The Conveyance Documents in substantially the
form and substance satisfactory to Chesapeake conveying to
Chesapeake all of Gothic Parties' right, title and interest
in and to the Properties including, without limitation, all
of the right, title and interest in and to the Interim Wells
in the event Chesapeake elects to include the Interim Wells
in the Properties pursuant to paragraph 5.8 hereof;

10.2.2 Releases. Releases and termination statements with respect
to any and all liens, claims, security interests and other
encumbrances covering any of the Properties including a
release of any reconveyance rights in favor of the Gothic
Parties under the Participation Agreement;

10.2.3 Evidence of Authority. Such corporate resolutions,
certificates of good standing, incumbency certificates and
other evidence of authority with respect to each of the
Gothic Parties as might be reasonably requested by
Chesapeake;

10.2.4 Closing Memorandum. A memorandum setting forth the items
delivered and accounting for the payments made on the
Closing Date;

10.2.5 Additional Documents. Such additional documents as might be
reasonably requested by Chesapeake to consummate this
Agreement.

10.3 Costs. Gothic will pay the following closing costs: (a) Gothic's
attorneys' fees, investment banker's fees and bank fees; (b) the cost
of recording all mortgage or other lien releases and the cost of
documentary stamps to be affixed to any deeds conveying title to the
Properties to Chesapeake; and (c) any other charge imposed by any
governmental authority for the transfer of any item comprising the

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<PAGE>

Properties. Chesapeake will pay only Chesapeake's attorneys' fees and
the cost of recording the Conveyance Documents. Chesapeake and the
Gothic Parties each agree to use their respective best efforts to
take any and all reasonable action to minimize the recording costs
and other charges associated with the consummation of the
transactions contemplated by this Agreement.

10.4 Files and Data. As of the Closing Date and at all times thereafter
during the term of the Restated Participation Agreement, Gothic will
make available to Chesapeake for copying, at Chesapeake's expense,
all files, records, reports and other data relating to the
Properties.

11. Default. In the event either party fails to perform such party's
obligations hereunder (except as excused by another party's default) (the
"Defaulting Party") such failure will constitute an event of default under this
Agreement and the other party (the "Other Party") will have the right to
exercise any and all remedies available at law or in equity including, without
limitation, specific performance of this Agreement or any one or more of the
provisions herein contained, unless such default is waived by the Other Party or
cured by the Defaulting Party within five (5) business days after receipt of
notice of such default. The remedies provided by this Agreement are cumulative
and will not exclude any other remedy to which the Other Party might be entitled
under this Agreement or applicable law. In the event the Other Party elects to
selectively and successfully enforce the Other Party's rights under this
Agreement, such action will not be deemed a waiver or discharge of any other
remedy. During the pendency of any default or disputes, this Agreement will be
deemed to be in full force and effect. Notwithstanding anything herein to the
contrary, on the occurrence of a default or other breach of this Agreement by
Gothic, Chesapeake may terminate the Option in the sole and absolute discretion
of Chesapeake.

12. Miscellaneous. It is further agreed as follows:

12.1 Time. Time is of the essence of this Agreement.

12.2 Notices. Any notice, demand or communication required or permitted to
be given by any provision of this Agreement will be in writing and
will be deemed to have been given and received when delivered
personally or by telefacsimile to the party designated to receive
such notice, or on the date following the day sent by overnight
courier, or on the third (3rd) business day after the same is sent by
certified mail, postage and charges prepaid, directed to the
following addresses or to such other or additional addresses as any
party might designate by written notice to the other parties:

Final Schedule Schedule "A"
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<PAGE>

To Gothic: Gothic Energy Corporation
6120 South Yale Avenue, Suite 1200
Tulsa, Oklahoma 74136
Attn: Michael K. Paulk
Telephone (918) 749-5666
Fax No. (918) 749-5882

With a copy to: Pray, Walker, Jackman, Williamson & Marlar
900 OneOk Plaza
100 West 5th Street
Tulsa, Oklahoma 74103-4218
Attn: Ira L. Edwards, Jr.
Telephone (918) 581-5500
Fax No. (918) 581-5599

To Chesapeake: Chesapeake Energy Corporation
6100 North Western Avenue
Oklahoma City, Oklahoma 73118
Attn: Aubrey K. McClendon
Telephone (405) 879-9226
Fax No. (405) 848-8588

With a copy to: Self, Giddens & Lees, Inc.
2725 Oklahoma Tower
210 Park Avenue
Oklahoma City, Oklahoma 73102
Attn: Ray Lees
Telephone (405) 232-3001
Fax: (405) 232-5553

12.3 Cooperation. At all times during the Option Period the parties agree
to execute and deliver, or cause to be executed and delivered, such
documents and do, or cause to be done, such other acts and things as
might reasonably be requested by the other party to this Agreement to
assure that the benefits of this Agreement are realized by the
parties.

12.4 Press Release. Except to the extent required by applicable disclosure
requirements, all press releases relating to this Agreement and the
transactions contemplated by this Agreement and the Conveyance
Documents will be approved by Gothic and Chesapeake prior to
dissemination.

12.5 Choice of Law. This Agreement will be interpreted, construed and
enforced in accordance with the laws of the State of Oklahoma and
will be deemed for such

Final Schedule Schedule "A"
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<PAGE>

purposes to have been made, executed and performed in Oklahoma
County, Oklahoma. All claims, disputes and other matters in question
arising out of or relating to this Agreement will be decided by
proceedings instituted and litigated in the District Court of
Oklahoma County, Oklahoma or the United States District Court for
the Western District of Oklahoma.

12.6 Headings. The paragraph headings contained in this Agreement are for
reference purposes only and are not intended to affect in any way
the meaning or interpretation of this Agreement.

12.7 Entire Agreement. This Agreement and any document executed in
connection herewith on or after the date of this Agreement
constitute the entire agreement between the parties with respect to
the subject matter hereof and there are no agreements,
understandings, warranties or representations except as set forth
herein.

12.8 Assignment. It is agreed that the parties may not assign such
party's rights nor delegate such party's duties under this Agreement
without the express written consent of the other parties to this
Agreement.

12.9 Amendment. Neither this Agreement, nor any of the provisions hereof
can be changed, waived, discharged or terminated, except by an
instrument in writing signed by the party against whom enforcement
of the change, waiver, discharge or termination is sought.

12.10 Severability. If any clause or provision of this Agreement is
illegal, invalid or unenforceable under any present or future law,
the remainder of this Agreement will not be affected thereby. It is
the intention of the parties that if any such provision is held to
be illegal, invalid or unenforceable, there will be added in lieu
thereof a provision as similar in terms to such provisions as is
possible to cause such provision to be legal, valid and enforceable.

12.11 Attorney Fees. If any party institutes an action or proceeding
against any other party relating to the provisions of this
Agreement, the party to such action or proceeding which does not
prevail will reimburse the prevailing party therein for the
reasonable expenses of attorneys' fees and disbursements incurred by
the prevailing party.

12.12 Waiver. Waiver of performance of any obligation or term contained in
this Agreement by any party, or waiver by one party of the other's
default hereunder will not operate as a waiver of performance of any
other obligation or term of this Agreement or a future waiver of the
same obligation or a waiver of any future default.

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<PAGE>

IN WITNESS WHEREOF, Chesapeake and Gothic have executed this Agreement
as of the date first above written.

GOTHIC ENERGY CORPORATION, an Oklahoma
corporation

By
------------------------------------
Michael K. Paulk, President

GOTHIC PRODUCTION COMPANY,
an Oklahoma corporation

By
------------------------------------
Michael K. Paulk, President

(jointly and severally referred to
herein as "Gothic")

CHESAPEAKE EXPLORATION LIMITED
PARTNERSHIP, an Oklahoma
limited partnership

By: Chesapeake Operating, Inc.,
General Partner

By
------------------------------------
Aubrey K. McClendon,
Chief Executive Officer

("Chesapeake")

Final Schedule Schedule "A"
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<PAGE>

EXHIBIT 23.0
Consent of PricewaterhouseCoopers LLP

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by reference in the Registration
Statements on Form S-3 (File No. 333-23239, No. 333-38679 and No. 333-68085) and
on Form S-8 (File No. 333- ______, No. 333-______, and No. 333-______) of Gothic
Energy Corporation of our report dated February 21, 2000, relating to the
financial statements, which appears in the Annual Report to Shareholders on Form
10-KSB.

PricewaterhouseCoopers LLP

Tulsa, Oklahoma
March 28, 2000

<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 2,583
<SECURITIES> 0
<RECEIVABLES> 8,240
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 11,447
<PP&E> 270,414
<DEPRECIATION> (54,170)
<TOTAL-ASSETS> 238,397
<CURRENT-LIABILITIES> 15,927
<BONDS> 319,857
0
45,612
<COMMON> 187
<OTHER-SE> (146,834)
<TOTAL-LIABILITY-AND-EQUITY> 238,397
<SALES> 52,967
<TOTAL-REVENUES> 55,624
<CGS> 35,887
<TOTAL-COSTS> 35,887
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 37,988
<INCOME-PRETAX> (17,309)
<INCOME-TAX> 0
<INCOME-CONTINUING> (17,309)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (17,309)
<EPS-BASIC> (1.51)
<EPS-DILUTED> (1.51)

</TABLE>