<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 1, 2000
REGISTRATION NO. 333-47330
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
CHESAPEAKE ENERGY CORPORATION
(Exact Name of Registrant as Specified in its Charter)
---------------------
<TABLE>
<S> <C> <C>
OKLAHOMA 1311 73-1395733
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
6100 NORTH WESTERN AVENUE, OKLAHOMA CITY, OKLAHOMA 73118
(405) 848-8000
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
---------------------
AUBREY K. MCCLENDON
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
6100 NORTH WESTERN AVENUE
OKLAHOMA CITY, OKLAHOMA 73118
(405) 848-8000
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
Copies to:
<TABLE>
<S> <C>
CONNIE S. STAMETS WILLIAM S. CLARKE
WINSTEAD SECHREST & MINICK P.C. WILLIAM S. CLARKE, P.A.
5400 RENAISSANCE TOWER, 1201 ELM STREET 457 NORTH HARRISON STREET
DALLAS, TEXAS 75270 PRINCETON, NEW JERSEY 08540
(214) 745-5400 (609) 921-3663
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after this Registration Statement is effective and all other
conditions to the transaction described in the proxy statement/prospectus
included in this Registration Statement have been satisfied or waived.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE PRICE(2) REGISTRATION FEE(2)(3)
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<S> <C> <C> <C> <C>
Common Stock, par value $0.01 per
share............................. 4,000,000 N/A $27,966,091 -0-
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</TABLE>
(1) Represents the maximum number of shares of common stock of the Registrant
issuable in the merger to holders of common stock of Gothic Energy
Corporation, pursuant to the terms of the agreement and plan of merger.
(2) Pursuant to Rule 457(c) and Rule 457(f)(1) under the Securities Act of 1933,
and solely for the purpose of calculating the registration fee, the proposed
maximum aggregate offering price is equal to (x) the estimated number of
shares of Gothic common stock to be exchanged in the merger multiplied by
(y) $1.20, the average of the bid and asked prices of the Gothic common
stock on September 28, 2000 on the OTC Bulletin Board.
(3) Pursuant to Rule 429(b), the registration fee for the shares registered
hereby, which would otherwise be $7,383, is offset in full by the
registration fee previously paid by the Registrant on July 7, 2000 in
connection with its Registration Statement on Form S-1 (File No. 333-41014).
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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--------------------------------------------------------------------------------
<PAGE> 2
GOTHIC ENERGY CORPORATION
TWO WARREN PLACE -- SUITE 1200
6120 SOUTH YALE AVENUE
TULSA, OKLAHOMA 74136
Dear fellow shareholder:
You are cordially invited to attend a special meeting of shareholders of
Gothic Energy Corporation on Tuesday, December 12, 2000, at 10:00 a.m., local
time, at the Doubletree Hotel at Warren Place, 6110 South Yale Avenue in Tulsa,
Oklahoma. At the special meeting, we are asking for shareholder approval of a
merger agreement and the transactions contemplated by that agreement, including
the merger of Chesapeake Merger 2000 Corp., a wholly-owned subsidiary of
Chesapeake Energy Corporation, with and into Gothic. As a result of the merger,
Gothic will become a wholly-owned subsidiary of Chesapeake Energy Corporation, a
New York Stock Exchange listed company. Except for those shareholders who demand
appraisal rights, holders of Gothic common stock will become Chesapeake
shareholders.
If the merger is completed, based on the number of shares of Gothic common
stock outstanding on the date of this proxy statement/prospectus, Gothic
shareholders will receive 0.1908 of a share of Chesapeake common stock for each
share of Gothic common stock.
Your board of directors recommends a vote "FOR" this proposal.
Please see the section entitled "Risk Factors" beginning on page 12 of the
proxy statement/prospectus for a discussion of potential risks related to the
merger and to Chesapeake's business.
Gothic and Chesapeake cannot complete the merger unless Gothic's
shareholders approve the merger and the merger agreement. We have scheduled a
special meeting of shareholders to vote on this matter.
YOUR VOTE IS VERY IMPORTANT. Regardless of the number of shares you own, it
is important that they be represented and voted at the meeting, whether or not
you plan to attend. Accordingly, you are requested to exercise your vote by
signing, dating and mailing the enclosed proxy in the postage prepaid return
envelope provided for your convenience. Only shareholders of record of Gothic on
October 20, 2000 are entitled to attend and vote at the special meeting.
This proxy statement/prospectus contains answers to frequently asked
questions; it also contains a summary description of the merger and other
related matters, beginning on page v, followed by a more detailed discussion of
the merger and these matters. Because the answers and the summary are not, by
their nature, detailed, we urge you to carefully read this proxy
statement/prospectus in its entirety. You may also obtain information about the
two companies from documents they have filed with the Securities and Exchange
Commission.
Your interest and participation in the affairs of Gothic are sincerely
appreciated.
GOTHIC ENERGY CORPORATION
Mike Paulk
President and Chief Executive
Officer
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE MERGER OR THE SHARES OF CHESAPEAKE
COMMON STOCK TO BE ISSUED IN THE MERGER OR DETERMINED IF THIS PROXY
STATEMENT/PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
This document is also the prospectus of Chesapeake for the shares that it
will issue in connection with the merger.
Chesapeake has furnished all the information in this proxy
statement/prospectus concerning Chesapeake, and Gothic has furnished all the
information concerning Gothic.
PROXY STATEMENT/PROSPECTUS DATED NOVEMBER 1, 2000 AND FIRST MAILED TO
SHAREHOLDERS ON OR ABOUT NOVEMBER 2, 2000
<PAGE> 3
GOTHIC ENERGY CORPORATION
TWO WARREN PLACE -- SUITE 1200
6120 SOUTH YALE AVENUE
TULSA, OKLAHOMA 74136
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON DECEMBER 12, 2000
To our shareholders:
Notice is hereby given that a Special Meeting of Shareholders of Gothic
Energy Corporation will be held at the Doubletree Hotel at Warren Place, 6110
South Yale Avenue, Tulsa, Oklahoma on Tuesday, December 12, 2000 at 10:00 AM,
for the following purposes:
1. A proposal to approve the merger of Gothic with Chesapeake Merger
2000 Corp., an Oklahoma corporation and wholly-owned subsidiary of
Chesapeake Energy Corporation, pursuant to an Agreement and Plan of Merger
dated September 8, 2000; and
2. To transact such other business as may properly come before the
meeting, or any adjournments thereof.
Information with respect to these matters is set forth in the proxy
statement/prospectus which accompanies this notice. All holders of record of
shares of Gothic's common stock and preferred stock at the close of business on
October 20, 2000 are entitled to notice of the special meeting. Only holders of
record of Gothic common stock on such date are entitled to vote at the special
meeting.
We hope that all of our shareholders who can conveniently do so will attend
the special meeting. Shareholders who do not expect to be able to attend the
special meeting are requested to mark, date and sign the enclosed proxy and
return the same in the enclosed addressed envelope which requires no postage and
is intended for your convenience.
By Order of the Board of Directors,
R. Andrew McGuire, Secretary
Tulsa, Oklahoma
November 1, 2000
<PAGE> 4
PROSPECTUS
FOR
CHESAPEAKE ENERGY CORPORATION
(COMMON STOCK, PAR VALUE $0.01 PER SHARE)
---------------------
PROXY STATEMENT
FOR
GOTHIC ENERGY CORPORATION
SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON DECEMBER 12, 2000
---------------------
This proxy statement/prospectus relates to a proposed merger pursuant to
the terms of an agreement and plan of merger dated September 8, 2000, as
amended, by and among Chesapeake Energy Corporation, an Oklahoma corporation,
Chesapeake Merger 2000 Corp., a newly-formed Oklahoma corporation and
wholly-owned subsidiary of Chesapeake, and Gothic Energy Corporation, an
Oklahoma corporation. The merger agreement provides that each holder of Gothic
common stock, other than Chesapeake and shareholders who demand appraisal of
their shares, will receive the right to convert each such share into a portion
of a share of Chesapeake common stock. The exchange ratio is presently expected
to be 0.1908 of a share of Chesapeake common stock per share of Gothic common
stock. Chesapeake will receive no merger consideration with respect to Gothic
common stock it owned as of September 8, 2000 or which is issued to Chesapeake
upon the conversion of Gothic preferred stock it owns. Chesapeake Merger 2000
Corp. will merge with and into Gothic. Gothic will survive the merger and, as a
result, become a wholly-owned subsidiary of Chesapeake.
Chesapeake has filed a registration statement on Form S-4 with the
Securities and Exchange Commission covering the shares of Chesapeake common
stock it will issue to Gothic shareholders, other than Chesapeake, pursuant to
the merger. This proxy statement/prospectus constitutes the prospectus that
Chesapeake files as part of its registration statement. This document also
constitutes the proxy statement that Gothic furnishes to its shareholders in
connection with the solicitation of proxies by the Gothic board of directors for
use at the special meeting of Gothic shareholders being held to vote on the
merger and merger agreement.
This proxy statement/prospectus and the accompanying form of proxy are
first being mailed to Gothic shareholders on or about November 2, 2000.
AN INVESTMENT IN CHESAPEAKE COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 12.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the merger or the shares of Chesapeake
common stock to be issued in the merger or determined if this proxy
statement/prospectus is truthful or complete. Any representation to the contrary
is a criminal offense.
The date of this proxy statement/prospectus is November 1, 2000.
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
QUESTIONS AND ANSWERS ABOUT THE MERGER...................... v
SUMMARY..................................................... 1
The Companies............................................. 1
The Merger................................................ 1
The Gothic Special Meeting; Reasons for the Merger........ 2
Opinion of Gothic's Financial Advisor..................... 3
Chesapeake's Reasons for the Merger....................... 3
Appraisal Rights.......................................... 3
Restrictions on the Ability to Sell Chesapeake Common
Shares................................................. 3
Certain United States Federal Income Tax Consequences..... 4
Interests of Certain Persons in the Merger................ 4
Conditions to the Merger.................................. 4
Termination of the Merger Agreement....................... 5
Listing of Chesapeake Common Stock........................ 5
SUMMARY SELECTED FINANCIAL DATA............................. 6
Chesapeake Energy Corporation............................. 6
Gothic Energy Corporation................................. 8
SUMMARY PRO FORMA COMBINED FINANCIAL DATA................... 9
SUMMARY OIL AND GAS RESERVE INFORMATION..................... 9
COMPARATIVE PER SHARE DATA.................................. 10
RECENT FINANCIAL RESULTS.................................... 11
COMPARATIVE MARKET VALUE INFORMATION........................ 11
RISK FACTORS................................................ 12
Risks Related to the Merger............................... 12
Risks Related to Chesapeake's Business.................... 14
FORWARD-LOOKING STATEMENTS.................................. 18
COMPARATIVE PER SHARE PRICES................................ 19
DIVIDEND INFORMATION........................................ 20
PRO FORMA COMBINED FINANCIAL DATA........................... 21
GOTHIC ENERGY CORPORATION SPECIAL MEETING................... 27
Time, Date and Place...................................... 27
Purpose of the Special Meeting............................ 27
Record Date; Voting Rights; Quorum; Required Vote......... 27
Proxies; Revocation....................................... 28
Solicitation of Proxies; Expenses......................... 28
Conversion of Certificates................................ 29
Independent Auditors...................................... 29
THE MERGER.................................................. 30
Background of the Merger.................................. 30
Gothic's Reasons for the Merger; Recommendation of
Gothic's Board of Directors............................ 33
Opinion of Gothic's Financial Advisor..................... 34
Chesapeake's Reasons for the Merger....................... 38
Interests of Certain Persons in the Merger................ 39
Certain United States Federal Income Tax Consequences..... 39
Accounting Treatment...................................... 41
Resales of Chesapeake Common Stock Received in the
Merger................................................. 41
Listing of Chesapeake Common Stock........................ 41
Appraisal Rights.......................................... 41
</TABLE>
i
<PAGE> 6
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
MATERIAL TERMS OF THE MERGER AGREEMENT...................... 45
The Merger................................................ 45
Certain Covenants......................................... 46
Representations and Warranties............................ 49
Conditions to the Merger.................................. 50
Termination of the Merger Agreement....................... 52
Expenses.................................................. 53
Amendments to the Merger Agreement........................ 53
CHESAPEAKE'S BUSINESS....................................... 54
General................................................... 54
Recent Developments....................................... 54
Primary Operating Area.................................... 55
Secondary Operating Areas................................. 55
Oil and Gas Reserves...................................... 55
Drilling Activity......................................... 57
Well Data................................................. 57
Volumes, Revenue, Prices and Production Costs............. 58
Development, Exploration and Acquisition Expenditures..... 58
Acreage................................................... 58
Marketing................................................. 59
Hedging Activities........................................ 59
Competition............................................... 60
Regulation................................................ 60
Title to Properties....................................... 62
Operating Hazards and Insurance........................... 63
Employees................................................. 63
Facilities................................................ 63
Legal Proceedings......................................... 63
Incorporation............................................. 66
CHESAPEAKE ENERGY CORPORATION SELECTED FINANCIAL DATA....... 67
CHESAPEAKE ENERGY CORPORATION MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS................................................ 69
Overview.................................................. 69
Recent Financial Results.................................. 69
Results of Operations..................................... 70
Risk Management Activities................................ 75
Liquidity and Capital Resources........................... 75
Recently Issued Accounting Standards...................... 78
CHESAPEAKE ENERGY CORPORATION QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK............................. 78
Commodity Price Risk...................................... 78
Commodity Hedging Activities.............................. 78
Interest Rate Risk........................................ 80
CHESAPEAKE'S MANAGEMENT..................................... 81
Chesapeake's Directors.................................... 81
Chesapeake's Officers..................................... 82
</TABLE>
ii
<PAGE> 7
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CHESAPEAKE'S EXECUTIVE COMPENSATION......................... 84
Summary Compensation Table................................ 84
Stock Options Granted During 1999......................... 84
Aggregated Option Exercises in 1999 and December 31, 1999
Option Values.......................................... 85
Employment Agreements..................................... 85
Compensation Committee Interlocks and Insider
Participation.......................................... 87
Directors' Compensation................................... 87
CERTAIN TRANSACTIONS INVOLVING CHESAPEAKE................... 88
Legal Counsel............................................. 88
Oil and Gas Operations.................................... 88
Loans to Executives....................................... 88
Purchase of Oil and Gas Assets from Executive............. 89
Miscellaneous............................................. 89
Transactions with Gothic.................................. 89
BENEFICIAL OWNERSHIP OF COMMON STOCK........................ 90
Chesapeake................................................ 90
Gothic.................................................... 91
GOTHIC'S BUSINESS........................................... 93
General................................................... 93
Business Strategy......................................... 93
Natural Gas and Oil Reserves.............................. 94
Principal Areas of Operations............................. 95
Drilling Activity......................................... 95
Operating Control Over Production Activities.............. 96
Title to Natural Gas and Oil Properties................... 96
Production and Sales Prices............................... 97
Marketing of Production................................... 97
Competition............................................... 98
Regulation................................................ 98
Operational Hazards and Insurance......................... 100
Employees................................................. 100
Executive Office.......................................... 101
Incorporation............................................. 101
Description of Property................................... 101
Legal Proceedings......................................... 102
GOTHIC ENERGY CORPORATION SELECTED CONSOLIDATED HISTORICAL
FINANCIAL DATA............................................ 103
GOTHIC ENERGY CORPORATION MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS................................................ 104
General................................................... 104
Recent Financial Results.................................. 105
Results of Operations..................................... 105
Liquidity and Capital Resources........................... 108
Credit Facility........................................... 109
Future Capital Requirements and Resources................. 110
Subsequent Events......................................... 110
Cautionary Statement for Purposes of the Safe Harbor
Provisions of the Private Securities Litigation Reform
Act of 1995............................................ 111
GOTHIC ENERGY CORPORATION QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISKS............................ 112
</TABLE>
iii
<PAGE> 8
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DESCRIPTION OF CHESAPEAKE CAPITAL STOCK..................... 113
Authorized Capital Stock.................................. 113
Common Stock.............................................. 113
Preferred Stock........................................... 113
Anti-Takeover Provisions.................................. 116
Shareholder Action........................................ 120
Registration Rights....................................... 121
Transfer Agent and Registrar.............................. 121
COMPARATIVE RIGHTS OF CHESAPEAKE AND GOTHIC SHAREHOLDERS.... 122
General................................................... 122
Limitation of Director Liability.......................... 122
Special Meetings of Shareholders.......................... 122
Voting; Election of Directors............................. 122
Amendments to Certificates of Incorporation............... 123
Amendments to Bylaws...................................... 123
Share Purchase Provision.................................. 124
Number of Directors....................................... 124
Anti-Takeover Provisions.................................. 124
FUTURE GOTHIC SHAREHOLDER PROPOSALS......................... 125
LEGAL MATTERS............................................... 125
EXPERTS..................................................... 125
WHERE YOU CAN FIND MORE INFORMATION......................... 126
GLOSSARY.................................................... 127
INDEX TO FINANCIAL STATEMENTS............................... F-1
ANNEX A -- AGREEMENT AND PLAN OF MERGER..................... A-1
ANNEX B -- OPINION OF CIBC WORLD MARKETS CORP. ............. B-1
ANNEX C -- OKLAHOMA STATUTORY APPRAISAL RIGHTS PROCESS...... C-1
</TABLE>
You may obtain documents that are referred to or that are incorporated by
reference in the registration statement, without charge, by requesting them in
writing or by telephone at the following addresses and telephone numbers:
<TABLE>
<CAPTION>
IF FROM CHESAPEAKE: IF FROM GOTHIC:
------------------- ---------------
<S> <C>
6100 North Western Avenue 6120 South Yale Ave., Suite 1200
Oklahoma City, Oklahoma 73118 Tulsa, Oklahoma 74136
Attn: Thomas S. Price, Jr. Attn: Stephen P. Ensz
Tel: (405) 879-9257 Tel: (918) 749-5666
</TABLE>
IF YOU WOULD LIKE TO REQUEST DOCUMENTS, PLEASE DO SO BY DECEMBER 5, 2000 TO
RECEIVE THEM BEFORE THE GOTHIC SPECIAL MEETING.
iv
<PAGE> 9
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q. WHAT WILL HAPPEN IN THE MERGER?
A. In the merger, Gothic will become a wholly owned subsidiary of Chesapeake.
Gothic common shareholders, other than Chesapeake and shareholders who
demand appraisal of their shares, will become Chesapeake common
shareholders and will own approximately 2.5% of the Chesapeake common
shares estimated to be outstanding after the merger. Current Chesapeake
common shareholders will own the remaining approximately 97.5%. Chesapeake
will receive no merger consideration with respect to Gothic common stock
it owned as of September 8, 2000 or which is issued to Chesapeake upon the
conversion of Gothic preferred stock it owns. The outstanding Gothic
preferred stock, all of which is owned by Chesapeake, will remain
outstanding following the merger but the terms of the Gothic preferred
stock will be amended.
Q. WHY ARE CHESAPEAKE AND GOTHIC PROPOSING THE MERGER?
A. Our companies are proposing the merger because we expect as a combined
company to grow reserves, production, cash flow, and earnings faster and
beyond the levels either company could achieve individually. We believe
our companies have complementary assets and we seek to combine their
respective strengths. Please read the more detailed description of our
respective reasons for the merger beginning on pages 33 and 38.
Q. WHAT WILL I RECEIVE IN THE MERGER?
A. If the merger is completed, holders of Gothic common stock, other than
Chesapeake or its subsidiaries, will receive Chesapeake common shares in
exchange for their shares of Gothic common stock. The number of shares you
will receive will be determined based on an exchange ratio. The exchange
ratio to be used in the merger will equal the quotient obtained by
dividing 4,000,000 shares of Chesapeake common stock to be issued in the
merger by:
- the total number of issued and outstanding shares of Gothic common stock
at the effective time of the merger, plus
- 53,572 shares issuable on exercise of outstanding Gothic warrants that
were in the money on September 8, 2000, minus
- 2,394,125 shares of Gothic common stock which Chesapeake owned on
September 8, 2000 and any Gothic common stock issued to Chesapeake with
respect to any Gothic convertible securities owned by Chesapeake.
Based on the number of Gothic common shares outstanding on November 1,
2000 and the number of Gothic shares owned by Chesapeake, we anticipate
the exchange ratio will be 0.1908. As a result, for each share of Gothic
common stock you own on the effective date of the merger, you will likely
receive 0.1908 of a share of Chesapeake common stock. Chesapeake will pay
cash instead of issuing fractional shares of its common stock.
Q. WILL THE EXCHANGE RATIO CHANGE?
A. Unless the number of issued and outstanding shares of Gothic common stock
changes between the date of this proxy statement/prospectus and the
effective date of the merger, the exchange ratio of 0.1908 of a share of
Chesapeake common stock for each share of Gothic common stock will not
change. If the number of issued and outstanding shares of Gothic common
stock changes, the exchange ratio will be adjusted accordingly. The only
cause of any change in the exchange ratio would result from the exercise
of outstanding Gothic options or warrants which were out of the money on
September 8, 2000 and have remained out of the money through the date of
this proxy statement/prospectus.
v
<PAGE> 10
Q. HOW MANY SHARES OF CHESAPEAKE COMMON STOCK WILL BE OUTSTANDING AFTER THE
MERGER?
A. If the merger had been completed on October 30, 2000, there would have
been approximately 156.1 million shares of Chesapeake common stock
outstanding, approximately 2.5% of which would have been held by former
shareholders of Gothic. This assumes the outstanding Gothic options and
warrants to be assumed by Chesapeake were not exercised prior to the
closing of the merger.
Q. WHERE WILL THE SHARES OF CHESAPEAKE COMMON STOCK BE LISTED?
A. The shares of Chesapeake common stock to be delivered in the merger will
be listed on the New York Stock Exchange under the trading symbol "CHK."
Q. WHAT ARE THE TAX CONSEQUENCES TO GOTHIC SHAREHOLDERS OF THE MERGER?
A. While Chesapeake and Gothic intend for the merger to be a tax-free
reorganization, the Chesapeake common stock received in the merger may or
may not be tax-free to the shareholders of Gothic for U.S. federal income
tax purposes. In any event, Gothic shareholders will be subject to tax on
cash received instead of fractional shares. A more detailed description of
the material U.S. federal income tax consequences of the merger appears on
page 39.
Q. WHEN IS THE MERGER EXPECTED TO BE COMPLETED?
A. The merger will be completed after the Gothic special meeting and
satisfaction or waiver of all conditions to the merger. Chesapeake and
Gothic presently expect that the closing of the transaction will occur in
January 2001.
Q. WHO MUST APPROVE THE MERGER?
A. In addition to the boards of directors of Chesapeake and Gothic, which
have already approved the merger, the holders of a majority of Gothic's
outstanding common stock must approve the merger.
Q. ARE GOTHIC SHAREHOLDERS ENTITLED TO APPRAISAL RIGHTS?
A. Yes. Under Oklahoma law, which governs Gothic and the rights of its
shareholders, Gothic shareholders who comply with Section 1091 of the
Oklahoma General Corporation Act are entitled to demand appraisal of the
fair value of their shares instead of the merger consideration issuable by
reason of the merger. If more than 5% of Gothic's shareholders demand
appraisal rights, Chesapeake will have the option to terminate the merger
agreement.
Q. WHAT IF I DON'T VOTE?
A. Because the merger requires the approval of the holders of a majority of
Gothic's outstanding common stock, if you fail to respond, it will have
the same effect as a vote AGAINST the merger. If you return a signed and
dated proxy by mail and do not indicate how you want to vote, your proxy
will be counted as a vote in FAVOR of the merger. If you respond and
abstain from voting, your proxy will have the same effect as a vote
AGAINST the merger.
Q. WHAT SHOULD I DO NOW?
A. After carefully reading and considering the information contained in this
document, you should cast your vote on the merger by completing, signing,
dating and mailing your proxy card. The completed proxy card should be
returned in the enclosed, self-addressed postage-paid envelope. You can
also attend the special meeting and vote in person. Gothic's board of
directors recommends you vote FOR approval of the merger agreement and
merger.
Q. IF MY SHARES OF GOTHIC COMMON STOCK ARE HELD IN "STREET NAME" BY MY
BROKER, WILL MY BROKER VOTE MY SHARES FOR ME?
A. No. Your broker will vote your shares only if you provide instructions on
how to vote. You should follow the directions provided by your broker
regarding how to instruct your broker to vote your shares.
vi
<PAGE> 11
Q. ONCE I HAVE VOTED, MAY I CHANGE MY VOTE PRIOR TO THE GOTHIC SPECIAL
MEETING?
A. Yes. You may change your vote at any time prior to your proxy being voted
at the Gothic special meeting by sending a signed notice of revocation or
a later-dated, signed proxy card to Gothic's Secretary before the Gothic
special meeting. If you hold your Gothic shares in your own name, you may
change your vote by attending the Gothic special meeting and voting in
person. If you hold your Gothic shares in "street name," you must contact
your broker for instructions.
Q. IF I HOLD GOTHIC STOCK CERTIFICATES IN MY OWN NAME, SHOULD I SEND MY STOCK
CERTIFICATES NOW?
A. No. You should not send your share certificates now. After the merger is
completed, Chesapeake will cause its exchange agent to send you
instructions for exchanging your shares of Gothic common stock for shares
of Chesapeake common stock.
Q. WHAT WILL HAPPEN IN THE MERGER TO OUTSTANDING WARRANTS TO PURCHASE GOTHIC
COMMON STOCK AND OUTSTANDING GOTHIC STOCK OPTIONS?
A. When the merger becomes effective, each outstanding option and warrant to
purchase Gothic common stock will be assumed by Chesapeake and converted
into an option or warrant to purchase shares of Chesapeake common stock.
The number of shares to be issued on exercise of the assumed Gothic
options and warrants and the exercise price will be adjusted based on the
terms in the governing documents for the options and warrants. The other
terms of the assumed options and warrants, such as vesting and
exercisability, will remain the same.
Q. MAY I EXERCISE MY STOCK OPTIONS AND WARRANTS AND SELL SHARES OF GOTHIC
COMMON STOCK BETWEEN NOW AND THE COMPLETION OF THE MERGER?
A. Yes, unless such securities constitute restricted securities or you are
subject to limitations on trading by persons defined as Gothic
"affiliates" and other restrictions on "insider trading" under securities
laws.
Q. WHOM SHOULD I CALL WITH QUESTIONS?
A. If you have questions about the merger or if you would like copies of any
of the documents referred to in this proxy statement/prospectus, please
call (1) Thomas S. Price, Jr., Senior Vice President -- Corporate
Development at Chesapeake at (405) 879-9257; or (2) Steven P. Ensz, Vice
President, Finance at Gothic at (918) 749-5666. See also "Where You Can
Find More Information" on page 126.
vii
<PAGE> 12
SUMMARY
This summary highlights selected information from this document and does
not contain all of the information that is important to you. To better
understand the merger, you should carefully read this entire document and the
documents to which you have been referred. In particular, you should read the
annexes to this document, including the merger agreement and the opinion of CIBC
World Markets Corp. which are attached as Annexes A and B, respectively.
THE COMPANIES
Chesapeake. Chesapeake is an independent energy company focused on the
exploration, development, acquisition and production of onshore natural gas
reserves, principally in the Mid-Continent region of the United States.
Chesapeake began operations in 1989 and completed its initial public offering in
1993. Chesapeake's common stock trades on the New York Stock Exchange under the
symbol CHK. Chesapeake's principal executive offices are located at 6100 North
Western Avenue, Oklahoma City, Oklahoma 73118, and its main telephone number at
that location is (405) 848-8000. Chesapeake maintains a website at
www.chkenergy.com.
Gothic. Gothic is an independent energy company engaged, through its
operating subsidiary, in the exploration, development, acquisition and
production of onshore natural gas reserves, principally in the Mid-Continent
region of the United States. Gothic's common stock trades on the OTC Bulletin
Board under the symbol GOTH. Gothic's principal executive offices are located at
Two Warren Place -- Suite 1200, 6120 South Yale Avenue, Tulsa, Oklahoma 74136,
and its telephone number at that location is (918) 749-5666.
THE MERGER
Description of the Merger. In the merger, Chesapeake Merger 2000 Corp. will
merge with and into Gothic and, as a result, Gothic will become a wholly owned
subsidiary of Chesapeake. Gothic common shareholders, other than Chesapeake and
shareholders demanding appraisal of their shares, will become Chesapeake common
shareholders and will own approximately 2.5% of the Chesapeake common shares
estimated to be outstanding after the merger. Current Chesapeake common
shareholders will own the remaining approximately 97.5%. Chesapeake will receive
no merger consideration with respect to Gothic common stock it owned as of
September 8, 2000 or which is issued to Chesapeake upon the conversion of Gothic
preferred stock it owns. The outstanding Gothic preferred stock, all of which is
owned by Chesapeake, will remain outstanding following the merger but, as a
consequence of the merger, the terms of the Gothic preferred stock will be
amended.
What Gothic Shareholders Will Receive. If the merger is completed, holders
of Gothic common stock, other than Chesapeake and shareholders who demand
appraisal of their shares, will receive Chesapeake common shares in exchange for
their shares of Gothic common stock. The number of shares you will receive will
be determined based on an exchange ratio. The exchange ratio to be used in the
merger will equal the quotient obtained by dividing 4,000,000 shares of
Chesapeake common stock to be issued in the merger by:
- the total number of issued and outstanding shares of Gothic common stock
at the effective time of the merger, plus
- 53,572 shares issuable on exercise of outstanding Gothic warrants that
were in the money on September 8, 2000, minus
- 2,394,125 shares of Gothic common stock which Chesapeake owned on
September 8, 2000 and any Gothic common stock issued to Chesapeake with
respect to any Gothic convertible securities owned by Chesapeake.
Based on the number of Gothic common shares outstanding on November 1, 2000
and the number of Gothic shares owned by Chesapeake, we anticipate the exchange
ratio will be 0.1908. As a result, for each
1
<PAGE> 13
share of Gothic common stock you own on the effective date for the merger, you
will likely receive 0.1908 of a share of Chesapeake common stock. Chesapeake
will pay cash instead of issuing fractional shares of its common stock.
Treatment of Options and Warrants. When the merger becomes effective, each
outstanding option and warrant to purchase Gothic common stock will be assumed
by Chesapeake and converted into an option or warrant to purchase shares of
Chesapeake common stock. The number of shares to be issued on exercise of the
assumed Gothic options and warrants and the exercise price will be adjusted
based on the terms in the governing documents for the options and warrants. The
other terms of the assumed options and warrants, such as vesting and
exercisability, will remain the same.
Exchange of Certificates. Chesapeake will deposit, immediately after the
effective date of the merger, the shares of Chesapeake common stock to be issued
in the merger with UMB Bank, N.A. on behalf of the Gothic common shareholders,
other than Chesapeake. Chesapeake will not deposit shares which would otherwise
have been issuable to shareholders demanding appraisal rights or shares which
would be issuable on exercise of outstanding Gothic warrants which were in the
money on September 8, 2000, unless those warrants are exercised prior to the
effective date of the merger.
UMB Bank, N.A. will act as the exchange agent. As soon as practicable
following the effectiveness of the merger, each Gothic common shareholder
entitled to Chesapeake common shares will be entitled to receive a certificate
representing the number of shares of Chesapeake common stock issuable as
consideration in the merger upon proper surrender of the shareholder's Gothic
common stock certificates. The exchange agent may impose reasonable terms and
conditions to accept the surrender of a certificate in accordance with normal
exchange practices. Until surrendered, each certificate representing shares of
Gothic common stock, other than those held by Chesapeake, will after the
effective time of the merger be deemed to represent only the right to receive
the merger consideration on surrender of the certificate.
Fractional Shares. Chesapeake will not issue fractional shares in
connection with the merger. Each Gothic common shareholder who would otherwise
have been entitled to a fraction of a share of Chesapeake common stock will
instead receive a cash payment, without interest, equal to its proportionate
interest in the amount of net proceeds from the sale by the exchange agent of
the aggregate fractional shares of Chesapeake common stock.
THE GOTHIC SPECIAL MEETING; REASONS FOR THE MERGER
The special meeting of Gothic shareholders will be held at the Doubletree
Hotel at Warren Place, 6110 South Yale Avenue in Tulsa, Oklahoma at 10:00 a.m.
local time on Tuesday, December 12, 2000. At the special meeting, Gothic
shareholders will be asked to vote to approve the merger agreement and the
merger of Chesapeake Merger 2000 Corp. with and into Gothic. Approval of the
merger proposal requires the favorable vote of a majority of the outstanding
Gothic common stock. Gothic's directors and executive officers own 14.6% of the
outstanding Gothic common stock entitled to vote at the special meeting and
Chesapeake owns 10.3%. All of these shares will be voted in favor of the merger
agreement. The vote of Chesapeake's shareholders is not required.
The board of directors of Gothic believes the merger is in the best
interests of Gothic and its shareholders and recommends you vote FOR approval of
the merger agreement and merger. In reaching its recommendation in favor of the
merger, the Gothic board of directors considered a number of factors, including
the following:
- Gothic's anticipated difficulty in meeting the cash debt service
requirement commencing in May 2002 on the fully accreted value of $104
million principal amount of discount notes;
- the absence, since May 1999, of Nasdaq SmallCap quotations for its common
stock and the low market price for its shares;
- the lack of financial flexibility to expand and accelerate its drilling
programs;
- the continuing reduction since April 1998 in its borrowing availability
under its bank credit facility;
2
<PAGE> 14
- the potential forced pooling of certain of its undeveloped natural gas
and oil properties;
- the report of Gothic's independent accountants for 1999 containing an
explanatory paragraph as to Gothic's ability to continue as a going
concern; and
- the difficulty in entering into a transaction with an acquiror other than
Chesapeake because of Gothic's highly leveraged and complex capital
structure.
OPINION OF GOTHIC'S FINANCIAL ADVISOR
CIBC World Markets Corp., Gothic's financial advisor, delivered a written
opinion to the Gothic board of directors as to the fairness, from a financial
point of view, of the exchange ratio to the Gothic shareholders. This opinion,
dated September 8, 2000, is attached as Annex B to this document. You should
read this opinion completely to understand the procedures followed, assumptions
made, matters considered and limitation of the review undertaken. CIBC's opinion
is addressed to the Gothic board of directors and does not constitute a
recommendation as to how you should vote in connection with the merger. See "The
Merger -- Opinion of Gothic's Financial Advisor."
CHESAPEAKE'S REASONS FOR THE MERGER
Chesapeake believes the merger is in the best interests of Chesapeake and
its shareholders because it will create a company with greater asset value,
greater oil and gas reserves and increased opportunities for the exploration,
development, production and acquisition of oil and gas properties. The merger is
a continuation of Chesapeake's strategy of focusing its operations on exploring,
developing and acquiring natural gas reserves in the Mid-Continent region of the
U.S. In addition, Chesapeake presently owns interests in a significant number of
Gothic's oil and gas properties, and the two companies have operated under a
participation agreement for the joint development of Gothic's non-producing
properties since April 1998. The merger is consistent with Chesapeake's
commitment to selectively acquire proved reserves on attractive terms as a
complement to its traditional strategy of developing reserves through the
drillbit.
APPRAISAL RIGHTS
Following a statutory appraisal proceeding in Oklahoma district court,
Gothic common shareholders who do not vote for the merger and who perfect their
appraisal rights in accordance with Section 1091 of the Oklahoma General
Corporation Act will be entitled to receive, in lieu of the merger
consideration, cash in the amount of the fair value of their shares, exclusive
of any element of value arising from the accomplishment or expectation of the
merger, as determined by the court in such appraisal proceeding, plus interest,
if any, at a rate determined by the court. Because of the complexity of the
procedures for exercising these rights, if you are considering exercising such
rights we urge you to seek the advice of counsel. If you vote for the merger,
you will be deemed to have accepted the consideration to be paid under the
merger agreement and to have waived your appraisal rights with respect to the
shares of Gothic common stock voted. In addition, if holders of more than 5% of
the outstanding shares of Gothic common stock demand appraisal of their shares,
Chesapeake will not be obligated to consummate the merger. IF YOU DO NOT VOTE
FOR THE MERGER BUT FAIL TO TAKE ANY ACTION TO EXERCISE YOUR APPRAISAL RIGHTS,
YOU MAY WAIVE OR LOSE THESE RIGHTS. SEE "THE MERGER -- APPRAISAL RIGHTS" AND
ANNEX C, WHICH SETS FORTH SECTION 1091 OF THE OKLAHOMA GENERAL CORPORATION ACT
IN FULL.
RESTRICTIONS ON THE ABILITY TO SELL CHESAPEAKE COMMON SHARES
Shares of Chesapeake common stock received in the merger will be freely
tradable except for shares held by affiliates of Gothic. Shares issued to
affiliates of Gothic will be subject to the provisions of Rule 145 under the
Securities Act of 1933. Shares of Chesapeake common stock received on the
exercise of assumed warrants will be considered to be restricted securities
unless registered under the Securities Act of 1933.
3
<PAGE> 15
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
While Chesapeake and Gothic intend for the merger to be a tax-free
reorganization, the merger may or may not be a tax-free reorganization for U.S.
federal income tax purposes. In any event, Gothic shareholders will be subject
to tax on cash received instead of fractional shares of Chesapeake common stock.
Neither Gothic nor Chesapeake has requested or received a ruling from the
Internal Revenue Service with respect to the U.S. federal income tax treatment
of the merger and neither Gothic nor Chesapeake has obtained or will obtain an
opinion of counsel with respect to such treatment. Completion of the merger is
not subject to the receipt of an opinion of counsel that the merger qualifies as
a tax-free reorganization.
Tax matters are complicated, and the tax consequences of the proposed
transactions to you may depend on the facts of your own situation and on
variables not within our control. You should consult your own tax advisors for a
full understanding of the tax consequences to you of the merger.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the Gothic board with respect to the
merger, you should be aware that members of Gothic's management and the Gothic
board of directors have interests in the merger separate from the interests of
Gothic's shareholders generally. See "The Merger -- Interests of Certain Persons
in the Merger." These separate interests include the following:
- Chesapeake will indemnify Gothic's officers and directors with respect to
actions occurring prior to the merger;
- Michael Paulk, Gothic's President, and Steven P. Ensz, Gothic's Vice
President and Chief Financial Officer, will be entitled to severance
payments of $225,000 and $187,500, respectively, under their employment
agreements with Gothic as a result of the closing of the merger and the
termination of their employment;
- Michael Paulk and Steven P. Ensz will enter into two-year consulting
agreements with Chesapeake following the merger which provide for
payments to them of $1,964,000 and $1,623,500, respectively;
- Gothic previously loaned $277,187 to each of Brian Bayley and John
Fleming, directors of Gothic, which they used to pay the exercise price
of options to purchase Gothic common stock. Each of these loans is
secured by a pledge of 712,000 shares of Gothic common stock; and
- Michael Paulk, Steven P. Ensz, Brian Bayley and John Fleming have
executed irrevocable proxies which grant Chesapeake the right to vote
their shares in connection with the merger and which bind them to vote in
favor of the merger.
CONDITIONS TO THE MERGER
The obligations of Chesapeake and Gothic to effect the merger are subject
to the satisfaction or waiver, in whole or in part, of a number of conditions
prior to the effective time of the merger. These conditions include the
following:
- approval of the merger by Gothic's shareholders;
- the holders of not more than 5% of the outstanding shares of Gothic
common stock demanding appraisal of their shares, unless Chesapeake
waives this condition;
4
<PAGE> 16
- satisfaction of all conditions set forth in the $275 million financing
commitment Chesapeake has received from Bear, Stearns & Co. Inc.; and
- satisfaction of all conditions for a merger by Gothic contained in the
indenture for the senior secured notes issued by Gothic's operating
subsidiary, including its ability to meet, as of the closing date of the
merger, the debt incurrence tests. If the closing date had been June 30,
2000, these tests would not have been met. Chesapeake and Gothic believe
these tests will be met by the anticipated effective date of the merger
based on Gothic's projected results of operations for 2000 and commodity
futures prices for December 2000.
There are no federal or state regulatory approvals required to complete the
merger.
TERMINATION OF THE MERGER AGREEMENT
Either party may unilaterally terminate the merger agreement if Gothic's
shareholders do not approve the merger, if a governmental authority issues an
order enjoining the merger, or if the merger is not consummated by June 30,
2001. In addition, either Gothic or Chesapeake can terminate the merger if the
other party materially breaches any representations or warranties and such
breach is not cured within 15 days following notice, so long as the breach would
result in a material adverse effect. The merger may also be terminated in some
circumstances if Gothic receives an unsolicited superior takeover proposal.
If the merger agreement is terminated due to the consummation of an
acquisition proposal by a third party that the Gothic board of directors deems
more favorable to the Gothic shareholders, Gothic will be obligated to pay
Chesapeake a termination fee of $10,000,000.
LISTING OF CHESAPEAKE COMMON STOCK
Chesapeake has agreed to use its best efforts to cause the shares of
Chesapeake common stock issued in the merger to be listed for trading on the New
York Stock Exchange. After the effective time of the merger, the Gothic common
stock will cease public trading.
5
<PAGE> 17
SUMMARY SELECTED FINANCIAL DATA
CHESAPEAKE ENERGY CORPORATION
The following table sets forth summary selected consolidated financial data
of Chesapeake for the six months ended June 30, 2000 and 1999, the years ended
December 31, 1999, 1998 and 1997, the six-month transition period ended December
31, 1997, the six months ended December 31, 1996 and the two fiscal years ended
June 30, 1997 and 1996. The data are derived from our audited consolidated
financial statements, except for periods for the six months ended June 30, 2000
and 1999, the year ended December 31, 1997 and the six months ended December 31,
1996, which are derived from unaudited consolidated financial statements of
Chesapeake. Acquisitions we made during the first and second quarters of 1998
materially affect the comparability of the selected financial data for 1997 and
1998. Each of the acquisitions was accounted for using the purchase method. The
table should be read in conjunction with "Chesapeake Energy Corporation
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements of Chesapeake, including
the notes thereto, appearing in this proxy statement/prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------
2000 1999
---------- ----------
($ IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Oil and gas sales....................................... $ 187,514 $ 120,078
Oil and gas marketing sales............................. 61,610 26,491
--------- ---------
Total revenues..................................... 249,124 146,569
--------- ---------
Operating costs:
Production expenses..................................... 25,126 25,175
Production taxes........................................ 10,933 4,788
General and administrative.............................. 6,220 7,292
Oil and gas marketing expenses.......................... 59,666 24,958
Oil and gas depreciation, depletion and amortization.... 49,360 47,386
Depreciation and amortization of other assets........... 3,702 4,138
--------- ---------
Total operating costs.............................. 155,007 113,737
--------- ---------
Income from operations.................................... 94,117 32,832
--------- ---------
Other income (expense):
Interest and other income............................... 2,859 3,840
Interest expense........................................ (42,677) (40,149)
--------- ---------
(39,818) (36,309)
--------- ---------
Income (loss) before income taxes......................... 54,299 (3,477)
Provision (benefit) for income taxes...................... 1,463 326
--------- ---------
Net income (loss)......................................... 52,836 (3,803)
Preferred stock dividends................................. (6,949) (8,052)
Gain on redemption of preferred stock..................... 11,895 --
--------- ---------
Net income (loss) available to common shareholders........ $ 57,782 $ (11,855)
========= =========
Earnings (loss) per common share:
Basic................................................... $ 0.53 $ (0.12)
Assuming dilution....................................... $ 0.36 $ (0.12)
Cash dividends declared per common share.................... $ -- $ --
CASH FLOW DATA:
Cash provided by operating activities before changes in
working capital......................................... $ 107,753 $ 48,145
Cash provided by operating activities..................... 83,870 47,566
Cash used in investing activities......................... (130,569) (67,345)
Cash provided by financing activities..................... 20,264 14,187
Effect of exchange rate changes on cash................... (204) 3,625
BALANCE SHEET DATA (at end of period):
Total assets.............................................. $ 980,982
Long-term debt, net of current maturities................. 983,230
Stockholders' equity (deficit)............................ (119,980)
</TABLE>
6
<PAGE> 18
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEARS ENDED
YEARS ENDED DECEMBER 31, DECEMBER 31, JUNE 30,
---------------------------------- ------------------- --------------------
1999 1998 1997 1997 1996 1997 1996
--------- ---------- --------- -------- -------- --------- --------
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Oil and gas sales...................... $ 280,445 $ 256,887 $ 198,410 $ 95,657 $ 90,167 $ 192,920 $110,849
Oil and gas marketing sales............ 74,501 121,059 104,394 58,241 30,019 76,172 28,428
Oil and gas service operations......... -- -- -- -- -- -- 6,314
--------- ---------- --------- -------- -------- --------- --------
Total revenues..................... 354,946 377,946 302,804 153,898 120,186 269,092 145,591
--------- ---------- --------- -------- -------- --------- --------
Operating costs:
Production expenses.................... 46,298 51,202 14,737 7,560 4,268 11,445 6,340
Production taxes....................... 13,264 8,295 4,590 2,534 1,606 3,662 1,963
General and administrative............. 13,477 19,918 10,910 5,847 3,739 8,802 4,828
Oil and gas marketing expenses......... 71,533 119,008 103,819 58,227 29,548 75,140 27,452
Oil and gas service operations......... -- -- -- -- -- -- 4,895
Oil and gas depreciation, depletion and
amortization......................... 95,044 146,644 127,429 60,408 36,243 103,264 50,899
Depreciation and amortization of other
assets............................... 7,810 8,076 4,360 2,414 1,836 3,782 3,157
Impairment of oil and gas properties... -- 826,000 346,000 110,000 -- 236,000 --
Impairment of other assets............. -- 55,000 -- -- -- -- --
--------- ---------- --------- -------- -------- --------- --------
Total operating costs.............. 247,426 1,234,143 611,845 246,990 77,240 442,095 99,534
--------- ---------- --------- -------- -------- --------- --------
Income (loss) from operations............ 107,520 (856,197) (309,041) (93,092) 42,946 (173,003) 46,057
--------- ---------- --------- -------- -------- --------- --------
Other income (expense):
Interest and other income.............. 8,562 3,926 87,673 78,966 2,516 11,223 3,831
Interest expense....................... (81,052) (68,249) (29,782) (17,448) (6,216) (18,550) (13,679)
--------- ---------- --------- -------- -------- --------- --------
(72,490) (64,323) 57,891 61,518 (3,700) (7,327) (9,848)
--------- ---------- --------- -------- -------- --------- --------
Income (loss) before income taxes and
extraordinary item..................... 35,030 (920,520) (251,150) (31,574) 39,246 (180,330) 36,209
Provision (benefit) for income taxes..... 1,764 -- (17,898) -- 14,325 (3,573) 12,854
--------- ---------- --------- -------- -------- --------- --------
Income (loss) before extraordinary
item................................... 33,266 (920,520) (233,252) (31,574) 24,921 (176,757) 23,355
Extraordinary item:
Loss on early extinguishment of debt,
net of applicable income taxes....... -- (13,334) (177) -- (6,443) (6,620) --
--------- ---------- --------- -------- -------- --------- --------
Net income (loss)........................ 33,266 (933,854) (233,429) (31,574) 18,478 (183,377) 23,355
Preferred stock dividends................ (16,711) (12,077) -- -- -- -- --
--------- ---------- --------- -------- -------- --------- --------
Net income (loss) available to common
shareholders........................... $ 16,555 $ (945,931) $(233,429) $(31,574) $ 18,478 $(183,377) $ 23,355
========= ========== ========= ======== ======== ========= ========
Earnings (loss) per common share --Basic:
Income (loss) before extraordinary
item................................. $ 0.17 $ (9.83) $ (3.30) $ (0.45) $ 0.40 $ (2.69) $ 0.43
Extraordinary item..................... -- (0.14) -- -- (0.10) (0.10) --
--------- ---------- --------- -------- -------- --------- --------
Net income (loss)...................... $ 0.17 $ (9.97) $ (3.30) $ (0.45) $ 0.30 $ (2.79) $ 0.43
========= ========== ========= ======== ======== ========= ========
Earnings (loss) per common
share -- Assuming dilution:
Income (loss) before extraordinary
item................................. $ 0.16 $ (9.83) $ (3.30) $ (0.45) $ 0.38 $ (2.69) $ 0.40
Extraordinary item..................... -- (0.14) -- -- (0.10) (0.10) --
--------- ---------- --------- -------- -------- --------- --------
Net income (loss)...................... $ 0.16 $ (9.97) $ (3.30) $ (0.45) $ 0.28 $ (2.79) $ 0.40
========= ========== ========= ======== ======== ========= ========
Cash dividends declared per common
share................................ $ -- $ 0.04 $ 0.06 $ 0.04 $ -- $ 0.02 $ --
CASH FLOW DATA:
Cash provided by operating activities
before changes in working capital...... $ 138,727 $ 117,500 $ 152,196 $ 67,872 $ 76,816 $ 161,140 $ 88,431
Cash provided by operating activities.... 145,022 94,639 181,345 139,157 41,901 84,089 120,972
Cash used in investing activities........ 159,773 548,050 476,209 136,504 184,149 523,854 344,389
Cash provided by (used in) financing
activities............................. 18,967 363,797 277,985 (2,810) 231,349 512,144 219,520
Effect of exchange rate changes on
cash................................... 4,922 (4,726) -- -- -- -- --
BALANCE SHEET DATA (at end of period):
Total assets............................. $ 850,533 $ 812,615 $ 952,784 $952,784 $860,597 $ 949,068 $572,335
Long-term debt, net of current
maturities............................. 964,097 919,076 508,992 508,992 220,149 508,950 268,431
Stockholders' equity (deficit)........... (217,544) (248,568) 280,206 280,206 484,062 286,889 177,767
</TABLE>
7
<PAGE> 19
GOTHIC ENERGY CORPORATION
The following table sets forth summary selected consolidated financial data
of Gothic for the six months ended June 30, 2000 and 1999, and the years ended
December 31, 1999 and 1998. The data are derived from Gothic's audited
consolidated financial statements, except for periods for the six months ended
June 30, 2000 and 1999, which are derived from unaudited consolidated financial
statements of Gothic. The table should be read in conjunction with "Gothic
Energy Corporation Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements of Gothic,
including the notes thereto, appearing in this proxy statement/prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
-------------------- -------------------------
2000 1999 1999 1998
--------- -------- ----------- -----------
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Oil and gas sales.......................... $ 31,863 $ 23,417 $ 52,967 $ 50,714
Well operations............................ 1,356 1,259 2,657 2,319
--------- -------- --------- ---------
Total revenues........................ 33,219 24,676 55,624 53,033
Operating costs:
Lease operating expenses................... 2,390 2,987 5,725 8,609
Production taxes........................... 2,053 1,614 3,880 3,520
General and administrative expense......... 1,976 1,984 4,675 3,823
Investment banking and related fees........ 785 -- 638 --
Oil and gas depreciation, depletion, and
amortization............................. 9,625 10,402 20,444 23,626
Depreciation and amortization of other
assets................................... 350 250 525 375
Provision for impairment of natural gas and
oil properties........................... -- -- -- 76,000
--------- -------- --------- ---------
Total operating costs................. 17,179 17,237 35,887 115,953
--------- -------- --------- ---------
Income (loss) from operations................. 16,040 7,439 19,737 (62,920)
Other income (expense):
Interest and other income.................. 50 817 942 128
Interest expense........................... (19,490) (18,727) (37,988) (35,438)
--------- -------- --------- ---------
Loss before extraordinary item................ (3,400) (10,471) (17,309) (98,230)
Loss on early extinguishment of debt.......... -- -- -- 31,459
--------- -------- --------- ---------
Net loss...................................... (3,400) (10,471) (17,309) (129,689)
Preferred dividend............................ 3,715 3,291 6,820 5,599
Preferred dividend -- amortization of
preferred discount......................... 923 923 1,847 5,095
--------- -------- --------- ---------
Net loss available to common shareholders..... $ (8,038) $(14,685) $ (25,976) $(140,383)
========= ======== ========= =========
Loss per common share before extraordinary
item, basic and diluted.................... $ (0.43) $ (0.90) $ (1.51) $ (6.70)
========= ======== ========= =========
Loss per common share, basic and diluted...... $ (0.43) $ (0.90) $ (1.51) $ (8.63)
========= ======== ========= =========
CASH FLOW DATA:
Cash provided by operating activities before
changes in working capital................. $ 12,583 $ 5,687 $ 15,286 $ 9,788
Cash provided by operating activities......... 8,339 3,017 13,707 11,567
Cash used in investing activities............. (11,328) (10,861) (22,241) (191,375)
Cash provided by financing activities......... 5,723 7,424 8,828 165,375
BALANCE SHEET DATA (at end of period):
Total assets.................................. 246,126 236,500 238,397 237,288
Long-term debt, net........................... 315,958 313,353 319,857 301,179
Stockholder's equity (deficit)................ (104,433) (94,376) (101,035) (83,921)
</TABLE>
8
<PAGE> 20
SUMMARY PRO FORMA COMBINED FINANCIAL DATA
The pro forma combined balance sheet data as of June 30, 2000 give effect
to the merger as if it occurred on that date. The pro forma combined income
statement data give effect to the merger as if it occurred on January 1, 1999.
We have included this summary unaudited pro forma information only for the
purposes of illustration, and it does not necessarily indicate what the
operating results or financial position would have been if the merger had been
completed at the dates indicated. Moreover, this information does not
necessarily indicate what the future operating results or financial position of
the combined company will be. You should read this summary pro forma combined
financial data in conjunction with the "Pro Forma Combined Financial Data"
included elsewhere in this document.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, 2000 DECEMBER 31, 1999
--------------- ------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
OPERATING DATA
Operating revenues.......................................... $ 280,987 $407,913
Net income (loss) available to common shareholders.......... 54,672 (858)
PER SHARE INFORMATION
Net income (loss) -- basic.................................. $ 0.47 $ (0.01)
Net income (loss) -- diluted................................ 0.32 (0.01)
BALANCE SHEET DATA (AT END OF PERIOD)
Total assets................................................ $1,302,893
Long-term debt.............................................. 1,198,343
Stockholders' equity (deficit).............................. (63,036)
</TABLE>
SUMMARY OIL AND GAS RESERVE INFORMATION
The following table sets forth summary information with respect to
Chesapeake's and Gothic's estimated proved oil and gas reserves as of December
31, 1999.
<TABLE>
<CAPTION>
OIL GAS TOTAL PRESENT VALUE
(MBbl) (MMcf) (MMcfe) (IN THOUSANDS)
------ --------- --------- --------------
<S> <C> <C> <C> <C>
Chesapeake Proved Reserves
Developed...................................... 17,750 763,323 869,823 $ 867,985
Undeveloped.................................... 7,045 293,503 335,772 221,511
------ --------- --------- ----------
Total.................................. 24,795 1,056,826 1,205,595 $1,089,496
====== ========= ========= ==========
Gothic Proved Reserves
Developed...................................... 1,683 251,631 261,726 $ 193,292
Undeveloped.................................... 239 37,560 38,996 20,040
------ --------- --------- ----------
Total.................................. 1,922 289,191 300,722 $ 213,332
====== ========= ========= ==========
</TABLE>
The present value amounts represent the present value of future net revenue
before income taxes discounted at 10%, using prices and costs in effect at
December 31, 1999. The weighted average prices used in calculating Chesapeake's
present value were $24.72 per barrel of oil and $2.25 per Mcf of natural gas.
The prices used in calculating Gothic's present value were $24.33 per barrel and
$1.89 per Mcf.
There are numerous uncertainties inherent in estimating quantities of
proved reserves and in projecting future rates of production and the timing of
development expenditures. See "Chesapeake's Business -- Oil and Gas Reserves"
beginning on page 55 and "Gothic's Business -- Natural Gas and Oil Reserves"
beginning on page 94.
Chesapeake's estimated proved reserves as of September 30, 2000 and the
present value of the estimated future net revenue therefrom were 1,325 Bcfe and
$2.7 billion, respectively, and, pro forma for the Gothic acquisition, would
have been 1,635 Bcfe and $3.2 billion, respectively. These estimates were
prepared by Chesapeake and Gothic reserve engineers using September 30, 2000
NYMEX prices adjusted for field differentials.
9
<PAGE> 21
COMPARATIVE PER SHARE DATA
We have set forth below information concerning net income (loss), cash
dividends declared and book value per common share for Chesapeake and Gothic on
both an historical and a pro forma basis. You should read the table together
with the financial information for Chesapeake and Gothic included in this proxy
statement/prospectus. You should not rely on the pro forma financial information
as an indication of the results that Chesapeake would have achieved if the
merger had taken place earlier or of the results of Chesapeake after the merger.
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 2000 DECEMBER 31, 1999
---------------- -----------------
<S> <C> <C>
Chesapeake Historical -- Per Common Share
Net income (loss)
Basic............................................ $ 0.53 $ 0.17
Diluted.......................................... $ 0.36 $ 0.16
Cash dividends...................................... $ 0.00 $ 0.00
Book value(1)....................................... $(0.84) $ (2.06)
Gothic Historical -- Per Common Share
Net income (loss) -- basic and diluted.............. $(0.43) $ (1.51)
Cash dividends...................................... $ 0.00 $ 0.00
Book value(1)....................................... $(5.59) $ (5.41)
Pro Forma Combined -- Per Common Share
Net income (loss)
Basic............................................ $ 0.47 $ (0.01)
Diluted.......................................... $ 0.32 $ (0.01)
Cash dividends...................................... $ 0.00 $ 0.00
Book value(2)....................................... $(0.42)
Pro Forma Combined -- Per Gothic Equivalent Common
Share(3)
Net income (loss)
Basic............................................ $ 0.09 $(0.002)
Diluted.......................................... $ 0.06 $(0.002)
Cash dividends...................................... $ 0.00 $ 0.00
Book value.......................................... $(0.08)
</TABLE>
---------------
(1) The historical book value per common share amounts are computed by dividing
each company's stockholders' equity by its actual common shares outstanding
as of June 30, 2000 and December 31, 1999.
(2) The pro forma combined book value per common share amounts are computed by
dividing pro forma stockholders' equity by the pro forma number of common
shares of Chesapeake outstanding as of June 30, 2000, assuming the merger
had occurred as of that date.
(3) The pro forma combined per Gothic equivalent share amounts are computed by
multiplying the pro forma combined share amounts by the exchange ratio of
0.1908 shares of Chesapeake common stock for each share of Gothic common
stock.
10
<PAGE> 22
RECENT FINANCIAL RESULTS
For the quarter ended September 30, 2000, Chesapeake had net income of
$54.7 million ($0.31 per diluted common share), compared to net income of $18.1
million ($0.13 per diluted common share) in the third quarter of 1999. Total
revenues were $168.2 million and $102.1 million, respectively. For the nine
months ended September 30, 2000, Chesapeake had net income of $107.5 million
($0.73 per diluted common share), compared to net income of $14.3 million ($0.02
per diluted common share) in the nine months ended September 30, 1999. Total
revenues were $417.3 million and $248.7 million, respectively.
For the quarter ended September 30, 2000, Gothic had net income of $1.3
million (a net loss of $0.05 per common share), compared to a net loss of $4.3
million ($0.37 per common share) in the third quarter of 1999. Total revenues
were $21.9 million and $14.2 million, respectively. For the nine months ended
September 30, 2000, Gothic had a net loss of $2.1 million ($0.46 per common
share), compared to a net loss of $14.8 million ($1.27 per common share) in the
nine months ended September 30, 1999. Total revenues were $55.1 million and
$38.8 million, respectively.
COMPARATIVE MARKET VALUE INFORMATION
The following table sets forth:
- the closing prices and bid prices per share and aggregate market values
of Chesapeake common stock on the New York Stock Exchange and of Gothic
common stock on the OTC Bulletin Board on June 29, 2000, the last trading
day prior to the public announcement of the proposed merger, and on
October 31, 2000, the most recent date for which prices were available
prior to the date of this proxy statement/prospectus;
- the equivalent price per share of Gothic common stock, based on the
exchange ratio of 0.1908; and
- the equivalent aggregate market value of Gothic common stock.
<TABLE>
<CAPTION>
GOTHIC
CHESAPEAKE GOTHIC EQUIVALENT
---------- ------- ----------
<S> <C> <C> <C>
On June 29, 2000
Closing/bid price per common share.................. $ 7.00 $ 0.50 $ 1.34
Market value of common shares (in 000's)............ $976,252 $ 9,343 $28,000
On October 31, 2000
Closing/bid price per common share.................. $ 5.63 $ 1.09 $ 1.07
Market value of common shares (in 000's)............ $855,368 $25,403 $22,500
</TABLE>
Historical aggregate market value is based on 139,464,502 Chesapeake common
shares and 18,685,765 Gothic common shares outstanding as of June 29, 2000, and
152,065,495 Chesapeake common shares and 23,305,094 Gothic common shares
outstanding as of October 31, 2000, excluding shares held in treasury or by
subsidiaries. Gothic equivalent aggregate market value is based on 4.0 million
shares of Chesapeake common stock to be issued in the merger.
11
<PAGE> 23
RISK FACTORS
An investment in Chesapeake common stock involves risks. In considering
whether to vote in favor of the merger, you should carefully consider the
following risk factors, together with the other information contained in this
proxy statement/prospectus.
RISKS RELATED TO THE MERGER
The market value of Chesapeake common shares that Gothic shareholders receive
in the merger will vary as a result of stock price fluctuations.
The merger consideration is fixed at 4,000,000 shares of Chesapeake common
stock, and the exchange ratio will change only if there is an increase or
decrease in the number of outstanding shares of Gothic common stock, such as by
the exercise of outstanding Gothic options or warrants. The exchange ratio will
not be adjusted for any increase or decrease in the price of Chesapeake common
shares or Gothic common shares. The price of Chesapeake common shares at the
time the merger is completed may be higher or lower than the price on the date
of this document or on the date of the special meeting. Changes in the business
operations or prospects of Chesapeake or Gothic, market assessments of the
benefits of the merger and of the likelihood that the merger will be completed,
oil and gas prices, general market and economic conditions or other factors may
affect the prices of Chesapeake common shares or Gothic common shares. Most of
these factors are beyond Chesapeake's and Gothic's control.
Because the merger will be completed after the special meeting of the
Gothic shareholders is held, there is no way to be sure that the price of the
Chesapeake common shares on the date of the special meeting will be indicative
of the price at the time the merger is completed. We urge you to obtain current
market quotations for both Chesapeake common shares and Gothic common shares.
If the businesses of Chesapeake and Gothic cannot be successfully integrated,
we may not achieve the anticipated benefits of the merger.
If Chesapeake and the shareholders of the combined company are to realize
the anticipated benefits of the merger, the operations of Chesapeake and Gothic
must be integrated and combined efficiently and effectively. We cannot assure
you that the integration will be successful or that we will realize the
anticipated benefits of the merger. For example, we may experience difficulties
and expenses in combining our operations, technology, systems and employees, or
there may be adverse effects from the enforcement of change of control
provisions under various Gothic contracts, including indentures and seismic
agreements. Similarly, we cannot guarantee that you will achieve greater value
through your ownership of Chesapeake common stock than you would have achieved
as a shareholder of Gothic as a separate entity. It is possible that our
integration activities will result in a decrease in the value of our common
stock or that other factors could adversely affect our future stock price.
The costs of the merger, the costs of integrating Gothic into Chesapeake's
business and other potential adjustments will be substantial.
We estimate it will cost approximately $12.8 million to consummate the
merger. These costs will consist of payments to former Gothic employees,
transaction fees for investment bankers, attorneys and accountants, and other
related costs incurred by Chesapeake and Gothic. In addition, we will incur
costs of approximately $3.2 million in connection with the establishment of a
standby credit facility. We will incur an additional $2.75 million of expenses
if we use our standby credit facility.
We may incur additional charges in excess of these amounts to reflect the
actual costs incurred associated with the merger, including the costs of
integrating Gothic's business with ours.
12
<PAGE> 24
The failure of the merger to qualify as a tax-free reorganization may result
in an increased tax burden to Gothic shareholders.
If the merger qualifies as a tax-free reorganization, you will not
recognize gain or loss by virtue of your receipt of Chesapeake common stock for
your Gothic common stock.
However, if the merger does not qualify as a tax-free reorganization under
Section 368(a) of the Internal Revenue Code, you will recognize gain or loss
based on the entire per share merger consideration you receive. Thus, you could
incur significant tax obligations payable in cash, even though you receive no
cash merger consideration to pay such obligations, if the merger does not
qualify as a tax-free reorganization. For more information on the material tax
consequences of the merger, see "The Merger -- Certain United States Federal
Income Tax Consequences" on page 39.
Sales of substantial amounts of Chesapeake's common stock in the open market
could depress Chesapeake's stock price.
If our shareholders sell substantial amounts of our stock in the public
market following consummation of the merger, including shares issued on the
exercise of outstanding options and warrants, the market price of our common
stock could fall. These sales might also make it more difficult for us to sell
equity or equity-related securities, or make acquisitions using our common
stock, at a time and price that we would deem appropriate. Immediately after the
merger, we estimate there will be approximately 156.1 million shares of our
common stock outstanding. All of the shares issued to Gothic shareholders will
be freely tradable without restrictions or further registration under the
Securities Act of 1933, unless such shares are held by any "affiliate" of ours
or any "affiliate" of Gothic prior to the merger, as that term is defined under
the Securities Act of 1933. The term "affiliate" would include directors,
executive officers and some significant stockholders. In addition, we have
recently registered for resale 12.6 million shares of our outstanding common
stock pursuant to registration rights agreements we have with former Gothic
noteholders. These shares are fully tradable upon registration.
Failure to complete the merger could negatively impact Gothic's stock price
and future business and operations.
If the merger is not completed, Gothic may be subject to the following
material risks:
- Gothic may need to seek protection under bankruptcy laws,
- the price of Gothic common stock may decline to the extent that the
current market price of Gothic common stock reflects a market assumption
that the merger will be completed, and
- costs related to the merger, such as legal, accounting and financial
advisor fees, must be paid even if the merger is not completed.
If the merger agreement is terminated and Gothic's board of directors
determines to seek another merger or business combination, there can be no
assurance that it will be able to find a partner willing to pay an equivalent or
more attractive price than that which would be paid in the merger. In addition,
while the merger agreement is in effect and subject to the limited exceptions
described on page 47 of this proxy statement/prospectus, Gothic is prohibited
from directly or indirectly soliciting or encouraging the initiation of any
inquiries or proposals regarding certain extraordinary transactions, such as a
merger, sale of assets or similar transactions, with any party other than
Chesapeake. Gothic may also be obligated to pay to Chesapeake a termination fee
of $10,000,000 if the merger agreement is terminated.
The opinion obtained by Gothic from its financial advisor will not reflect
changes in circumstances prior to the merger.
Gothic does not intend to obtain an updated opinion from its financial
advisor prior to the consummation of the merger. Changes in the operations and
prospects of Chesapeake or Gothic, general market and economic conditions and
other factors on which the opinion of its financial advisor is based,
13
<PAGE> 25
may alter the value of Chesapeake or Gothic or our respective stock prices by
the time the merger is completed. As a result, you should be aware that the
opinion of CIBC World Markets Corp. does not address the fairness of the merger
consideration at the time the merger will be completed.
The consummation of the proposed acquisition may not occur or could be delayed
if conditions to the merger are not met.
There are significant conditions to be satisfied before we will be able to
acquire Gothic as contemplated by this proxy statement/prospectus. These
conditions include the following:
- approval of the merger by Gothic's shareholders;
- the holders of not more than 5% of the outstanding shares of Gothic
common stock demanding appraisal of their shares, unless Chesapeake
waives this condition;
- satisfaction of all conditions set forth in the $275 million financing
commitment Chesapeake has received from Bear, Stearns & Co. Inc.; and
- satisfaction of all conditions for a merger by Gothic contained in the
indenture for senior secured notes issued by Gothic's operating
subsidiary, including its ability to meet, as of the closing date of the
merger, the debt incurrence tests. If the closing date had been June 30,
2000, these tests would not have been met.
Chesapeake and Gothic cannot assure you that these conditions will be
satisfied or guarantee that the closing date for the merger will occur in
January 2001 as presently expected.
RISKS RELATED TO CHESAPEAKE'S BUSINESS
If we are not able to meet our debt service obligations, our operations could
suffer.
As of June 30, 2000, we had long-term indebtedness of $983.2 million, which
included bank indebtedness of $63.0 million, and our stockholders' equity was a
deficit of $120.0 million. If the merger had been completed as of June 30, 2000,
our long-term indebtedness, on a pro forma basis, would have been $1.2 billion.
Our ability to meet our debt service requirements throughout the life of our
senior notes and, if the merger is completed, the senior notes of Gothic's
subsidiary, and our ability to meet our preferred stock obligations will depend
on our future performance. Our future performance will be subject to oil and gas
prices, our production levels of oil and gas, general economic conditions, and
various financial, business and other factors affecting our operations. Our
level of indebtedness may have the following effects on future operations:
- a substantial portion of our cash flow from operations may be dedicated
to the payment of interest and principal on indebtedness and will not be
available for other purposes,
- restrictions in our debt instruments limit our ability to borrow
additional funds or to dispose of assets and may affect our flexibility
in planning for, and reacting to, changes in the energy industry, and
- our ability to obtain additional capital in the future may be impaired.
Our business is subject to the volatility of oil and gas prices.
Our revenues, operating results and future rate of growth are highly
dependent on the prices we receive for our oil and gas. Historically, the
markets for oil and gas have been volatile and may continue to be volatile in
the future. Various factors which are beyond our control will affect prices of
oil and gas. These factors include:
- worldwide and domestic supplies of oil and gas,
- weather conditions,
14
<PAGE> 26
- the ability of the members of the Organization of Petroleum Exporting
Countries to agree to and maintain oil price and production controls,
- political instability or armed conflict in oil-producing regions,
- the price and level of foreign imports,
- the level of consumer demand,
- the price and availability of alternative fuels,
- the availability of pipeline capacity, and
- domestic and foreign governmental regulations and taxes.
We are unable to predict the long-term effects of these and other
conditions on the prices of oil and gas. Lower oil and gas prices may reduce the
amount of oil and gas we produce, which may adversely affect our revenues and
operating income. Significant reductions in oil and gas prices may require us to
reduce our capital expenditures. Reducing drilling will make it more difficult
for us to replace the reserves we produce.
If we are not able to replace reserves, we may not be able to sustain
production.
As is customary in the oil and gas exploration and production industry, our
future success depends largely upon our ability to find, develop or acquire
additional oil and gas reserves that are economically recoverable. Unless we
replace the reserves we produce through successful development, exploration or
acquisition, our proved reserves will decline over time. In addition,
approximately 28% by volume, or 20% by value, of our total estimated proved
reserves at December 31, 1999 were undeveloped. By their nature, undeveloped
reserves are less certain. Recovery of such reserves will require significant
capital expenditures and successful drilling operations. We cannot assure you
that we can successfully find and produce reserves economically in the future.
If we do not make significant capital expenditures, we may not be able to
exploit reserves.
We must make substantial capital expenditures in connection with the
exploration, development and production of our oil and gas properties.
Historically, we have funded our capital expenditures through a combination of
internally generated funds, equity issuances and long-term debt financing
arrangements and sale of non-core assets. From time to time, we have used
short-term bank debt, generally as a working capital facility. Future cash flows
are subject to a number of variables, such as the level of production from
existing wells, prices of oil and gas, and our success in developing and
producing new reserves. If revenue were to decrease as a result of lower oil and
gas prices or decreased production, and our access to capital were limited, we
would have a reduced ability to replace our reserves. If our cash flow from
operations is not sufficient to fund our capital expenditure budget, there can
be no assurance that additional debt or equity financing will be available to
meet these requirements.
Drilling and oil and gas operations are hazardous.
Drilling activities are subject to many risks, including well blowouts,
cratering, uncontrollable flows of oil, natural gas or well fluids, fires,
formations with abnormal pressures, pollution, releases of toxic gases and other
environmental hazards and risk, any of which could result in substantial losses.
In addition, we incur the risk that we will not encounter any commercially
productive reservoirs through our drilling operations. We cannot assure you that
the new wells we drill will be productive or that we will recover all or any
portion of our investment in wells drilled. Drilling for oil and gas may involve
unprofitable efforts, not only from dry wells, but from wells that are
productive but do not produce enough reserves to return a profit after drilling,
operating and other costs.
15
<PAGE> 27
Our debt covenants may restrict our operations.
Our bank credit agreement and the indentures which govern our senior notes
contain covenants which may restrict our ability, and the ability of most of our
subsidiaries, to engage in the following activities:
- incurring additional debt,
- creating liens,
- paying dividends and making other restricted payments,
- merging or consolidating with any other entity,
- selling, assigning, transferring, leasing or otherwise disposing of all
or substantially all of our assets, and
- guaranteeing indebtedness.
From December 31, 1998 through March 31, 2000, we did not meet a debt
incurrence test contained in two of our senior note indentures and were
therefore not able to incur unsecured debt or pay dividends on our preferred
stock. Beginning June 30, 2000, we met the debt incurrence test, but
significantly lower oil and gas prices or poor operating results could cause us
to fail this test in the future.
In addition, the indenture for the senior secured notes of Gothic's
operating subsidiary contains similar covenants which, after the merger, may
restrict Gothic's activities.
Canadian operations present the risks associated with conducting business
outside the U.S.
A portion of our business is conducted in Canada. You may review the
amounts of revenue, operating income (loss) and identifiable assets attributable
to our Canadian operations in note 8 of the notes to Chesapeake's audited
consolidated financial statements included at the end of this proxy statement/
prospectus. Also, note 11 of the audited consolidated financial statements
provides disclosures about our Canadian oil and gas producing activities. Our
operations in Canada are subject to the risks associated with operating outside
of the United States. These risks include the following:
- adverse local political or economic developments,
- exchange controls,
- currency fluctuations,
- royalty and tax increases,
- retroactive tax claims,
- negotiations of contracts with governmental entities, and
- import and export regulations.
In addition, in the event of a dispute, we may be required to litigate the
dispute in Canadian courts since we may not be able to sue foreign persons in a
United States court.
Transactions with executive officers may create conflicts of interest.
Our chief executive officer, Aubrey K. McClendon, and our chief operating
officer, Tom L. Ward, have the right to participate in certain wells we drill,
subject to certain limitations outlined in their employment contracts. As a
result of their participation, they routinely have significant accounts payable
to Chesapeake for joint interest billings and other related advances. As of June
30, 2000, Messrs. McClendon and Ward had payables to Chesapeake of $1.5 million
and $1.4 million, respectively, in connection with such participation. The
rights to participate in wells we drill could present a conflict of interest
with respect to Messrs. McClendon and Ward.
16
<PAGE> 28
The ownership of a significant percentage of stock by insiders could influence
the outcome of shareholder votes.
At October 30, 2000, our board of directors and senior management
beneficially owned an aggregate of 25,148,640 shares of our common stock,
including outstanding vested options, which represented approximately 16% of our
outstanding shares. The beneficial ownership of Messrs. McClendon and Ward
accounted for 14% of our outstanding common stock. As a result, Messrs.
McClendon and Ward, together with our other officers and directors, are in a
position to significantly influence matters requiring the vote or consent of our
shareholders.
17
<PAGE> 29
FORWARD-LOOKING STATEMENTS
This proxy statement/prospectus includes "forward-looking statements" made
by both Gothic and Chesapeake within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Forward-looking statements include statements regarding oil and gas reserve
estimates, planned capital expenditures, expected oil and gas production,
Chesapeake's and Gothic's financial positions, business strategy and other plans
and objectives for future operations, expected future expenses, realization of
deferred tax assets, the proposed acquisition of Gothic, the parties' abilities
to meet the closing conditions in the merger agreement and the combined entity's
future operations. In addition to these statements, forward-looking statements
may be included within this document under the following captions:
- "Risk Factors"
- "Chesapeake's Reasons for the Merger"
- "Gothic's Reasons for the Merger"
- "Recommendation of Gothic's Board of Directors"
- "Opinion of Gothic's Financial Advisor"
Although we believe the expectations reflected in these and other
forward-looking statements are reasonable, we can give no assurance that our
expectations will prove to have been correct. Factors that could cause actual
results to differ materially from expected results, include:
- uncertainties relating to the proposed business combination with Gothic;
- our substantial indebtedness;
- fluctuations in the prices of oil and gas;
- need to replace reserves;
- substantial capital requirements;
- uncertainties inherent in estimating quantities of oil and gas reserves;
- projecting future rates of production and the timing of development
expenditures;
- operating risks;
- restrictions imposed by lenders;
- the effects of governmental and environmental regulation;
- pending or future litigation; and
- conflicts of interest our CEO and COO may have.
We caution you not to place undue reliance on these forward-looking
statements, which speak only as of the date of this proxy statement/prospectus,
and we undertake no obligation to update this information. We urge you to
carefully review and consider the disclosures made in this document and in our
other reports filed with the Securities and Exchange Commission that attempt to
advise interested parties of the risks and factors that may affect our business.
18
<PAGE> 30
COMPARATIVE PER SHARE PRICES
Chesapeake's common shares are listed on the New York Stock Exchange under
the symbol "CHK." Gothic's common shares are quoted on the OTC Bulletin Board
under the symbol "GOTH." The following table sets forth, for the periods
indicated, the high and low sales prices per share of the Chesapeake common
stock as reported by the New York Stock Exchange and the high and low bid
quotations on the OTC Bulletin Board per share for the Gothic common stock:
<TABLE>
<CAPTION>
CHESAPEAKE GOTHIC
COMMON STOCK COMMON STOCK
------------- -------------
HIGH LOW HIGH LOW
----- ----- ----- -----
<S> <C> <C> <C> <C>
1998:
First Quarter........................................ $7.75 $5.50 $3.06 $1.81
Second Quarter....................................... 6.00 3.88 2.38 1.19
Third Quarter........................................ 4.06 1.13 1.59 0.56
Fourth Quarter....................................... 2.63 0.75 0.72 0.22
1999:
First Quarter........................................ 1.50 0.63 0.72 0.38
Second Quarter....................................... 2.94 1.31 0.81 0.42
Third Quarter........................................ 4.13 2.75 0.53 0.41
Fourth Quarter....................................... 3.88 2.13 0.44 0.16
2000:
First Quarter........................................ 3.31 1.94 0.47 0.14
Second Quarter....................................... 8.00 2.75 1.06 0.24
Third Quarter........................................ 8.25 5.31 1.39 0.98
Fourth Quarter (through October 31).................. 7.88 5.63 1.36 1.06
</TABLE>
On June 29, 2000, the last trading day prior to the public announcement of
the proposed merger, the closing price of Chesapeake common stock was $7.00 and
the closing bid quotation on Gothic common stock was $0.50. On October 31, 2000,
the most recent date for which prices were available prior to the date of this
document, the Chesapeake common stock closing price was $5.63 and the Gothic
common stock closing bid quotation was $1.09.
At October 30, 2000 there were 1,035 holders of record of Chesapeake common
stock and approximately 26,000 beneficial owners. At October 20, 2000 there were
159 holders of record of Gothic common stock and approximately 500 beneficial
owners.
19
<PAGE> 31
DIVIDEND INFORMATION
CHESAPEAKE
We paid quarterly dividends of $0.02 per share of common stock from July
1997 to July 1998. The payment of future cash dividends on common stock, if any,
will be reviewed periodically by our board of directors and will depend on,
among other things, our financial condition, funds from operations, the level of
capital and development expenditures, our future business prospects and any
contractual restrictions.
Our bank credit agreement and two of the indentures governing our
outstanding senior notes contain restrictions on our ability to declare and pay
dividends. Under these indentures, we may not pay any cash dividends on our
common or preferred stock if:
- a default or an event of default has occurred and is continuing at the
time of or immediately after giving effect to the dividend payment;
- we would not be able to incur at least $1 of additional indebtedness
under the terms of the indentures; or
- immediately after giving effect to the dividend payment, the aggregate of
all dividends and other restricted payments declared or made after the
respective issue dates of the notes exceeds the sum of specified income,
proceeds from the issuance of stock and debt and other amounts from the
quarter in which the respective note issuances occurred to the quarter
immediately preceding the date of the dividend payment.
From December 31, 1998 through March 31, 2000, we did not meet the debt
incurrence tests under the indentures and were not able to pay dividends on our
common or preferred stock. We did meet the debt incurrence tests as of June 30,
2000, and are therefore able to incur unsecured debt and we are eligible to
resume the payment of dividends on our preferred stock. On September 22, 2000,
our board of directors declared a regular quarterly dividend and a special
dividend in the amount of all accrued and unpaid dividends on the preferred
stock, payable on November 1, 2000.
During the first six months of 2000, we entered into a number of
unsolicited transactions whereby we issued approximately 34.2 million shares of
common stock, plus cash of $8.3 million, in exchange for 3,039,363 shares of
preferred stock. This reduced the liquidation amount of preferred stock
outstanding by $152.0 million to $77.9 million, and reduced the amount of
preferred dividends in arrears by $16.8 million to $9.5 million as of June 30,
2000.
From July 1 to August 16, 2000, we engaged in additional transactions in
which we exchanged 9.2 million shares of our common stock for 933,000 shares of
our preferred stock with a liquidation value of $46.7 million plus dividends in
arrears of $6.1 million.
GOTHIC
Gothic has never paid a cash dividend on its common stock and its
management has no present intention of commencing to pay dividends on its common
stock. Gothic's loan documents and indentures prohibit Gothic from paying cash
dividends on its common stock. Additionally, in the merger agreement Gothic
agreed that, until the merger is completed or the merger agreement is
terminated, Gothic will not declare, set aside, make or pay any dividend or
other distribution on its capital stock.
20
<PAGE> 32
PRO FORMA COMBINED FINANCIAL DATA
The following unaudited pro forma combined financial statements are derived
from the historical financial statements of Chesapeake and Gothic included in
this proxy statement/prospectus. The pro forma combined statements of operations
for the six months ended June 30, 2000 and for the year ended December 31, 1999
reflect the Gothic acquisition, accounted for as a purchase, as if the
acquisition occurred on January 1, 1999. The pro forma combined balance sheet at
June 30, 2000 reflects the consummation of the Gothic acquisition as if it
occurred on June 30, 2000. The unaudited pro forma combined financial data
should be read in conjunction with the notes thereto and the historical
financial statements of Chesapeake and Gothic, including the notes thereto,
which are included in this proxy statement/prospectus.
The unaudited pro forma combined financial statements do not purport to be
indicative of the results of operations that would actually have occurred if the
transaction described had occurred as presented in such statements or that may
occur in the future. In addition, future results may vary significantly from the
results reflected in such statements due to general economic conditions, oil and
gas commodity prices, Chesapeake's ability to successfully integrate the
operations of Gothic with its current business and several other factors, many
of which are beyond Chesapeake's control. See "Risk Factors" beginning on page
12.
The Gothic acquisition will be accounted for using the purchase method.
After the acquisition, the purchase cost will be allocated to the Gothic assets
and liabilities based on their respective fair values. The final allocation of
the actual purchase price is subject to the final valuation of the acquired
assets, but that allocation is not expected to differ materially from the
preliminary allocation presented in these pro forma combined financial
statements.
21
<PAGE> 33
CHESAPEAKE ENERGY CORPORATION
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF JUNE 30, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
----------------------- ---------------------------
CHESAPEAKE GOTHIC ADJUSTMENTS AS ADJUSTED
----------- --------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS
Current assets............................ $ 103,769 $ 18,791 $ (919)(f) $ 127,750
6,109(k)
Property, plant and equipment:
Proved.................................. 2,422,373 269,380 94,648(a) 2,787,812
1,411(f)
Unproved................................ 32,146 5,911 4,089(a) 42,146
Accumulated DD&A........................ (1,719,259) (62,752) 62,752(a) (1,719,259)
----------- --------- -------- -----------
Net proved and unproved properties...... 735,260 212,539 162,900 1,110,699
Other, net................................ 35,056 5,058 -- 40,114
----------- --------- -------- -----------
Total property, plant and equipment,
net.................................. 770,316 217,597 162,900 1,150,813
----------- --------- -------- -----------
Other..................................... 106,897 9,738 (4,796)(a) 24,330
(10,000)(a)
(77,509)(b)
----------- --------- -------- -----------
Total assets.................... $ 980,982 $ 246,126 $ 75,785 $ 1,302,893
=========== ========= ======== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities....................... $ 101,423 $ 31,327 $ 12,760(a) $ 148,003
3,240(j)
(747)(f)
Long-term debt............................ 983,230 315,958 (77,509)(b) 1,198,343
(23,336)(f)
Deferred income tax liabilities........... 7,904 -- -- 7,904
Other liabilities......................... 8,405 3,274 -- 11,679
Stockholders' equity:
Preferred stock......................... 77,852 50,252 (50,252)(a) 77,852
Common stock............................ 1,433 187 (187)(a) 1,505
41(f)
40(a)
(9)(k)
Paid-in capital......................... 862,230 42,987 24,534(f) 922,342
(42,987)(a)
1,500(a)
27,960(a)
6,109(k)
9(k)
Accumulated earnings (deficit).......... (1,045,984) (197,859) 197,859(a) (1,049,224)
(3,240)(j)
Accumulated other comprehensive income
(loss)............................... (2,757) -- -- (2,757)
Less treasury stock..................... (12,754) -- -- (12,754)
----------- --------- -------- -----------
Total stockholders' equity
(deficit)..................... (119,980) (104,433) 161,377 (63,036)
----------- --------- -------- -----------
Total liabilities and
stockholders' equity
(deficit)..................... $ 980,982 $ 246,126 $ 75,785 $ 1,302,893
=========== ========= ======== ===========
</TABLE>
The accompanying notes are an integral part of these pro forma combined
financial statements.
22
<PAGE> 34
CHESAPEAKE ENERGY CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2000
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
--------------------- ---------------------------
CHESAPEAKE GOTHIC ADJUSTMENTS AS ADJUSTED
---------- -------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Oil and gas sales........................... $187,514 $ 31,863 $ -- $219,377
Oil and gas marketing sales................. 61,610 -- -- 61,610
Well operations............................. -- 1,356 (1,356)(i) --
-------- -------- ------- --------
Total revenues...................... 249,124 33,219 (1,356) 280,987
-------- -------- ------- --------
OPERATING COSTS:
Production expenses and taxes............... 36,059 4,443 -- 40,502
General and administrative.................. 6,220 2,761 (1,356)(i) 7,625
Oil and gas marketing expenses.............. 59,666 -- -- 59,666
Oil and gas depreciation, depletion and
amortization............................. 49,360 9,625 5,531(c) 64,516
Depreciation and amortization of other
assets................................... 3,702 350 -- 4,052
-------- -------- ------- --------
Total operating costs............... 155,007 17,179 4,175 176,361
-------- -------- ------- --------
INCOME FROM OPERATIONS........................ 94,117 16,040 (5,531) 104,626
-------- -------- ------- --------
OTHER INCOME (EXPENSE):
Interest and other income................... 2,859 50 -- 2,909
Interest expense............................ (42,677) (19,490) 6,015(h) (56,152)
-------- -------- ------- --------
Total other income (expense)........ (39,818) (19,440) 6,015 (53,243)
-------- -------- ------- --------
INCOME (LOSS) BEFORE INCOME TAXES............. 54,299 (3,400) 484 51,383
-------- -------- ------- --------
INCOME TAX EXPENSE............................ 1,463 -- 194(d) 1,657
-------- -------- ------- --------
NET INCOME (LOSS)............................. 52,836 (3,400) 290 49,726
Preferred stock dividends................... (6,949) (4,638) 4,638(g) (6,949)
Gain on redemption of preferred stock....... 11,895 -- -- 11,895
-------- -------- ------- --------
NET INCOME (LOSS) AVAILABLE TO COMMON
SHAREHOLDERS................................ $ 57,782 $ (8,038) $ 4,928 $ 54,672
======== ======== ======= ========
EARNINGS (LOSS) PER COMMON SHARE:
Basic....................................... $ 0.53 $ 0.47
======== ========
Assuming dilution........................... $ 0.36 $ 0.32
======== ========
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING:
Basic....................................... 108,196 115,336(e)
======== ========
Assuming dilution........................... 146,285 153,425(e)
======== ========
</TABLE>
The accompanying notes are an integral part of these pro forma combined
financial statements.
23
<PAGE> 35
CHESAPEAKE ENERGY CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
--------------------- ----------------------------
CHESAPEAKE GOTHIC ADJUSTMENTS AS ADJUSTED
---------- -------- ------------ -----------
<S> <C> <C> <C> <C>
REVENUES:
Oil and gas sales.......................... $280,445 $ 52,967 $ -- $ 333,412
Oil and gas marketing sales................ 74,501 -- -- 74,501
Well operations............................ -- 2,657 (2,657)(i) --
-------- -------- -------- ---------
Total revenues..................... 354,946 55,624 (2,657) 407,913
-------- -------- -------- ---------
OPERATING COSTS:
Production expenses and taxes.............. 59,562 9,605 -- 69,167
General and administrative................. 13,477 5,313 (2,657)(i) 16,133
Oil and gas marketing expenses............. 71,533 -- -- 71,533
Oil and gas depreciation, depletion and
amortization............................ 95,044 20,444 11,679(c) 127,167
Depreciation and amortization of other
assets.................................. 7,810 525 -- 8,335
-------- -------- -------- ---------
Total operating costs.............. 247,426 35,887 9,022 292,335
-------- -------- -------- ---------
INCOME FROM OPERATIONS....................... 107,520 19,737 (11,679) 115,578
-------- -------- -------- ---------
OTHER INCOME (EXPENSE):
Interest and other income.................. 8,562 942 -- 9,504
Interest expense........................... (81,052) (37,988) 11,505(h) (107,535)
-------- -------- -------- ---------
Total other income (expense)....... (72,490) (37,046) 11,505 (98,031)
-------- -------- -------- ---------
INCOME (LOSS) BEFORE INCOME TAXES............ 35,030 (17,309) (174) 17,547
-------- -------- -------- ---------
INCOME TAX EXPENSE........................... 1,764 -- (70)(d) 1,694
-------- -------- -------- ---------
NET INCOME (LOSS)............................ 33,266 (17,309) (104) 15,853
Preferred stock dividends.................. (16,711) (8,667) 8,667(g) (16,711)
Gain on redemption of preferred stock...... -- -- -- --
-------- -------- -------- ---------
NET INCOME (LOSS) AVAILABLE TO COMMON
SHAREHOLDERS............................... $ 16,555 $(25,976) $ 8,563 $ (858)
======== ======== ======== =========
EARNINGS (LOSS) PER COMMON SHARE:
Basic...................................... $ 0.17 $ (0.01)
======== =========
Assuming dilution.......................... $ 0.16 $ (0.01)
======== =========
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING:
Basic...................................... 97,077 104,217(e)
======== =========
Assuming dilution.......................... 102,038 109,178(e)
======== =========
</TABLE>
The accompanying notes are an integral part of these pro forma combined
financial statements.
24
<PAGE> 36
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
(a) Chesapeake will issue four million shares of common stock at an
estimated $7.00 per share and incur costs of approximately $12.8 million
(including $6 million for estimated termination costs of Gothic employees) to
acquire Gothic. In addition, Chesapeake's investment in Gothic preferred and
common stock, which has a carrying value of $10 million, and its investment in
Gothic senior discount notes, which have a carrying value of $77.5 million, are
included in the allocation of purchase price. Chesapeake estimates that the fair
value of the Gothic debt equals Gothic's carrying value. The purchase price also
gives effect to the estimated fair value of out-of-the-money Gothic warrants to
be assumed by Chesapeake. Below is a summary of the purchase price allocation to
the estimated fair value of the assets acquired and liabilities assumed ($ in
000's):
<TABLE>
<S> <C>
Issuance of common stock................................. $ 28,000
Investment in Gothic senior discount notes............... 77,509
Investment in Gothic preferred and common stock.......... 10,000
Fair value of Gothic warrants............................ 1,500
Other acquisition costs.................................. 12,760
--------
Purchase price................................. $129,769
========
</TABLE>
<TABLE>
<CAPTION>
GOTHIC ESTIMATED PRO FORMA
BOOK VALUE FAIR VALUE ADJUSTMENT
---------- ---------- ----------
<S> <C> <C> <C>
Current assets..................................... $ 18,791 $ 18,791 $ --
Property and equipment -- proved properties........ 269,380 364,028 94,648
Property and equipment -- unproved properties...... 5,911 10,000 4,089
Accumulated DD&A................................... (62,752) -- 62,752
Other property and equipment....................... 5,058 5,058 --
Other assets....................................... 9,738 4,942 (4,796)
Current liabilities................................ (31,327) (31,327) --
Debt, less investment in Gothic discount notes..... (238,449) (238,449) --
Other liabilities.................................. (3,274) (3,274) --
--------- --------- --------
$ (26,924) $ 129,769 $156,693
========= ========= ========
</TABLE>
(b) To eliminate Chesapeake's $77.5 million investment in Gothic's senior
discount notes which were acquired in June 2000.
(c) To record DD&A expense of oil and gas properties using a rate of $0.80
per mcfe. This combined rate reflects the impact of the allocation of purchase
price to Gothic's proved oil and gas properties.
(d) To record the tax effects of the pro forma adjustments at a statutory
rate of 40%.
(e) Basic and diluted earnings per share have been calculated assuming the
transaction had been consummated at the beginning of the period and is
calculated as follows (in 000's):
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, 2000 DECEMBER 31, 1999
------------- -----------------
<S> <C> <C>
Chesapeake's basic shares outstanding (as reported)..... 108,196 97,077
Issuance of common stock to Gothic -- merger
consideration......................................... 4,000 4,000
Issuance of common stock -- acquisition of Gothic
debt.................................................. 3,140 3,140
------- -------
Basic shares outstanding -- as adjusted....... 115,336 104,217
======= =======
Chesapeake's diluted shares outstanding (as reported)... 146,285 102,038
Issuance of common stock to Gothic -- merger
consideration......................................... 4,000 4,000
Issuance of common stock -- acquisition of Gothic
debt.................................................. 3,140 3,140
------- -------
Diluted shares outstanding -- as adjusted..... 153,425 109,178
======= =======
</TABLE>
25
<PAGE> 37
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL DATA -- (CONTINUED)
(f) To record Chesapeake's acquisition of $3.2 million of Gothic's 14 1/8%
senior secured discount notes (face value of $4.0 million) on August 31, 2000
and $20.15 million of Gothic's 11 1/8% senior secured notes at 107%, plus
accrued interest of $747,000, on September 1, 2000. Consideration given for the
14 1/8% discount notes consisted of 389,378 shares of Chesapeake common stock
(valued at $5.825 per share) plus cash of $919,000. Consideration given for the
11 1/8% senior secured notes was 3,694,939 shares of Chesapeake common stock
(valued at $6.04 per share).
(g) To eliminate dividends on Gothic's preferred stock held by Chesapeake.
(h) To eliminate interest expense and amortization costs related to the
senior discount notes and senior secured notes acquired by Chesapeake.
(i) To reclassify overhead reimbursements recognized by Gothic as operator
of certain oil and gas properties and reported as well operations revenue. These
reimbursements have been reclassified as a reduction to general and
administrative expenses to conform with Chesapeake's presentation of similar
reimbursements.
(j) To record the initial financing fees incurred by Chesapeake for the
standby credit facility. Chesapeake believes the standby credit facility will
not be utilized, and therefore the associated fees will be expensed when the
holders' change-of-control put options expire. If, however, the standby credit
facility is utilized, Chesapeake would incur an additional $2.75 million in
financing costs and the total financing costs of $6 million would be deferred
and amortized over the twenty-six month term of the facility. Assuming the
standby credit facility is utilized to (a) purchase the outstanding 11 1/8%
Gothic senior secured notes and (b) replace Chesapeake's current line of credit,
the pro forma results of operations would reflect a decrease in interest expense
of approximately $0.8 million and $1.1 million for the six months ended June 30,
2000 and the year ended December 31, 1999, respectively.
(k) To record the effects of certain make-whole provisions associated with
Chesapeake's investment in Gothic's 14 1/8% discount notes in June 2000.
Chesapeake received $6.1 million in cash and 944,153 shares of Chesapeake common
stock under the terms of the individual purchase agreements.
(l) Estimated total pro forma proved reserves at June 30, 2000 were as
follows (in MMcfe):
<TABLE>
<S> <C>
Chesapeake................................................ 1,313,264
Gothic.................................................... 321,670
---------
As adjusted..................................... 1,634,934
=========
</TABLE>
26
<PAGE> 38
GOTHIC ENERGY CORPORATION SPECIAL MEETING
This proxy statement/prospectus and the accompanying form of proxy are
being furnished to Gothic shareholders in connection with the solicitation of
proxies by Gothic's board of directors to be used at a special meeting of
shareholders to be held on Tuesday, December 12, 2000, and at any adjournments
or postponements of the meeting. All holders of record of Gothic common stock
and Gothic preferred stock at the close of business on October 20, 2000 are
entitled to notice of the meeting. Only holders of record of Gothic common stock
on such date are entitled to vote at the special meeting. This proxy statement/
prospectus and the accompanying proxy card are first being mailed to Gothic
shareholders beginning on or about November 2, 2000.
TIME, DATE AND PLACE
The special meeting will be held at 10:00 a.m. local time, on Tuesday,
December 12, 2000, at the Doubletree Hotel at Warren Place, 6110 South Yale
Avenue, in Tulsa, Oklahoma.
PURPOSE OF THE SPECIAL MEETING
At the Gothic special meeting, and any adjournment or postponement thereof,
Gothic's shareholders will be asked to consider and vote upon:
- a proposal to approve the merger and the merger agreement, and
- such other matters as may properly be brought before the special meeting
and any adjournment or postponement thereof.
In the merger, Chesapeake Merger 2000 Corp., a wholly-owned subsidiary of
Chesapeake, will merge with and into Gothic and each outstanding share of Gothic
common stock, other than shares held by Chesapeake and by shareholders demanding
appraisal rights, will be converted into a number of shares of Chesapeake common
stock determined as described under "Material Terms of the Merger Agreement --
The Merger -- Share Conversion." Chesapeake will receive no merger consideration
with respect to Gothic common stock it owned as of September 8, 2000 or which is
issued to Chesapeake upon the conversion of Gothic preferred stock it owns.
As of the date of this proxy statement/prospectus, Gothic's board of
directors does not know of any business to be presented at the special meeting
other than the merger proposal. If any other matters should properly come before
the special meeting, it is intended that the shares represented by proxies will
be voted with respect to such matters in accordance with the judgment of the
persons voting such proxies.
RECORD DATE; VOTING RIGHTS; QUORUM; REQUIRED VOTE
Gothic's board of directors has fixed the close of business on October 20,
2000 as the record date for Gothic's shareholders to be entitled to notice of
and to vote at the special meeting.
Only holders of record of shares of Gothic common stock and Gothic
preferred stock at the close of business on the record date are entitled to
notice of the special meeting. Each holder of record of Gothic common stock as
of the record date is entitled to cast one vote per share on all matters
submitted to Gothic's shareholders.
At the close of business on October 20, 2000, there were 159 holders of
record of Gothic common stock and Chesapeake was the sole holder of record of
Gothic preferred stock. On the record date, there were 23,305,094 million shares
of Gothic common stock outstanding and entitled to vote at the special meeting.
As of the record date, the directors and executive officers of Gothic
beneficially owned approximately 14.6% of the outstanding Gothic common stock.
For additional information on the ownership of Gothic common stock by Gothic
directors and executive officers, see "Beneficial Ownership of Common Stock --
27
<PAGE> 39
Gothic" beginning on page 90. In connection with the merger agreement, Michael
Paulk, Steven P. Ensz, Brian Bayley and John Fleming have granted Chesapeake
irrevocable proxies to vote all shares of Gothic common stock they hold. These
proxies will terminate on the effective date of the merger or if the merger
agreement is terminated. In addition, as of the record date, Chesapeake held
2,394,125 shares of Gothic common stock. Chesapeake has advised Gothic that it
intends to vote all of these shares, or approximately 10.3% of the total votes
entitled to be cast at the special meeting, in favor of the proposal.
Accordingly, the votes to be cast pursuant to the irrevocable proxies and the
votes to be cast by Chesapeake with respect to the shares held by it aggregate
approximately 24.9% of the total votes entitled to be cast with respect to the
merger.
The presence, in person or by proxy, of the holders of a majority of the
outstanding shares of Gothic stock entitled to vote is necessary to constitute a
quorum at the special meeting. The affirmative vote of the holders of a majority
of the outstanding shares of Gothic common stock is required to approve and
adopt the merger proposal.
Votes cast by proxy or in person at the Gothic special meeting will be
tabulated and will determine whether or not a quorum is present. Abstentions
will be treated as shares present in determining whether Gothic has a quorum for
the special meeting, but abstentions will have the same effect as a vote against
adoption of the merger agreement. If a broker or other record holder or nominee
indicates on a proxy that it does not have direction or authority to vote
certain shares, those shares will be considered present at the special meeting
for purposes of determining a quorum but will have the same effect as a vote
against adoption of the merger agreement. A broker or other record holder or
nominee will vote shares of Gothic stock only if the holder of such shares
provides instructions on how to vote by following the instructions provided by
such broker, record holder or nominee.
PROXIES; REVOCATION
A proxy card is enclosed for use by Gothic shareholders. Gothic's board of
directors requests that shareholders SIGN AND RETURN THE PROXY CARD IN THE
ACCOMPANYING ENVELOPE. No postage is required if mailed within the United
States. If you have questions or requests for completing and submitting proxy
cards, please contact Steven P. Ensz at the following address and telephone
number:
Gothic Energy Corporation
Two Warren Place
6120 South Yale Avenue, Suite 1200
Tulsa, Oklahoma 74136
(918) 749-5666
Neither the laws of the State of Oklahoma, the jurisdiction in which
Chesapeake and the merger subsidiary are incorporated, nor the rules of the New
York Stock Exchange require that the merger or the issuance of the Chesapeake
common stock pursuant to the merger be approved by Chesapeake's shareholders.
All properly executed proxies that are not revoked will be voted at the
special meeting as instructed on those proxies. A shareholder who executes and
returns a proxy may revoke it at any time before it is voted, but only by
executing and returning a proxy bearing a later date, by giving written notice
of revocation to an officer of Gothic, or by attending the special meeting and
voting in person. A proxy that has been properly executed, but has otherwise
been left blank, will be voted for the adoption of the merger agreement, unless
the proxy is revoked before the vote is taken.
SOLICITATION OF PROXIES; EXPENSES
In connection with the special meeting, proxies are being solicited by, and
on behalf of, the Gothic board of directors. Gothic will bear the cost of the
solicitation of proxies from its stockholders; however, Chesapeake has agreed in
the merger agreement to bear one-half of the costs of filing, printing and
mailing this document and filing fees of the Securities and Exchange Commission.
In addition to the
28
<PAGE> 40
solicitation of proxies by use of mail, the directors, officers and employees of
Gothic may solicit proxies from stockholders personally or by telephone,
facsimile or other means of communication. Such directors, officers and
employees will not be additionally compensated for such solicitation but may be
reimbursed for out-of-pocket expenses incurred in connection with the
solicitation. In addition, Gothic has engaged The Altman Group, Inc. for a fee
of $20,000, plus expenses, to aid in the solicitation of proxies. Arrangements
will also be made with brokerage houses, banks, fiduciaries and other custodians
for the forwarding of solicitation material to the beneficial owners of stock
held of record by such persons, and Gothic will reimburse such persons for their
reasonable out-of-pocket expenses in connection with the solicitation.
CONVERSION OF CERTIFICATES
You should not send in any stock certificates with your proxy cards. As
soon as practicable after the consummation of the merger, a transmittal form
will be sent to former shareholders of Gothic who hold their stock in their own
name with instructions for receiving Chesapeake common stock. Broker-dealers who
hold stock for a shareholder in "street name" will execute the conversion from
Gothic common stock to Chesapeake common stock for that shareholder.
INDEPENDENT AUDITORS
PricewaterhouseCoopers LLP serves as Gothic's independent auditors. It is
expected that a representative of PricewaterhouseCoopers LLP will be at the
special meeting to answer questions by shareholders and will have the
opportunity to make a statement if so desired.
29
<PAGE> 41
THE MERGER
This section, as well as the next section "Material Terms of the Merger
Agreement," describe the material aspects of the proposed merger, including the
merger agreement. These descriptions are qualified in their entirety by
reference to the merger agreement, which is attached as Annex A to this
document, and to the other agreements and documents that are described in this
document and that are filed as exhibits to the registration statement of which
this document forms a part. YOU SHOULD READ THE MERGER AGREEMENT IN ITS ENTIRETY
AS IT IS THE LEGAL DOCUMENT THAT GOVERNS THE MERGER.
BACKGROUND OF THE MERGER
In April 1998, Gothic recapitalized its outstanding debt and preferred
equity. In this recapitalization Gothic, among other things,
- organized Gothic Production Corporation as a wholly-owned subsidiary and
transferred all of Gothic's natural gas and oil properties to Gothic
Production;
- caused Gothic Production to issue, with Gothic's guaranty, $235 million
principal amount of 11 1/8% senior secured notes due May 1, 2005; and
- issued approximately $60 million initial principal amount, accreting to
$104 million principal amount at May 1, 2002, of 14 1/8% senior secured
discount notes due May 1, 2006.
As part of the recapitalization, Gothic also entered into a series of
transactions with Chesapeake. As part of these transactions, Gothic
- sold to Chesapeake 50,000 shares of its 12% Series B senior redeemable
preferred stock with an aggregate liquidation value of $50 million and a
warrant to purchase 2,439,246 shares of its common stock for $0.01 per
share;
- assigned a 50% interest in substantially all of Gothic's undeveloped
leasehold, subject to Chesapeake's obligation to reassign in 2003
interests in any acreage which had not been the subject of development,
and entered into a participation agreement with Chesapeake to provide for
the development of the undeveloped acreage; and
- sold to Chesapeake a 50% interest in its producing Arkoma basin natural
gas and oil properties for approximately $20 million.
When issued, the Series B preferred stock had an aggregate liquidation
preference of $50 million and a dividend rate equal to 12% of the aggregate
liquidation preference payable in additional shares of Series B preferred stock,
or, after April 1, 2000 at Gothic's option, in cash. After April 30, 2000, the
Series B preferred stock became convertible into the number of shares of Gothic
common stock determined by dividing the liquidation preference by the greater of
$2.04 or the fair market value of a share of Gothic common stock on the date of
conversion. The conversion right may not be exercised, however, if the
conversion would cause any holder or group to own more than 19.9% of Gothic's
outstanding common stock. To date, all dividends on the Series B preferred stock
have been paid in kind and on October 20, 2000, Chesapeake held 66,675 shares of
Series B preferred stock, including accrued dividends.
Gothic used the net proceeds from the recapitalization to (1) repay $56.5
million due June 30, 1998 under a secured bridge note and $149.9 million under a
revolving loan, (2) redeem its outstanding Series A preferred stock for $38.7
million, and (3) redeem its outstanding 12 1/4% senior notes for $102.3 million.
Gothic had incurred these obligations to finance its acquisition of oil and
natural gas assets from Amoco Corporation in January 1998. The purchase price
for the Amoco acquisition consisted of (a) $237.5 million in cash, (b) warrants
to purchase 1.5 million shares of Gothic common stock at an exercise price of
$3.00 per share, before anti-dilution adjustments, and (c) the transfer of
producing properties having a value of less than $1.8 million. The cash portion
of the purchase price was financed
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with approximately $216.4 million of bank borrowings and a portion of the
proceeds from the issuance of 37,000 shares of Gothic's Series A preferred stock
with an aggregate liquidation preference of $37.0 million.
Following the completion of the recapitalization transactions, commodity
prices for natural gas and oil began to decline. At the end of the quarter ended
June 30, 1998, the price for natural gas was $2.25 per Mcf and declined to
approximately $1.65 per Mcf by the end of October 1998. As a result of these
declining prices, Gothic's asset value declined leading to a writedown of
Gothic's asset values. Gothic recorded full cost ceiling writedowns in its
financial statements in the quarters ended September 30, 1998 and December 31,
1998 in the amounts of $34.0 million and $42.0 million, respectively.
The declining natural gas and oil prices, and resulting lower cash flow
levels, combined with the losses created by Gothic's asset write-downs, strained
Gothic's financial resources. Because of this strain on its resources, Gothic
was at risk of not being able to continue to expend funds for the development
and exploitation of its undeveloped natural gas and oil interests.
As a result of these factors, Gothic's auditor's report for the year ended
1998 contained a going concern qualification. At the same time, Gothic's common
stock traded below $1.00 for an extended period of time, resulting in the
delisting of the Gothic common stock from the Nasdaq SmallCap Market on May 26,
1999. The market value of Gothic's debt instruments suffered as well with both
its senior secured notes and its senior discount notes trading at substantial
discounts to par.
On August 17, 1999, Chesapeake exercised the common stock purchase warrant
it received in April 1998 for 2,394,125 shares of Gothic's common stock.
Chesapeake surrendered 45,121 warrants to Gothic as part of its cashless
exercise of the common stock purchase warrant. Pursuant to the participation
agreement entered into in April 1998, during the year ended December 31, 1999
and the six months ended June 30, 2000 Chesapeake elected to participate to the
extent of 50% of Gothic's interest in the development of 29 and 15 non-producing
properties, respectively, and did not participate in any acquired properties.
On September 13, 1999, Gothic announced it had retained CIBC World Markets
Corp. to provide assistance in considering alternatives for restructuring its
debt and equity capital. Gothic stated it was seeking financing alternatives
intended to reduce its debt as well as raise new capital. Gothic intended to
restructure its outstanding Series B preferred stock, all held by Chesapeake,
and its discount notes in order to reduce their dilutive effect on Gothic's
common equity. The terms of Gothic's Series B preferred stock provide for
dividends payable in additional shares of Series B preferred stock or, since
April 2000, in cash at Gothic's option. The discount notes increase in principal
amount, in lieu of cash interest payments to $104 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 on May 1 and November 1. In an effort to eliminate
the continuing erosion of Gothic's common equity by the payment of dividends in
kind on the shares of preferred stock and accretion of the outstanding principal
of its discount note indebtedness, Gothic had begun seeking to refinance these
securities in the latter half of 1999.
Because of the reduced market prices for natural gas and oil throughout the
latter half of 1998 and into 1999, and the resulting impact on Gothic's revenues
and financial condition, Gothic was not able to refinance its preferred stock
and discount notes. Gothic's existing capital structure, including specifically
the Series B preferred stock and the discount notes, proved to be substantial
impediments to raising new capital or exploring a sale of the company.
During the period of September through mid-December 1999, Gothic had
various preliminary discussions with Chesapeake concerning the possibility of a
sale or merger of Gothic to or with Chesapeake. As part of that process, on
October 7, 1999, Chesapeake entered into a confidentiality agreement with Gothic
wherein Gothic provided Chesapeake with financial, natural gas and oil reserve
data and other information Chesapeake required in order to evaluate a possible
transaction. At that time, Gothic and Chesapeake determined a transaction was
impractical due to, among other things, limitations on Chesapeake's ability to
incur debt under its existing indentures.
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<PAGE> 43
In early 2000, Gothic determined it needed to restructure and reorganize
its liabilities and amend the participation agreement with Chesapeake in order
to achieve the financial flexibility it needed to develop its asset base. As a
result, Gothic commenced discussions with holders of its 14 1/8% senior discount
notes and with Chesapeake concerning the overall restructure of Gothic's
obligations. Because of the rights of Chesapeake and others to propose the
drilling of wells on Gothic's undeveloped acreage, combined with their ability
to obtain ownership of Gothic's interest if Gothic did not participate, Gothic
believed, in early 2000, that it could be at risk to lose a portion of its
undeveloped assets due to its lack of liquidity.
On February 29, 2000, Gothic and Chesapeake entered into an agreement to
grant to Gothic the option to substantially revise the participation agreement
and for Gothic to redeem its Series B preferred stock and common stock held by
Chesapeake. The exercise of the option issued to Gothic by Chesapeake was
subject to a number of conditions including the approval of Gothic's lenders and
confirmation by the United States Bankruptcy Court of a plan of reorganization
covering Gothic.
As part of the granting of the foregoing option to Gothic, the amendments
to the participation agreement and the redemption of the securities owned by
Chesapeake, Gothic and Chesapeake agreed, among other matters, to the following
terms:
- Extending the participation agreement for an additional three years
through April 30, 2006 and excluding a portion of the state of Texas from
the agreement;
- Granting a right of first refusal to Chesapeake on any property
dispositions made by Gothic, other than a sale of substantially all of
Gothic's assets to an unaffiliated third party through a merger,
reorganization, consolidation or the sale of all of Gothic's equity
ownership;
- The segregation of the parties' first development rights and the
assumption by Chesapeake of the operation of 28 wells drilled pursuant to
the participation agreement;
- The permanent assignment to Chesapeake of the 50% undeveloped leasehold
interest originally assigned to Chesapeake in April, 1998 that was
subject to reassignment to Gothic by Chesapeake on April 30, 2003; and
- The redemption by Gothic of its entire issue of Series B preferred stock
and of approximately 2.4 million shares of Gothic's common stock.
On June 5, 2000 Gothic entered into restructure agreements with the holders
of approximately 90% of the principal amount of its outstanding discount notes
to convert those notes into shares of its common stock. The restructure
agreements provided that the conversion of the notes and the other
restructurings of its balance sheet would be effected through a pre-negotiated
plan of reorganization under chapter 11 of the federal bankruptcy code. The plan
of reorganization would have provided that the holders of all outstanding Gothic
discount notes would convert their notes into Gothic common stock representing
approximately 94% of Gothic's equity. Under the proposed plan, Gothic's common
stockholders would have received approximately 6% of Gothic's equity following
the reorganization.
The plan of reorganization also provided for offerings of additional shares
of common stock to the holders of the Gothic discount notes and the holders of
Gothic's common stock to participate in the sale of up to $15.0 million of
additional shares of Gothic common stock. If fully subscribed by the holders of
the discount notes and common stock, the post-confirmation ownership of Gothic
by the holders of Gothic common stock would have represented approximately 9% of
Gothic's outstanding equity.
On June 6, 2000 Chesapeake notified Gothic it intended to contact the
holders of the Gothic discount notes for the purpose of negotiating a purchase
of some or all of the discount notes. Chesapeake asked that Gothic confirm its
understanding that such contact would not violate any standstill or
confidentiality provisions in effect. Chesapeake also confirmed that if
successful in purchasing any of the discount notes, it would be bound by and
assume the provisions agreed to in the June 5, 2000 restructure agreements with
the holders of the Gothic discount notes. On or about June 27, 2000, Chesapeake
purchased approximately
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96% of the outstanding discount notes subject to the terms of the restructure
agreements for a combination of cash and Chesapeake common stock.
On June 28, 2000, representatives of Gothic and Chesapeake met to discuss
Chesapeake's intentions with respect to its purchase of Gothic's discount notes.
The conversations focused on the restructure agreements and alternative methods
to maximize the value to existing Gothic equity owners. The parties determined
that a merger with Chesapeake, in which a fixed number of Chesapeake shares
would be exchanged for Gothic's outstanding common shares, would provide more
value to Gothic's shareholders than would the anticipated restructuring plan.
The basic terms of the merger were agreed to over the next two days. The
proposed merger was approved by the Gothic board of directors and the Chesapeake
board of directors on June 29, 2000, and the proposed terms of the merger were
reflected in a letter of intent executed by Chesapeake and Gothic on June 30,
2000. The proposed merger was announced the same day.
Subsequent to the execution of the letter of intent the senior officers of
Gothic and the senior officers of Chesapeake negotiated the terms of the
definitive merger agreement. Contemporaneously with the negotiation of the
merger agreement, Chesapeake also negotiated a credit facility to fund the
purchase of any of the Gothic Production 11 1/8% senior secured notes which
might be tendered under the change of control provisions of the indenture. The
parties also negotiated, as part of the merger, the assumption by Chesapeake of
all outstanding warrants and options in accordance with the agreements
controlling such warrants and options and the severance arrangements with the
employees of Gothic.
On August 9, 2000, Chesapeake's board of directors reviewed the merger
agreement and the information provided by the advisors to the board of directors
and approved the merger. On September 22, 2000, Chesapeake's board of directors
ratified the terms of the merger agreement. On September 6, 2000, Gothic's board
of directors reviewed the merger agreement and the information provided by the
advisors to the board of directors and approved the terms of the merger
agreement. On September 8, 2000, representatives of Gothic and Chesapeake
executed the merger agreement.
In July 2000, in a transaction considered to be unrelated to the merger,
Chesapeake exercised its first refusal rights under the amended participation
agreement and purchased from Gothic for $1.6 million approximately 200 primarily
non-operated wells on the basis of the terms theretofore negotiated by Gothic
with a party not affiliated with either Gothic or Chesapeake.
GOTHIC'S REASONS FOR THE MERGER; RECOMMENDATION OF GOTHIC'S BOARD OF DIRECTORS
Gothic's board of directors has approved the merger and the merger
agreement and has determined that these transactions are in the best interests
of Gothic and its shareholders. Gothic's board of directors recommends that
Gothic's shareholders approve the merger and the merger agreement. In its
deliberations and in making its determination and recommendation, the Gothic
board of directors consulted with CIBC World Markets Corp. and with Gothic's
outside counsel.
Gothic's board of directors considered a number of factors, relating to
Gothic, which it concluded made the merger agreement with Chesapeake advisable,
including the following:
- Gothic's outstanding discount notes would accrete in principal amount to
$104 million at May 1, 2002 and thereafter Gothic would be required to
pay cash interest on its discount notes of approximately $14.7 million
per annum. Based on Gothic's projections, Gothic believed it would have
difficulty meeting these debt service requirements.
- On May 27, 1999, Gothic's common stock was no longer quoted on the Nasdaq
SmallCap Market, and since then its shares traded as low as $0.16 per
share.
- Gothic lacked the financial flexibility to expand and accelerate its
drilling program.
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- With the approach of the requirement to make cash interest payments on
its discount notes, Gothic's borrowing availability under its bank credit
facility had been reduced from $25 million, as of April 30, 1998, to $15
million as of April 1, 2000.
- The potential forced pooling of certain of Gothic's undeveloped natural
gas and oil properties threatened Gothic's asset base.
- The report of Gothic's independent accountants for the year ended
December 31, 1999 contained an explanatory paragraph resulting from
Gothic's recurring losses from operations and working capital and net
capital deficiency that raised substantial doubt in the opinion of the
independent accountants about Gothic's ability to continue as a going
concern.
- It would be difficult to enter into a transaction with another acquirer
other than Chesapeake because of Gothic's highly leveraged and complex
capital structure which would require a potential acquirer to negotiate
with both Gothic and the holders of its discount notes and senior secured
notes.
Gothic's board of directors also considered a number of other factors
relating to Chesapeake, which it concluded also made the merger agreement with
Chesapeake advisable, including the following:
- The Gothic shareholders would receive as merger consideration shares of
Chesapeake common stock with a market valuation, as of June 29, 2000,
based on the merger exchange ratio, of approximately $1.34 per Gothic
common share, whereas the average bid price of the Gothic shares for the
thirty days preceding June 29, 2000 was approximately $0.32 per share.
- The strategic benefits to Chesapeake from the merger, when compared to
other potential acquirers, would be significant due to the substantial
overlap in Gothic's and Chesapeake's oil and natural gas properties.
- Chesapeake and Gothic anticipate annual operating and administrative cost
savings as a result of the merger.
- By completing the merger, Chesapeake would save approximately $14.7
million in cash interest payments, commencing in May, 2002, from the
extinguishment of the Gothic discount notes.
- Chesapeake's financial capacity should permit an accelerated drilling
program.
- The merger provides greater value to Gothic's shareholders compared to
the restructuring and reorganization of Gothic under the previously
proposed plan of reorganization.
- Chesapeake's common stock is traded actively on the New York Stock
Exchange and provides liquidity to the Gothic shareholders receiving
Chesapeake shares in the merger.
OPINION OF GOTHIC'S FINANCIAL ADVISOR
At the September 6, 2000 meeting of Gothic's board of directors, CIBC World
Markets Corp. delivered its oral opinion, subsequently confirmed in writing in
an opinion dated as of September 8, 2000, to Gothic's board of directors, to the
effect that, as of that date and based upon the assumptions made, matters
considered and limits of review set forth in its opinion, the exchange ratio, as
defined in the merger agreement, was fair to the holders of Gothic common stock,
excluding those shares already owned by Chesapeake, from a financial point of
view.
THE FULL TEXT OF CIBC'S OPINION, WHICH SETS FORTH THE ASSUMPTIONS MADE,
MATTERS CONSIDERED AND CERTAIN LIMITATIONS ON THE SCOPE OF REVIEW UNDERTAKEN BY
CIBC, IS ATTACHED AS ANNEX B TO THIS PROXY STATEMENT/PROSPECTUS. WE URGE YOU TO
READ THE CIBC OPINION IN ITS ENTIRETY. THE CIBC OPINION WAS PROVIDED FOR THE USE
AND BENEFIT OF GOTHIC'S BOARD OF DIRECTORS IN ITS EVALUATION OF THE MERGER, WAS
DIRECTED ONLY TO THE FAIRNESS TO THE HOLDERS OF THE GOTHIC COMMON STOCK OF THE
EXCHANGE RATIO PURSUANT TO THE MERGER AGREEMENT FROM A FINANCIAL POINT OF VIEW,
EXCLUDING THOSE SHARES ALREADY OWNED BY CHESAPEAKE, AND DOES NOT CONSTITUTE A
RECOMMENDATION AS TO HOW ANY SHAREHOLDER SHOULD VOTE WITH
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<PAGE> 46
RESPECT TO THE MERGER OR ANY OTHER MATTERS RELATING TO THE MERGER. THIS SUMMARY
OF THE CIBC OPINION IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT
OF THE CIBC OPINION.
In arriving at its opinion, CIBC, among other things:
(a) reviewed the merger agreement;
(b) reviewed Chesapeake's audited financial statements for the fiscal
years ended December 31, 1998 and 1999 and the unaudited financial
statements for the six months ended June 30, 2000;
(c) held discussions with senior management of Chesapeake with respect
to the business and prospects for future growth of Chesapeake;
(d) reviewed the historical market prices and trading volume of both
Chesapeake and Gothic common stock;
(e) reviewed Gothic's audited financial statements for the fiscal
years ended December 31, 1998 and 1999 and the unaudited financial
statements for the six months ended June 30, 2000;
(f) reviewed financial projections of Gothic prepared by Gothic's
management;
(g) held discussions with senior management of Gothic with respect to
the business and prospects for future growth of Gothic;
(h) reviewed and analyzed certain publicly available financial data
for certain companies CIBC deemed comparable to Gothic;
(i) performed discounted cash flow analyses of Gothic using certain
assumptions of future performance provided to CIBC by the management of
Gothic;
(j) reviewed and analyzed certain publicly available financial
information for transactions that CIBC deemed comparable to the merger;
(k) reviewed public information concerning Gothic; and
(l) performed such other analyses and reviewed such other information
as CIBC deemed appropriate.
In rendering its opinion, CIBC relied upon and assumed, without independent
verification or investigation, the accuracy and completeness of all of the
financial and other information that was publicly available or provided to CIBC
by Gothic and Chesapeake and their respective employees, representatives and
affiliates. With respect to forecasts of future financial condition and
operating results of Gothic provided to CIBC, CIBC assumed at the direction of
Gothic's management, without independent verification or investigation, that
such forecasts were reasonably prepared on bases reflecting the best available
information, estimates and judgment of Gothic's management. CIBC neither made
nor obtained any independent evaluations or appraisals of the assets or the
liabilities of Gothic or affiliate entities. CIBC did not express any opinion as
to the underlying valuation, future performance or long term viability of Gothic
following the merger, or the price at which Chesapeake's common stock will trade
subsequent to the merger. CIBC was not asked to consider, and its opinion does
not address, the relative merits of the merger as compared to any alternative
business strategies that might exist for Gothic or the effect of any other
transaction in which Gothic might engage. CIBC's opinion was based on the
information available to CIBC and general economic, financial and stock market
conditions and circumstances as they existed and could be evaluated by CIBC on
the date thereof. In addition, CIBC further assumed that the merger would
qualify as a tax-free reorganization for U.S. federal income tax purposes.
The following is a summary of certain financial and comparative analyses
performed by CIBC in arriving at its opinion. Some of these summaries of
financial analyses include information presented in tabular format. In order to
understand fully the financial analyses used by CIBC, the tables must be read
together with the text of each summary. The tables alone do not constitute a
complete description of the financial analyses.
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Historical Exchange Ratio Analysis. CIBC reviewed the per share daily
closing market price and volume movements of Gothic common stock and Chesapeake
common stock for various time periods ending on August 28, 2000. CIBC also
calculated the implied value of the merger consideration, as defined in the
merger agreement, per share of Gothic common stock by multiplying 4.0 million by
the average closing trading prices of Chesapeake stock for the one month, three
month and six month trading periods preceding August 28, divided by the Gothic
aggregate number, as defined in the merger agreement. The analysis resulted in
the following values of the merger consideration received per share of Gothic
common stock for the periods indicated.
<TABLE>
<CAPTION>
MERGER GOTHIC
PERIOD ENDING AUGUST 28, 2000 CONSIDERATION VALUE ACTUAL VALUE PREMIUM
----------------------------- ------------------- ------------ -------
<S> <C> <C> <C>
Preceding 1 month............................. $1.32 $1.19 10.9%
Preceding 3 months............................ $1.26 $0.87 44.8%
Preceding 6 months............................ $0.97 $0.60 61.7%
</TABLE>
Contribution Analysis. CIBC analyzed the relative contributions of Gothic
and Chesapeake to the pro forma combined company based on selective projected
financial data. CIBC compared the relative contribution of Gothic to certain
financial data for the pro forma combined company, including the following:
<TABLE>
<CAPTION>
GOTHIC CONTRIBUTION 2001
------------------- ----
<S> <C> <C>
1. Production (MMcfe)......................................... 15.8%
2. Revenues................................................... 13.9%
3. EBITDA..................................................... 16.6%
</TABLE>
Pro Forma Combined Accretion/Dilution Analysis. CIBC analyzed the pro forma
effect of the merger on Chesapeake's estimated earnings per share and cash flow
per share in fiscal years 2000 and 2001, based on estimates provided by Gothic
and publicly available research analysts' estimates for Chesapeake. Based on the
exchange ratio in the merger, this analysis indicated that, without synergies,
the proposed merger would be accretive to Chesapeake's earnings per share and
cash flow per share in fiscal 2000 and 2001. The actual results achieved by the
combined company may vary from projected results, and the variations may be
material.
Comparable Public Companies Analysis. Using publicly available information,
CIBC compared certain financial and operating information and ratios for Gothic
with corresponding financial and operating information and ratios for the
following six companies in lines of business believed to be generally comparable
to those of Gothic:
- Belco Oil & Gas Corporation
- Bellwether Exploration Co.
- Comstock Resources, Inc.
- HS Resources Inc.
- Key Production Company
- Swift Energy Company
The analysis indicated that:
- the ratio of the aggregate value, meaning the market value of equity plus
total debt and preferred stock minus cash, to earnings before interest,
taxes, depreciation and amortization, which is referred to as EBITDA,
would be estimated to range from 3.4x to 7.2x for 2000, with an average
of 5.2x and an adjusted average of 5.1x, and would be estimated to range
from 2.8x to 6.2x for 2001, with an average of 4.9x and an adjusted
average of 5.1x; and
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<PAGE> 48
- the ratio of the price to cash flow would be estimated to range from 1.9x
to 4.6x for 2000, with an average of 3.7x and an adjusted average of
3.9x, and would be estimated to range from 1.5x to 4.7x for 2001, with an
average of 3.5x and an adjusted average of 3.7x.
CIBC then applied the range of multiples for the selected companies to the
corresponding data of Gothic. This analysis indicated an implied equity
reference range for Gothic common stock of less than $0.00 to approximately
$2.40, with an average of less than $0.00 per share.
Comparable Transactions Analysis. CIBC reviewed certain publicly available
information regarding 25 business combinations in the oil and gas exploration
and production industry since January 1, 1999. CIBC estimated a reference range
for the transactions which indicated that the implied value per Mcfe of proved
reserves ranged from $0.48 to $1.40, with an average of $0.78, compared to an
estimate of $1.09 per Mcfe of proved reserves for the Gothic-Chesapeake
transaction.
CIBC also reviewed certain publicly available information regarding 31
business combinations based on asset transactions in the oil and gas exploration
and production industry since January 1, 1999. CIBC estimated a reference range
for the transactions which indicated that the implied value per Mcfe ranged from
$0.47 to $1.55, with an average of $0.88, compared to an estimate of $1.09 for
the Gothic-Chesapeake transaction.
Discounted Cash Flow Analysis. CIBC performed a discounted cash flow
analysis for Gothic using financial forecasts provided by Gothic. CIBC
calculated a discounted cash flow analysis for Gothic as of July 1, 2000,
assuming discount rates ranging from 10% to 20%. After deducting debt from, and
adding back cash to, the present value of free cash flows, this analysis
produced an implied per common share equity value for Gothic of less than $0.00.
The summary set forth above does not purport to be a complete description
of the analyses performed by CIBC in arriving at its opinion. Arriving at a
fairness opinion is a complex process not necessarily susceptible to partial
analysis or summary description. CIBC believes that its analyses must be
considered as a whole and that selecting portions of analyses and of the factors
considered by it, without considering all such factors and analyses, could
create a misleading view of the processes underlying its opinion. CIBC did not
assign relative weights to any of its analyses in preparing its opinion. The
matters considered by CIBC in its analyses were based on numerous macroeconomic,
operating and financial assumptions with respect to industry performance,
general business and economic conditions and other matters, many of which are
beyond Gothic's and Chesapeake's control and involve the application of complex
methodologies and educated judgment. Any estimates incorporated in the analyses
performed by CIBC are not necessarily indicative of actual past or future
results or values, which may be significantly more or less favorable than such
estimates. Estimated values do not purport to be appraisals and do not
necessarily reflect the prices at which businesses or companies may be sold in
the future, and such estimates are inherently subject to uncertainty. None of
the comparable companies used in the comparable public companies analysis
described above is identical to Gothic or Chesapeake, and none of the comparable
transactions used in the comparable transactions analysis described above is
identical to the merger. Accordingly, an analysis of publicly traded comparable
companies and transactions is not mathematical; rather it involves complex
considerations and judgments concerning differences in financial and operating
characteristics of the comparable companies and other factors that could affect
the public trading value of the comparable companies or company to which they
are being compared.
Gothic's board of directors selected CIBC to act as its financial advisor
on the basis of the reputation of CIBC as an internationally recognized
investment banking firm with substantial expertise in transactions similar to
the merger and because it is familiar with Gothic and its business. As part of
its financial advisory business, CIBC is continually engaged in the valuation of
businesses and their securities in connection with mergers and acquisitions and
valuations for estate, corporate and other purposes. CIBC has acted as a
financial advisor to Gothic's board of directors in connection with the merger
and will receive a fee for its services. In addition, CIBC has performed
investment banking and other services for Gothic and has been compensated for
such services. In the ordinary course of business, CIBC or its
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<PAGE> 49
affiliates may trade in the debt and equity securities of Gothic and Chesapeake
for its own account and for the accounts of its customers and, accordingly, may
at any time hold a long or short position in such securities.
The terms of the engagement of CIBC by the board of directors are set forth
in a letter dated July 15, 1999 and a series of amendments dated October 18,
1999 and January 24 and July 19, 2000. Pursuant to the terms of this engagement
and based on the current trading value of Chesapeake's common stock, Gothic has
agreed to pay to CIBC a fee of approximately $4.0 million upon the closing of
the merger. In addition to this compensation, Gothic has also agreed to
reimburse CIBC for its reasonable out-of-pocket expenses, including the fees of
its legal counsel, and to indemnify CIBC and certain related persons from and
against certain liabilities in connection with its engagement, including certain
liabilities under the federal securities laws, arising out of its engagement.
CHESAPEAKE'S REASONS FOR THE MERGER
Chesapeake's board of directors has approved the merger and the merger
agreement and has determined that these transactions are in the best interests
of Chesapeake and its shareholders. In reaching its decision, Chesapeake's board
of directors consulted with Chesapeake's legal and financial advisors as well as
Chesapeake's management. The Chesapeake board of directors considered a number
of factors, including the following:
- Adds to core operating area. Gothic's producing properties are located
almost exclusively in Chesapeake's core Mid-Continent operating area.
- Increases natural gas concentration. The acquisition will increase
Chesapeake's proved reserves by an estimated 25%, and approximately 88%
of the acquired proved reserves will be natural gas.
- Expected savings. Because Chesapeake presently has an interest in a
significant number of Gothic's oil and gas properties, Chesapeake expects
to generate substantial annual savings from reduced general
administrative and lease operating expenses, including usage of Gothic's
telemetry systems. Gothic's lifting costs are even lower than
Chesapeake's lifting costs, which will result in improved operating
results.
- Accretive to cash flow per share. Chesapeake believes the merger will be
immediately accretive to cash flow per share.
- Improved leadership position. Chesapeake believes it will be the 10th
largest independent natural gas producer in the United States after the
merger.
- Presentation of financial advisor. Bear, Stearns & Co. Inc., Chesapeake's
financial advisor, gave a financial presentation and delivered an opinion
to the effect that as of the date of its opinion and based on and subject
to the matters described in its opinion, the merger consideration is
fair, from a financial point of view, to Chesapeake.
- Terms and conditions of merger. The terms and conditions of the merger
agreement and the merger were viewed by the Chesapeake board of directors
and management as fair to, and in the best interest of, Chesapeake and
Chesapeake shareholders.
Chesapeake's board of directors was aware of the interests of Gothic's
management in the merger as described in "Interests of Certain Persons in the
Merger" below in determining whether to approve the merger agreement.
All combinations, including the merger, also include certain risks and
disadvantages. The Chesapeake board of directors believed and continues to
believe that the potential risks and disadvantages of the merger are greatly
outweighed by the potential benefits anticipated to result from the merger.
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<PAGE> 50
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the Gothic board with respect to the
merger, Gothic shareholders should be aware that members of Gothic's management
and the Gothic board of directors have interests in the merger separate from the
interests of Gothic's shareholders generally. These separate interests are
summarized below.
Indemnification. Chesapeake has agreed that, from and after the
consummation of the merger, it will indemnify each person who is, has been at
any time prior to the date of the merger agreement, or becomes prior to the
effective time of the merger, an officer or director of Gothic or any of its
subsidiaries, with respect to his service prior to the effective time of the
merger to the fullest extent permitted by applicable law, Gothic's
organizational documents, or any indemnification agreements with Gothic.
Employment Agreements. Michael Paulk, Gothic's President, and Steven P.
Ensz, Gothic's Vice President and Chief Financial Officer, have each entered
into amended employment agreements with Gothic that provide for severance
payments upon termination of their employment on the effective date of the
merger between Gothic and Chesapeake, among other circumstances. Mr. Paulk's
employment agreement provides for a severance payment of $225,000 as a result of
the termination of his employment upon the closing of the merger, and Mr. Ensz's
agreement provides for a severance payment of $187,500. Each of these payments
will be made on the date the merger becomes effective.
Irrevocable Proxies. In connection with the merger, Chesapeake has entered
into limited irrevocable proxy agreements with Michael Paulk, Steven Ensz, Brian
Bayley and John Fleming. These agreements grant Chesapeake the power to vote all
of the shares of Gothic common stock owned by these officers and directors of
Gothic in connection with the merger until the merger agreement is terminated or
the merger is completed. These individuals have also agreed to vote in favor of
the merger if Chesapeake cannot exercise the proxies granted to it.
Additionally, these officers and directors have agreed to not sell their Gothic
shares, grant any other proxies or powers of attorneys, or enter into any voting
agreements with respect to their Gothic shares.
Pledge Agreements. On August 1, 2000, Gothic loaned Brian Bayley, a Gothic
director, $277,187 which was secured by a pledge of 712,000 shares of Gothic
common stock. Similarly, Gothic loaned John Fleming, Gothic's chairman and a
director, $277,188 which was secured by a pledge of 712,000 shares of Gothic
common stock. The loans are due July 31, 2001 and bear interest at an annual
rate of 6%.
Consulting Agreements. Messrs. Paulk and Ensz have entered into two-year
consulting agreements with Chesapeake which will become effective at the close
of the merger. Chesapeake will pay Mr. Paulk a total of $1,964,000 for his
services under his consulting agreement, $900,000 on the effective date of the
merger and the remainder in successive quarterly payments of $133,000.
Chesapeake will pay Mr. Ensz a total of $1,623,500, for his services under his
consulting agreement, $742,500 of which will be paid on the effective date of
the merger and the remainder will be paid in successive quarterly payments of
$110,125. Chesapeake will also pay Messrs. Paulk and Ensz $2,200 and $1,400 per
month, respectively, as expense reimbursement for the first six months of the
contracts. As part of the consulting agreements, Messrs. Paulk and Ensz will
agree not to acquire any oil and gas leasehold or mineral interest in any unit
in the Mid-Continent area if Chesapeake owns an interest in such a unit. If
Messrs. Paulk and Ensz make such an acquisition, they have agreed to offer the
interests acquired to Chesapeake at their cost.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
General. The following discussion summarizes certain United States federal
income tax consequences of the merger which are generally applicable to holders
of Gothic common stock under the Internal Revenue Code of 1986, as amended. Tax
consequences which are different from or in addition to those described herein
may apply to Gothic shareholders who are subject to special treatment under U.S.
federal income tax laws, such as the following persons:
- non-U.S. persons,
- tax exempt organizations,
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- financial institutions,
- insurance companies,
- broker-dealers,
- Gothic shareholders who hold their Gothic common stock as part of a
hedge, straddle, wash sale, synthetic security, conversion transaction,
or other integrated investment comprised of Gothic common stock and one
or more other investments,
- persons with a "functional currency," as defined in the Internal Revenue
Code, other than the U.S. dollar, and
- persons who acquired their shares of Gothic common stock in compensatory
transactions.
This discussion does not address non-U.S. or state or local tax considerations.
Moreover, this discussion does not address the tax consequences to holders of
Gothic stock options and Gothic warrants.
THIS SUMMARY IS NOT A SUBSTITUTE FOR AN INDIVIDUAL ANALYSIS OF THE TAX
CONSEQUENCES OF THE MERGER TO YOU. YOU SHOULD CONSULT A TAX ADVISER REGARDING
THE PARTICULAR FEDERAL, STATE AND LOCAL AND NON-U.S. TAX CONSEQUENCES OF THE
MERGER IN LIGHT OF YOUR OWN SITUATION.
While Chesapeake and Gothic intend for the merger to qualify as a
reorganization under Section 368(a) of the Internal Revenue Code, the merger may
or may not qualify as such a tax-free reorganization. Neither Chesapeake nor
Gothic has requested or received a ruling from the Internal Revenue Service with
respect to the federal income tax treatment of the merger and neither Chesapeake
nor Gothic has obtained or will obtain an opinion of counsel with respect to
such treatment. Neither Chesapeake, Chesapeake Merger 2000 Corp. nor Gothic will
recognize gain or loss as a result of the merger. Assuming the merger qualifies
as a tax-free reorganization, the material United States federal income tax
consequences will include the following:
- You will not recognize gain or loss solely as a result of receiving
Chesapeake common stock in the merger in exchange for Gothic common
stock;
- Your aggregate tax basis of the shares of Chesapeake common stock you
receive in the merger, including any fractional share not actually
received, will be the same as the aggregate tax basis of the shares of
Gothic common stock you surrender in the merger;
- Your holding period for the shares of Chesapeake common stock you receive
in the merger will include the holding period of the shares of Gothic
common stock you surrendered in the merger, provided that you hold your
Gothic common stock as a capital asset at the effective time of the
merger; and
- Any cash you receive in lieu of a fractional share of Chesapeake common
stock will be treated as if you received a fractional share of Chesapeake
common stock in the merger which was then redeemed by Chesapeake. This
redemption should qualify as a distribution in full payment in exchange
for the fractional share rather than as a distribution of a dividend.
Accordingly, if you receive cash in lieu of a fractional share of
Chesapeake common stock you will recognize gain or loss upon such payment
in an amount equal to the difference, if any, between your basis in the
fractional share and the amount of cash you receive. Such a gain or loss
will be a capital gain or loss if you hold the Gothic common stock as a
capital asset at the effective time of the merger.
In the event the merger were held not to qualify as a reorganization under
Section 368(a) of the Internal Revenue Code, you would recognize gain or loss in
an amount equal to the difference between your tax basis in your shares of
Gothic common stock and the fair market value, as of the effective date of the
merger, of the shares of Chesapeake common stock you receive in the merger. In
such event, your tax basis in the shares of Chesapeake common stock you receive
would be equal to the fair market value of such shares as of the effective date
of the merger. The holding period for the shares of Chesapeake common stock you
receive in the merger would begin on the day after the effective date of the
merger.
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Dissenting Gothic Shareholders. If you validly perfect appraisal rights as
described below under "The Merger -- Appraisal Rights" and receive cash for the
value of your shares of Gothic common stock, you should, in general, treat such
cash as having been received as a distribution from Gothic in redemption of your
Gothic shares. Such a redemption generally would be treated as a distribution in
full payment in exchange for your shares of Gothic common stock, and you would
recognize gain or loss measured by the difference between the cash received and
the tax basis of your Gothic shares, if the redemption does not have the effect
of the distribution of a dividend under Section 302 of the Internal Revenue
Code, after applying the constructive ownership rules of Section 318 of the
Internal Revenue Code. Any amount you receive through the exercise of
dissenters' rights which is or is deemed to be interest for United States
federal income tax purposes will be treated as ordinary income.
Backup Withholding; Information Reporting; Records. If you are a
noncorporate Gothic shareholder, you may be subject to backup withholding at a
rate of 31% with respect to the exchange of your Gothic shares in the merger or
the exercise of dissenters' rights. Backup withholding will not apply, however,
if you:
(1) furnish a correct taxpayer identification number and certify you
are not subject to backup withholding on Form W-9;
(2) provide a certificate of foreign status on Form W-8, or
(3) are otherwise exempt from backup withholding.
If you fail to provide the correct taxpayer identification number on Form W-9
you may be subject to a $50 penalty imposed by the Internal Revenue Service.
You will be required to retain records and file a statement setting forth
facts relating to the merger with your U.S. federal income tax return.
THE UNITED STATES FEDERAL INCOME TAX CONSEQUENCES SUMMARIZED ABOVE ARE FOR
GENERAL INFORMATION ONLY. YOU SHOULD CONSULT A TAX ADVISER WITH RESPECT TO THE
PARTICULAR CONSEQUENCES OF THE MERGER THAT MAY APPLY TO YOU, INCLUDING THE
CONSEQUENCES UNDER STATE, LOCAL, NON-U.S. AND OTHER FEDERAL TAX LAWS.
ACCOUNTING TREATMENT
Chesapeake intends to account for the merger as a purchase of Gothic by
Chesapeake, and not as a pooling of interests.
RESALES OF CHESAPEAKE COMMON STOCK RECEIVED IN THE MERGER
Shares of Chesapeake common stock issued in connection with the merger will
be freely tradeable except for shares issued to affiliates of Gothic. Shares
issued to affiliates of Gothic will be subject to the provisions of Rule 145
under the Securities Act of 1933.
LISTING OF CHESAPEAKE COMMON STOCK
Chesapeake has agreed to use its best efforts to list the Chesapeake common
stock to be issued in the merger on the New York Stock Exchange.
APPRAISAL RIGHTS
Pursuant to Section 1091 of the Oklahoma General Corporation Act, any
holder of Gothic common stock who does not vote in favor of the merger may elect
to demand the appraisal of the value of such shares of Gothic common stock,
exclusive of any element of value arising from the accomplishment or expectation
of the merger, judicially determined and paid in cash, together with a fair rate
of interest. The following discussion is not a complete statement of the law
pertaining to appraisal rights under Oklahoma law, and is qualified in its
entirety by the full text of Section 1091, which is set forth in its entirety as
Annex C to this proxy statement/prospectus, and any future amendments to Section
1091.
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If you wish to exercise your appraisal rights or wish to preserve the right
to do so, you should carefully review Annex C to this proxy
statement/prospectus. If you fail to comply with the procedures specified in
Section 1091 in a proper and timely fashion, you will lose your appraisal
rights. Moreover, because of the complexity of the procedures for exercising
appraisal rights, Gothic recommends that if you are considering exercising
appraisal rights you should seek the advice of counsel.
If you wish to exercise your right to demand appraisal under Section 1091,
you must satisfy each of the following conditions:
(1) You must deliver to Gothic a written demand for appraisal of your
shares of Gothic common stock prior to the vote being taken on the merger.
Demand can only be made by the record owner. Consequently, if you are a
beneficial owner who is not a record owner, you must instruct the record
owner to make appropriate demand on your behalf. You should forward demands
for appraisal to Gothic Energy Corporation, Two Warren Place, Suite 1200,
6120 South Yale Avenue, Tulsa, Oklahoma 74136, Attention: Secretary. A
proxy or vote against the merger or merely failing to consent to the
approval of the merger will not constitute a demand for appraisal within
the meaning of Section 1091.
(2) You must not vote for the merger.
(3) You must continuously hold your shares of Gothic common stock from
the date of making your demand through the effective time of the merger.
Accordingly, if you are the record holder of shares of Gothic common stock
on the date the written demand for appraisal is made but subsequently
transfer such shares prior to the effective time, you will lose any right
to appraisal in respect of such shares.
A demand for appraisal should:
- be executed by or on behalf of the shareholder of record, fully and
correctly, as such shareholder's name appears on the shareholder's stock
certificates,
- specify the shareholder's name, mailing address and the number of shares
of Gothic common stock owned and include a statement that the shareholder
intends thereby to demand appraisal of the shareholder's stock.
However, demand will be sufficient if it reasonably informs Gothic of the
shareholder's identity and the shareholder's intent to demand appraisal of the
shareholder's shares.
Any person signing a demand for appraisal on behalf of a partnership or
corporation or other entity should indicate that person's title. If the shares
are owned of record in a fiduciary capacity, such as by a trustee, guardian or
custodian, execution of the demand should be made in that capacity, and if the
shares of Gothic common stock are owned of record by more than one person, as in
a joint tenancy or tenancy in common, the demand should be executed by or on
behalf of all joint owners. An authorized agent, including one or more joint
owners, may execute a demand for appraisal on behalf of a holder of record;
however, the agent should identify the record owner or owners and expressly
disclose the fact that in executing the demand for appraisal, the agent is
acting for such owner or owners. A record holder such as a broker who holds
shares of Gothic common stock as a nominee for several beneficial owners may
exercise appraisal rights with respect to the shares of Gothic common stock held
for one or more beneficial owners while not exercising such rights with respect
to the shares of Gothic common stock held for other beneficial owners. In such
case, the written demand should set forth the number of shares as to which
appraisal is sought.
If you hold your Gothic shares in brokerage accounts or nominee form and
you wish to exercise appraisal rights, we urge you to promptly consult with your
broker or nominee to determine the appropriate procedures for the making of a
demand for appraisal.
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Within 10 days after the effective time of the merger, Chesapeake must give
written notice that the merger has become effective to each shareholder who has
not voted in favor of the merger and has filed a written demand meeting the
requirements of Section 1091. Within 120 days after the effective time of the
merger, but not thereafter, either Chesapeake or any former Gothic shareholder
who has complied with the requirements of Section 1091 may file a petition in
Oklahoma district court demanding a determination of the value of the shares of
Gothic common stock held by all dissenting Gothic shareholders.
Chesapeake does not presently intend to file such a petition. If you seek
to exercise your appraisal rights, you should not assume that Chesapeake will
file such a petition or that Chesapeake will initiate any negotiations with
respect to the fair value of your dissenting shares. Accordingly, if you desire
to have your Gothic shares appraised, you should file the petition necessary for
the determination of your appraised value within the time periods and in the
manner prescribed in Section 1091. Inasmuch as Chesapeake does not have an
obligation to file such a petition, if you fail to file a petition within the
period specified, this could have the effect of nullifying your previous written
demand for appraisal.
Within 120 days after the effective time of the merger, any Gothic
shareholder who has complied with the provisions of Section 1091 to that point
will be entitled to receive from Chesapeake, upon written request, a statement
setting forth the aggregate number of shares not voted in favor of the merger
and the aggregate number of holders of such shares. Chesapeake must mail such
statement to the requesting shareholder within 10 days of receipt of such
request or within 10 days of the expiration of the period for delivery of
demands for appraisal, whichever is later.
If a petition for an appraisal is timely filed, after a hearing on such
petition, the district court will determine which Gothic shareholders are
entitled to appraisal rights and will appraise the "fair value" of their shares,
exclusive of any element of value arising from the accomplishment or expectation
of the merger, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining fair value, the
district court will take into account all relevant factors. Any such payment
will be made solely out of Gothic's assets. The costs of the action may be
determined by the district court and taxed upon the parties as the district
court deems equitable. Upon application of a shareholder, the district court may
also order that all or a portion of the expenses incurred by any shareholder in
connection with the appraisal proceeding, including, without limitation,
reasonable attorneys' fees and expenses of experts, be charged pro rata against
the value of all of the shares entitled to appraisal. IF YOU ARE CONSIDERING
SEEKING APPRAISAL OF YOUR GOTHIC SHARES, YOU SHOULD BE AWARE THAT THE FAIR VALUE
OF YOUR GOTHIC SHARES AS DETERMINED UNDER SECTION 1091 COULD BE MORE THAN, THE
SAME AS OR LESS THAN THE CONSIDERATION YOU WOULD RECEIVE PURSUANT TO THE MERGER
AGREEMENT IF YOU DID NOT SEEK APPRAISAL OF YOUR SHARES.
If you have duly demanded an appraisal in compliance with Section 1091, you
will not, after the effective time, be entitled to vote the shares subject to
the demand for any purpose or be entitled to the payment of dividends or other
distributions on those shares (except dividends or other distributions payable
to holders of record of shares as of a record date prior to the effective time)
unless the demand is withdrawn, the appraisal rights are not perfected by the
filing of a petition or a court of competent jurisdiction determines that the
shareholder is not entitled to exercise dissenter's rights.
If you exercise your appraisal rights, you can at any time within 60 days
after the effective time of the merger withdraw your demand for appraisal and
accept the terms offered in the merger agreement if the withdrawal is made in
writing to Chesapeake. After this period, you may withdraw your demand for
appraisal only with Chesapeake's written consent. No appraisal proceeding in the
district court will be dismissed without the approval of the district court, and
such approval may be conditioned on terms the district court deems just. If no
petition for appraisal is filed with the district court within 120 days after
the effective time of the merger, if you have withdrawn your demand for
appraisal, or if a court of competent jurisdiction determines you are not
entitled to demand appraisal, your rights to appraisal will cease, and you will
be entitled to receive the merger consideration set forth in the merger
agreement.
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IF YOU FAIL TO STRICTLY COMPLY WITH THE PROCEDURES SET FORTH IN SECTION
1091, YOU WILL LOSE YOUR STATUTORY APPRAISAL RIGHTS WITH RESPECT TO YOUR SHARES
OF GOTHIC COMMON STOCK. CONSEQUENTLY, IF YOU WISH TO EXERCISE APPRAISAL RIGHTS,
WE URGE YOU TO CONSULT LEGAL COUNSEL BEFORE ATTEMPTING TO EXERCISE YOUR RIGHTS.
A VOTE AGAINST ADOPTION OF THE MERGER AGREEMENT ALONE WILL NOT SATISFY THE
REQUIREMENTS OF THE SEPARATE WRITTEN DEMAND FOR APPRAISAL REFERRED TO IN THE
STATUTORY PROCEDURE SUMMARIZED ABOVE.
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MATERIAL TERMS OF THE MERGER AGREEMENT
This section describes the material provisions of the merger agreement.
This description does not purport to be compete and is qualified in its entirety
by reference to the merger agreement. A copy of the merger agreement is attached
to this document as Annex A and is incorporated herein by reference. We urge you
to carefully read the merger agreement in its entirety.
THE MERGER
Structure. In the merger, Chesapeake Merger 2000 Corp. will be merged into
Gothic and Gothic will be the surviving corporation. As a result of the merger,
Gothic will become a wholly owned subsidiary of Chesapeake.
Effective Time. The merger will become effective when a certificate of
merger relating to the merger is filed with the Oklahoma Secretary of State.
This is expected to occur after Gothic shareholders have approved the merger and
after all of the other conditions in the merger agreement have been satisfied or
waived. Chesapeake and Gothic presently anticipate the effective time of the
merger will occur in January 2001.
Share Conversion. As a result of the merger, all outstanding shares of
Gothic common stock, other than shares of Gothic common stock held by Chesapeake
and those held by shareholders demanding appraisal rights, will be converted
into Chesapeake common shares based on the exchange ratio described below.
Chesapeake will receive no merger consideration with respect to Gothic common
stock it owned as of September 8, 2000 or which is issued to Chesapeake upon the
conversion of Gothic preferred stock it owns. The total number of Chesapeake
common shares to be issued as consideration for Gothic common shares exchanged
in the merger will be 4,000,000.
The exchange ratio to be used in the merger will equal the result obtained
by dividing 4,000,000 shares of Chesapeake common stock to be issued in the
merger by:
- the total number of issued and outstanding shares of Gothic common stock
at the effective time of the merger, plus
- 53,572 shares issuable on exercise of outstanding Gothic warrants that
were in the money on September 8, 2000, minus
- 2,394,125 shares of Gothic common stock which Chesapeake owned on
September 8, 2000 and any Gothic common stock issued to Chesapeake with
respect to any Gothic convertible securities owned by Chesapeake.
Each holder of Gothic common stock, other than Chesapeake and those
demanding appraisal rights, will be entitled to receive the number of Chesapeake
common shares obtained by multiplying the exchange ratio by the number of shares
of Gothic common stock he or she holds. We estimate the exchange ratio will be
0.1908 shares of Chesapeake common stock for each share of Gothic common stock.
When the merger is completed, each outstanding share of Gothic's Series B
senior redeemable preferred stock will remain outstanding and be governed by an
amended and restated certificate of designation which will eliminate the right
of the Series B preferred stock to be converted into Gothic common stock. Also,
each share of Chesapeake Merger 2000 Corp. stock outstanding before the merger
will automatically be converted into one share of Gothic common stock following
the merger.
Fractional Shares. Chesapeake will not issue fractional shares in
connection with the merger. Instead, each Gothic common shareholder will receive
the number of Chesapeake common shares he or she is entitled to receive as
described above, rounded down to the nearest whole number. The Chesapeake common
shares representing the fractional interests otherwise issuable in the merger
will be sold by Chesapeake's exchange agent at prevailing prices on the New York
Stock Exchange. The cash received from the sale of such shares will be
distributed to the Gothic common shareholders in lieu of fractional
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shares in proportion to the fractional shares each Gothic common shareholder
would have otherwise been entitled to.
In the merger, all shares of Gothic common stock, other than the shares
held by Chesapeake prior to the merger, will automatically be canceled and
retired, will cease to exist and will no longer be outstanding. Following the
completion of the merger, Gothic common shareholders will cease to have any
rights with respect to Gothic common stock other than the following:
- the right to receive Chesapeake common stock and cash in lieu of
fractional shares or
- the consideration determined to be due to a shareholder demanding
appraisal of his or her shares in accordance with the Oklahoma General
Corporation Act.
Gothic Stock Options and Warrants. Chesapeake will assume, upon the
consummation of the merger, each option and each warrant to purchase Gothic
common stock outstanding at the effective time of the merger. The terms of the
assumed options and warrants will be determined in accordance with the documents
governing the options and warrants.
CERTAIN COVENANTS
Gothic Interim Operations. The merger agreement provides that, prior to the
consummation of the merger, Gothic will conduct its business only in the
ordinary course of business and in a manner consistent with its past practice.
Gothic will use reasonable commercial efforts to preserve substantially intact
its business organization and that of its subsidiary, to keep available the
services of its present officers, employees and consultants and to preserve the
goodwill of its current significant business relationships. In particular,
Gothic has agreed that neither it nor its subsidiary will, without Chesapeake's
prior written consent:
- amend or otherwise change their respective certificates of incorporation,
by-laws or other organizational documents;
- issue, sell, pledge, dispose of or encumber, or authorize any of the
foregoing with respect to, any shares of common or preferred stock or
convertible securities or any other ownership interest in them, except
for common stock issued pursuant to options, warrants or Gothic preferred
stock outstanding on the date of the merger agreement;
- sell, pledge, dispose of or encumber any assets, other than sales of
products in the ordinary course of business;
- declare, set aside, make or pay any dividend or other distribution in
respect of any capital stock, other than distributions made from Gothic's
subsidiary to Gothic or payment-in-kind dividends made to Chesapeake, as
the sole holder, on Gothic's preferred stock;
- acquire any business entity or any division of any business entity or any
material amount of assets, other than in the ordinary course of business,
or enter into or amend any contract, agreement, commitment or arrangement
to acquire any entity, division, or material assets;
- take or cause to be taken any action which would disqualify the merger as
a reorganization under Section 368(a) of the Internal Revenue Code;
- amend, modify, terminate, waive or permit to lapse any right of first
refusal, preferential right, right of first offer or any other material
right they may hold;
- undertake significant capital commitments or expenditures, new land or
lease initiatives, or new well proposals or regulatory or governmental
actions with respect to any well activities;
- split, combine, reclassify, subdivide or redeem, purchase or otherwise
acquire, directly or indirectly, any of their capital stock;
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- settle or compromise any claim, suit or other action brought or
threatened against them which is material or which relates to any of the
transactions contemplated by the merger agreement, unless such settlement
or compromise would not have a material adverse effect on Gothic;
- incur or enter into a contract to incur any indebtedness for borrowed
money in excess of the borrowing base under Gothic's current bank credit
agreement;
- make loans, incur indebtedness or capital contributions, or investments,
other than in the ordinary course of business consistent with past
practice;
- increase the compensation payable or to become payable to their
directors, officers, employees or consultants except for increases in
salaries or wages of employees who are not officers in accordance with
past practices;
- grant any severance or termination pay to, or enter into any employment
or severance agreement with, any of their directors, officers or other
employees;
- establish, adopt, enter into or amend any collective bargaining
agreement, benefit plan, trust, fund, policy or arrangement for the
benefit of any director, officer or employee;
- make any material tax election or settle or compromise any material
federal, state, local or foreign income tax liability;
- pay, discharge or satisfy any claims, liabilities or obligations other
than in the ordinary course of business; or
- take or offer or propose to take, or agree in writing or otherwise to
take, any of the actions described above or any action which would result
in any of the conditions to the merger not being satisfied.
Chesapeake's Conduct. Chesapeake has agreed that, prior to the consummation
of the merger, except as set forth in Chesapeake's SEC documents or as otherwise
agreed to in writing, it will conduct its business and that of its subsidiaries
in the ordinary course of business and consistent with past practice. Chesapeake
will use its reasonable best efforts to preserve substantially intact its
business organization and that of its subsidiaries, to keep available the
services of its current officers, employees and consultants and to preserve the
goodwill of current significant business relationships. In particular,
Chesapeake will not, between the date of the merger agreement and the effective
date of the merger, directly or indirectly do, or propose to do, any of the
following without Gothic's prior written consent:
- amend or otherwise change the certificate of incorporation, by-laws, or
other organizational documents of Chesapeake;
- reclassify, combine, split, subdivide or redeem, purchase or otherwise
acquire, directly or indirectly, any Chesapeake common stock; or
- take or cause to be taken any action which would disqualify the merger as
a reorganization under Section 368(a) of the Internal Revenue Code.
No Solicitation. As part of the merger agreement, Gothic has agreed to
terminate any existing discussions or negotiations with any party other than
Chesapeake regarding the acquisition of all or any part of Gothic's common stock
or all or a material portion of Gothic's assets, business or equity interests.
Gothic has additionally agreed it will not solicit or encourage the initiation
of any inquiries or proposals regarding any merger, sale of assets, sale of all
or more than 3% of its common stock or similar transactions involving Gothic or
its subsidiary. However, if a third party makes an unsolicited, alternative
proposal, Gothic may, after providing written notice to Chesapeake, enter into
discussions or negotiations with such third party and provide the third party
with non-public information concerning Gothic and its business and properties.
In addition, Gothic may take and disclose to its shareholders a position with
respect to a tender offer for its securities as required by the Securities
Exchange Act of 1934. Prior to
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providing any non-public information to a third party, Gothic must obtain an
executed confidentiality and standstill agreement from the third party, with
terms satisfactory to Chesapeake.
Gothic's board of directors may recommend the alternative proposal, or
withdraw, modify or not make its recommendation in favor of the Chesapeake
merger only if it determines in good faith:
- based on the advice of Gothic's counsel, that failure to recommend the
alternative proposal would breach its fiduciary duties;
- based on the advice of Gothic's financial advisor, that the alternative
proposal would have financially superior results for the Gothic
shareholders, and that the person making the superior proposal has the
financial means, or the ability to obtain the necessary financing, to
conclude the transaction.
Gothic must notify Chesapeake about any inquiries indicating that any person
intends to make an alternative proposal, any requests for non-public
information, the terms and conditions of any offers or proposals and the status
of any actions or discussions concerning an alternative proposal.
Other Chesapeake Covenants.
- Chesapeake will use its best efforts to list on the New York Stock
Exchange the Chesapeake common shares to be delivered pursuant to the
merger.
- After the consummation of the merger, Chesapeake will, to the fullest
extent permitted under applicable law, indemnify and hold harmless each
present and former director and officer of Gothic or its subsidiary
against any costs or expenses, judgments, fines, losses, claims, damages,
liabilities and amounts paid in settlement in connection with any claim,
action, suit, proceeding or investigation, whether civil, criminal,
administrative or investigative, arising out of any acts or omissions
taken by such officer or director in his or her capacity as an officer or
director, to the same extent as provided in Gothic's certificate of
incorporation or by-laws or any applicable contract or agreement as in
effect on the date of the merger agreement.
- Chesapeake will provide Gothic's financial advisors access to the
executive officers of Chesapeake to the extent necessary for such
advisors to prepare the financial opinion required by the merger
agreement. Prior to accessing any information, the financial advisors
must execute a confidentiality agreement.
Mutual Covenants.
- Gothic and Chesapeake will cooperate in the preparation and filing of the
preliminary proxy statement and the registration statement and the
acquisition of all necessary permits and registrations under state
securities' laws.
- Gothic and Chesapeake agree and covenant that the information supplied by
them for the proxy statement/prospectus and registration statement will
be true and they will not omit any material fact required to make other
statements contained in such documents not misleading. Gothic and
Chesapeake further agree to notify the other party of any event requiring
an amendment to the registration statement or a supplement to the proxy
statement/prospectus and to cooperate in preparing and filing such
amendments or supplements.
- Gothic and Chesapeake will give each other prompt notice of any
representation being untrue when made, the occurrence or nonoccurrence of
any event which would reasonably be expected to cause any representation
or warranty contained in the merger agreement to be materially untrue or
inaccurate on the closing date, or any failure of Gothic or Chesapeake,
as the case may be, to comply with or satisfy any covenant, condition, or
agreement contained in the merger agreement.
- The parties to the merger agreement will use all reasonable efforts to
take all actions and do all things necessary or advisable to consummate
and make effective the transactions contemplated by
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the merger agreement, to obtain in a timely manner all necessary waivers,
consents and approvals and to effect all necessary registrations and
filings, and otherwise to satisfy or cause to be satisfied all conditions
precedent to each of their obligations under the merger agreement.
- The parties to the merger agreement will use all reasonable efforts to
have any order, ruling or injunction which restrains, enjoins or
otherwise prevents consummation of the merger declared ineffective as
soon as practicable.
- Gothic will provide severance pay in accordance with its severance policy
to all Gothic employees, except as specifically provided for in the
merger agreement.
REPRESENTATIONS AND WARRANTIES
The merger agreement contains customary representations and warranties made
by Gothic relating to, among other things, the following:
- corporate organization, power and good standing,
- authority to enter into the merger agreement and approvals with respect
to the merger agreement,
- no violations of organizational documents, loan documents and legal
requirements,
- receipt of all necessary consents and approvals,
- compliance with securities laws and disclosure requirements,
- preparation of financial statements,
- brokerage and finders' fees,
- capitalization,
- absence of undisclosed material litigation,
- absence of adverse changes or events since March 31, 2000,
- compliance with laws, material agreements and permits,
- tax matters,
- employee benefit matters,
- environmental matters,
- employment contracts and related matters,
- labor matters,
- insurance,
- intellectual property matters,
- title to assets,
- opinion of financial advisor,
- oil and gas operations matters,
- financial and commodity hedging,
- books and records,
- subsidiaries,
- accuracy of information supplied for inclusion in the proxy
statement/prospectus,
- required approvals,
49
<PAGE> 61
- equipment,
- capital expenditure commitments, and
- employee, officer and director loans.
Chesapeake and Chesapeake Merger 2000 Corp. have made representations and
warranties relating to, among other things, the following:
- corporate organization, power and good standing,
- authority to enter into the merger agreement and approvals with respect
to the merger agreement,
- no violations of organizational documents, loan documents and legal
requirements,
- receipt of all necessary consents and approvals,
- compliance with securities laws and disclosure requirements,
- preparation of financial statements,
- capitalization,
- governmental regulation,
- absence of undisclosed material litigation,
- brokerage and finders' fees,
- absence of adverse changes or events since March 31, 2000 and interim
operations,
- compliance with laws, material agreements and permits,
- tax matters,
- no restrictions on the ability to complete the transaction,
- environmental matters,
- employment contracts and benefits,
- labor matters,
- insurance,
- intellectual property matters,
- opinion of financial advisor,
- books and records,
- employee benefit plans, and
- accuracy of information supplied for inclusion in the proxy
statement/prospectus.
The representations and warranties contained in the merger agreement will not
survive the merger, but they form the basis of certain conditions to the
parties' obligations to complete the merger.
CONDITIONS TO THE MERGER
Conditions to Each Party's Obligations. The obligations of Gothic and
Chesapeake to consummate the merger are subject to the satisfaction of the
following conditions:
- the receipt of approval of the holders of Gothic common stock;
- satisfaction of all of the terms and conditions of Chesapeake's financing
commitment relating to the merger and the effectiveness of such financing
commitment;
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<PAGE> 62
- the expiration or termination of the applicable waiting period under the
Hart-Scott-Rodino Act, if applicable, and receipt of all governmental and
other consents and approvals required in connection with the consummation
of the merger except where the failure to obtain such consents or
approvals would not have a material adverse effect on Chesapeake or the
merger;
- the absence of any temporary restraining order, preliminary or permanent
injunction or other legal restraint or prohibition preventing the
consummation of the merger;
- the effectiveness of the registration statement with respect to the
shares of Chesapeake common stock to be issued in the merger, with no
stop order suspending its effectiveness and no proceedings seeking a stop
order;
- the delivery by Gothic to the trustee of the senior secured notes issued
by Gothic's operating subsidiary of the officer's certificate indicating
compliance with certain terms of the indenture issued by the operating
subsidiary; and
- receipt of all material permits, approvals and consents of securities
authorities of any jurisdiction that are necessary.
Additional Conditions to Chesapeake's Obligations. Chesapeake's obligation
to consummate the merger is subject to the satisfaction or waiver, at or prior
to the closing date, of the following additional conditions:
- the accuracy and correctness of Gothic's representations and warranties
in the merger agreement as of the closing date of the merger, except to
the extent that no material adverse effect on Gothic or its subsidiary is
caused by the inaccuracy or incorrectness of any such representation or
warranty;
- Gothic's performance, in all material respects, of its covenants and
agreements under the merger agreement required to be performed at or
prior to the closing date;
- Chesapeake's receipt of agreements regarding the sale of Chesapeake
shares received in the merger from all affiliates of Gothic;
- the continuing validity of the tax determination made by Chesapeake under
the merger agreement;
- the effectiveness of the pledge agreements or the letters directing the
payment of loans out of severance payments, executed by Gothic's
directors, officers and employees;
- the receipt of customary closing certificates, consents, legal opinions
and other closing documents;
- Chesapeake's receipt of a release from each officer and director of
Gothic and its subsidiary;
- the resignations of all corporate officers and directors of Gothic and
its subsidiary;
- the absence of any change in condition of Gothic or its subsidiary that
would have or would be reasonably likely to have a material adverse
effect on Gothic or its subsidiary; and
- the holders of 5% or less of Gothic's outstanding common stock have
demanded appraisal of their Gothic shares and such demands remain in
effect.
Additional Conditions to Gothic's Obligations. Gothic's obligation to
consummate the merger is subject to the satisfaction or waiver, at or prior to
the closing date, of the following additional conditions:
- the accuracy and correctness of Chesapeake's representations and
warranties and in the merger agreement as of the closing date of the
merger, except to the extent that no material adverse effect is caused by
the inaccuracy or incorrectness of any such representation or warranty;
- Chesapeake's performance, in all material respects, of its obligations
under the merger agreement required to be performed at or prior to the
closing date;
- the receipt of customary closing certificates, consents, legal opinions
and other closing documents;
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<PAGE> 63
- the authorization for listing on the New York Stock Exchange of the
shares of Chesapeake common stock to be issued in the merger; and
- the absence of any change in the condition of Chesapeake or its
subsidiaries which would result in a material adverse effect on
Chesapeake or its subsidiaries.
TERMINATION OF THE MERGER AGREEMENT
Rights to Terminate. The parties to the merger agreement can terminate the
agreement and abandon the merger at any time prior to closing if they mutually
agree to do so. Either Chesapeake or Gothic can unilaterally terminate the
merger agreement if:
- Gothic's shareholders do not approve the merger agreement;
- any governmental authority issues an order, decree or ruling or takes any
other action permanently enjoining, restraining or otherwise prohibiting
the merger and such action has become final and nonappealable, provided
the terminating party has used reasonable efforts to remove any such
order; or
- the merger has not been consummated by June 30, 2001, unless the failure
to consummate the merger is the result of a failure to fulfill any
obligations under the merger agreement by the party seeking to terminate
the merger agreement.
Chesapeake may unilaterally terminate the merger agreement if:
- Gothic materially breaches any of its representations and warranties
contained in the merger agreement and the breach (1) causes a material
adverse effect to Gothic, and (2) is not cured within 15 days following
receipt of notice of such breach:
- Gothic fails to comply in any material respect with any of its covenants
or agreements contained in the merger agreement and such failure is not,
or cannot be, cured within 10 days after notice and demand for cure; or
- Gothic accepts a takeover proposal that its board of directors determines
to constitute a superior proposal.
Gothic may unilaterally terminate the merger agreement if:
- Chesapeake breaches any of is representations and warranties in the
merger agreement and such breach (1) causes a material adverse effect to
Chesapeake, and (2) is not cured within 15 days following receipt of
notice of such breach;
- Chesapeake fails to comply in any material respect with any of its
covenants or agreements in the merger agreement and such failure is not,
or cannot be, cured within a reasonable time after notice and demand for
cure; or
- Gothic receives a takeover proposal that its board of directors
determines to constitute a superior proposal such that it is obligated to
accept the proposal, except that, prior to terminating the agreement upon
receipt of a superior proposal, Gothic will provide Chesapeake with at
least three full business days to adjust the terms and conditions of the
merger agreement or the merger in order to enable Gothic to proceed with
the merger, and provided further, that Gothic must pay the termination
fee set forth in the merger agreement before terminating the merger
agreement pursuant to this right.
If the merger agreement is terminated pursuant to its terms, no provision
of the merger agreement will survive, other than the provisions relating to the
truthfulness of statements made in the registration statement and the
termination fee. Both Chesapeake and Gothic will remain liable for damages
suffered by the other as a result of their breach of representations,
warranties, covenants, agreements or other
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<PAGE> 64
obligations in the merger agreement prior to termination. Chesapeake's aggregate
potential liability is limited to $1,000,000 if Gothic terminates based on
Chesapeake's breach of its representations and warranties, covenants or other
agreements contained in the merger agreement. Gothic's aggregate liability is
limited to $1,000,000 if Chesapeake terminates based on Gothic's breach of its
representations and warranties, covenants or other agreements contained in the
merger agreement.
Termination Fee. Gothic must pay a termination fee of $10,000,000 to
Chesapeake if:
(1) Gothic terminates the merger agreement because it received an
alternative takeover proposal that its board of directors determined to be
a superior proposal;
(2) Chesapeake terminates the merger agreement because Gothic accepted
an alternative takeover proposal that Gothic's board of directors
determined to be superior; or
(3) Gothic or Chesapeake terminate the merger agreement due to the
failure of Gothic's shareholders to approve the merger if:
(a) at the time that the shareholders fail to approve the merger,
Gothic has received an alternative proposal; and
(b) within seven months of the termination of the merger agreement,
Gothic enters into a definitive agreement with a third party with
respect to such alternative proposal.
EXPENSES
Each party will pay its own expenses whether or not the merger is
consummated. However, Chesapeake and Gothic will each be responsible for 50% of
the printing, filing and mailing costs, and all SEC and other regulatory filing
fees, incurred in connection with this proxy statement/prospectus and the
registration statement.
AMENDMENTS TO THE MERGER AGREEMENT
The parties to the merger agreement may amend it at any time before or
after the approval of Gothic's shareholders by an instrument signed by all of
the parties to the agreement. No amendment may be made subsequent to approval by
Gothic's shareholders that, by law, would require further approval by the
shareholders unless such approval is obtained.
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<PAGE> 65
CHESAPEAKE'S BUSINESS
GENERAL
Chesapeake Energy Corporation is an independent energy company focused on
the exploration, development, acquisition and production of onshore natural gas
reserves, principally in the Mid-Continent region of the United States. We began
operations in 1989 and completed our initial public offering in 1993. Our common
stock trades on the New York Stock Exchange under the symbol CHK. Our principal
executive offices are located at 6100 North Western Avenue, Oklahoma City,
Oklahoma 73118. Our main telephone number is (405)848-8000 and our website
address is www.chkenergy.com.
At the end of 1999, we owned interests in approximately 4,700 producing oil
and gas wells. Our primary operating area is the Mid-Continent region, which
includes Oklahoma, western Arkansas, southwestern Kansas and the Texas
Panhandle. Our other operating areas are
- the Gulf Coast region consisting primarily of the Austin Chalk Trend in
Texas and Louisiana and the Tuscaloosa Trend in Louisiana;
- the Helmet area of northeastern British Columbia; and
- the Permian Basin region of west Texas and southeastern New Mexico.
During 1999, we produced 133.5 Bcfe, making Chesapeake one of the 15 largest
public independent oil and gas producers in the United States. We participated
in 211 gross (119.7 net) wells, of which we operated 135 wells. A summary of our
1999 drilling activities, capital expenditures and property sales by primary
operating area is as follows ($ in thousands):
<TABLE>
<CAPTION>
CAPITAL EXPENDITURES -- OIL AND GAS PROPERTIES
GROSS NET ----------------------------------------------------------------------
WELLS WELLS SUB- SALE OF
DRILLED DRILLED DRILLING LEASEHOLD TOTAL ACQUISITIONS PROPERTIES TOTAL
------- ------- -------- --------- -------- ------------ ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mid-Continent................ 169 95.3 $ 55,670 $12,478 $ 68,148 $47,364 $(36,702) $ 78,810
Gulf Coast................... 10 3.7 22,049 8,288 30,337 629 (2,628) 28,338
Canada....................... 12 7.5 27,380 1,982 29,362 4,100 (813) 32,649
Permian Basin................ 9 5.5 3,232 727 3,959 -- -- 3,959
All other areas.............. 11 7.7 20,874 588 21,462 -- (5,492) 15,970
--- ----- -------- ------- -------- ------- -------- --------
Total................ 211 119.7 $129,205 $24,063 $153,268 $52,093 $(45,635) $159,726
=== ===== ======== ======= ======== ======= ======== ========
</TABLE>
Our proved reserves increased 11% to an estimated 1,206 Bcfe at December
31, 1999, compared to 1,091 Bcfe of estimated proved reserves at December 31,
1998. See note 11 of the notes to our audited consolidated financial statements
included at the end of this proxy statement/prospectus.
For 2000, we have established a capital expenditure budget of $290 million,
including approximately $150 million allocated to drilling, acreage acquisition,
seismic and related capitalized internal costs, and $140 million for
acquisitions, debt repayment and general corporate purposes, including the
potential purchase of additional Gothic notes. This budget is subject to ongoing
adjustments based on drilling results, oil and gas prices, and other factors.
RECENT DEVELOPMENTS
As a hedge against higher drilling costs, we recently formed Advanced
Drilling Technologies, L.L.C., a 50% Chesapeake-owned drilling rig company which
presently owns five rigs that are either drilling or are being refurbished for
drilling. We anticipate that our share of the capital costs related to these
five rigs will total $8 million. These rigs are capable of drilling to depths
ranging from 8,500 to 18,000 feet and are therefore able to drill all but the
deepest of our Mid-Continent prospects.
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<PAGE> 66
PRIMARY OPERATING AREA
Mid-Continent Region
Our Mid-Continent proved reserves of 758 Bcfe represented 63% of our total
proved reserves as of December 31, 1999 and this area produced 70 Bcfe, or 52%
of our 1999 production. During 1999, we invested approximately $56 million to
drill 169 gross (95.3 net) wells in the Mid-Continent.
SECONDARY OPERATING AREAS
Gulf Coast
Our Gulf Coast proved reserves, consisting of the Austin Chalk Trend in
Texas and Louisiana, the Wharton County area in Texas, and the Tuscaloosa Trend
in Louisiana, represented 190 Bcfe, or 15% of our total proved reserves as of
December 31, 1999. During 1999, the Gulf Coast assets produced 45 Bcfe, or 34%
of our total production. During 1999, we invested approximately $22 million to
drill 10 gross (3.7 net) wells in the Gulf Coast.
Helmet Area
Our Canadian proved reserves of 178 Bcfe represented 15% of our total
proved reserves at December 31, 1999. During 1999, production from Canada was 12
Bcfe, or 9% of our total production. During 1999, we invested approximately $27
million to drill 12 gross (7.5 net) wells, install various pipelines and
compressors, and to perform capital workovers in Canada.
Permian Basin
Our Permian Basin proved reserves of 33 Bcfe represented 3% of our total
proved reserves as of December 31, 1999 and this area produced 5 Bcfe, or 4% of
our 1999 production. During 1999, we invested approximately $3 million to drill
9 gross (5.5 net) wells in the Permian Basin.
OIL AND GAS RESERVES
The tables below set forth information as of December 31, 1999 with respect
to our estimated proved reserves, the estimated future net revenue we may derive
from these proved reserves and the present value of this future net revenue at
such date. Williamson Petroleum Consultants, Inc. evaluated 50% and Ryder Scott
Company L.P. evaluated 16% of our combined discounted future net revenues from
our estimated proved reserves at December 31, 1999. The remaining properties
were evaluated internally by our engineers. All estimates were prepared based
upon a review of production histories and other geologic, economic, ownership
and engineering data we developed. The present value of estimated future net
revenue shown is not intended to represent the current market value of our
estimated oil and gas reserves.
<TABLE>
<CAPTION>
ESTIMATED PROVED RESERVES OIL GAS TOTAL
AS OF DECEMBER 31, 1999 (MBbl) (MMcf) (MMcfe)
------------------------- ------ --------- ---------
<S> <C> <C> <C>
Proved developed...................................... 17,750 763,323 869,823
Proved undeveloped.................................... 7,045 293,503 335,772
------ --------- ---------
Total proved................................ 24,795 1,056,826 1,205,595
====== ========= =========
</TABLE>
<TABLE>
<CAPTION>
ESTIMATED FUTURE NET REVENUE PROVED PROVED
AS OF DECEMBER 31, 1999(a) DEVELOPED UNDEVELOPED TOTAL PROVED
---------------------------- ---------- ----------- ------------
($ IN THOUSANDS)
<S> <C> <C> <C>
Estimated future net revenue..................... $1,470,297 $420,878 $1,891,175
Present value of future net revenue.............. $ 867,985 $221,511 $1,089,496
</TABLE>
---------------
(a) Estimated future net revenue represents estimated future gross revenue to
be generated from the production of proved reserves, net of estimated
production and future development costs, using prices and costs in effect
at December 31, 1999. The amounts shown do not give effect to non-property
related expenses, such as general and administrative expenses, debt service
and future income tax
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<PAGE> 67
expense or to depreciation, depletion and amortization. The prices used in
the external and internal reports yield weighted average prices of $24.72
per barrel of oil and $2.25 per Mcf of gas.
The future net revenue attributable to our estimated proved undeveloped
reserves of $420.9 million at December 31, 1999, and the $221.5 million present
value thereof, have been calculated assuming that we will expend approximately
$212.5 million to develop these reserves. The amount and timing of these
expenditures will depend on a number of factors, including actual drilling
results, product prices and the availability of capital.
No estimates of proved reserves comparable to those included herein have
been included in reports to any federal agency other than the Securities and
Exchange Commission.
Our ownership interest used in calculating proved reserves and the
estimated future net revenue therefrom were determined after giving effect to
the assumed maximum participation by other parties to our farmout and
participation agreements. The prices used in calculating the estimated future
net revenue attributable to proved reserves do not reflect market prices for oil
and gas production sold subsequent to December 31, 1999. There can be no
assurance that all of the estimated proved reserves will be produced and sold at
the assumed prices or that existing contracts will be honored or judicially
enforced.
There are numerous uncertainties inherent in estimating quantities of
proved reserves and in projecting future rates of production and timing of
development expenditures, including many factors beyond our control. The reserve
data set forth herein represent only estimates. Reserve engineering is a
subjective process of estimating underground accumulations of oil and gas that
cannot be measured in an exact way, and the accuracy of any reserve estimate is
a function of the quality of available data and of engineering and geological
interpretation and judgment. As a result, estimates made by different engineers
often vary. In addition, results of drilling, testing and production subsequent
to the date of an estimate may justify revision of such estimates, and such
revisions may be material. Accordingly, reserve estimates are often different
from the actual quantities of oil and gas that are ultimately recovered.
Furthermore, the estimated future net revenue from proved reserves and the
present value thereof are based upon certain assumptions, including prices,
future production levels and cost, that may not prove correct. Predictions about
prices and future production levels are subject to great uncertainty, and the
foregoing uncertainties are particularly true as to proved undeveloped reserves,
which are inherently less certain than proved developed reserves and which
comprise a significant portion of our proved reserves.
The following table sets forth our estimated proved reserves by area and
the related present value, discounted at 10%, of the proved reserves, based on
weighted average prices at December 31, 1999 of $24.72 per barrel of oil and
$2.25 per Mcf of gas:
<TABLE>
<CAPTION>
PRESENT
PERCENT VALUE
GAS OF (DISC. @
OIL GAS EQUIVALENT PROVED 10%)
(MBbl) (MMcf) (MMcfe) RESERVES ($ IN 000'S)
------ --------- ---------- -------- ------------
<S> <C> <C> <C> <C> <C>
Mid-Continent.................... 12,230 684,178 757,559 63% $ 663,993
Gulf Coast....................... 4,169 164,693 189,708 15 211,348
Canada........................... -- 178,242 178,242 15 97,749
Permian Basin.................... 3,480 12,391 33,269 3 62,067
Other areas...................... 4,916 17,322 46,817 4 54,339
------ --------- --------- --- ----------
Total.................. 24,795 1,056,826 1,205,595 100% $1,089,496
====== ========= ========= === ==========
</TABLE>
During 1999, we increased our proved developed reserve percentage to 80% by
present value and 72% by volume, and natural gas reserves accounted for 88% of
proved reserves at December 31, 1999. See note 11 of the notes to our audited
consolidated financial statements included at the end of this proxy statement/
prospectus for other disclosures about our oil and gas producing activities.
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<PAGE> 68
DRILLING ACTIVITY
The following table sets forth the wells we drilled during the periods
indicated. In the table, "gross" refers to the total wells in which we have a
working interest and "net" refers to gross wells multiplied by our working
interest in those wells.
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS
DECEMBER 31, ENDED YEAR ENDED
---------------------------- DECEMBER 31, JUNE 30,
1999 1998 1997 1997
------------- ------------ ------------ ------------
GROSS NET GROSS NET GROSS NET GROSS NET
----- ----- ----- ---- ----- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
UNITED STATES
Development:
Productive............... 167 93.3 158 93.9 55 24.4 90 55.0
Non-productive........... 17 10.6 9 4.7 1 0.3 2 0.2
--- ----- --- ---- -- ---- -- ----
Total............... 184 103.9 167 98.6 56 24.7 92 55.2
=== ===== === ==== == ==== == ====
Exploratory:
Productive............... 9 3.7 46 23.4 28 15.5 71 46.1
Non-productive........... 6 4.6 9 6.8 2 0.9 8 5.7
--- ----- --- ---- -- ---- -- ----
Total............... 15 8.3 55 30.2 30 16.4 79 51.8
=== ===== === ==== == ==== == ====
CANADA
Development:
Productive............... 11 7.3 11 3.6
Non-productive........... 1 0.2 1 0.4
--- ----- --- ----
Total............... 12 7.5 12 4.0
=== ===== === ====
Exploratory:
Productive............... -- -- 1 0.3
Non-productive........... -- -- 7 2.1
--- ----- --- ----
Total............... -- -- 8 2.4
=== ===== === ====
</TABLE>
WELL DATA
At December 31, 1999, we had interests in 4,719 (2,235.1 net) producing
wells, of which 238 (104.6 net) were classified as primarily oil producing wells
and 4,481 (2,130.5 net) were classified as primarily gas producing wells.
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<PAGE> 69
VOLUMES, REVENUE, PRICES AND PRODUCTION COSTS
The following table sets forth certain information regarding the production
volumes, revenue, average prices received and average production costs
associated with our sale of oil and gas for the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, SIX MONTHS ENDED YEAR ENDED
------------------- DECEMBER 31, JUNE 30,
1999 1998 1997 1997
-------- -------- ---------------- ----------
<S> <C> <C> <C> <C>
NET PRODUCTION:
Oil (MBbl)......................... 4,147 5,976 1,857 2,770
Gas (MMcf)......................... 108,610 94,421 27,326 62,005
Gas equivalent (MMcfe)............. 133,492 130,277 38,468 78,625
OIL AND GAS SALES ($ IN 000'S):
Oil................................ $ 66,413 $ 75,877 $34,523 $ 57,974
Gas................................ 214,032 181,010 61,134 134,946
-------- -------- ------- --------
Total oil and gas sales.... $280,445 $256,887 $95,657 $192,920
======== ======== ======= ========
AVERAGE SALES PRICE:
Oil ($ per Bbl).................... $ 16.01 $ 12.70 $ 18.59 $ 20.93
Gas ($ per Mcf).................... $ 1.97 $ 1.92 $ 2.24 $ 2.18
Gas equivalent ($ per Mcfe)........ $ 2.10 $ 1.97 $ 2.49 $ 2.45
OIL AND GAS COSTS ($ PER Mcfe):
Production expenses................ $ .35 $ .39 $ .20 $ .14
Production taxes................... $ .10 $ .06 $ .07 $ .05
General and administrative......... $ .10 $ .15 $ .15 $ .11
Depreciation, depletion and
amortization.................... $ .71 $ 1.13 $ 1.57 $ 1.31
</TABLE>
Included in the above table are the results of our Canadian operations
during 1999 and 1998. The average sales price for our Canadian gas production
was $1.19 and $1.03 during 1999 and 1998, respectively, and the Canadian
production expenses were $0.18 and $0.24 per Mcfe, respectively.
DEVELOPMENT, EXPLORATION AND ACQUISITION EXPENDITURES
The following table sets forth certain information regarding the costs we
incurred in development, exploration and acquisition activities during the
periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS
DECEMBER 31 ENDED YEAR ENDED
------------------- DECEMBER 31, JUNE 30,
1999 1998 1997 1997
-------- -------- ------------ ----------
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
Development and leasehold costs......... $126,865 $176,610 $144,283 $324,989
Exploration costs....................... 23,693 68,672 40,534 136,473
Acquisition costs....................... 52,093 740,280 39,245 --
Sales of oil and gas properties......... (45,635) (15,712) -- --
Capitalized internal costs.............. 2,710 5,262 2,435 3,905
-------- -------- -------- --------
Total......................... $159,726 $975,112 $226,497 $465,367
======== ======== ======== ========
</TABLE>
ACREAGE
The following table sets forth as of December 31, 1999 the gross and net
acres of our developed and undeveloped oil and gas leases. "Gross" acres are the
total number of acres in which we own a working interest. "Net" acres refer to
gross acres multiplied by our fractional working interest. Acreage numbers
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<PAGE> 70
are stated in thousands and do not include options for additional leasehold we
held but had not yet exercised.
<TABLE>
<CAPTION>
TOTAL DEVELOPED
DEVELOPED UNDEVELOPED AND UNDEVELOPED
----------- ------------- ---------------
GROSS NET GROSS NET GROSS NET
----- --- ----- ----- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Mid-Continent............................ 1,439 563 848 306 2,287 869
Gulf Coast............................... 230 156 766 666 996 822
Canada................................... 100 50 641 305 741 355
Permian Basin............................ 5 3 42 23 47 26
Other areas.............................. 35 18 597 398 632 416
----- --- ----- ----- ----- -----
Total.......................... 1,809 790 2,894 1,698 4,703 2,488
===== === ===== ===== ===== =====
</TABLE>
MARKETING
Our oil production is sold under market sensitive or spot price contracts.
Our natural gas production is sold to purchasers under varying
percentage-of-proceeds and percentage-of-index contracts or by direct marketing
to end users or aggregators. By the terms of the percentage-of-proceeds
contracts, we receive a percentage of the resale price received by the purchaser
for sales of residue gas and natural gas liquids recovered after gathering and
processing our gas. The residue gas and natural gas liquids sold by these
purchasers are sold primarily based on spot market prices. The revenue we
receive from the sale of natural gas liquids is included in natural gas sales.
During 1999, only sales to Aquila Southwest Pipeline Corporation accounted for
more than 10% of our total oil and gas sales. We believe the loss of this
customer would not have a material adverse effect on our results of operations
or our financial position.
Sales to individual customers constituting 10% or more of total oil and gas
sales were as follows from July 1, 1996 to December 31, 1999:
<TABLE>
<CAPTION>
PERCENT OF
AMOUNT OIL AND GAS SALES
------ -----------------
($ IN THOUSANDS)
<S> <C> <C>
YEAR ENDED DECEMBER 31,
1999 Aquila Southwest Pipeline Corporation............ $31,505 11%
1998 Koch Oil Company................................. $30,564 12%
Aquila Southwest Pipeline Corporation........... 28,946 11
SIX MONTHS ENDED DECEMBER 31,
1997 Aquila Southwest Pipeline Corporation............ $20,138 21%
Koch Oil Company................................ 18,594 19
GPM Gas Corporation............................. 12,610 13
FISCAL YEAR ENDED JUNE 30,
1997 Aquila Southwest Pipeline Corporation............ $53,885 28%
Koch Oil Company................................ 29,580 15
GPM Gas Corporation............................. 27,682 14
</TABLE>
Chesapeake Energy Marketing, Inc., a wholly owned subsidiary, provides us
oil and natural gas marketing services, including commodity price structuring,
contract administration and nomination services. Chesapeake Energy Marketing
also provides these services to our partners and other oil and natural gas
producers in certain geographical areas where we are active.
HEDGING ACTIVITIES
Periodically, we utilize hedging strategies to hedge the price of a portion
of our future oil and gas production and to manage fixed interest rate exposure.
See "Chesapeake Energy Corporation Quantitative and Qualitative Disclosures
About Market Risk."
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COMPETITION
The oil and gas industry is highly competitive. We compete with major and
independent oil and gas companies for the acquisition of leasehold, proven oil
and gas properties, as well as for the services and labor required to explore,
develop and produce such properties. Many of these competitors have financial,
technical and other resources substantially greater than ours.
REGULATION
General. Numerous departments and agencies, federal, state and local, issue
rules and regulations binding on the oil and gas industry, some of which carry
substantial penalties for failure to comply. This regulatory burden increases
our cost of doing business and, consequently, affects our profitability.
Exploration and Production. Our operations are subject to various types of
regulation at the federal, state and local levels. Such regulation includes:
- requiring permits for the drilling of wells,
- maintaining bonding requirements in order to drill or operate wells and
regulating the location of wells,
- the method of drilling and casing wells,
- the surface use and restoration of properties upon which wells are
drilled, and
- the plugging and abandoning of wells and the disposal of fluids used or
obtained in connection with operations.
Our operations are also subject to various conservation regulations. These
include the regulation of the size of drilling and spacing units and the density
of wells which may be drilled and the unitization or pooling of oil and gas
properties. In this regard, some states, such as Oklahoma, allow the forced
pooling or integration of tracts to facilitate exploration while other states,
such as Texas, rely on voluntary pooling of lands and leases. In areas where
pooling is voluntary, it may be more difficult to form units and, therefore,
more difficult to develop a prospect if the operator owns less than 100% of the
leasehold. In addition, state conservation laws establish maximum rates of
production from oil and gas wells, generally prohibit the venting or flaring of
gas and impose certain requirements regarding the ratability of production. The
effect of these regulations is to limit the amount of oil and gas we can produce
and to limit the number of wells or the locations at which we can drill. The
full extent of any impact of such restrictions cannot be predicted.
Environmental and Occupational Regulation.
General. Our activities are subject to existing federal, state and local
laws and regulations governing environmental quality and pollution control. It
is anticipated that, absent the occurrence of an extraordinary event, compliance
with existing federal, state and local laws, rules and regulations concerning
the protection of the environment and human health will not have a material
effect on our operations, capital expenditures, earnings or competitive
position. We cannot predict what effect additional regulation or legislation,
enforcement policies thereunder and claims for damages for injuries to property,
employees, other persons and the environment resulting from our operations could
have on our activities.
Our exploration, development and production activities are subject to
stringent environmental regulation by state and federal authorities including
the United States Environmental Protection Agency. Such regulation has increased
the cost of planning, designing, drilling, operating and in some instances,
abandoning wells. In most instances, the regulatory requirements relate to the
handling and disposal of drilling and production waste products and waste
created by water and air pollution control procedures. Although we believe
compliance with environmental regulations will not have a material adverse
effect on our operations or earnings, risks of substantial costs and liabilities
are inherent in oil and gas operations, and there can be no assurance that
significant costs and liabilities, including criminal penalties, will not be
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incurred. Moreover, it is possible that other developments, such as stricter
environmental laws and regulations, and claims for damages for injuries to
property or persons resulting from our operations could result in substantial
costs and liabilities.
Waste Disposal. We currently own or lease, and we have in the past owned or
leased, numerous properties that have been used for many years for the
exploration and production of oil and gas. Although we have utilized operating
and disposal practices that were standard in the industry at the time,
hydrocarbons or other wastes may have been disposed of or released on or under
these properties or on or under other locations where such wastes have been
taken for disposal. In addition, many of these properties have been operated by
third parties whose treatment and disposal or release of hydrocarbons or other
wastes was not under our control. State and federal laws applicable to oil and
natural gas wastes and properties have gradually become more strict. Under such
laws, we could be required to remove or remediate previously disposed wastes,
including wastes disposed of or released by prior owners or operators, or
property contamination, including groundwater contamination, or to perform
remedial plugging operations to prevent future contamination.
We generate wastes, including hazardous wastes, that are subject to the
federal Resource Conservation and Recovery Act and comparable state statutes.
The Environmental Protection Agency and various state agencies have limited the
disposal options for hazardous and nonhazardous wastes and are considering the
adoption of stricter disposal standards for nonhazardous wastes. Furthermore,
certain wastes generated by our oil and natural gas operations that are
currently exempt from treatment as hazardous wastes may in the future be
designated as hazardous wastes, and therefore be subject to considerably more
rigorous and costly operating and disposal requirements.
Superfund. The Comprehensive Environmental Response, Compensation and
Liability Act, sometimes referred to as the "superfund" law, imposes liability,
without regard to fault or the legality of the original conduct, on certain
classes of persons with respect to the release of a "hazardous substance" into
the environment. These persons include the owner and operator of a site and
persons that disposed of or arranged for the disposal of the hazardous
substances found at a site. CERCLA also authorizes the Environmental Protection
Agency and, in some cases, third parties to take actions in response to threats
to the public health or the environment and to seek to recover from responsible
classes of persons the costs of such action. In the course of our operations, we
may have generated and may generate wastes that fall within CERCLA's definition
of "hazardous substances." We may also be or have been an owner of sites on
which "hazardous substances" have been released. We may be responsible under
CERCLA for all or part of the costs to clean up sites at which such wastes have
been released. To date, however, neither we nor, to our knowledge, our
predecessors or successors have been named a potentially responsible party under
CERCLA or similar state superfund laws affecting property we have owned or
leased.
Air Emissions. Our operations are subject to local, state and federal
regulations for the control of emissions of air pollution. Legal and regulatory
requirements in this area are increasing, and there can be no assurance that
significant costs and liabilities will not be incurred in the future as a result
of new regulatory developments. In particular, regulations promulgated under the
Clean Air Act Amendments of 1990 may impose additional compliance requirements
that could affect our operations. However, it is impossible to accurately
predict the effect, if any, of the Clean Air Act Amendments on our operations at
this time. We may in the future be subject to civil or administrative
enforcement actions for failure to comply strictly with air regulations or
permits. These enforcement actions are generally resolved by payment of monetary
fines and correction of any identified deficiencies. Alternatively, we could be
required to forgo construction or operation of certain air emission sources.
OSHA. We are subject to the requirements of the federal Occupational Safety
and Health Act and comparable state statutes. The OSHA hazard communications
standard, the EPA community right-to-know regulations under Title III of the
federal Superfund Amendment and Reauthorization Act and similar state statutes
require us to organize information about hazardous materials used, released or
produced in our operations. Certain of this information must be provided to
employees, state and local governmental authorities and local citizens. We are
also subject to the requirements and reporting set forth
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in OSHA workplace standards. We provide safety training and personal protective
equipment to our employees.
OPA and Clean Water Act. Federal regulations require certain owners or
operators of facilities that store or otherwise handle oil, such as Chesapeake,
to prepare and implement spill prevention control plans, countermeasure plans
and facilities response plans relating to the possible discharge of oil into
surface waters. The Oil Pollution Act of 1990, or OPA, subjects owners of
facilities to strict joint and several liability for all containment and cleanup
costs and certain other damages arising from a spill, including, but not limited
to, the costs of responding to a release of oil to surface waters. The Clean
Water Act provides penalties for any discharges of petroleum product in
reportable quantities and imposes substantial liability for the costs of
removing a spill. State laws for the control of water pollution also provide
varying civil and criminal penalties and liabilities in the case of releases of
petroleum or its derivatives into surface waters or into the ground. Regulations
are currently being developed under OPA and state laws concerning oil pollution
prevention and other matters that may impose additional regulatory burdens on
the Company. In addition, the Clean Water Act and analogous state laws require
permits to be obtained to authorize discharges into surface waters or to
construct facilities in wetland areas. With respect to certain of our
operations, we are required to maintain permits under the Clean Water Act or
meet general permit requirements. The EPA has adopted regulations concerning
discharges of storm water runoff. These regulations require covered facilities
to obtain individual permits, participate in a group permit or seek coverage
under an EPA general permit. We believe that, with respect to existing
properties, we have obtained, or are included under, necessary permits and with
respect to future operations we will be able to obtain, or be included under,
their permits, where necessary. Compliance with these permits is not expected to
have a material effect on our operations.
NORM. Oil and gas exploration and production activities have been
identified as generators of concentrations of low-level naturally-occurring
radioactive materials ("NORM"). NORM regulations have recently been adopted in
several states. We are not able to fully estimate the effect of these
regulations, although based on our preliminary analysis to date, we do not
believe compliance with such regulations will have a material adverse effect on
our operations or financial condition.
Safe Drinking Water Act. Our operations involve the disposal of produced
saltwater and other nonhazardous oilfield wastes by reinjection into the
subsurface. Under the Safe Drinking Water Act, oil and gas operators, such as
Chesapeake, must obtain a permit for the construction and operation of
underground Class II injection wells. To protect against contamination of
drinking water, we are required to perform periodic mechanical integrity tests.
We have obtained the necessary permits for the Class II wells we operate. We
also have disposed of wastes in facilities other than those we owned which are
commercial Class II injection wells.
Toxic Substances Control Act. The Toxic Substances Control Act, or TSCA,
was enacted to control the adverse effects of newly manufactured and existing
chemical substances. Under the TSCA, the EPA has issued specific rules and
regulations governing the use, labeling, maintenance, removal from service and
disposal of PCB items, such as transformers and capacitors used by oil and gas
companies. We may own such PCB items but we do not believe compliance with TSCA
has had or will have a material adverse effect on our operations or financial
condition.
TITLE TO PROPERTIES
Title to properties is subject to royalty, overriding royalty, carried, net
profits, working and other similar interests and contractual arrangements
customary in the oil and gas industry, to liens for current taxes not yet due
and to other encumbrances. As is customary in the industry in the case of
undeveloped properties, only cursory investigation of record title is made at
the time of acquisition. Drilling title opinions are usually prepared before
commencement of drilling operations. From time to time, our title to oil and gas
properties is challenged through legal proceedings. We are routinely involved in
litigation involving title to certain of our oil and gas properties, some of
which we believe could be adverse to Chesapeake, individually or in the
aggregate.
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OPERATING HAZARDS AND INSURANCE
The oil and gas business involves a variety of operating risks, including
the risk of fire, explosions, blow-outs, pipe failure, abnormally pressured
formations and environmental hazards such as oil spills, gas leaks, ruptures or
discharges of toxic gases, the occurrence of any of which could result in
substantial losses due to injury or loss of life, severe damage to or
destruction of property, natural resources and equipment, pollution or other
environmental damage, clean-up responsibilities, regulatory investigation and
penalties and suspension of operations. Our horizontal and deep drilling
activities involve greater risk of mechanical problems than vertical and shallow
drilling operations.
We maintain a $50 million oil and gas lease operator policy that insures
against sudden and accidental risks associated with drilling, completing and
operating our wells. There can be no assurance that this insurance will be
adequate to cover any losses or exposure to liability. We also carry
comprehensive general liability policies and a $75 million umbrella policy. We
carry, and our subsidiaries carry, workers' compensation insurance in all states
in which we operate and a $75 million employment practice liability policy.
While we believe these policies are customary in the industry, they do not
provide complete coverage against all operating risks.
EMPLOYEES
We had 427 full-time employees as of June 30, 2000. No employees are
represented by organized labor unions. We consider our employee relations to be
good.
FACILITIES
We own an office building complex in Oklahoma City totaling approximately
86,500 square feet and nine acres of land that comprise our headquarters'
offices. We also own field offices in Lindsay and Waynoka, Oklahoma and Garden
City, Kansas. We lease office space in Oklahoma City and Weatherford, Oklahoma;
Fritch and Navasota, Texas; and Dickinson, North Dakota. We also have leased
office space in College Station, Texas; Wichita, Kansas; and Calgary, Alberta,
Canada, which has been sub-leased.
LEGAL PROCEEDINGS
We are subject to ordinary routine litigation incidental to our business.
In addition, the following matters are pending:
Securities Litigation. On March 3, 2000, the U.S. District Court for
the Western District of Oklahoma dismissed a consolidated class action
complaint styled In re Chesapeake Energy Corporation Securities Litigation.
The complaint, which consolidated twelve purported class action suits filed
in August and September 1997, alleged violations of Sections 10(b) and
20(a) of the Securities Exchange Act of 1934 by Chesapeake and certain of
our officers and directors. The action was brought on behalf of purchasers
of our common stock and common stock options between January 25, 1996 and
June 27, 1997. The complaint alleged that the defendants made material
misrepresentations and failed to disclose material facts about our
exploration and drilling activities in the Louisiana Trend. The court ruled
that Chesapeake had disclosed the precise risks of its Louisiana Trend
activities. The plaintiffs in this case have filed a motion to amend their
consolidated complaint but no appeal has been filed.
Bayard Drilling Technologies, Inc. On July 30, 1998, the plaintiffs in
Yuan, et al. v. Bayard, et al. filed an amended class action complaint in
the U.S. District Court for the Western District of Oklahoma alleging
violations of Sections 11 and 12 of the Securities Act of 1933 and Section
408 of the Oklahoma Securities Act by Chesapeake and others. The action,
originally filed in February 1998, was brought purportedly on behalf of
investors who purchased Bayard common stock in, or traceable to, Bayard's
initial public offering in November 1997. The defendants include officers
and directors of Bayard who signed the registration statement, selling
shareholders, including Chesapeake, and
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underwriters of the offering. Total proceeds of the offering were $254
million, of which we received net proceeds of $90 million.
The plaintiffs allege that Chesapeake, which owned 30.1% of Bayard's
outstanding common stock prior to the offering, was a controlling person of
Bayard. The plaintiffs also allege that we had established an interlocking
financial relationship with Bayard and were a customer of Bayard's drilling
services under allegedly below-market terms. The plaintiffs assert that the
Bayard prospectus contained material omissions and misstatements relating
to (i) our financial "problems" and their impact on Bayard's operating
results, (ii) increased costs associated with Bayard's growth strategy,
(iii) undisclosed pending related-party transactions between Bayard and
third parties other than Chesapeake, (iv) Bayard's planned use of offering
proceeds and (v) Bayard's capital expenditures and liquidity. The alleged
defective disclosures are claimed to have resulted in a decline in Bayard's
share price following the public offering. The plaintiffs seek a
determination that the suit is a proper class action and damages in an
unspecified amount or rescission, together with interest and costs of
litigation, including attorneys' fees.
On August 24, 1999, the District Court entered an order granting in
part and denying in part the defendants' motion to dismiss the action. The
court dismissed the plaintiffs' claims against Chesapeake under Section 15
of the Securities Act of 1933 alleging that Chesapeake was a "controlling
person" of Bayard. The court denied that portion of the defendants' motion
seeking dismissal of the plaintiffs' claims under Sections 11 and 12(a)(2)
of the Securities Act of 1933 and Section 408 of the Oklahoma Securities
Act. Of these, only the Section 11 claim and the Section 408 claim are
asserted against Chesapeake. Discovery is proceeding in the case and trial
is presently scheduled to be held in May 2001.
We believe we have meritorious defenses to these claims and intend to
defend this action vigorously. No estimate of loss or range of estimate of
loss, if any, can be made at this time. Bayard, which was acquired by
Nabors Industries, Inc. in April 1999, has been reimbursing us for our
costs of defense as they have been incurred.
Patent Litigation. In Union Pacific Resources Company v. Chesapeake,
et al., filed in October 1996 in the U.S. District Court for the Northern
District of Texas, Fort Worth Division, Union Pacific Resources Company
asserted that we had infringed UPRC's patent covering a "geosteering"
method utilized in drilling horizontal wells. Following a trial to the
court in June 1999, the court ruled on September 21, 1999 that the patent
was invalid. Because the patent was declared invalid, the court held that
we could not have infringed the patent, dismissed all of UPRC's claims with
prejudice and assessed court costs against UPRC. The court concluded that
the UPRC patent was invalid for failure to describe definitively the
patented method in the patent claims and for failure to provide sufficient
disclosure in the patent to enable one of ordinary skill in the art to
practice the patented method. Appeals of the judgment by both Chesapeake
and UPRC are pending in the Federal Circuit Court of Appeals. We are not
able to predict the outcome of these appeals but we believe the invalidity
of the patent will be upheld on appeal. We have appealed the trial court's
ruling denying our request for attorneys' fees.
West Panhandle Field Cessation Cases One of our subsidiaries,
Chesapeake Panhandle Limited Partnership ("CP") (f/k/a MC Panhandle, Inc.),
and two subsidiaries of Kinder Morgan, Inc. are defendants in 13 lawsuits
filed between June 1997 and January 1999 by royalty owners seeking the
cancellation of oil and gas leases in the West Panhandle Field in Texas. MC
Panhandle, Inc., which we acquired in April 1998, has owned the leases
since January 1, 1997. The co-defendants are prior lessees.
The plaintiffs in these cases claim the leases terminated upon the
cessation of production for various periods primarily during the 1960s. In
addition, the plaintiffs seek to recover conversion damages, exemplary
damages, attorneys' fees and interest. Defendants assert that any cessation
of production was excused and have pled affirmative defenses of
limitations, waiver, temporary estoppel,
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laches and title by adverse possession. Four of the 13 cases have been
tried; no trial dates have been set for the other cases.
Following are the cases pending or tried in the District Court of Moore
County, Texas, 69th Judicial District:
Lois Law, et al. v. NGPL, et al., No. 97-70, filed December 22, 1997,
jury trial in June 1999, verdict for CP and co-defendants. The jury found
plaintiffs' claims were barred by adverse possession, laches and revivor.
On January 19, 2000, the court granted plaintiffs' motion for judgment
notwithstanding verdict and entered judgment in favor of plaintiffs. In
addition to quieting title to the lease (including existing gas wells and
all attached equipment) in plaintiffs, the court awarded actual damages
against CP in the amount of $716,400 and exemplary damages in the amount of
$25,000. The court further awarded, jointly and severally from all
defendants, $160,000 in attorneys' fees and interest and court costs. CP
and the other defendants have appealed and posted supersedeas bonds.
Joseph H. Pool, et al. v. NGPL, et al., No. 98-30, first filed
December 17, 1997, refiled May 11, 1998, jury trial in June 1999, verdict
for CP and co-defendants. The jury found plaintiffs' claims were barred by
laches and adverse possession. On September 28, 1999, the court granted
plaintiffs' motion for judgment notwithstanding verdict and entered
judgment in favor of plaintiffs. In addition to quieting title to the lease
(including existing gas wells and all attached equipment) in plaintiffs,
the court awarded actual damages as of June 28, 1999 of $545,000 from CP
and $235,000 jointly and severally from the other two defendants. The court
further awarded, jointly and severally from all defendants, $77,500 of
attorneys' fees in the event of an appeal, $1,900 of sanctions, interest
and court costs. CP and the other two defendants filed an appeal of the
judgment in the Court of Appeals for the Seventh District of Texas in
Amarillo on October 12, 1999, and they have each posted a supersedeas bond.
On October 12, 2000, the Court of Appeals issued a decision sustaining the
trial court's finding that the leases had terminated due to a cessation of
production and that the plaintiffs were entitled to actual damages and
attorneys' fees. However, the award was reduced by $161,750, by way of
additional offset for lease operating expenses, which were improperly
excluded by the jury. CP and the other defendants intend to file a motion
for rehearing which is due to be filed by November 7, 2000.
Joseph H. Pool, et al. v. NGPL, et al., No. 98-36, first filed
February 2, 1998, refiled May 20, 1998, jury trial in July 1999, verdict
for plaintiffs. The jury found that the defendants were bad-faith
trespassers and produced gas from the leases as a result of fraud. On
September 28, 1999, the court entered final judgment for plaintiffs
terminating the lease, quieting title to the lease (including existing gas
wells and all attached equipment) in plaintiffs as of June 1, 1999 and
awarding actual damages of $1.5 million, attorneys' fees of $97,500 in the
event of an appeal, interest and court costs. CP's liability for this award
is joint and several with the other two defendants. The court also awarded
exemplary damages of $1.2 million against each of CP and the other two
defendants. CP and the other two defendants filed an appeal of the judgment
in the Court of Appeals for the Seventh District of Texas in Amarillo on
October 12, 1999, and they have each posted a supersedeas bond. On October
12, 2000, the Court of Appeals issued a decision sustaining the trial
court's finding that the leases had terminated due to a cessation of
production and that the plaintiffs were entitled to actual damages and
attorneys' fees. However, the court reduced the damages award to
$1,049,500, based on the application of a two-year statute of limitations
and reversed all of the $3.6 million exemplary damages award, finding there
was no legal basis for such an award. CP and the other defendants intend to
file a motion for rehearing which is due to be filed by November 7, 2000.
A. C. Smith, et al. v. NGPL, et al., No. 98-47, first filed January
26, 1998, refiled May 29, 1998. On June 18, 1999, the court granted
plaintiffs' motion for summary judgment in part, finding that the lease had
terminated due to the cessation of production, subject to the defendants'
affirmative defenses.
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Joseph H. Pool, et al. v. NGPL, et al., No. 98-35, first filed
February 2, 1998, refiled May 20, 1998. On December 3, 1999, the Court
entered a partial summary judgment finding the lease had terminated and
that defendants' affirmative defenses all failed as a matter of law except
with respect to the defense of revivor against certain of the plaintiffs.
CP and the other defendants filed a motion to reconsider on December 22,
1999.
Joseph H. Pool, et al. v. NGPL, et al., No. 98-49, first filed March
10, 1998, refiled May 29, 1998.
Joseph H. Pool, et al. v. NGPL, et al., No. 98-50, first filed March
18, 1998, refiled May 29, 1998.
Joseph H. Pool, et al. v. NGPL, et al., No. 98-51, first filed
December 2, 1997, refiled May 29, 1998.
Joseph H. Pool, et al. v. NGPL, et al., No. 98-48, first filed
February 2, 1998, refiled May 29, 1998.
Joseph H. Pool, et al. v. NGPL, et al., No. 98-70, first filed March
23, 1998, refiled October 22, 1998.
The Pool cases listed above were first filed in the U.S. District Court,
Northern District of Texas, Amarillo Division. Other related cases pending are
the following:
Phillip Thompson, et al. v. NGPL, et al., U.S. District Court,
Northern District of Texas, Amarillo Division, Nos. 2:98-CV-012 and
2:98-CV-106, filed January 8, 1998 and March 18, 1998, respectively
(actions consolidated), jury trial in May 1999, verdict for CP and
co-defendants. The jury found plaintiffs' claims were barred by the payment
of shut-in royalties, laches, and revivor. Plaintiffs have filed a motion
for a new trial.
Craig Fuller, et al. v. NGPL, et al., District Court of Carson County,
Texas, 100th Judicial District, No. 8456, filed June 23, 1997, cross
motions for summary judgment pending.
Pace v. NGPL et al., U.S. District Court, Northern District of Texas,
Amarillo Division, filed January 29, 1999. Defendants' motion for summary
judgment pending.
We have previously established an accrued liability we believe will be
sufficient to cover the estimated costs of litigation for each of these cases.
Because of the inconsistent verdicts reached by the juries in the four cases
tried to date and because the amount of damages sought is not specified in all
of the other cases, the outcome of the remaining trials and the amount of
damages that might ultimately be awarded could differ from management's
estimates. We believe, however, that the leases are valid, there is no basis for
exemplary damages, fraud or bad faith trespass. CP and the other defendants
intend to vigorously defend against the plaintiffs' claims.
INCORPORATION
We were incorporated as a Delaware corporation on December 26, 1991 and
were reincorporated as an Oklahoma corporation on December 31, 1996.
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CHESAPEAKE ENERGY CORPORATION
SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data of
Chesapeake for the six months ended June 30, 2000 and 1999, the years ended
December 31, 1999, 1998 and 1997, the six-month transition period ended December
31, 1997, the six months ended December 31, 1996 and the two fiscal years ended
June 30, 1997 and 1996. The data are derived from our audited consolidated
financial statements, except for periods for the six months ended June 30, 2000
and 1999, the year ended December 31, 1997 and the six months ended December 31,
1996, which are derived from unaudited consolidated financial statements of
Chesapeake. Acquisitions we made during the first and second quarters of 1998
materially affect the comparability of the selected financial data for 1997 and
1998. Each of the acquisitions was accounted for using the purchase method. The
table should be read in conjunction with "Chesapeake Energy Corporation
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements of Chesapeake, including
the notes thereto, appearing in this proxy statement/prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------
2000 1999
---------- ----------
($ IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Oil and gas sales....................................... $ 187,514 $ 120,078
Oil and gas marketing sales............................. 61,610 26,491
--------- ---------
Total revenues...................................... 249,124 146,569
--------- ---------
Operating costs:
Production expenses..................................... 25,126 25,175
Production taxes........................................ 10,933 4,788
General and administrative.............................. 6,220 7,292
Oil and gas marketing expenses.......................... 59,666 24,958
Oil and gas depreciation, depletion and amortization.... 49,360 47,386
Depreciation and amortization of other assets........... 3,702 4,138
--------- ---------
Total operating costs............................... 155,007 113,737
--------- ---------
Income from operations.................................... 94,117 32,832
--------- ---------
Other income (expense):
Interest and other income............................... 2,859 3,840
Interest expense........................................ (42,677) (40,149)
--------- ---------
(39,818) (36,309)
--------- ---------
Income (loss) before income taxes......................... 54,299 (3,477)
Provision (benefit) for income taxes...................... 1,463 326
--------- ---------
Net income (loss)......................................... 52,836 (3,803)
Preferred stock dividends................................. (6,949) (8,052)
Gain on redemption of preferred stock..................... 11,895 --
--------- ---------
Net income (loss) available to common shareholders........ $ 57,782 $ (11,855)
========= =========
Earnings (loss) per common share:
Basic................................................... $ 0.53 $ (0.12)
Assuming dilution....................................... $ 0.36 $ (0.12)
Cash dividends declared per common share.................... $ -- $ --
CASH FLOW DATA:
Cash provided by operating activities before changes in
working capital......................................... $ 107,753 $ 48,145
Cash provided by operating activities..................... 83,870 47,566
Cash used in investing activities......................... (130,569) (67,345)
Cash provided by financing activities..................... 20,264 14,187
Effect of exchange rate changes on cash................... (204) 3,625
BALANCE SHEET DATA (at end of period):
Total assets.............................................. $ 980,982 N/A
Long-term debt, net of current maturities................. 983,230 N/A
Stockholders' equity (deficit)............................ (119,980) N/A
</TABLE>
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<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, DECEMBER 31, YEARS ENDED JUNE 30,
---------------------------------- ------------------- --------------------
1999 1998 1997 1997 1996 1997 1996
--------- ---------- --------- -------- -------- --------- --------
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Oil and gas sales................ $ 280,445 $ 256,887 $ 198,410 $ 95,657 $ 90,167 $ 192,920 $110,849
Oil and gas marketing sales...... 74,501 121,059 104,394 58,241 30,019 76,172 28,428
Oil and gas service operations... -- -- -- -- -- -- 6,314
--------- ---------- --------- -------- -------- --------- --------
Total revenues............... 354,946 377,946 302,804 153,898 120,186 269,092 145,591
--------- ---------- --------- -------- -------- --------- --------
Operating costs:
Production expenses.............. 46,298 51,202 14,737 7,560 4,268 11,445 6,340
Production taxes................. 13,264 8,295 4,590 2,534 1,606 3,662 1,963
General and administrative....... 13,477 19,918 10,910 5,847 3,739 8,802 4,828
Oil and gas marketing expenses... 71,533 119,008 103,819 58,227 29,548 75,140 27,452
Oil and gas service operations... -- -- -- -- -- -- 4,895
Oil and gas depreciation,
depletion and amortization..... 95,044 146,644 127,429 60,408 36,243 103,264 50,899
Depreciation and amortization of
other assets................... 7,810 8,076 4,360 2,414 1,836 3,782 3,157
Impairment of oil and gas
properties..................... -- 826,000 346,000 110,000 -- 236,000 --
Impairment of other assets....... -- 55,000 -- -- -- -- --
--------- ---------- --------- -------- -------- --------- --------
Total operating costs........ 247,426 1,234,143 611,845 246,990 77,240 442,095 99,534
--------- ---------- --------- -------- -------- --------- --------
Income (loss) from operations...... 107,520 (856,197) (309,041) (93,092) 42,946 (173,003) 46,057
--------- ---------- --------- -------- -------- --------- --------
Other income (expense):
Interest and other income........ 8,562 3,926 87,673 78,966 2,516 11,223 3,831
Interest expense................. (81,052) (68,249) (29,782) (17,448) (6,216) (18,550) (13,679)
--------- ---------- --------- -------- -------- --------- --------
(72,490) (64,323) 57,891 61,518 (3,700) (7,327) (9,848)
--------- ---------- --------- -------- -------- --------- --------
Income (loss) before income taxes
and extraordinary item........... 35,030 (920,520) (251,150) (31,574) 39,246 (180,330) 36,209
Provision (benefit) for income
taxes............................ 1,764 -- (17,898) -- 14,325 (3,573) 12,854
--------- ---------- --------- -------- -------- --------- --------
Income (loss) before extraordinary
item............................. 33,266 (920,520) (233,252) (31,574) 24,921 (176,757) 23,355
Extraordinary item:
Loss on early extinguishment of
debt, net of applicable income
taxes.......................... -- (13,334) (177) -- (6,443) (6,620) --
--------- ---------- --------- -------- -------- --------- --------
Net income (loss).................. 33,266 (933,854) (233,429) (31,574) 18,478 (183,377) 23,355
Preferred stock dividends.......... (16,711) (12,077) -- -- -- -- --
--------- ---------- --------- -------- -------- --------- --------
Net income (loss) available to
common shareholders.............. $ 16,555 $ (945,931) $(233,429) $(31,574) $ 18,478 $(183,377) $ 23,355
========= ========== ========= ======== ======== ========= ========
Earnings (loss) per common share --
Basic:
Income (loss) before
extraordinary item............. $ 0.17 $ (9.83) $ (3.30) $ (0.45) $ 0.40 $ (2.69) $ 0.43
Extraordinary item............... -- (0.14) -- -- (0.10) (0.10) --
--------- ---------- --------- -------- -------- --------- --------
Net income (loss)................ $ 0.17 $ (9.97) $ (3.30) $ (0.45) $ 0.30 $ (2.79) $ 0.43
========= ========== ========= ======== ======== ========= ========
Earnings (loss) per common share --
Assuming dilution:
Income (loss) before
extraordinary item............. $ 0.16 $ (9.83) $ (3.30) $ (0.45) $ 0.38 $ (2.69) $ 0.40
Extraordinary item............... -- (0.14) -- -- (0.10) (0.10) --
--------- ---------- --------- -------- -------- --------- --------
Net income (loss)................ $ 0.16 $ (9.97) $ (3.30) $ (0.45) $ 0.28 $ (2.79) $ 0.40
========= ========== ========= ======== ======== ========= ========
Cash dividends declared per
common share................... $ -- $ 0.04 $ 0.06 $ 0.04 $ -- $ 0.02 $ --
CASH FLOW DATA:
Cash provided by operating
activities before changes in
working capital.................. $ 138,727 $ 117,500 $ 152,196 $ 67,872 $ 76,816 $ 161,140 $ 88,431
Cash provided by operating
activities....................... 145,022 94,639 181,345 139,157 41,901 84,089 120,972
Cash used in investing
activities....................... 159,773 548,050 476,209 136,504 184,149 523,854 344,389
Cash provided by (used in)
financing activities............. 18,967 363,797 277,985 (2,810) 231,349 512,144 219,520
Effect of exchange rate changes on
cash............................. 4,922 (4,726) -- -- -- -- --
BALANCE SHEET DATA (at end of
period):
Total assets....................... $ 850,533 $ 812,615 $ 952,784 $952,784 $860,597 $ 949,068 $572,335
Long-term debt, net of current
maturities....................... 964,097 919,076 508,992 508,992 220,149 508,950 268,431
Stockholders' equity (deficit)..... (217,544) (248,568) 280,206 280,206 484,062 286,889 177,767
</TABLE>
68
<PAGE> 80
CHESAPEAKE ENERGY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The following table sets forth certain operating data of Chesapeake for the
periods presented:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEARS ENDED
JUNE 30, DECEMBER 31,
------------------- ------------------------------
2000 1999 1999 1998 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
NET PRODUCTION DATA:
Oil (MBbl).................... 1,655 2,362 4,147 5,976 3,511
Gas (MMcf).................... 58,086 52,706 108,610 94,421 59,236
Gas equivalent (MMcfe)........ 68,016 66,878 133,492 130,277 80,302
OIL AND GAS SALES ($ IN 000'S):
Oil........................... $ 40,588 $ 31,335 $ 66,413 $ 75,877 $ 68,079
Gas........................... 146,926 88,743 214,032 181,010 130,331
-------- -------- -------- -------- --------
Total oil and gas
sales............... $187,514 $120,078 $280,445 $256,887 $198,410
======== ======== ======== ======== ========
AVERAGE SALES PRICE:
Oil ($ per Bbl)............... $ 24.52 $ 13.27 $ 16.01 $ 12.70 $ 19.39
Gas ($ per Mcf)............... $ 2.53 $ 1.68 $ 1.97 $ 1.92 $ 2.20
Gas equivalent ($ per Mcfe)... $ 2.76 $ 1.80 $ 2.10 $ 1.97 $ 2.47
OIL AND GAS COSTS ($ PER MCFE):
Production expenses and
taxes...................... $ .53 $ .45 $ .45 $ .45 $ .24
General and administrative.... $ .09 $ .11 $ .10 $ .15 $ .14
Depreciation, depletion and
amortization............... $ .73 $ .71 $ .71 $ 1.13 $ 1.59
</TABLE>
RECENT FINANCIAL RESULTS
During the third quarter of 2000, we generated net income of $54.7 million
($0.31 per diluted common share) on revenue of $168.2 million, compared to net
income of $18.1 million ($0.13 per diluted common share) on revenue of $102.1
million during the third quarter of 1999. These results reflect increases of
202% in net income and 65% in revenue.
During the nine months ended September 30, 2000, we generated net income of
$107.5 million ($0.73 per diluted common share) on revenue of $417.3 million,
compared to net income of $14.3 million ($0.02 per diluted common share) on
revenue of $248.7 million during the nine months ended September 30, 1999.
Production for the third quarter of 2000 was 33.7 Bcfe, comprised of 29.1
Bcf of natural gas and 761,000 barrels of oil. Production for the third quarter
of 1999 was 32.7 Bcfe, comprised of 27.4 Bcf and 875,000 barrels of oil. Pro
forma for the pending merger with Gothic, our third quarter 2000 production
would have increased by 21% to 40.7 Bcfe, comprised of 36.0 Bcf of natural gas
and 790,000 barrels of oil.
Average prices realized during the third quarter of 2000 were $28.25 per
barrel of oil and $3.52 per Mcf of natural gas, for a gas equivalent price of
$3.68 per Mcfe. Average prices realized during the third quarter of 1999 were
$18.90 per barrel and $2.26 per Mcf, for a gas equivalent price of $2.40 per
Mcfe.
Hedging activities reduced third quarter 2000 realizations by $1.86 per
barrel and $0.35 per Mcf, for a total of $11.7 million. Hedging activities
reduced third quarter 1999 realizations by $2.06 per barrel and $0.01 per Mcf,
for a total of $2.0 million.
69
<PAGE> 81
RESULTS OF OPERATIONS
Three Months Ended June 30, 2000 vs. June 30, 1999.
General. For the three months ended June 30, 2000 (the "Current Quarter"),
Chesapeake realized net income of $31.6 million, or $0.22 per diluted common
share. This compares to net income of $8.1 million, or $0.04 per diluted common
share, in the three months ended June 30, 1999 (the "Prior Quarter").
Oil and Gas Sales. During the Current Quarter, oil and gas sales increased
47% to $100.2 million from $68.3 million in the Prior Quarter. For the Current
Quarter, Chesapeake produced 34.1 Bcfe, consisting of 0.8 million barrels of oil
and 29.3 Bcf of natural gas, compared to 1.1 million barrels of oil and 27.0
Bcf, or 33.6 Bcfe, in the Prior Quarter. Average oil prices realized were $24.46
per barrel of oil in the Current Quarter compared to $16.01 per barrel in the
Prior Quarter, an increase of 53%. Average gas prices realized were $2.76 per
Mcf in the Current Quarter compared to $1.88 per Mcf in the Prior Quarter, an
increase of 47%.
For the Current Quarter, Chesapeake realized an average price of $2.94 per
Mcfe, compared to $2.03 per Mcfe in the Prior Quarter. Chesapeake's hedging
activities resulted in decreased oil and gas revenues of $11.0 million, or $0.32
per Mcfe, in the Current Quarter, compared to increased oil and gas revenues of
$2.9 million, or $0.09 per Mcfe, in the Prior Quarter.
The following table shows Chesapeake's production by region for the Current
Quarter and the Prior Quarter:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED JUNE 30,
-----------------------------------
2000 1999
---------------- ----------------
OPERATING AREAS MMCFE PERCENT MMcfe PERCENT
--------------- ------ ------- ------ -------
<S> <C> <C> <C> <C>
Mid-Continent...................................... 19,265 57% 17,520 52%
Gulf Coast......................................... 8,650 25 10,683 32
Canada............................................. 3,579 10 3,134 9
Permian Basin...................................... 1,528 5 1,239 4
Other Areas........................................ 1,063 3 990 3
------ --- ------ ---
Total.................................... 34,085 100% 33,566 100%
====== === ====== ===
</TABLE>
Natural gas production represented approximately 86% of Chesapeake's total
production volume on an equivalent basis in the Current Quarter, compared to 81%
in the Prior Quarter.
Oil and Gas Marketing Sales. Chesapeake realized $34.2 million in oil and
gas marketing sales to third parties in the Current Quarter, with corresponding
oil and gas marketing expenses of $33.1 million, for a margin of $1.1 million.
This compares to sales of $12.6 million, expenses of $11.7 million, and a margin
of $0.9 million in the Prior Quarter. The increase in marketing sales and cost
of sales was due primarily to higher oil and gas prices in the Current Quarter
as compared to the Prior Quarter and Chesapeake's initial marketing of oil which
began in June 1999.
Production Expenses. Production expenses increased to $12.6 million in the
Current Quarter, a $1.4 million increase from the $11.2 million of production
expenses incurred in the Prior Quarter. On a unit of production basis,
production expenses were $0.37 and $0.33 per Mcfe in the Current and Prior
Quarters, respectively. Chesapeake anticipates production expenses will not vary
significantly from current levels during the remainder of 2000.
Production Taxes. Production taxes, which consist primarily of wellhead
severance taxes, were $5.7 million and $2.8 million in the Current and Prior
Quarters, respectively. On a per unit basis, production taxes were $0.17 per
Mcfe in the Current Quarter compared to $0.08 per Mcfe in the Prior Quarter. The
increase in the Current Quarter is due to higher oil and gas prices. In general,
production taxes are calculated using value-based formulas that produce higher
per unit costs when oil and gas prices are higher.
70
<PAGE> 82
Oil and Gas Depreciation, Depletion and Amortization. Depreciation,
depletion and amortization of oil and gas properties ("DD&A") for the Current
Quarter was $24.9 million, compared to $24.2 million in the Prior Quarter. The
DD&A rate per Mcfe increased from $0.72 in the Prior Quarter to $0.73 in the
Current Quarter. Chesapeake expects the DD&A rate will increase moderately from
current levels during the remainder of 2000 and is expected to increase further
upon the completion of the Gothic acquisition.
Depreciation and Amortization of Other Assets. Depreciation and
amortization of other assets ("D&A") was $1.8 million in the Current Quarter
compared to $2.0 million in the Prior Quarter. Chesapeake anticipates D&A will
continue at current levels during the remainder of 2000.
General and Administrative. General and administrative expenses ("G&A"),
which are net of capitalized internal payroll and non-payroll expenses, were
$3.2 million in the Current Quarter compared to $3.3 million in the Prior
Quarter. Chesapeake capitalized $1.5 million of internal costs in the Current
Quarter directly related to Chesapeake's oil and gas exploration and development
efforts, compared to $0.8 million in the Prior Quarter. The increase in
capitalized internal costs is primarily due to the addition of technical
employees and other related costs. Chesapeake anticipates that G&A costs during
the remainder of 2000 will remain at approximately the same level as the Current
Quarter.
Interest and Other Income. Interest and other income for the Current
Quarter was $1.7 million compared to $3.0 million in the Prior Quarter. The
decrease is due primarily to a $1.5 million gain on the sale of certain
marketing assets located in the Mid-Continent in the Prior Quarter.
Interest Expense. Interest expense increased to $21.8 million in the
Current Quarter from $20.3 million in the Prior Quarter as a result of lower
capitalized interest and higher amounts of indebtedness. In addition to the
interest expense reported, Chesapeake capitalized $0.6 million of interest
during the Current Quarter compared to $1.0 million capitalized in the Prior
Quarter.
Provision for Income Taxes. Chesapeake recorded income tax expense of $1.4
million for the Current Quarter and $0.3 million in the Prior Quarter. The
income tax expense recorded in both the Current Quarter and Prior Quarter is
related to Chesapeake's Canadian operations. At June 30, 2000, Chesapeake had a
U.S. net operating loss carryforward of approximately $640 million for regular
federal income taxes which will expire in future years beginning in 2007.
Management believes that it cannot be demonstrated at this time that it is more
likely than not that the deferred income tax assets, comprised primarily of the
U.S. net operating loss carryforwards, will be realized in future years, and
therefore a valuation allowance of $424.3 million has been recorded. However,
management continues to evaluate the deferred tax assets. If oil and gas prices
as well as improvements in Chesapeake's operating performance continue to
strengthen and stabilize in future periods, all or a portion of the valuation
allowance may be reversed.
Six Months Ended June 30, 2000 vs. June 30, 1999.
General. For the six months ended June 30, 2000 (the "Current Period"),
Chesapeake realized net income of $52.8 million, or $0.36 per diluted common
share. This compares to a net loss of $3.8 million, or a net loss of $0.12 per
diluted common share after deducting preferred dividends of $8.1 million, in the
six months ended June 30, 1999 (the "Prior Period").
Oil and Gas Sales. During the Current Period, oil and gas sales increased
to $187.5 million from $120.1 million, an increase of $67.4 million, or 56%. For
the Current Period, Chesapeake produced 1.7 million barrels of oil and 58.1 Bcf,
compared to 2.4 million barrels of oil and 52.7 Bcf in the Prior Period. Average
oil prices realized were $24.52 per barrel in the Current Period compared to
$13.27 per barrel in the Prior Period, an increase of 85%. Average gas prices
realized were $2.53 per Mcf in the Current Period compared to $1.68 per Mcf in
the Prior Period, an increase of 51%.
For the Current Period, Chesapeake realized an average price of $2.76 per
Mcfe, compared to $1.80 per Mcfe in the Prior Period. Chesapeake's hedging
activities resulted in decreased oil and gas revenues of $13.2 million, or $0.19
per Mcfe, in the Current Period, compared to increased oil and gas revenues of
$3.2 million in the Prior Period.
71
<PAGE> 83
The following table shows Chesapeake's production by region for the Current
Period and the Prior Period:
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30,
-----------------------------------
2000 1999
---------------- ----------------
OPERATING AREAS Mmcfe PERCENT Mmcfe PERCENT
--------------- ------ ------- ------ -------
<S> <C> <C> <C> <C>
Mid-Continent............................................... 38,294 56% 33,828 51%
Gulf Coast.................................................. 18,832 28 22,086 33
Canada...................................................... 6,504 10 5,564 8
Permian Basin............................................... 3,127 4 2,469 4
Other areas................................................. 1,259 2 2,931 4
------ --- ------ ---
Total.............................................. 68,016 100% 66,878 100%
====== === ====== ===
</TABLE>
Natural gas production represented approximately 85% of Chesapeake's total
production volume on an equivalent basis in the Current Period, compared to 79%
in the Prior Period.
Oil and Gas Marketing Sales. Chesapeake realized $61.6 million in oil and
gas marketing sales to third parties in the Current Period, with corresponding
oil and gas marketing expenses of $59.7 million for a margin of $1.9 million.
This compares to sales of $26.5 million and expenses of $25.0 million in the
Prior Period for a margin of $1.5 million. The increase in marketing sales and
cost of sales was due primarily to higher oil and gas prices in the Current
Period as compared to the Prior Period and Chesapeake's initial marketing of oil
which began in June 1999.
Production Expenses. Production expenses decreased to $25.1 million in the
Current Period, a $0.1 million decrease from $25.2 million incurred in the Prior
Period. On a production unit basis, production expenses were $0.37 and $0.38 per
Mcfe in the Current and Prior Periods, respectively.
Production Taxes. Production taxes, which consist primarily of wellhead
severance taxes, were $10.9 million and $4.8 million in the Current and Prior
Periods, respectively. This increase was the result of increased natural gas
production and higher oil and gas prices. On a per unit basis, production taxes
were $0.16 per Mcfe in the Current Period compared to $0.07 per Mcfe in the
Prior Period.
Oil and Gas Depreciation, Depletion and Amortization. DD&A for the Current
Period was $49.4 million, compared to $47.4 million in the Prior Period. This
increase was caused by increased production as well as an increase in the DD&A
rate per Mcfe from $0.71 to $0.73 in the Prior and Current Periods,
respectively.
Depreciation and Amortization of Other Assets. D&A decreased to $3.7
million in the Current Period compared to $4.1 million in the Prior Period.
General and Administrative. G&A, which is net of capitalized internal
payroll and non-payroll expenses, was $6.2 million in the Current Period
compared to $7.3 million in the Prior Period. This decrease was primarily due to
cost efficiencies that were generated throughout 1999 and an increase in
capitalized internal costs between periods. Chesapeake capitalized $3.4 million
of internal costs in the Current Period directly related to Chesapeake's oil and
gas exploration and development efforts, compared to $2.0 million in the Prior
Period. The increase in capitalized internal costs is primarily due to the
addition of technical employees and other related costs.
Interest and Other Income. Interest and other income for the Current Period
was $2.9 million compared to $3.8 million in the Prior Period. This decrease is
due primarily to a $1.5 million gain on the sale of certain marketing assets
located in the Mid-Continent in the Prior Period.
Interest. Interest expense increased to $42.7 million in the Current Period
from $40.1 million in the Prior Period as a result of lower capitalized interest
and higher amounts of indebtedness. Chesapeake capitalized $1.3 million of
interest during the Current Period compared to $2.2 million capitalized in the
Prior Period.
Provision for Income Taxes. Chesapeake recorded income tax expense of $1.5
million for the Current Period, compared to $0.3 million in the Prior Period.
The income tax expense in both Periods is entirely related to Chesapeake's
operations in Canada. Management believes that it cannot be demonstrated that it
72
<PAGE> 84
is more likely than not that its domestic deferred income tax assets will be
realizable in future years, and therefore a valuation allowance of $424.3
million has been recorded. However, management continues to evaluate the
deferred tax assets. If oil and gas prices as well as improvements in
Chesapeake's operating performance continue to strengthen and stabilize in
future periods, all or a portion of the valuation allowance may be reversed.
Years Ended December 31, 1999, 1998 and 1997.
General. In 1999, Chesapeake had net income of $33.3 million, or $0.16 per
diluted common share, on total revenues of $354.9 million. This compares to a
net loss of $933.9 million, or a loss of $9.97 per diluted common share, on
total revenues of $377.9 million during the year ended December 31, 1998, and a
net loss of $233.4 million, or a loss of $3.30 per diluted common share, on
total revenues of $302.8 million during the year ended December 31, 1997. The
loss in 1998 was caused primarily by an $826.0 million oil and gas property
writedown recorded under the full-cost method of accounting and a $55.0 million
writedown of other assets. The loss in 1997 was caused primarily by a $346
million oil and gas property writedown. See "Impairment of Oil and Gas
Properties" and "Impairment of Other Assets".
Oil and Gas Sales. During 1999, oil and gas sales increased to $280.4
million versus $256.9 million in 1998 and $198.4 million in 1997. In 1999,
Chesapeake produced 133.5 Bcfe at a weighted average price of $2.10 per Mcfe,
compared to 130.3 Bcfe produced in 1998 at a weighted average price of $1.97 per
Mcfe, and 80.3 Bcfe produced in 1997 at a weighted average price of $2.47 per
Mcfe.
The following table shows Chesapeake's production by region for 1999, 1998
and 1997:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1999 1998 1997
----------------- ----------------- ----------------
OPERATING AREAS MMcfe PERCENT MMcfe PERCENT MMcfe PERCENT
--------------- ------- ------- ------- ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Mid-Continent.................... 69,946 52% 61,930 48% 17,685 22%
Gulf Coast....................... 44,822 34 52,793 40 60,662 76
Canada........................... 11,737 9 7,746 6 -- --
Permian Basin.................... 5,408 4 3,939 3 1,656 2
All other areas.................. 1,579 1 3,869 3 299 --
------- --- ------- --- ------ ---
Total production....... 133,492 100% 130,277 100% 80,302 100%
======= === ======= === ====== ===
</TABLE>
Natural gas production represented approximately 81% of Chesapeake's total
production volume on an equivalent basis in 1999, compared to 72% in 1998 and
74% in 1997.
For 1999, Chesapeake realized an average price per barrel of oil of $16.01,
compared to $12.70 in 1998 and $19.39 in 1997. Gas price realizations fluctuated
from an average of $1.92 per Mcf in 1998 and $2.20 in 1997 to $1.97 per Mcf in
1999. Chesapeake's hedging activities resulted in a decrease in oil and gas
revenues of $1.7 million in 1999, an increase in oil and gas revenues of $11.3
million in 1998, and a decrease in oil and gas revenues of $4.6 million in 1997.
Oil and Gas Marketing Sales. Chesapeake realized $74.5 million in oil and
gas marketing sales for third parties in 1999, with corresponding oil and gas
marketing expenses of $71.5 million, for a net margin of $3.0 million. This
compares to sales of $121.1 million and $104.4 million, expenses of $119.0
million and $103.8 million, and a margin of $2.1 million and $0.6 million in
1998 and 1997, respectively.
Production Expenses and Taxes. Production expenses and taxes, which include
lifting costs, production taxes and ad valorem taxes, were $59.6 million in
1999, compared to $59.5 million and $19.3 million in 1998 and 1997,
respectively. On a unit of production basis, production expenses and taxes were
$0.45 per Mcfe in 1999 and 1998, and $0.24 per Mcfe in 1997.
Impairment of Oil and Gas Properties. Chesapeake utilizes the full-cost
method to account for its investment in oil and gas properties. Under this
method, all costs of acquisition, exploration and development of oil and gas
reserves (including such costs as leasehold acquisition costs, geological and
geophysical expenditures, certain capitalized internal costs, dry hole costs and
tangible and intangible
73
<PAGE> 85
development costs) are capitalized as incurred. These oil and gas property
costs, along with the estimated future capital expenditures to develop proved
undeveloped reserves, are depleted and charged to operations using the
unit-of-production method based on the ratio of current production to proved oil
and gas reserves as estimated by Chesapeake's independent engineering
consultants and Chesapeake's engineers. Costs directly associated with the
acquisition and evaluation of unproved properties are excluded from the
amortization computation until it is determined whether or not proved reserves
can be assigned to the property or whether impairment has occurred. The excess
of capitalized costs of oil and gas properties, net of accumulated depreciation,
depletion and amortization and related deferred income taxes, over the
discounted future net revenues of proved oil and gas properties is charged to
operations.
Chesapeake incurred an impairment of oil and gas properties charge of $826
million in 1998. No such charge was incurred in 1999. The 1998 writedown was
caused by a combination of several factors, including the acquisitions completed
by Chesapeake during 1998, which were accounted for using the purchase method,
and the significant decreases in oil and gas prices throughout 1998. Oil and gas
prices used to value Chesapeake's proved reserves decreased from $17.62 per Bbl
of oil and $2.29 per Mcf of gas at December 31, 1997, to $10.48 per Bbl of oil
and $1.68 per Mcf of gas at December 31, 1998. Higher drilling and completion
costs and the evaluation of certain leasehold, seismic and other
exploration-related costs that were previously unevaluated were the remaining
factors which contributed to the writedown in 1998.
Chesapeake incurred an impairment of oil and gas properties charge of $346
million during 1997. The writedown in 1997 was caused by several factors,
including declining oil and gas prices during the year, escalating drilling and
completion costs, and poor drilling results primarily in Louisiana.
Impairment of Other Assets. Chesapeake incurred a $55 million impairment
charge during 1998. Of this amount, $30 million related to Chesapeake's
investment in preferred stock of Gothic Energy Corporation, and the remainder
was related to certain of Chesapeake's gas processing and transportation assets
located in Louisiana. No such charge was recorded in 1999 or 1997.
Oil and Gas Depreciation, Depletion and Amortization. DD&A of oil and gas
properties was $95.0 million, $146.6 million and $127.4 million during 1999,
1998 and 1997, respectively. The average DD&A rate per Mcfe, which is a function
of capitalized costs, future development costs, and the related underlying
reserves in the periods presented, was $0.71 ($0.73 in U.S. and $0.52 in
Canada), $1.13 ($1.17 in U.S. and $0.43 in Canada) and $1.59 in 1999, 1998 and
1997, respectively. Chesapeake did not have operations in Canada prior to 1998.
Depreciation and Amortization of Other Assets. D&A of other assets was $7.8
million in 1999, compared to $8.1 million in 1998 and $4.4 million in 1997. The
increase in 1998 compared to 1997 was caused by increased investments in
depreciable buildings and equipment and increased amortization of debt issuance
costs as a result of the issuance of senior notes in April 1998.
General and Administrative. G&A expenses, which are net of capitalized
internal payroll and non-payroll expenses (see note 11 of the notes to our
audited consolidated financial statements included at the end of this proxy
statement/prospectus), were $13.5 million in 1999, $19.9 million in 1998 and
$10.9 million in 1997. The decrease in 1999 compared to 1998 was due primarily
to various actions taken to lower corporate overhead, including staff reductions
and office closings which occurred in late 1998 and early 1999. The increase in
1998 compared to 1997 is due primarily to increased personnel expenses required
by Chesapeake's growth and industry wage inflation. Chesapeake capitalized $2.7
million, $5.3 million and $5.3 million of internal costs in 1999, 1998 and 1997,
respectively, directly related to Chesapeake's oil and gas exploration and
development efforts.
Interest and Other Income. Interest and other income for 1999 was $8.6
million compared to $3.9 million in 1998, and $87.7 million in 1997. The
increase from 1998 to 1999 was due primarily to gains on sales of various
non-core assets during 1999. During 1997, Chesapeake realized a gain on the sale
of its Bayard common stock of $73.8 million, the most significant component of
interest and other income.
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Interest Expense. Interest expense increased to $81.1 million in 1999,
compared to $68.2 million in 1998 and $29.8 million in 1997. The increase in
1999 is due primarily to a full year of interest on Chesapeake's $500 million
senior notes. The increase in 1998 compared to 1997 was due primarily to the
issuance of $500 million of senior notes in April 1998. In addition to the
interest expense reported, Chesapeake capitalized $3.5 million of interest
during 1999, compared to $6.5 million capitalized in 1998, and $10.4 million
capitalized in 1997.
Provision (Benefit) for Income Taxes. Chesapeake recorded income taxes of
$1.8 million in 1999 compared to $0 in 1998 and an income tax benefit of $17.9
million in 1997. The income tax expense recorded in 1999 is related entirely to
Chesapeake's Canadian operations.
At December 31, 1999, Chesapeake had a U.S. net operating loss carryforward
of approximately $613 million for regular federal income taxes which will expire
in future years beginning in 2007. Management believes that it cannot be
demonstrated at this time that it is more likely than not that the deferred
income tax assets, comprised primarily of the net operating loss carryforwards
generated for U.S. purposes, will be realizable in future years, and therefore a
valuation allowance of $442 million was recorded.
RISK MANAGEMENT ACTIVITIES
See "Chesapeake Energy Corporation Quantitative and Qualitative Disclosures
About Market Risk."
LIQUIDITY AND CAPITAL RESOURCES
Chesapeake had working capital of $2.3 million at June 30, 2000 and a cash
balance (including restricted cash) of $16.8 million. Chesapeake has a $100
million revolving bank credit facility, which matures in July 2002, with a
committed borrowing base of $100 million. As of June 30, 2000, Chesapeake had
borrowed $63.0 million under this facility. Borrowings under the facility are
secured by certain producing oil and gas properties and bear interest at
variable rates, which averaged 10.0% per annum as of June 30, 2000.
In a series of private transactions from June 27, 2000 through September
21, 2000, CEMI purchased 99.8% of Gothic's $104 million 14 1/8% Series B senior
secured discount notes for total consideration of $80.8 million, comprised of
$17.2 million in cash and $63.6 million of Chesapeake common stock (8,914,210
shares valued at $7.13 per share), as adjusted by make-whole adjustments settled
as of September 30, 2000. The purchase price for approximately $4.0 million
principal amount is subject to adjustment in November 2000. The discount notes
accrete at a rate per annum of 14 1/8%, compounded semiannually 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
semiannually 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 secured by the stock
of Gothic Production Corporation.
On September 1, 2000, we purchased $20 million of the $235 million of
11 1/8% senior secured notes issued by Gothic Production for $22 million of
Chesapeake common stock (3,694,939 shares valued at $6.0371 per share, subject
to adjustment), in a private transaction. The senior secured notes mature on May
1, 2005, bear interest at the rate of 11 1/8% per annum, payable semiannually in
cash on May 1 and November 1 of each year, and are secured by oil and gas
interests owned by the issuer.
On September 8, 2000, we entered into the merger agreement to acquire the
common stock of Gothic for 4.0 million shares of Chesapeake common stock. Upon
the closing of the transaction, Gothic's shareholders will own approximately
2.5% of Chesapeake's common stock. The total acquisition cost to Chesapeake,
including the Gothic notes described above, will be approximately $345 million,
plus transaction expenses and adjusted for any working capital at the time of
the merger. The Gothic acquisition is subject to approval by Gothic's
shareholders and other closing conditions. Completion of the transaction is
expected in January 2001.
At June 30, 2000, Chesapeake's senior notes represented $919.2 million of
its $999.5 million of long-term liabilities. Debt ratings for the senior notes
are B2 by Moody's Investors Service and B by
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Standard & Poor's Corporation as of August 1, 2000. On July 5, 2000, Standard &
Poor's Corporation placed its ratings on Chesapeake on credit watch with
positive implications. There are no scheduled principal payments required on any
of the senior notes until March 2004, when $150 million is due.
The senior note indentures restrict the ability of Chesapeake and its
restricted subsidiaries to incur additional indebtedness. This restriction does
not affect Chesapeake's ability to borrow under or expand its secured commercial
bank facility. As of June 30, 2000, Chesapeake estimates that secured commercial
bank indebtedness of $152.2 million could have been incurred under the
indentures. The indenture restrictions do not apply to borrowings incurred by
CEMI, an unrestricted subsidiary.
The senior note indentures also limit Chesapeake's ability to make
restricted payments (as defined), including the payment of preferred stock
dividends, unless certain tests are met. From December 31, 1998 through March
31, 2000, Chesapeake was unable to meet the requirements to incur additional
unsecured indebtedness, and consequently was not able to pay cash dividends on
its 7% cumulative convertible preferred stock. Chesapeake had accumulated
dividends in arrears of $9.5 million related to its preferred stock as of June
30, 2000. Chesapeake was unable to pay a dividend on the preferred stock on May
1, 2000, the sixth consecutive dividend payment date on which dividends had not
been paid. As a result of Chesapeake's failure to pay dividends for six
quarterly periods, the holders of preferred stock are entitled to elect two new
directors to the Board. Based on the Current Quarter financial results,
Chesapeake was able to pay a dividend on the preferred stock on August 1, 2000,
although the Board of Directors did not declare a dividend that would have been
payable on that date. On September 22, 2000, the Board of Directors declared a
regular quarterly dividend and a special dividend in the amount of all accrued
and unpaid dividends on the preferred stock, payable on November 1, 2000.
Between April 1, 2000 and June 30, 2000, Chesapeake engaged in unsolicited
transactions in which a total of 24.7 million shares of common stock (newly
issued shares), plus a cash payment of $8.3 million, were exchanged for
2,364,363 shares of its issued and outstanding preferred stock with a
liquidation value of $118.2 million plus dividends in arrears of $13.6 million.
A total of 34.2 million shares of common stock, plus a cash payment of $8.3
million, have been exchanged for 3,039,363 shares of preferred stock between
January 1, 2000 and June 30, 2000. These transactions have reduced (i) the
number of preferred shares from 4.6 million to 1.6 million, (ii) the liquidation
value of the preferred stock from $229.8 million to $77.9 million, and (iii)
dividends in arrears by $16.8 million to $9.5 million. A gain on redemption of
all preferred shares exchanged through June 30, 2000 of $11.9 million ($1.5
million related to the quarter ended June 30, 2000) is reflected in net income
available to common shareholders in determining basic earnings per share.
Between July 1 and August 16, 2000, Chesapeake engaged in additional
transactions in which 9.2 million shares of common stock (newly issued shares)
were exchanged for 933,000 shares of its issued and outstanding preferred stock
with a liquidation value of $46.7 million plus dividends in arrears of $6.1
million. A $5.3 million loss on the redemption of these preferred shares will be
reflected in net income available to common shareholders in determining earnings
per share in the third quarter.
Chesapeake believes it has adequate resources, including cash on hand and
budgeted cash flow from operations, to fund its capital expenditure budget for
exploration and development activities during 2000, which are currently
estimated to be approximately $150 million. However, low oil and gas prices or
unfavorable drilling results could cause Chesapeake to reduce its drilling
program, which is largely discretionary. Based on current oil and gas prices,
Chesapeake expects to generate excess cash flow that will be available to fund
acquisitions, reduce debt, make preferred stock dividend payments, acquire
Gothic debt securities or a combination of the above.
If the Gothic merger is completed, holders of Gothic Production's senior
secured notes will have the right, but not the obligation, to require Chesapeake
to repurchase their notes at a purchase price equal to 101% of the principal
amount of the notes, plus accrued and unpaid interest to the date of repurchase.
Chesapeake presently holds $20 million of the $235 million principal amount of
senior secured notes outstanding. Bear, Stearns & Co. Inc. has agreed to provide
a $275 million standby commitment, consisting of a $175 million term credit
facility and a $100 million revolving credit facility. The term credit
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facility may be used to repurchase any 11 1/8% senior secured notes tendered to
Chesapeake. If used, the revolving credit facility will replace Chesapeake's
existing revolving credit facility. Chesapeake has incurred costs of
approximately $3.2 million in obtaining the commitment and will incur an
additional $2.75 million of costs if the facility is used.
Six Months Ended June 30, 2000 and 1999.
Cash Flows From Operating Activities. Chesapeake's cash provided by
operating activities increased 76% to $83.9 million during the Current Period
compared to $47.6 million during the Prior Period. The increase was due
primarily to higher oil and gas prices realized during the Current Period.
Cash Flows From Investing Activities. Cash used in investing activities
increased to $130.6 million during the Current Period from $67.3 million in the
Prior Period. During the Current Period Chesapeake expended approximately $68.3
million to initiate drilling on 66 gross (35.6 net) wells and invested
approximately $10.6 million in leasehold acquisitions. This compares to $68.3
million to initiate drilling on 80 gross (48.9 net) wells and $11.1 million to
purchase leasehold in the Prior Period. During the Current Period, Chesapeake
had acquisitions of oil and gas properties of $25.0 million, divestitures of oil
and gas properties of $1.4 million, and a cash payment of $22.4 million related
to the acquisition of the Gothic Discount Notes. This compares to acquisitions
of $6.5 million and divestitures of $17.4 million in the Prior Period.
Cash Flows From Financing Activities. There was $20.3 million of cash
provided by financing activities in the Current Period, compared to $14.2
million in the Prior Period. The activity in the Current Period and the Prior
Period reflects the net increase in borrowings under Chesapeake's commercial
bank credit facility of $19.5 million and $14.0 million in the Current and Prior
Periods, respectively, and cash received through the exercise of stock options.
Years Ended December 31, 1999, 1998 and 1997.
Cash Flows from Operating Activities. Cash provided by operating activities
(inclusive of changes in working capital) was $145.0 million in 1999, compared
to $94.6 million in 1998 and $181.3 million in 1997. The increase of $50.4
million from 1998 to 1999 was due primarily to increased oil and gas revenues.
The decrease of $86.7 million from 1997 to 1998 was due primarily to reduced
operating income resulting from significant decreases in average oil and gas
prices between periods, as well as significant increases in G&A expenses and
interest expense.
Cash Flows from Investing Activities. Cash used in investing activities
decreased to $159.8 million in 1999, compared to $548.1 million in 1998 and
$476.2 million in 1997. During 1999, Chesapeake invested $153.3 million for
exploration and development drilling, $49.9 million for the acquisition of oil
and gas properties, and received $45.6 million related to divestitures of oil
and gas properties. During 1998, $279.9 million was used to acquire certain oil
and gas properties and companies with oil and gas reserves. However, the
increase in cash used to acquire oil and gas properties was partially offset by
reduced expenditures during 1998 for exploratory and developmental drilling.
During 1998 and 1997, Chesapeake invested $259.7 million and $471.0 million,
respectively, for exploratory and developmental drilling. Also during 1998,
Chesapeake sold its 19.9% stake in Pan East Petroleum Corp. to Poco Petroleums,
Ltd. for approximately $21.2 million. During 1997, Chesapeake received net
proceeds from the sale of its investment in Bayard common stock of approximately
$90.4 million.
Cash Flows from Financing Activities. Cash provided by financing activities
decreased to $19.0 million in 1999, compared to $363.8 million in 1998, and
$278.0 million in 1997. During 1999, Chesapeake made additional borrowings under
its commercial bank credit facility of $116.5 million, and had payments under
this facility of $98.0 million. During 1998, Chesapeake retired $85 million of
debt assumed at the completion of the DLB Oil & Gas, Inc. acquisition, $120
million of debt assumed at the completion of the Hugoton Energy Corporation
acquisition, $90 million of senior notes, and $170 million of borrowings made
under its commercial bank credit facilities. Also during 1998, Chesapeake issued
$500 million in senior notes and $230 million in preferred stock. During 1997,
Chesapeake issued $300 million of senior notes.
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RECENTLY ISSUED ACCOUNTING STANDARDS
On June 15, 1998, the Financial Accounting Standards Board issued FAS No.
133, Accounting for Derivative Instruments and Hedging Activities. FAS 133
establishes a new model for accounting for derivatives and hedging activities
and supersedes and amends a number of existing standards. FAS 133, as amended by
FAS 137 and FAS 138, is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000.
FAS 133 standardizes the accounting for derivative instruments by requiring
that all derivatives be recognized as assets and liabilities and measured at
fair value. The accounting for changes in the fair value of derivatives (gains
and losses) depends on (i) whether the derivative is designated and qualifies as
a hedge, and (ii) the type of hedging relationship that exists. Changes in the
fair value of derivatives that are not designated as hedges or that do not meet
the hedge accounting criteria in FAS 133 are required to be reported in
earnings. In addition, all hedging relationships must be designated, reassessed
and documented pursuant to the provisions of FAS 133. Chesapeake has not yet
determined the impact that adoption of FAS 133 will have on the financial
statements. However, Chesapeake believes that its commodity derivatives will be
designated as hedges in accordance with the relevant accounting criteria.
CHESAPEAKE ENERGY CORPORATION
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
COMMODITY PRICE RISK
Chesapeake's results of operations are highly dependent upon the prices
received for oil and natural gas production.
COMMODITY HEDGING ACTIVITIES
Periodically Chesapeake utilizes hedging strategies to hedge the price of a
portion of its future oil and gas production. These strategies include:
(1) swap arrangements that establish an index-related price above
which Chesapeake pays the counterparty and below which Chesapeake is paid
by the counterparty,
(2) the purchase of index-related puts that provide for a "floor"
price below which the counterparty pays Chesapeake the amount by which the
price of the commodity is below the contracted floor,
(3) the sale of index-related calls that provide for a "ceiling" price
above which Chesapeake pays the counterparty the amount by which the price
of the commodity is above the contracted ceiling, and
(4) basis protection swaps, which are arrangements that guarantee the
price differential of oil or gas from a specified delivery point or points.
Results from commodity hedging transactions are reflected in oil and gas
sales to the extent related to Chesapeake's oil and gas production. Chesapeake
only enters into commodity hedging transactions related to Chesapeake's oil and
gas production volumes or CEMI's physical purchase or sale commitments. Gains or
losses on crude oil and natural gas hedging transactions are recognized as price
adjustments in the months of related production.
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As of June 30, 2000, Chesapeake had the following open natural gas swap
arrangements designed to hedge a portion of Chesapeake's domestic gas production
for periods after June 2000:
<TABLE>
<CAPTION>
NYMEX-INDEX
VOLUME STRIKE PRICE
MONTHS (MMBtu) (PER MMBtu)
------ --------- ------------
<S> <C> <C>
July 2000................................................... 2,790,000 3.03
August 2000................................................. 2,790,000 3.03
September 2000.............................................. 2,100,000 3.07
October 2000................................................ 1,240,000 2.55
</TABLE>
If the swap arrangements listed above had been settled on June 30, 2000,
Chesapeake would have incurred a loss of $13.2 million. Subsequent to June 30,
2000, Chesapeake settled the July 2000 natural gas swaps for a loss of $4.5
million, which will be recognized as a price adjustment in July. Additionally,
Chesapeake has closed hedges on 920,000 MMBtu of the August through October
swaps which resulted in a loss of $0.6 million. This loss will be recognized as
price adjustments from August through October 2000.
On June 2, 2000, Chesapeake entered into a natural gas basis protection
swap transaction for 13,500,000 MMBtu for the period of January 2001 through
March 2001. This transaction requires that the counterparty pay Chesapeake if
the NYMEX price exceeds the Houston Ship Channel Beaumont/Texas Index by more
than $0.0675 for each of the related months of production. If the NYMEX price
less $0.0675 does not exceed the Houston Ship Channel Beaumont/Texas Index for
each month, Chesapeake will pay the counterparty. Gains or losses on basis swap
transactions are recognized as price adjustments in the month of related
production.
As of June 30, 2000, Chesapeake had the following open crude oil swap
arrangements designed to hedge a portion of Chesapeake's domestic crude oil
production for periods after June 2000:
<TABLE>
<CAPTION>
MONTHLY NYMEX-INDEX
VOLUME STRIKE PRICE
MONTHS (Bbls) (PER Bbl)
------ ------- ------------
<S> <C> <C>
July 2000................................................... 125,000 $28.42
August 2000................................................. 125,000 28.42
September 2000.............................................. 125,000 28.42
October 2000................................................ 125,000 28.42
November 2000............................................... 125,000 28.42
December 2000............................................... 125,000 28.42
</TABLE>
If the swap arrangements listed above had been settled on June 30, 2000,
Chesapeake would have incurred a loss of $1.9 million.
Chesapeake has also closed transactions designed to hedge a portion of its
domestic oil and natural gas production as of June 30, 2000. The net
unrecognized losses resulting from these transactions, $1.4 million as of June
30, 2000, will be recognized as price adjustments in the months of related
production. These hedging losses are set forth below ($ in thousands):
<TABLE>
<CAPTION>
HEDGING GAINS (LOSSES)
-------------------------
MONTH GAS OIL TOTAL
----- ------- ----- -------
<S> <C> <C> <C>
July 2000................................................. $ (422) $(231) $ (653)
August 2000............................................... (432) -- (432)
September 2000............................................ (149) -- (149)
October 2000.............................................. (196) -- (196)
------- ----- -------
$(1,199) $(231) $(1,430)
======= ===== =======
</TABLE>
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Subsequent to September 30, 2000, Chesapeake entered into crude oil swap
arrangements designed to hedge 5,000 barrels per day at $29.76 for 2001.
In addition to commodity hedging transactions related to Chesapeake's oil
and gas production, CEMI periodically enters into various hedging transactions
designed to hedge against physical purchase and sale commitments made by CEMI.
Gains or losses on these transactions are recorded as adjustments to oil and gas
marketing sales in the consolidated statements of operations and are not
considered by management to be material.
INTEREST RATE RISK
Chesapeake also utilizes hedging strategies to manage fixed-interest rate
exposure. Through the use of a swap arrangement, Chesapeake has reduced its
interest expense by $2.7 million from May 1998 through June 2000. During the
Current Quarter, Chesapeake's interest rate swap resulted in a $36,000 increase
of interest expense. The terms of the swap agreement are as follows:
<TABLE>
<CAPTION>
MONTHS NOTIONAL AMOUNT FIXED RATE FLOATING RATE
------ --------------- ---------- -------------
<S> <C> <C> <C>
May 1998 -- April 2001............... $230,000,000 7% Average of three-month Swiss Franc
LIBOR, Deutsche Mark and Australian
Dollar plus 300 basis points
May 2001 -- April 2008............... $230,000,000 7% Three-month LIBOR (USD) plus 300
basis points
</TABLE>
If the floating rate is less than the fixed rate, the counterparty will pay
Chesapeake accordingly. If the floating rate exceeds the fixed rate, Chesapeake
will pay the counterparty. The interest rate swap agreement contains a "knockout
provision" whereby the agreement will terminate on or after May 1, 2001 if the
average closing price for the previous twenty business days for the shares of
Chesapeake's common stock is greater than or equal to $7.50 per share. The
agreement also provides for a maximum floating rate of 8.5% from May 2001
through April 2008.
As of June 30, 2000, based upon prevailing interest rates, the present
value of Chesapeake's estimated future payments under the interest rate swap
agreement, without ascribing any value to the knock-out provision, was $17.7
million. However, because of the knock-out provision discussed above and the
volatility of interest rates, Chesapeake does not believe that this worst-case
scenario is a fair measure of the market value of the swap agreement and,
therefore, would not pay this amount to cancel the transaction. Results from
interest rate hedging transactions are reflected as adjustments to interest
expense in the corresponding months covered by the swap agreement.
The table below presents principal cash flows and related weighted average
interest rates by expected maturity dates. The fair value of the long-term debt
has been estimated based on quoted market prices.
<TABLE>
<CAPTION>
JUNE 30, 2000
----------------------------------------------------------------------
YEARS OF MATURITY
----------------------------------------------------------------------
2000 2001 2002 2003 2004 THEREAFTER TOTAL FAIR VALUE
---- ---- ----- ---- ------ ---------- ------ ----------
($ IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LIABILITIES:
Long-term debt, including current portion -- fixed
rate............................................. $0.4 $0.8 $ 0.6 $-- $150.0 $770.0 $921.8 $867.7
Average interest rate............................ 9.1% 9.1% 9.1% -- 7.9% 9.3% 9.1% --
Long-term debt -- variable rate.................... $ -- $ -- $63.0 $-- $ -- $ -- $ 63 $ 63.0
Average interest rate............................ -- -- 10.0% -- -- -- 10% --
</TABLE>
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CHESAPEAKE'S MANAGEMENT
CHESAPEAKE'S DIRECTORS
Aubrey K. McClendon, age 41, has served as our Chairman of the Board, Chief
Executive Officer and a director since co-founding Chesapeake in 1989. From 1982
to 1989, Mr. McClendon was an independent producer of oil and gas in affiliation
with Tom L. Ward, our President and Chief Operating Officer. Mr. McClendon is a
member of the Board of Visitors of the Fuqua School of Business at Duke
University. Mr. McClendon is a 1981 graduate of Duke University.
Tom L. Ward, age 41, has served as our President, Chief Operating Officer
and a director since co-founding Chesapeake in 1989. From 1982 to 1989, Mr. Ward
was an independent producer of oil and gas in affiliation with Aubrey K.
McClendon, our Chairman and Chief Executive Officer. Mr. Ward is a member of the
Board of Trustees of Anderson University in Anderson, Indiana. Mr. Ward
graduated from the University of Oklahoma in 1981.
Breene M. Kerr, age 71, has been member of our board of a directors since
1993. He is President of Brookside Company, Easton, Maryland. In 1969, Mr. Kerr
founded Kerr Consolidated, Inc., which was sold in 1996. In 1969, Mr. Kerr
co-founded the Resource Analysis and Management Group and remained its senior
partner until 1982. From 1967 to 1969, he was Vice President of Kerr-McGee
Chemical Corporation. From 1951 through 1967, Mr. Kerr worked for Kerr-McGee
Corporation as a geologist and land manager. Mr. Kerr has served as chairman of
the Investment Committee for the Massachusetts Institute of Technology and is a
life member of the Corporation (Board of Trustees) of that university. He served
as a director of Kerr-McGee Corporation from 1957 to 1981. Mr. Kerr currently is
a trustee of the Brookings Institution in Washington, D.C., and has been an
associate director since 1987 of Aven Gas & Oil, Inc., an oil and gas property
management company located in Oklahoma City. Mr. Kerr graduated from the
Massachusetts Institute of Technology in 1951.
Edgar F. Heizer, Jr., age 71, has been a member of our board of directors
since 1993. From 1985 to the present, Mr. Heizer has been a private venture
capitalist. He founded Heizer Corporation, a publicly traded business
development company, in 1969 and served as Chairman and Chief Executive Officer
from 1969 until 1986, when Heizer Corporation was reorganized into a number of
public and private companies. Mr. Heizer was Assistant Treasurer of the Allstate
Insurance Company from 1962 to 1969 in charge of Allstate's venture capital
operations. He was employed by Booz, Allen and Hamilton from 1958 to 1962,
Kidder, Peabody & Co. from 1956 to 1958, and Arthur Andersen & Co. from 1954 to
1956. He serves on the advisory board of the Kellogg School of Management at
Northwestern University. Mr. Heizer is a director of Material Science
Corporation, a New York Stock Exchange listed company in Elk Grove, Illinois,
and several private companies. Mr. Heizer graduated from Northwestern University
in 1951 and from Yale University Law School in 1954.
Frederick B. Whittemore, age 69, has been a member of our board of
directors since 1993. Mr. Whittemore has been an advisory director of Morgan
Stanley Dean Witter & Co. since 1989 and was a managing director or partner of
the predecessor firms of Morgan Stanley Dean Witter & Co. from 1967 to 1989. He
was Vice-Chairman of the American Stock Exchange from 1982 to 1984. Mr.
Whittemore is a director of Partner Reinsurance Company, Bermuda; Maxcor
Financial Group Inc., New York; SunLife of New York, New York; KOS
Pharmaceuticals, Inc., Miami, Florida; and Southern Pacific Petroleum,
Australia, NL. Mr. Whittemore graduated from Dartmouth College in 1953 and from
the Amos Tuck School of Business Administration in 1954.
Shannon T. Self, age 43, has been a member of our board of directors since
1993. He is a shareholder in the law firm of Self, Giddens & Lees, Inc., a
professional corporation, in Oklahoma City, which he co-founded in 1991. Mr.
Self was an associate and shareholder in the law firm of Hastie and Kirschner,
Oklahoma City, from 1984 to 1991 and was employed by Arthur Young & Co. from
1979 to 1980. Mr. Self is a member of the Visiting Committee of Northwestern
University School of Law and for part of 1999 was a director of The Rock Island
Group, a private computer firm in Oklahoma City. Mr. Self is a
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Certified Public Accountant. He graduated from the University of Oklahoma in
1979 and from Northwestern University Law School in 1984.
CHESAPEAKE'S OFFICERS
Executive Officers. In addition to Messrs. McClendon and Ward, the
following are also executive officers of Chesapeake.
Marcus C. Rowland, age 48, was appointed as our Executive Vice President in
March 1998 and has been our Chief Financial Officer since 1993. He served as our
Senior Vice President from September 1997 to March 1998 and as our Vice
President -- Finance from 1993 until 1997. From 1990 until his association with
Chesapeake, Mr. Rowland was Chief Operating Officer of Anglo-Suisse, L.P.
assigned to the White Nights Russian Enterprise, a joint venture of
Anglo-Suisse, L.P. and Phibro Energy Corporation, a major foreign operation
which was granted the right to engage in oil and gas operations in Russia. Prior
to his association with White Nights Russian Enterprise, Mr. Rowland owned and
managed his own oil and gas company and prior to that was Chief Financial
Officer of a private exploration company in Oklahoma City from 1981 to 1985. Mr.
Rowland is a Certified Public Accountant. Mr. Rowland graduated from Wichita
State University in 1975.
Martha A. Burger, age 47, has served as our Treasurer since 1995, as our
Senior Vice President -- Human Resources since March 2000 and as our Secretary
since November 1999. She was our Vice President -- Human Resources from 1998
until March 2000 and our Human Resources Manager from 1996 to 1998. From 1994 to
1995, she served in various accounting positions with Chesapeake including
Assistant Controller -- Operations. From 1989 to 1993, Ms. Burger was employed
by Hadson Corporation as Assistant Treasurer and from 1993 to 1994 served as
Vice President and Controller of Hadson Corporation. Prior to joining Hadson
Corporation, Ms. Burger was employed by The Phoenix Resource Companies, Inc. as
Assistant Treasurer and by Arthur Andersen & Co. Ms. Burger is a Certified
Public Accountant and graduated from the University of Central Oklahoma in 1982
and from Oklahoma City University in 1992.
Michael A. Johnson, age 35, has served as our Senior Vice
President -- Accounting since March 2000. He served as our Vice President of
Accounting and Financial Reporting from March 1998 to March 2000 and as
Assistant Controller from 1993 to 1998. From 1991 to 1993 Mr. Johnson served as
Project Manager for Phibro Energy Production, Inc., a Russian joint venture.
From 1987 to 1991 he served as audit manager for Arthur Andersen & Co. Mr.
Johnson is a Certified Public Accountant and graduated from the University of
Texas at Austin in 1987.
Other Officers. Other officers of Chesapeake include the following:
Steven C. Dixon, age 42, has been our Senior Vice President -- Operations
since 1995 and served as our Vice President -- Exploration from 1991 to 1995.
Mr. Dixon was a self-employed geological consultant in Wichita, Kansas from 1983
through 1990. He was employed by Beren Corporation in Wichita, Kansas from 1980
to 1983 as a geologist. Mr. Dixon graduated from the University of Kansas in
1980.
J. Mark Lester, age 47, has been our Senior Vice President -- Exploration
since 1995 and served as our Vice President -- Exploration from 1989 to 1995.
From 1986 to 1989, Mr. Lester was self-employed and acted as a consultant to
Messrs. McClendon and Ward. He was employed by various independent oil companies
in Oklahoma City from 1980 to 1986, and was employed by Union Oil Company of
California from 1977 to 1980 as a geophysicist. Mr. Lester graduated from Purdue
University in 1975 and in 1977.
Henry J. Hood, age 40, was appointed as our Senior Vice President -- Land
and Legal in 1997 and served as our Vice President -- Land and Legal from 1995
to 1997. We retained Mr. Hood as a consultant during the two years prior to his
joining Chesapeake, and he was associated with the law firm of White, Coffey,
Galt & Fite from 1992 to 1995. Mr. Hood was associated with or a partner of the
law firm of Watson & McKenzie from 1987 to 1992. Mr. Hood is a member of the
Oklahoma and Texas Bar Associations. Mr. Hood graduated from Duke University in
1982 and from the University of Oklahoma College of Law in 1985.
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<PAGE> 94
Thomas L. Winton, age 53, has served as our Senior Vice
President -- Information Technology and Chief Information Officer since July
1998. From 1985 until his association with Chesapeake, Mr. Winton served as the
Director, Information Services Department, at Union Pacific Resources Company.
Prior to that period Mr. Winton held the positions of Regional
Manager -- Information Services from 1984 until 1985 and Manager -- Technical
Applications Planning and Development from 1980 until 1984 with UPRC. Mr. Winton
also served as an analyst and supervisor in the Operations Research Division,
Conoco Inc., from 1973 until 1980. Mr. Winton graduated from Oklahoma Christian
University in 1969, Creighton University in 1973 and the University of Houston
in 1980. Mr. Winton also completed the Tuck Executive Program, Amos Tuck School
of Business, Dartmouth College in 1987.
Douglas J. Jacobson, age 46, has served as our Senior Vice
President -- Acquisitions & Divestitures since August 1999. Prior to joining
Chesapeake, Mr. Jacobson was employed by Samson Investment Company from 1980
until August 1999, where he served as Senior Vice President -- Project
Development and Marketing from 1996 until 1999. Mr. Jacobson has served on
various Oklahoma legislative commissions intended to address issues in the oil
and gas industry, including the Commission of Oil and Gas Production Practices
and the Natural Gas Policy Commission. Mr. Jacobson is a Certified Public
Accountant and graduated from John Brown University in 1976 and from the
University of Arkansas in 1977.
Thomas S. Price, Jr., age 48, has served as our Senior Vice
President -- Corporate Development since March 2000. Mr. Price previously served
as our Vice President -- Corporate Development from 1992 to March 2000 and was a
consultant to Chesapeake during the prior two years. He was employed by Kerr-
McGee Corporation, Oklahoma City, from 1988 to 1990 and by Flag-Redfern Oil
Company from 1984 to 1988. Mr. Price is Vice Chairman of the Mid-Continent Oil
and Gas Association and a member of the Petroleum Investor Relations Association
and the National Investor Relations Institute. Mr. Price graduated from the
University of Central Oklahoma in 1983, from the University of Oklahoma in 1989
and from the American Graduate School of International Management in 1992.
James C. Johnson, age 42, was appointed as President of Chesapeake Energy
Marketing, Inc., a wholly-owned subsidiary of ours, in January 2000. He
previously served as Vice President -- Contract Administration from 1997 to
January 2000 and as our Manager -- Contract Administration from 1996 to 1997.
From 1980 to 1996, Mr. Johnson held various gas marketing and land positions
with Enogex, Inc., Delhi Gas Pipeline Corporation, TXO Production Corp. and Gulf
Oil Corporation. Mr. Johnson is a member of the Natural Gas Association of
Oklahoma and graduated from the University of Oklahoma in 1980.
Stephen W. Miller, age 43, has served as our Vice President -- Operations
since 1996 and served as our District Manager -- College Station District from
1994 to 1996. Mr. Miller held various engineering positions in the oil and gas
industry from 1980 to 1993. Mr. Miller is a registered Professional Engineer in
Texas, is a member of the Society of Petroleum Engineers and graduated from
Texas A & M University in 1980.
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CHESAPEAKE'S EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
In 1997 we changed our fiscal year end to December 31 from June 30. The
following table sets forth for the fiscal years ended December 31, 1999 and
1998, the transition period for the six months ended December 31, 1997 and the
fiscal year ended June 30, 1997 the compensation earned in each period by (i)
our chief executive officer, and (ii) our four other most highly compensated
executive officers:
<TABLE>
<CAPTION>
SECURITIES
ANNUAL COMPENSATION UNDERLYING
------------------------------------- OPTION
NAME AND PRINCIPAL PERIOD OTHER ANNUAL AWARDS (# OF ALL OTHER
POSITION ENDING SALARY BONUS COMPENSATION(a) SHARES)(b) COMPENSATION(c)
------------------ -------- -------- -------- --------------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Aubrey K. McClendon............. 12/31/99 $350,000 $300,000 $137,029 500,000 $19,500
Chairman of the Board 12/31/98 $350,000 $325,000 $115,429 1,505,808(d) $10,000
and Chief Executive 12/31/97 $150,000 $200,000 $ 92,625 457,800(d) $ --
Officer 6/30/97 $250,000 $310,000 $ 76,950 463,000(d) $11,050
Tom L. Ward..................... 12/31/99 $350,000 $300,000 $113,331 500,000 $20,000
President and Chief 12/31/98 $350,000 $325,000 $115,977 1,505,808(d) $10,000
Operating Officer 12/31/97 $150,000 $200,000 $ 93,026 457,800(d) $ --
6/30/97 $250,000 $310,000 $ 77,908 463,000(d) $13,700
Marcus C. Rowland............... 12/31/99 $262,500 $110,000 $ 41,428 125,000 $ 6,000
Executive Vice 12/31/98 $250,000 $175,000 (e) 397,476(d) $10,000
President and Chief 12/31/97 $112,500 $100,000 (e) 131,600(d) $ --
Financial Officer 6/30/97 $185,000 $155,000 (e) 36,000(d) $ 9,500
Steven C. Dixon................. 12/31/99 $190,000 $ 55,000 (e) 40,000 $11,500
Senior Vice President 12/31/98 $190,000 $110,000 (e) 206,120(d) $10,000
-- Operations 12/31/97 $ 87,500 $ 50,000 (e) 92,000(d) $ --
6/30/97 $145,000 $105,000 (e) 30,000(d) $11,500
J. Mark Lester.................. 12/31/99 $177,500 $ 55,000 (e) 40,000 $11,980
Senior Vice President 12/31/98 $175,000 $100,000 (e) 153,691(d) $10,000
-- Exploration 12/31/97 $ 80,000 $ 40,000 (e) 69,700(d) $ 2,660
6/30/97 $132,500 $ 70,000 (e) 19,500(d) $10,400
</TABLE>
---------------
(a) Represents the cost of personal benefits provided by Chesapeake, including
for fiscal year 1999 personal accounting support ($65,175 for Messrs.
McClendon and Ward), personal vehicle ($18,000 for Messrs. McClendon and
Ward and $12,000 for Mr. Rowland), travel allowance ($50,000 for Mr.
McClendon, $25,904 for Mr. Ward and $25,000 for Mr. Rowland) and country
club membership dues ($3,854 for Mr. McClendon, $4,252 for Mr. Ward and
$4,428 for Mr. Rowland).
(b) No awards of restricted stock or payments under long-term incentive plans
were made to any of the named executives in any period covered by the
table.
(c) Represents our matching contributions to the Chesapeake Energy Corporation
Savings and Incentive Stock Bonus Plan.
(d) Includes both (i) option grants which were canceled and (ii) replacement
options which were granted at 60% of the original number of options
granted.
(e) Other annual compensation did not exceed the lesser of $50,000 ($25,000 for
the transition period) or 10% of the executive officer's salary and bonus
during the period.
STOCK OPTIONS GRANTED DURING 1999
The following table sets forth information concerning options to purchase
common stock we granted during 1999 to the executive officers named in the
Summary Compensation Table. Amounts represent stock options granted under our
1994 and 1999 stock option plans and include both incentive and non-qualified
stock options. One-fourth of each option grant becomes exercisable on each of
the first four
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<PAGE> 96
grant date anniversaries. The exercise price of each option represents the
market price of the common stock on the date of grant.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------- POTENTIAL REALIZABLE
PERCENT OF VALUE AT ASSUMED
NUMBER OF TOTAL OPTIONS ANNUAL RATE OF STOCK
SECURITIES GRANTED TO PRICE APPRECIATION
UNDERLYING EMPLOYEES IN EXERCISE FOR OPTION TERM(a)
OPTIONS YEAR ENDED PRICE PER EXPIRATION --------------------
NAME GRANTED 12/31/99 SHARE DATE 5% 10%
---- ---------- ------------- --------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Aubrey K. McClendon........................ 500,000 17.9% $0.94 3/5/09 $295,580 $749,059
Tom L. Ward................................ 500,000 17.9% $0.94 3/5/09 $295,580 $749,059
Marcus C. Rowland.......................... 125,000 4.5% $0.94 3/5/09 $ 73,895 $187,265
Steven C. Dixon............................ 40,000 1.4% $0.94 3/5/09 $ 23,646 $ 59,925
J. Mark Lester............................. 40,000 1.4% $0.94 3/5/09 $ 23,646 $ 59,925
</TABLE>
---------------
(a) The assumed annual rates of stock price appreciation of 5% and 10% are set
by the Securities and Exchange Commission and are not intended as a
forecast of possible future appreciation in stock prices.
AGGREGATED OPTION EXERCISES IN 1999 AND DECEMBER 31, 1999 OPTION VALUES
The following table sets forth information about options exercised by the
named executive officers during 1999 and the unexercised options to purchase
common stock held by them at December 31, 1999.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN-THE-
SHARES UNDERLYING UNEXERCISED MONEY OPTIONS AT
ACQUIRED OPTIONS AT 12/31/99 12/31/99(a)
ON VALUE ---------------------------- ----------------------------
NAME EXERCISE REALIZED(b) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Aubrey K. McClendon............... -- -- 722,953 1,629,355 $585,434 $2,131,694
Tom L. Ward....................... 315,000 $329,544 722,953 1,629,355 $585,434 $2,131,694
Marcus C. Rowland................. 139,871 $305,642 -- 423,105 -- $ 552,631
Steven C. Dixon................... -- -- 416,434 194,586 $504,871 $ 250,833
J. Mark Lester.................... -- -- 115,827 155,264 $151,094 $ 201,680
</TABLE>
---------------
(a) At December 31, 1999, the closing price of the common stock on the New York
Stock Exchange was $2.38. "In-the-money options" are stock options with
respect to which the market value of the underlying shares of common stock
exceeded the exercise price at December 31, 1999. The values shown were
determined by subtracting the aggregate exercise price of such options from
the aggregate market value of the underlying shares of common stock on
December 31, 1999.
(b) Represents amounts determined by subtracting the aggregate exercise price
of such options from the aggregate market value of the underlying shares of
common stock on the exercise date.
EMPLOYMENT AGREEMENTS
We have entered into employment agreements with Messrs. McClendon and Ward,
each of which provides, among other things, for an annual base salary of not
less than $350,000, bonuses at the discretion of our board of directors,
eligibility for stock options and benefits, including an automobile and travel
allowance, club membership and personal accounting support. Each agreement has a
term of five years commencing July 1, 1998, which term is automatically extended
for one additional year on each June 30 unless one of the parties provides 30
days prior notice of non-extension. In addition, for each calendar year during
which the employment agreements are in effect, Messrs. McClendon and Ward each
agree to hold shares of our common stock having an aggregate investment value
equal to 500% of his annual base salary and bonus.
Under the employment agreements, Messrs. McClendon and Ward are permitted
to participate in all of the wells spudded by or on behalf of Chesapeake during
each calendar quarter. In order to participate, at least 30 days prior to the
beginning of a calendar quarter the executive must notify the disinterested
members of our compensation committee whether the executive elects to
participate and, if so, the
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<PAGE> 97
percentage working interest the executive will take in each well spudded by or
on behalf of Chesapeake during such quarter. The participation election by
Messrs. McClendon or Ward may not exceed a 2.5% working interest in a well and
is not effective for any well where our working interest after elections by
Messrs. McClendon and Ward to participate would be reduced to below 12.5%. Once
an executive elects to participate, the percentage cannot be adjusted during the
calendar quarter without the prior written consent of the disinterested
directors, and no such adjustment has ever been requested or granted. For each
well in which the executive participates, we bill to the executive an amount
equal to the executive's participation percentage multiplied by the costs of
drilling and operating incurred in drilling the well, together with leasehold
costs in an amount determined to approximate what third parties pay for similar
leasehold in the area of the well. Payment is due within 150 days for invoices
received prior to June 30, 2000 and within 90 days for invoices received
subsequent to such date. The executive also receives a proportionate share of
revenue from the well less certain charges by Chesapeake for marketing the
production. As a result of marketing arrangements with other participants in our
wells to correct the timing of the receipt of revenues, we have advanced to the
executives an amount equal to two months production on each of the wells based
on a six-month trailing average of production revenue. As a result of
fluctuations in the price and volume of oil and natural gas from the wells, such
advance now exceeds two months production. We and the executives have agreed
that such amount will bear interest, and have also agreed to a payment schedule
to reduce such advance to equal one month's production by December 31, 2000. In
the event an executive is not in compliance with the foregoing payment
obligations, the right to participate in our wells is automatically suspended
until the executive is in compliance.
Messrs. McClendon and Ward have agreed they will not engage in oil and gas
operations individually except pursuant to the aforementioned participation in
our wells and as a result of subsequent operations on properties owned by them
or their affiliates as of July 1, 1995. Messrs. McClendon and Ward participated
in all wells we drilled from our initial public offering in February 1993
through December 1998 with either a 1.0%, 1.25% or 1.5% working interest.
Messrs. McClendon and Ward did not participate in our wells during 1999 or the
first quarter of 2000. However, both resumed participation in our wells on April
1, 2000.
The employment agreement we have with Mr. Rowland provides for a 35-month
contract term from August 1, 2000 which can be terminated by either party and an
initial minimum annual base salary of $250,000 increasing to $275,000 on January
1, 2001. Mr. Rowland's employment agreement requires him to hold 5,000 shares of
our common stock throughout the term of the agreement. Under his employment
agreement, Mr. Rowland is permitted to continue to conduct oil and gas
activities individually and through various related or family-owned entities,
but he may not, after August 1, 2000, acquire, attempt to acquire or aid another
person in acquiring an interest in any oil and gas exploration, development or
production activities within five miles of any operations or ownership interests
of Chesapeake or its affiliates.
We also have employment agreements with Messrs. Dixon and Lester. These
agreements have a term of three years from July 1, 2000, with minimum annual
base salaries of $205,000. The agreements require each of them to acquire and
continue to hold at least 1,000 shares of our common stock throughout the term
of their contract.
We may terminate any of these employment agreements at any time without
cause; however, upon such termination Messrs. McClendon and Ward are entitled to
continue to receive salary and benefits for the balance of the contract term.
Mr. Rowland would be entitled to receive six months compensation and benefits if
we terminate him without cause. Messrs. Dixon and Lester are entitled to three
months compensation and benefits if we terminate their employment without cause.
Each of the employment agreements for Messrs. Rowland, McClendon, Ward, Rowland,
Dixon and Lester further state that if, during the term of the agreement, there
is a change of control and (a) within one year the agreement expires and is not
extended, (b) within one year the executive officer resigns as a result of (i) a
reduction in the executive officer's compensation, or (ii) a required relocation
more than 25 miles from the executive officer's then current place of employment
or (c) within two years from the effective date of the change of control (one
year for Messrs. Rowland, Dixon and Lester) the executive officer is terminated
other than for cause, death or incapacity, then the executive officer will be
entitled to a severance payment in an
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<PAGE> 98
amount equal to 60 months of base compensation (as that term is defined in the
agreements) for Messrs. McClendon and Ward and six months for Messrs. Rowland,
Dixon and Lester. Change of control is defined in Messrs. McClendon and Ward's
agreements to include (x) an event which results in a person acquiring
beneficial ownership of securities having 35% or more of the voting power of our
outstanding voting securities, or (y) within two years of a tender offer or
exchange offer for our voting stock or as a result of a merger, consolidation,
sale of assets or contested election, a majority of the members of our board of
directors is replaced by directors who were not nominated and approved by our
board of directors. In Messrs. Dixon, Lester and Rowland's agreements, change of
control is defined to include (1) the direct or indirect acquisition by any
person of beneficial ownership of the right to vote, or securities representing
the right to vote, 51% or more of the combined voting power of our then
outstanding securities having the right to vote for the election of directors or
(2) a merger, consolidation, sale of assets or contested election or (3) any
combination of (1) and (2) which results in a majority of the members of our
board of directors being replaced by directors who were not nominated and
approved by the existing board of directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Our compensation committee is composed of Messrs. Heizer and Whittemore.
Messrs. McClendon and Ward served on the compensation committee until September
1999. Mr. McClendon is our Chairman of the Board and Chief Executive Officer and
Mr. Ward is our President and Chief Operating Officer. Messrs. McClendon and
Ward administer our 1992 stock option plan. Our 1992 Incentive Stock Option Plan
was terminated in December 1994, except with respect to the administration of
outstanding options. The only options issued under our 1992 NSO Plan during the
year ended December 31, 1999 were those to our non-employee directors pursuant
to a formula award provision. See "-- Directors' Compensation." Messrs.
McClendon and Ward also serve on committees which administer our other stock
option plans with respect to employee participants who are not executive
officers. Messrs. Heizer and Whittemore serve on committees which administer
these plans with respect to employee participants who are executive officers.
Messrs. McClendon and Ward participate as working interest owners in our oil and
gas wells pursuant to the terms of their employment agreements. See
"-- Employment Agreements." Accounts receivable from Messrs. McClendon and Ward
are generated by joint interest billings relating to such participation and as a
result of miscellaneous expenses we paid on their behalf. We extended loans of
$5.0 million each to Messrs. McClendon and Ward in 1998 which were paid in full
in late 1999. See "Certain Transactions Involving Chesapeake."
DIRECTORS' COMPENSATION
During 1999, directors who were not employees received cash compensation of
$25,000, comprised of an annual retainer of $5,000, payable in quarterly
installments of $1,250, and $5,000 for each meeting of the Board attended, not
to exceed $20,000 per year for Board meetings attended. Directors are reimbursed
for travel and other expenses. Officers who also serve as directors do not
receive fees for serving as directors. Under a formula award provision in our
1992 NSO Plan, non-employee directors were granted ten-year non-qualified
options to purchase 6,250 shares of common stock at an exercise price equal to
the market price on the first business day of each quarter of 1999 and the first
quarter of 2000. Commencing with the second quarter in 2000, the quarterly
option grant to non-employee directors increased to 7,500 shares. The options
are immediately exercisable upon grant.
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<PAGE> 99
CERTAIN TRANSACTIONS INVOLVING CHESAPEAKE
LEGAL COUNSEL
Shannon T. Self, a member of our board of directors, is a shareholder in
the law firm of Self, Giddens & Lees, Inc., which provides us with legal
services. During 1997, 1998 and 1999, the firm billed us approximately $414,314,
$493,000 and $398,000, respectively for such legal services.
OIL AND GAS OPERATIONS
Prior to 1989, Messrs. McClendon and Ward and their affiliates, as
independent oil producers, acquired various leasehold and working interests. In
1989, Chesapeake Operating, Inc., one of our wholly-owned subsidiaries, was
formed to drill and operate wells in which Messrs. McClendon and Ward or their
affiliates owned working interests. Chesapeake Operating entered into joint
operating agreements with Messrs. McClendon and Ward and other working interest
owners and billed each for their respective shares of expenses and fees.
Chesapeake Operating continues to operate wells in which directors, executive
officers and related parties own working interests. In addition, directors,
executive officers and related parties have in the past acquired working
interests directly and indirectly from Chesapeake and participated in wells
drilled by Chesapeake Operating. Our non-employee directors have not acquired
interests in any new wells we have drilled since their election as directors in
1993 and have no present intention to acquire interests in any of our new wells.
The table below presents information about drilling, completion, equipping
and operating costs billed to the persons named in 1997, 1998 and 1999, the
largest amount owed by them during those periods and the balances owed by them
at December 31, 1999, 1998, 1997 and 1996. No interest is charged on amounts
owing for such costs. The amounts for all other directors and executive officers
who are joint working interest owners in our wells were insignificant.
<TABLE>
<CAPTION>
AUBREY K. TOM L. MARCUS C.
MCCLENDON WARD ROWLAND
--------- ------ ---------
(IN 000'S)
<S> <C> <C> <C>
Amount billed in 1999.................................. $1,421 $1,366 $ 68
Largest outstanding balance in 1999 (month end)........ $1,503 $1,718 $ 29
Balance at December 31, 1999........................... $1,426 $ 868 $ 16
Amount billed in 1998.................................. $3,950 $3,902 $106
Largest outstanding balance in 1998 (month end)........ $2,581 $3,291 $ 62
Balance at December 31, 1998........................... $1,541 $1,444 $ 18
Amount billed in 1997.................................. $6,784 $6,759 $142
Largest outstanding balance in 1997 (month end)........ $4,745 $4,190 $ 60
Balance at December 31, 1997........................... $ 68 $2,203 $ 36
Balance at December 31, 1996........................... $1,224 $1,272 $ 35
</TABLE>
The amounts advanced to the executive officers during 1998 and 1999 to
correct the timing of the receipt of oil and gas revenues on the wells in which
the executive officers participated, including accrued interest, equaled
$984,000 and $959,208, respectively for Mr. McClendon, $958,000 and $932,223,
respectively for Mr. Ward and $29,060 and $25,000, respectively for Mr. Rowland.
The amount of these advances in excess of revenue we received and not disbursed
bears interest at 9.125%.
LOANS TO EXECUTIVES
In June 1998, we extended loans of $5.0 million each to Messrs. McClendon
and Ward to pay a portion of the margin debt incurred by them in connection with
their purchase of 730,750 shares each of our common stock in the open market in
February 1997 at an approximate average price of $20.24 per share. Each loan
initially had a maturity date of December 31, 1998, which was extended to
December 31, 1999. In each case the terms of the loan and the documentation
evidencing the loan were negotiated by a committee of independent directors in
conjunction with separate legal counsel. Interest accrued on each of
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<PAGE> 100
the loans at an annual rate of 9.125% and was payable quarterly. Each of the
loans was secured by collateral with an indicated fair market value greater than
150% of the unpaid principal balance of the loan. In November 1999, the
borrowers repaid the loans in full by surrendering shares of our common stock
having a market value equal to the then respective amounts owed (principal
amount of $3,847,000 for Mr. McClendon and $3,688,000 for Mr. Ward).
PURCHASE OF OIL AND GAS ASSETS FROM EXECUTIVE
In January 2000, we purchased Mr. Rowland's interests in the oil and gas
wells in which he participated pursuant to his employment agreement. The
purchase price for the oil and gas assets was $465,000 and was determined using
a methodology similar to that used for similar acquisitions of assets from
disinterested third parties. See "Chesapeake's Executive
Compensation -- Employment Agreements."
MISCELLANEOUS
From time to time, we have paid various expenses incurred on behalf of
Messrs. McClendon and Ward and their affiliates, creating accounts receivable.
During 1997, 1998 and 1999 additions to accounts receivable, excluding joint
interest billings, which are described above, from Messrs. McClendon and Ward
and their affiliates were insignificant.
TRANSACTIONS WITH GOTHIC
Since April 1998, Gothic and Chesapeake have entered into a number of
transactions. These transactions include the following:
- Gothic sold to Chesapeake 50,000 shares of Gothic's 12% Series B senior
redeemable preferred stock, aggregate liquidation value of $50 million,
and a warrant to purchase 2,439,246 shares of Gothic's common stock;
- Gothic sold to Chesapeake a 50% interest in its producing Arkoma basin
natural gas and oil properties for approximately $20 million;
- Gothic assigned a 50% interest in substantially all of Gothic's
undeveloped leasehold to Chesapeake and entered into a participation
agreement with Chesapeake to provide for the development of the
undeveloped acreage;
- Gothic and Chesapeake subsequently revised the terms of the participation
agreement;
- Chesapeake exercised first refusal rights and purchased, for
approximately $1.6 million, Gothic's interest in approximately 200
producing properties upon terms Gothic had previously negotiated with a
third party; and
- Chesapeake granted Gothic the option to revise further the participation
agreement and to redeem the Gothic common and preferred stock held by
Chesapeake. The letter of intent for the merger executed by Chesapeake
and Gothic on June 30, 2000 terminated this option.
For a more complete description of these transactions, please see "The
Merger -- Background of the Merger."
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<PAGE> 101
BENEFICIAL OWNERSHIP OF COMMON STOCK
CHESAPEAKE
The table below sets forth (1) the name and address of each person known by
us to own beneficially more than 5% of our outstanding common stock, the number
of shares beneficially owned by each such shareholder and the percentage of
outstanding shares owned, and (2) the number and percentage of outstanding
shares of common stock beneficially owned by each of our directors and executive
officers listed in the Summary Compensation Table in "Chesapeake's Executive
Compensation" and by all of our directors and executive officers as a group.
Unless otherwise noted, information is given as of October 30, 2000 and the
persons named below have sole voting and/or investment power with respect to
such shares. The ownership percentages shown for after the merger were
calculated assuming the issuance of 4,000,000 shares of Chesapeake common stock.
<TABLE>
<CAPTION>
COMMON STOCK
---------------------------------------------------------------------
PERCENT OF
OUTSTANDING OPTION TOTAL PERCENT OF CLASS AFTER
BENEFICIAL OWNER SHARES SHARES(A) OWNERSHIP CLASS MERGER
---------------- ----------- --------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Tom L. Ward(1)(2)............... 10,084,522(b)(c) 1,224,406 11,308,958 7.4% 7.2%
6100 North Western Avenue
Oklahoma City, OK 73118
Aubrey K. McClendon(1)(2)....... 8,701,847(c)(d) 1,224,406 9,926,253 6.5% 6.3%
6100 North Western Avenue
Oklahoma City, OK 73118
Franklin Advisers, Inc. ........ 10,760,100 -- 10,760,100 7.1% 6.9%
777 Mariners Island Boulevard
San Mateo, CA 94404
Loomis, Sayles & Company,
L.P. ......................... 8,157,070 386,318(e) 8,543,388(e) 5.6% 5.5%
One Financial Center
Boston, MA 02111
Edgar F. Heizer, Jr.(1)......... 709,650 421,000 1,130,650 (3) (3)
Breene M. Kerr(1)............... 376,000(f) 197,500(g) 573,500 (3) (3)
Shannon T. Self(1).............. 31,458(h) 435,666 467,124 (3) (3)
Frederick B. Whittemore(1)...... 481,800(i) 1,200,250(g) 1,682,050 1.1% 1.1%
Steven C. Dixon(2).............. 13,716(c) 462,964 476,680 (3) (3)
J. Mark Lester(2)............... 37,845(c) 109,352 147,197 (3) (3)
Marcus C. Rowland(2)............ 131,917(c) -- 131,917 (3) (3)
All directors and executive
officers as a group........... 20,618,196 4,530,444 25,148,640 16.1% 15.7%
</TABLE>
---------------
(1) Director
(2) Executive officer
(3) Less than 1%
(a) Represents shares of common stock which can be acquired on October 30, 2000
or 60 days thereafter through the exercise of options or conversion of
Chesapeake's convertible preferred stock.
(b) Includes 1,444,860 shares held by TLW Investments, Inc., an Oklahoma
corporation of which Mr. Ward is sole shareholder and chief executive
officer; 1,098,600 shares held by the Aubrey K. McClendon Children's Trust
of which Mr. Ward is Trustee; and 21,435 shares held by Mr. Ward's immediate
family sharing the same household. Excluded are the shares of common stock
beneficially owned by Mr. McClendon which may be attributed to Mr. Ward
based on a jointly filed Schedule 13D. Mr. Ward disclaims such ownership.
(c) Includes shares purchased on behalf of the executive officer in the
Chesapeake Energy Corporation Savings and Incentive Stock Bonus Plan (Tom
L. Ward, 34,042 shares; Aubrey K. McClendon,
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<PAGE> 102
81,123 shares; Steven C. Dixon, 13,716 shares; J. Mark Lester, 13,345
shares; and Marcus C. Rowland, 16,403 shares).
(d) Includes 13,560 shares held by Chesapeake Investments, an Oklahoma limited
partnership of which Mr. McClendon is sole general partner. Excluded are
the shares beneficially owned by Mr. Ward which may be attributed to Mr.
McClendon based on a jointly filed Schedule 13D. Mr. McClendon disclaims
such ownership.
(e) Represents shares of Chesapeake's preferred stock which is convertible into
386,318 shares of Chesapeake's common stock. Excludes any shares that might
be issuable with respect to accrued and unpaid dividends.
(f) Includes 250,000 shares held by Talbot Fairfield II Limited Partnership, of
which Mr. Kerr is a general partner.
(g) Includes options to purchase shares of Chesapeake's common stock owned by
Messrs. Ward and McClendon issued to Messrs. Kerr, and Whittemore (Breene
M. Kerr, 93,750 shares from Aubrey K. McClendon; Frederick B. Whittemore,
394,688 shares from Aubrey K. McClendon and 355,312 shares from Tom L.
Ward).
(h) Includes 12,382 shares held by Pearson Street Limited Partnership, an
Oklahoma limited partnership of which Mr. Self is sole general partner and
the remaining partner is Mr. Self's spouse.
(i) Includes 41,750 shares held by Mr. Whittemore as trustee of the Whittemore
Foundation.
GOTHIC
The following table sets forth (1) the name and address of each person
known by Gothic to own beneficially more than 5% of Gothic's outstanding common
stock, the number of shares beneficially owned by each such shareholder and the
percentage of outstanding shares owned, and (2) the number and percentage of
outstanding shares of common stock beneficially owned by each of Gothic's
directors and executive officers and by all directors and executive officers as
a group. Unless otherwise noted, information is given as of October 20, 2000.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF BENEFICIAL PERCENT OF
HOLDER, IDENTITY OF GROUP(1)(2) AMOUNT(3) CLASS
------------------------------- --------- ----------
<S> <C> <C>
Michael Paulk............................................... 1,049,891 4.5%
John Fleming................................................ 712,500 3.1%
Brian E. Bayley............................................. 712,500 3.1%
Carl C. Icahn(4)............................................ 1,600,000 6.9%
High River Limited Partnership(4)
Riverdale LLC(4)
Little Meadow Corp.(4)
100 South Bedford Road
Mount Kisco, New York 10549
Amoco Corporation(4)........................................ 1,967,672(5) 7.8%
200 East Randolph Drive
Chicago, Illinois 60601
Chesapeake Energy Corporation(6)............................ 2,394,125 10.3%
6100 North Western Avenue
Oklahoma City, Oklahoma 73118
OppenheimerFunds, Inc.(7)................................... 1,265,913 5.4%
Two World Trade Center, 34th Floor
New York, New York 10048
All officers and directors as a group (6 persons)........... 3,405,291 14.6%
</TABLE>
---------------
(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
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<PAGE> 103
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 Gothic Energy Corporation, 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.
(3) Except as otherwise noted, shares beneficially owned by each person as of
October 20, 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) Based on information contained in Schedule 13D provided by such person.
(5) Issuable on exercise of common stock purchase warrants at $2.29 per share,
as adjusted.
(6) In addition, as of October 20, 2000, Chesapeake held 66,675 shares of Series
B senior redeemable preferred stock with a liquidation value of $1,000 per
share. Such shares are convertible into a number of shares of Gothic common
stock determined by dividing the liquidation value by the conversion price
currently of $2.04167 per share.
(7) Based on information contained in Schedule 13G/A provided by such person.
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GOTHIC'S BUSINESS
GENERAL
Gothic is an independent energy company engaged, through its wholly owned
subsidiary corporation, Gothic Production Corporation, in the exploration,
development, acquisition and production of onshore natural gas reserves,
principally in the Mid-Continent region of the United States. As of December 31,
1999, Gothic 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
Gothic's independent petroleum engineers.
Gothic'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. Gothic has engaged in 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.
At December 31, 1999, Gothic 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). Gothic served as operator of 578 of the wells in which it
had an interest. Operated wells accounted for approximately 63% of the PV-10
value of Gothic's proved reserves as of December 31, 1999. Gothic 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.
BUSINESS STRATEGY
Gothic's objective has been to increase its reserves, production, earnings,
cash flow and net asset value through a growth strategy that includes (1)
developing, exploiting and exploring its properties, (2) maintaining a low
operating cost structure, and (3) acquiring strategic natural gas and oil
properties in a disciplined manner.
- Development, Exploitation and Exploration. Gothic has sought to maximize
the value of its natural gas and oil properties through development
drilling, workovers, recompletions, reductions in operating costs and
enhanced operating efficiencies. Gothic had, as of March 1, 2000,
identified 214 development and exploitation projects within its
properties, of which 154 had been assigned proved undeveloped reserves.
Gothic believes geological and geophysical data, including 3D and 2D
seismic surveys acquired in the Amoco acquisition, has enabled it to
reduce costs and risks associated with drilling activities throughout its
Anadarko basin properties.
- Maintain Low Cost Operations. Gothic was able to directly control
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, Gothic 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,
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 decreased 40%, from $0.30
per Mcfe to $0.18 per Mcfe over the same period. Gothic intends to
maintain the reduced operating costs associated with well operations
through the use of advanced wireless technology licensed to Gothic as
part of the Amoco acquisition in January 1998. This technology enables
Gothic to remotely monitor well operations, thereby reducing the need for
on-site monitoring personnel. Gothic has deployed this technology
throughout many of its producing properties in the Anadarko and Arkoma
basins.
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- Strategic Acquisitions. Gothic 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. Gothic focuses its acquisition efforts on producing
natural gas properties within strategic geographic areas with (1)
relatively long-lived natural gas production, (2) quantifiable
development and exploitation potential, (3) low risk exploration
potential, (4) historically low operating expenses or the potential to
reduce operating expenses, (5) close proximity to Gothic's existing
production or in areas where Gothic has the ability to develop operating
economies of scale and (6) geological, geophysical and other technical
and operating characteristics with which management of Gothic 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 Gothic
based on the report of Lee Keeling and Associates, Inc. The calculations which
Lee Keeling and Associates, Inc. used in the 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 Gothic during December
1999. Gothic 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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<PAGE> 106
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 Gothic at December 31, 1999.
<TABLE>
<CAPTION>
NATURAL % OF
OIL AND NATURAL GAS TOTAL
FIELD CONDENSATE GAS EQUIVALENT PV-10% PV-10%
----- ---------- ------- ---------- -------------- ------
(MBbls) (MMcf) (MMcfe) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ANADARKO BASIN:
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, 1999, 1998 and 1997. There were no exploratory wells drilled
during those years.
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ -----------
GROSS NET GROSS NET GROSS NET
----- ---- ----- ---- ----- ---
<S> <C> <C> <C> <C> <C> <C>
Productive.................................... 41.0 14.5 44.0 20.4 17.0 9.9
Drilling and completing....................... 15.0 5.6 -- -- -- --
Non-Productive................................ 5.0 2.9 2.0 1.8 -- --
---- ---- ---- ---- ---- ---
Total............................... 61.0 23.0 46.0 22.2 17.0 9.9
==== ==== ==== ==== ==== ===
</TABLE>
In the third quarter of 1997, Gothic 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. Gothic believes geological and
geophysical data, including 3D and 2D seismic surveys acquired in the Amoco
acquisition, has enabled it to reduce costs and risks associated with drilling
activities throughout its Anadarko basin properties.
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 the following:
- the results of exploration efforts and the review and analysis of the
seismic or other data,
- the availability of sufficient capital resources by Gothic for drilling
prospects, and
- 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.
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<PAGE> 107
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
Gothic operated 578 of the 1,005 wells in which it owned 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 Gothic. If Gothic declines to participate in
additional activities proposed by the outside operator, under certain operating
agreements, Gothic 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, Gothic received a license to use
advanced well automation technology developed by Amoco. This technology is a
wireless application that allows Gothic 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. Gothic
believes that the application of this wireless technology has allowed Gothic 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 Gothic owns an interest in.
TITLE TO NATURAL GAS AND OIL PROPERTIES
Gothic has acquired interests in producing and non-producing acreage in the
form of working interests, royalty interests and overriding royalty interests.
Substantially all of Gothic'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 or bonus and a fixed annual charge, or
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
Gothic's non-producing acreage is held under leases from mineral owners or a
government entity which expire at varying dates. Gothic 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 Gothic'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
Gothic'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. Gothic 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 Gothic'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, Gothic'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
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<PAGE> 108
standard practices in the industry before the acquisition of producing
properties and before exploratory drilling.
PRODUCTION AND SALES PRICES
Gothic's production of natural gas and oil is derived solely from within
the United States. Gothic 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, Gothic does enter into
hedging agreements with respect to its natural gas and oil production.
In April 1999, Gothic 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 Gothic. Additionally, in July 1999
Gothic 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 placed a floor of $2.30 per MMBtu and a ceiling of $3.03 per
MMBtu.
The collars represented approximately 70% of Gothic's current daily natural
gas production. Collar arrangements limit the benefits Gothic will realize if
actual prices rise above the ceiling price. These arrangements provide for
Gothic to exchange a floating market price for a fixed range contract price.
Payments are made by Gothic 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, as described below.
In January 2000, Gothic 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, Gothic 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 was in effect for the months of April and May 2000 and the commodity
reference price for both contracts was the Panhandle Eastern Pipeline Company,
Texas, Oklahoma Mainline Index ("Panhandle Eastern"). If the open gas hedges
noted above had been settled on June 30, 2000, Gothic would have recognized a
loss of approximately $11,096,000.
In September 2000, Gothic entered into a hedge agreement covering 60,000
MMBtu per day at a fixed price of $4.88 per MMBtu for November 2000 and $5.00
per MMBtu for December 2000. The commodity price reference for both of these
contracts is also Panhandle Eastern.
In August 1999, Gothic entered into a hedge agreement covering 10,000
barrels of oil per month at a fixed price of $20.10 per barrel. This hedge was
in effect from September 1999 through August 2000.
Gothic 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. Gothic 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
Gothic'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 Gothic 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
Gothic a price for the gas which is based on published indices of average
pipeline prices or upon a percentage of the pipeline resale value.
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<PAGE> 109
In January 1998 Gothic entered into a ten-year marketing agreement with
Continental Natural Gas Company, now CMS Continental Natural Gas, whereby the
majority of the natural gas associated with the Amoco acquisition will be sold
to Continental at current market prices adjusted for marketing and
transportation fees.
Gothic's revenues, earnings and cash flows are highly dependent upon
current prices for natural gas and oil received by Gothic. In December 1999,
natural gas and oil prices received by Gothic 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 Gothic 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 July 1, 2000, the price received by Gothic for natural gas had risen to
$4.01 per Mcf. During the period from April to October 2000, Gothic had hedges
in place which resulted in it receiving a net price of $2.44 per Mcf. In
September 2000, Gothic entered into hedge agreements covering 60,000 MMBtu per
day at a fixed price of $4.88 per MMBtu for November 2000 and $5.00 per MMBtu
for December 2000. In view of the many uncertainties affecting the supply and
demand for crude oil, natural gas and refined petroleum products, Gothic is
unable to accurately predict future natural gas and oil prices and demand or the
overall effect they will have on Gothic.
During the year ended December 31, 1999, Gothic sold approximately 56% of
its gas production to Continental and 47% of its oil production to Duke Energy,
Inc. Gothic does not believe it would be adversely affected if it were unable to
sell to either of these purchasers.
COMPETITION
The natural gas and oil industry is highly competitive in all of its
phases. Gothic 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 Gothic. Competition for
acquisition of producing properties is affected by the amount of funds available
to Gothic, information about producing properties available to Gothic and any
standards established from time to time by Gothic 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, Gothic is unable to predict the future cost of complying with
such regulations. Gothic 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.
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Environmental Matters. Gothic'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 Gothic's operations. The
permits required for various areas of Gothic's operations are subject to
revocation, modification and renewal by issuing authorities. Governmental
authorities have the power to enforce compliance with their regulations, and
violators are subject to fines or injunction, or both. In the opinion of
management, Gothic is in substantial compliance with current applicable
environmental laws and regulations, and Gothic 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 Gothic, 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 Gothic'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 Gothic, 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 Gothic. 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, Gothic 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. Gothic 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 Gothic.
Gothic 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
Gothic's properties are or have been operated by third parties over whom Gothic
has or had no control. Notwithstanding Gothic'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
Gothic.
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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 Gothic, as well as the
revenues received by Gothic for sales of 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 Gothic.
Because Order 636 may be modified as a result of the appeals, it is difficult to
predict the ultimate impact of the orders on Gothic 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 Gothic 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. Gothic 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
Gothic 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. Gothic'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 Gothic's insurance, could have a material adverse effect on Gothic's
financial condition and results of operations. Moreover, no assurance can be
given that Gothic will be able to maintain adequate insurance in the future at
reasonable rates.
EMPLOYEES
As of June 30, 2000, Gothic had a total of 31 employees consisting of 18
production and land personnel, and 13 financial, accounting and administrative
personnel, two of whom are executive officers.
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EXECUTIVE OFFICE
Gothic 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. Gothic believes this facility
is adequate for its present requirements.
INCORPORATION
Gothic was 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 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. Gothic's
principal office is at 6120 South Yale Avenue, Suite 1200, Tulsa, Oklahoma
74136, and its telephone number is (918) 749-5666.
DESCRIPTION OF PROPERTY
Acreage. The following table shows the approximate gross and net acres of
leasehold interests of Gothic on December 31, 1999:
<TABLE>
<CAPTION>
UNDEVELOPED
DEVELOPED 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 Gothic as of December 31,
1999:
<TABLE>
<CAPTION>
GROSS WELL NET WELL
FIELD COUNT COUNT
----- ---------- --------
<S> <C> <C>
Anadarko Basin
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>
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<PAGE> 113
Natural Gas and Oil Production. The following table shows the approximate
net natural gas and oil production attributable to Gothic for the years ended
December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998 1997
------ ------ -----
<S> <C> <C> <C>
Natural Gas (MMcf).......................................... 25,477 24,455 6,583
Oil (MBbls)................................................. 158 257 176
Natural gas equivalents (MMcfe)............................. 26,425 25,997 7,639
</TABLE>
LEGAL PROCEEDINGS
Gothic 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. seeking actual and punitive damages against Jefferies
& Company for intentional interference with contractual relations and business
opportunity wherein Gothic claims Jefferies & Company improperly and wrongfully
interfered in the closing of the acquisition of the Amoco assets in January
1998. Jefferies & Company has filed a counterclaim against Gothic seeking
indemnification under an alleged letter agreement between Gothic and Jefferies &
Company for attorney's fees and expenses of litigation, among other things.
Gothic believes that discovery in the litigation is substantially complete and
anticipates a trial of the matter. Jefferies & Company has filed a motion for
summary judgment and Gothic has filed a response to the motion. Gothic's
management is unable to predict the ultimate outcome of the litigation.
Gothic is not a party to any other proceedings other than ordinary
litigation incidental to its business, the outcome of which management believes
will not have a material adverse effect on its financial position or results of
operations.
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<PAGE> 114
GOTHIC ENERGY CORPORATION
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
The following table sets forth selected consolidated financial data of
Gothic for the six months ended June 30, 2000 and 1999, and the years ended
December 31, 1999 and 1998. The data are derived from Gothic's audited
consolidated financial statements, except for periods for the six months ended
June 30, 2000 and 1999, which are derived from unaudited consolidated financial
statements of Gothic. The table should be read in conjunction with "Gothic
Energy Corporation Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements of Gothic,
including the notes thereto, appearing in this proxy statement/prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
-------------------- -------------------------
2000 1999 1999 1998
--------- -------- ----------- -----------
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Oil and gas sales.......................... $ 31,863 $ 23,417 $ 52,967 $ 50,714
Well operations............................ 1,356 1,259 2,657 2,319
--------- -------- --------- ---------
Total revenues........................ 33,219 24,676 55,624 53,033
Operating costs:
Lease operating expenses................... 2,390 2,987 5,725 8,609
Production taxes........................... 2,053 1,614 3,880 3,520
General and administrative expense......... 1,976 1,984 4,675 3,823
Investment banking and related fees........ 785 -- 638 --
Oil and gas depreciation, depletion, and
amortization............................. 9,625 10,402 20,444 23,626
Depreciation and amortization of other
assets................................... 350 250 525 375
Provision for impairment of natural gas and
oil properties........................... -- -- -- 76,000
--------- -------- --------- ---------
Total operating costs................. 17,179 17,237 35,887 115,953
--------- -------- --------- ---------
Income (loss) from operations................. 16,040 7,439 19,737 (62,920)
Other income (expense):
Interest and other income.................. 50 817 942 128
Interest expense........................... (19,490) (18,727) (37,988) (35,438)
--------- -------- --------- ---------
Loss before extraordinary item................ (3,400) (10,471) (17,309) (98,230)
Loss on early extinguishment of debt.......... -- -- -- 31,459
--------- -------- --------- ---------
Net loss...................................... (3,400) (10,471) (17,309) (129,689)
Preferred dividend............................ 3,715 3,291 6,820 5,599
Preferred dividend -- amortization of
preferred discount......................... 923 923 1,847 5,095
--------- -------- --------- ---------
Net loss available to common shareholders..... $ (8,038) $(14,685) $ (25,976) $(140,383)
========= ======== ========= =========
Loss per common share before extraordinary
item, basic and diluted.................... $ (0.43) $ (0.90) $ (1.51) $ (6.70)
========= ======== ========= =========
Loss per common share, basic and diluted...... $ (0.43) $ (0.90) $ (1.51) $ (8.63)
========= ======== ========= =========
CASH FLOW DATA:
Cash provided by operating activities before
changes in working capital................. $ 12,583 $ 5,687 $ 15,286 $ 9,788
Cash provided by operating activities......... 8,339 3,017 13,707 11,567
Cash used in investing activities............. (11,328) (10,861) (22,241) (191,375)
Cash provided by financing activities......... 5,723 7,424 8,828 165,375
BALANCE SHEET DATA (at end of period):
Total assets.................................. 246,126 236,500 238,397 237,288
Long-term debt, net........................... 315,958 313,353 319,857 301,179
Stockholder's equity (deficit)................ (104,433) (94,376) (101,035) (83,921)
</TABLE>
103
<PAGE> 115
GOTHIC ENERGY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
As a consequence of Gothic's holding company structure, all of Gothic's
natural gas and oil acquisition, development, exploitation, exploration and
production activities are conducted through Gothic Production, the wholly owned
operating subsidiary of Gothic. The sole material asset of Gothic, the parent
corporation, is the outstanding capital stock of Gothic Production. During the
six months ended June 30, 2000, the parent corporation had approximately $5.2
million of interest expense and related note amortization costs on its
outstanding 14 1/8% senior secured discount notes due 2006. Additionally, it
recognized $4.6 million in preferred dividends and amortization of preferred
discount on its Series B convertible preferred stock during the six months ended
June 30, 2000.
As part of its ongoing efforts to restructure and improve its balance
sheet, Gothic had negotiated agreements with the holders of its senior secured
discount notes intended to result in the conversion of that indebtedness into
equity securities of Gothic. Subsequently, Chesapeake purchased 99.8% of the
principal amount of those notes. Negotiations between Gothic and Chesapeake
followed and Gothic announced on June 30, 2000 its intention to merge with a
subsidiary of Chesapeake in exchange for 4,000,000 shares of Chesapeake's common
stock. A definitive merger agreement was executed on September 8, 2000. The
parties expect the transaction to close in January 2001, subject to shareholder
approval and satisfaction of other closing conditions.
The following table reflects certain summary operating data for the periods
presented:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEARS ENDED
JUNE 30, DECEMBER 31,
--------------------- ---------------------
2000 1999 1999 1998
--------- --------- --------- ---------
(IN THOUSANDS, UNLESS OTHERWISE INDICATED)
<S> <C> <C> <C> <C>
Net Production:
Oil (MBbls).................................. 79 75 158 257
Natural gas (MMcf)........................... 12,641 12,891 25,477 24,455
Natural gas equivalent (MMcfe)............... 13,115 13,341 26,425 25,997
Oil and Natural Gas Sales:
Oil.......................................... $ 1,722 $ 1,045 $ 2,671 $ 3,469
Natural gas.................................. 30,141 22,372 50,296 47,245
------- ------- ------- -------
Total................................ $31,863 $23,417 $52,967 $50,714
======= ======= ======= =======
Average Sales Price:(1)
Oil (Bbl).................................... $ 21.80 $ 13.93 $ 16.91 $ 13.50
Natural gas (Mcf)............................ 2.38 1.74 1.97 1.93
Natural gas equivalent (Mcfe)................ 2.43 1.76 2.00 1.95
Expenses ($ per Mcfe):
Lease operating(2)........................... $ 0.18 $ 0.22 $ 0.22 $ 0.33
General and administrative................... 0.15 0.15 0.18 0.14
Depreciation, depletion and
amortization(3)........................... 0.73 0.80 0.77 0.91
</TABLE>
---------------
(1) Includes the effect of hedging activity (see note 1 of notes to Gothic's
unaudited consolidated financial statements).
(2) These amounts exclude production taxes.
(3) These amounts represent depletion of oil and natural gas properties only.
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<PAGE> 116
RECENT FINANCIAL RESULTS
For the quarter ended September 30, 2000, Gothic had net income of $1.3
million (a loss of $0.05 per common share), compared to a net loss of $4.3
million ($0.37 per common share) in the third quarter of 1999. Total revenues
were $21.9 million and $14.2 million, respectively.
For the nine months ended September 30, 2000, Gothic had a net loss of $2.1
million ($0.46 per common share), compared to a net loss of $14.8 million ($1.27
per common share) in the nine months ended September 30, 1999. Total revenues
were $55.1 million and $38.8 million, respectively.
Production for the third quarter of 2000 was 7.1 Bcfe, comprised of 6.9 Bcf
of natural gas and 29,000 barrels of oil. Production for the third quarter of
1999 was 6.4 Bcfe, comprised of 6.1 Bcf and 45,000 barrels of oil. Average
prices realized during the third quarter of 2000 were $20.14 per barrel of oil
and $3.00 per Mcf of natural gas. Average prices realized during the third
quarter of 1999 were $19.07 per barrel and $2.08 per Mcf.
Hedging activities reduced third quarter 2000 realizations by $11.07 per
barrel and $1.23 per Mcf, for a total of $8.1 million. Hedging activities
reduced third quarter 1999 natural gas realizations by $0.20 per Mcf, for a
total of $1.2 million, and had no effect on oil realizations.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2000 Compared with Three Months Ended June 30,
1999.
Revenues were $17.7 million for the three months ended June 30, 2000, as
compared to $13.2 million for the three months ended June 30, 1999. This
represents a 34% increase in total revenue for the period. Natural gas and oil
sales for the three months ended June 30, 2000 increased $4.4 million (35%) to
$17.0 million, with $741,000 from oil sales and $16.3 million from natural gas
sales, as compared to natural gas and oil sales of $12.6 million for the three
months ended June 30, 1999, with $564,000 from oil sales and $12.0 million from
natural gas sales. The increase in natural gas and oil sales was the result of
higher commodity prices within the natural gas and oil industry during 2000. Oil
sales in 2000 were based on the sale of 35,000 barrels at an average price of
$21.17 per barrel as compared to 35,000 barrels at an average price of $16.11
per barrel in 1999. Natural gas sales in 2000 were based on the sale of
6,446,000 Mcf at an average price of $2.53 per Mcf compared to 6,469,000 Mcf at
an average price of $1.86 per Mcf in 1999.
Gothic incurred lease-operating expenses for the three months ended June
30, 2000 of $2.5 million compared with lease-operating expenses of $2.3 million
for the three months ended June 30, 1999. Lease operating expenses include
approximately $1.3 million and $883,000, respectively, in production taxes,
which Gothic incurred from its share of production in 2000 and 1999. The 2000
production taxes were reduced by approximately $300,000 in tax rebates for which
Gothic is eligible. Lease operating expenses as a percentage of natural gas and
oil sales were 14% in 2000 as compared to 18% in 1999.
Depreciation, depletion and amortization expense was $4.7 million for the
three months ended June 30, 2000 as compared to $5.4 million for the three
months ended June 30, 1999. The decrease resulted primarily from an increase in
Gothic's reserve base caused by higher commodity prices, which in turn lowers
Gothic's depletion rate.
General and administrative costs were $1.0 million for both the three
months ended June 30, 2000 and 1999. General and administrative costs per Mcfe
were $0.15 in 2000, the same as the 1999 period.
Interest and debt issuance costs were $9.7 million for the three months
ended June 30, 2000 as compared to $9.5 million for 1999. The increase primarily
relates to interest, associated with the discount notes issued as part of
Gothic's recapitalization in April 1998. Gothic incurred interest costs of $6.5
million related to its 11 1/8% senior secured notes, $2.5 million related to the
discount notes, $265,000 with Bank One, Texas, N.A. and $455,000 as amortization
of loan costs during the three months ended June 30, 2000.
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<PAGE> 117
Gothic also incurred $2.4 million in preferred dividends and amortization
of preferred discount costs on its Series B preferred stock during the three
months ended June 30, 2000, compared to $2.1 million in 1999.
Six Months Ended June 30, 2000 Compared with Six Months Ended June 30, 1999.
Revenues were $33.2 million for the six months ended June 30, 2000, as
compared to $24.7 million for the six months ended June 30, 1999. This
represents a 34% increase in total revenue for the period. Natural gas and oil
sales for the six months ended June 30, 2000 increased $8.5 million (36%) to
$31.9 million, with $1.7 million from oil sales and $30.2 million from natural
gas sales, as compared to natural gas and oil sales of $23.4 million for the six
months ended June 30, 1999, with $1.0 million from oil sales and $22.4 million
from natural gas sales. The increase in natural gas and oil sales was the result
of higher commodity prices within the natural gas and oil industry during 2000.
Oil sales in 2000 were based on the sale of 79,000 barrels at an average price
of $21.80 per barrel as compared to 75,000 barrels at an average price of $13.93
per barrel in 1999. Natural gas sales in 2000 were based on the sale of
12,641,000 Mcf at an average price of $2.38 per Mcf compared to 12,891,000 Mcf
at an average price of $1.74 per Mcf in 1999.
Gothic incurred lease-operating expenses for the six months ended June 30,
2000 of $4.4 million compared with lease operating expenses of $4.6 million for
the six months ended June 30, 1999. Lease operating expenses include
approximately $2.0 million and $1.6 million, respectively, in production taxes,
which Gothic incurred from its share of production in 2000 and 1999. The 2000
production taxes were reduced by approximately $625,000 for tax rebates for
which Gothic is eligible. In addition to the production tax rebates,
lease-operating expenses were lower in 2000 due to efficiencies realized from
the use of Gothic's telemetry equipment, lower compressor charges, and the
effect of certain gas balancing adjustments made in the 1999 period. Lease
operating expenses as a percentage of natural gas and oil sales were 14% in 2000
as compared to 20% in 1999.
Depreciation, depletion and amortization expense was $10.0 million for the
six months ended June 30, 2000 as compared to $10.7 million for the six months
ended June 30, 1999. The lower depreciation, depletion and amortization in 2000
resulted primarily from an increase in Gothic's reserve base caused by higher
commodity prices in 2000, which in turn lowered Gothic's depletion rate.
General and administrative costs were $2.0 million for both the six months
ended June 30, 2000 and 1999. General and administrative costs per Mcfe were
$0.15 in 2000, the same as in the 1999 period.
Interest and debt issuance costs were $19.5 million for the six months
ended June 30, 2000 as compared to $18.7 million for 1999. The increase
primarily relates to interest associated with the discount notes issued as part
of Gothic's recapitalization in April 1998. Gothic incurred interest costs of
$13.1 million related to the 11 1/8% senior secured notes, $5.1 million related
to the discount notes, $409,000 with Bank One, Texas, N.A. and $907,000 as
amortization of loan costs during the six months ended June 30, 2000.
Gothic earned $50,000 in interest and other income during the six months
ended June 30, 2000 compared to $817,000 in 1999. The 1999 amount includes
$720,000 from the sale of seismic data.
Gothic also incurred $4.6 million in preferred dividends and amortization
of preferred discount costs on its Series B preferred stock during the six
months ended June 30, 2000, compared to $4.2 million in 1999.
The Year Ended December 31, 1999 Compared with the Year Ended December 31,
1998.
Gothic 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, Gothic had $3.5 million from oil sales and $47.2
million from natural gas sales. The increase in natural gas
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<PAGE> 118
and oil sales was primarily the result of higher commodity prices for both
natural gas and oil in 1999 compared to 1998. Oil sales in 1999 were based 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.
Gothic incurred lease-operating expenses during 1999 of $9.6 million
compared with lease operating expenses of $12.1 million for 1998. Lease
operating expenses include approximately $3.9 million and $3.5 million in
production taxes, which Gothic incurred from its 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. 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 are due to more widespread
use of telemetry and other more efficient means of operating Gothic properties
that were acquired as part of the transaction with Amoco in early 1998.
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.
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 added
and other costs 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. Gothic also incurred
investment banking and related fees in 1999 of $638,000 in connection with
efforts to restructure Gothic's balance sheet.
Gothic accounts for oil and gas exploration and development activities
using the full cost method of accounting prescribed by the 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 oil and gas
reserves. Gothic capitalizes 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. Independent petroleum engineers estimate
Gothic's natural gas and oil reserves annually. The calculation of depreciation,
depletion and amortization includes estimated future expenditures that Gothic
believes it will incur in developing 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 being amortized exceeds
the full cost ceiling as defined by the SEC, the amount of the excess is charged
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
Gothic's natural gas and oil properties. Changes in the estimates or declines in
prevailing natural gas and oil prices could cause Gothic to reduce in the near
term the carrying value of the natural gas and oil properties. A write-down
arising out of these conditions is referred to throughout the natural gas and
oil industry as a full cost ceiling write-down.
During the year ended December 31, 1998, Gothic made a $76.0 million
pre-tax provision for impairment of its natural gas and oil properties because
of the drop in natural gas and oil prices during the last half of 1998. The 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
on the balance sheet as a reduction of the cost of natural gas and oil
properties. Gothic had no full cost ceiling write-down during 1999.
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 the senior secured notes which
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<PAGE> 119
were issued in April 1998 by Gothic Production, interest on the discount notes
which Gothic issued in April 1998, and amortization of the costs incurred to
complete the sale of these notes and amendments to the bank credit facility.
Gothic incurred interest costs of $26.1 million related to the senior secured
notes, $9.7 million related to the discount notes, $397,000 with the bank, and
$1.8 million as amortization of loan costs.
Gothic 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. Gothic obtained consents to the amendment of the terms of its 12 1/4%
senior notes in early 1998 prior to repaying the notes and also prepaid the bank
credit facility in April 1998.
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 Gothic's
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
since early 1998.
Gothic uses the sales method for recording natural gas sales. Oil and
condensate production is sold, title passed, and revenue recognized at or near
the wells under short-term purchase contracts at prevailing prices in accordance
with arrangements, which are customary in the natural gas and oil industry. Gas
sales are recorded as revenues when the gas is metered and title transferred
pursuant to the gas sales contracts. During such times as the sales of gas
exceed the pro rata ownership in a well, such sales are recorded as revenues
unless total sales from the well have exceeded Gothic's 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 business in the operation of 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, Gothic 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 Gothic conducted but related to the assets acquired. It is not
Gothic's policy to operate wells in such a manner that imbalances are created.
Gothic expects 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.
LIQUIDITY AND CAPITAL RESOURCES
General.
Since 1994, Gothic's principal sources of cash have been bank borrowings,
the sale of equity and debt securities and cash flow from operations. The
following summary table reflects comparative cash flows for Gothic for the six
months ended June 30, 2000 and 1999, and the years ended December 31, 1999 and
1998:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEARS ENDED
JUNE 30, DECEMBER 31,
----------------- ------------------
2000 1999 1999 1998
------- ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net cash provided by operating activities..... $ 8,339 $ 3,017 $13,707 $ 11,567
Net cash used by investing activities......... 11,328 10,861 22,241 191,375
Net cash provided by financing activities..... 5,723 7,424 8,828 165,375
</TABLE>
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Six Months Ended June 30, 2000 and 1999.
Net cash provided by operations was $8.3 million for the six months ended
June 30, 2000 as compared to net cash provided of $3.0 million for the same
period in 1999. The operating cash flows for the six months ended June 30, 2000
reflect the increase in income from operations resulting from higher commodity
prices, partially offset by changes in working capital.
Gothic used $11.3 million of net cash in investing activities for the six
months ended June 30, 2000 compared to net cash used of $10.9 million for the
same period in 1999. The 2000 amount includes well enhancement costs of
approximately $12.2 million and approximately $779,000 in cash paid for property
acquisitions and equipment, offset by approximately $1.6 million received from
the sale of properties. The 1999 cash used for investing activities includes
property development costs of approximately $9.3 million and approximately $3.7
million in cash paid for property acquisitions. These uses were partially offset
by proceeds of $2.1 million received from the sale of substantially all of
Gothic's Johnson Ranch operations.
Net cash provided by financing activities for the six months ended June 30,
2000 was $5.7 million compared to $7.4 million provided in 1999. The June 30,
2000 amount represents the net increase in borrowing under Gothic's credit
facility during the six months. The June 30, 1999 amount includes proceeds from
Gothic's credit facility of $7.5 million, partially offset by the payment of
$76,000 in bank and other loan fees.
Years Ended December 31, 1999 and 1998.
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.
Gothic 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 Gothic's 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.
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 the 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
the 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.
CREDIT FACILITY
On April 27, 1998, Gothic entered into a credit facility, with Bank One.
This credit facility consists of a revolving line of credit, and had 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 is redetermined at least
semi-annually. Upon completion of the April 1, 2000 redetermination, the
borrowing base was reduced to $15,000,000. 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. Gothic may elect to calculate
interest under a London Interbank Offered Rate, or LIBOR, plus 1.5%, or up to
2.0% in the event the loan balance is greater than 75% of the borrowing base).
Gothic is required to pay a commitment fee on the unused portion of the
borrowing base
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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
Gothic whether currently owned or hereafter acquired. As of June 30, 2000,
Gothic had $14.7 million 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,
(1) prohibitions against additional indebtedness unless approved by the lenders,
subject to certain exceptions, (2) prohibitions against the creation of liens on
the assets of Gothic subject to certain exceptions, (3) prohibitions against
cash dividends, (4) prohibitions against hedging positions unless consented to
by Bank One, (5) prohibitions on asset sales, subject to certain exceptions, (6)
restrictions on mergers or consolidations, (7) a requirement to maintain a ratio
of current assets to current liabilities of 1.0 to 1.0, and (8) a minimum
interest coverage ratio of not less than 2.0 to 1.0 for each 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 Gothic 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. Gothic is
required to escrow interest payments due on the 11 1/8% 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
judgments, bankruptcy or insolvency, a default under certain covenants not cured
within a grace period, and a change in the management or control of Gothic. For
the quarter ended March 31, 2000, Gothic failed to meet both the interest
coverage ratio and the current ratio tests. The interest coverage ratio was 1.81
to 1.0 for the quarter, and the current ratio was .92 to 1.0 at March 31, 2000.
Gothic requested and received a waiver of compliance with both covenants at
March 31, 2000. At June 30, 2000 Gothic was in compliance with all covenants
under the credit facility.
FUTURE CAPITAL REQUIREMENTS AND RESOURCES
Gothic's capital requirements relate to the acquisition, exploration,
enhancement, development and operation of natural gas and oil properties. In
general, because the natural gas and oil reserves Gothic has acquired are
depleted by production over time, the success of its business strategy is
dependent upon a continuous acquisition, exploitation, enhancement, and
development program. In order to achieve profitability and generate cash flow,
Gothic will be dependent upon acquiring or developing additional natural gas and
oil properties or entering into joint natural gas and oil well development
arrangements.
SUBSEQUENT EVENTS
On June 30, 2000 Gothic announced it had reached an agreement with
Chesapeake to merge with a wholly owned subsidiary of Chesapeake, in exchange
for 4,000,000 shares of Chesapeake's common stock. On September 8, 2000, the
parties executed a definitive merger agreement.
Gothic's previously announced plan of restructuring, which contemplated the
redemption of Chesapeake's holding of Gothic's preferred and common stock for
oil and gas properties and other considerations, the exchange of the
$104,000,000 discount notes in exchange for 94% of Gothic's equity and an equity
rights offering of $15,000,000, have been terminated in anticipation of this
transaction.
The merger is subject to approval by Gothic's shareholders and other
closing conditions. Both boards of directors have unanimously approved the
transaction. Completion of the transaction is expected in January 2001.
At June 30, 2000, Gothic had 18,685,765 common shares outstanding, plus
employee and director options to purchase 4,435,000 shares. Of the outstanding
shares, Chesapeake owns 2,394,125 shares and these shares will not participate
in the exchange for the 4,000,000 Chesapeake common shares to be received by
Gothic's other shareholders.
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Gothic loaned $90,000 to certain employees and one director in the form of
notes payable to Gothic, at an interest rate of 6% per annum, due and payable on
July 31, 2001. On July 11, 2000, the employees and the director of Gothic
exercised 225,000 outstanding common stock options. The options were exercised
upon the payment of $90,000 to Gothic.
Gothic loaned $1,739,500 to certain employees, two officers and two
directors in the form of notes payable to Gothic, at an interest rate of 6% per
annum, due and payable on July 31, 2001. On August 1, 2000 these individuals
exercised 4,165,000 outstanding common stock options. Of the total options
exercised, 4,155,000 options were exercised upon payment of $1,739,500 to
Gothic, and 10,000 options were exercised under the cashless exercise provisions
of the option plan.
Reflecting the exercise of these options, 45,000 common stock options
remain outstanding at November 1, 2000.
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 discussed in this
proxy statement/prospectus are "forward-looking statements" as defined under the
Securities Exchange Act of 1934, as amended, that involve risks and
uncertainties. Forward-looking statements include, but are not limited to, the
matters described below, as well as notes 2 and 3 to the notes to Gothic's
audited consolidated financial statements and "Management's Discussion and
Analysis of Financial Condition and Results of Operations." Such forward-looking
statements relate to Gothic's ability to attain and maintain profitability and
cash flow, the stability of and future prices for oil and gas, the ability of
Gothic to expand through acquisitions and to redeploy its equipment among
regional operations, the ability of Gothic to raise additional capital to meet
its requirements and to obtain additional financing, its ability to successfully
implement its business strategy, its ability to obtain waivers from the bank
under its credit facility and its ability to maintain compliance with the
covenants of its various loan documents and other agreements pursuant to which
securities have been issued. Such forward-looking statements also relate to the
completion of Gothic's merger with a subsidiary of Chesapeake and its ability to
restructure its balance sheet if the merger is not completed. The inability of
Gothic to meet these objectives or the consequences on Gothic from adverse
developments attempting to complete these objectives, or in general economic
conditions, adverse developments in the oil and gas industry, and other factors
could have a material adverse effect on Gothic. Gothic cautions readers that
various risk factors could cause Gothic's operating results and financial
condition to differ materially from those expressed in any forward-looking
statements made by Gothic and could adversely affect Gothic's financial
condition and its ability to pursue its business strategy.
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GOTHIC ENERGY CORPORATION
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Gothic 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. Gothic's objective is to hedge a portion of its
exposure to price volatility from producing natural gas. These arrangements may
expose Gothic to credit risk from its counterparty.
In July 1999, Gothic entered into a costless collar agreement with respect
to the production of 50,000 MMBtu per day during the period of November 1999
through March 2000, which placed a floor of $2.30 per MMBtu and a ceiling of
$3.03 per MMBtu. The collar represented approximately 70% of Gothic's current
daily natural gas production. Collar arrangements limit the benefits Gothic will
realize if actual prices rise above the ceiling price. These arrangements
provide for Gothic to exchange a floating market price for a fixed range
contract price. Gothic makes payments when the floating price exceeds the fixed
range for a contract month and payments are received when the fixed range price
exceeded the floating price. The commodity reference price for the contract was
the Panhandle Eastern Pipeline Company, Texas, and Oklahoma Mainline Index.
Additionally, in January 2000, Gothic 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, Gothic
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
was in effect for the months of April and May 2000. The commodity reference
price for both contracts is Panhandle Eastern, Texas, and Oklahoma Mainline
Index. If the open gas hedge noted above had been settled on June 30, 2000,
Gothic would have recognized a loss of approximately $11.1 million.
In September 2000, Gothic entered into a hedge agreement covering 60,000
MMBtu per day at a fixed price of $4.88 per MMBtu for November 2000 and $5.00
per MMBtu for December 2000. The commodity references for both of these
contracts is also Panhandle Eastern.
In August 1999, Gothic entered into a hedge agreement covering 10,000
barrels of oil per month at a fixed price of $20.10 per barrel. This hedge was
in effect from September 1999 through August 2000. Gains and losses on such
natural gas and oil contracts are reflected in revenues as price adjustments in
the months of related production. If the open crude oil hedge noted above had
been settled on June 30, 2000, Gothic would have recognized a loss of
approximately $338,000.
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DESCRIPTION OF CHESAPEAKE CAPITAL STOCK
The description of our capital stock set forth below is not complete and is
qualified by reference to our certificate of incorporation and bylaws. Copies of
our certificate of incorporation and bylaws are available from Chesapeake upon
request and both documents have been filed with the Securities and Exchange
Commission.
AUTHORIZED CAPITAL STOCK
Our authorized capital stock consists of 250,000,000 shares of common
stock, par value $.01 per share, and 10,000,000 shares of preferred stock, par
value $.01 per share, of which 624,037 shares are designated as 7% Cumulative
Convertible Preferred Stock and 250,000 shares are designated as Series A Junior
Participating Preferred Stock. As of October 30, 2000, our issued and
outstanding capital stock consisted of 152.1 million shares of common stock and
624,037 shares of convertible preferred stock. No shares of Series A preferred
stock are currently outstanding. Also, an additional 16.6 million shares of
common stock were reserved for issuance upon the exercise of outstanding options
granted under our stock option plans.
COMMON STOCK
Holders of our common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of shareholders. Subject to
preferences that may be applicable to any outstanding preferred stock, holders
of our common stock are entitled to receive ratably such dividends as may be
declared by the board of directors out of funds legally available for dividends.
In the event of our liquidation or dissolution, holders of our common stock are
entitled to share ratably in all assets remaining after payment of liabilities
and the liquidation preference of any outstanding preferred stock.
Holders of our common stock have no preemptive rights and have no rights to
convert their common stock into any other securities. All of the outstanding
shares of common stock are duly authorized, validly issued, fully paid and
nonassessable.
PREFERRED STOCK
Our convertible preferred stock is described below under "7% Cumulative
Convertible Preferred Stock." The Series A preferred stock is described below
under "-- Anti-Takeover Provisions -- Share Rights Plan."
We have 9,375,963 shares of authorized preferred stock which are
undesignated. Our board of directors has the authority, without further
shareholder approval, to issue shares of preferred stock from time to time in
one or more new series and to fix the number of shares, designations,
preferences, voting powers, qualifications and special or relative rights or
privileges of each series, including dividend rights, voting rights, redemption
and sinking fund provisions, liquidation preferences and conversion rights.
While providing desirable flexibility for possible acquisitions and other
corporate purposes, and eliminating delays associated with a shareholder vote on
specific issuances, the issuance of preferred stock could adversely affect the
voting power of holders of common stock, as well as dividend and liquidation
payments on common stock. It also could have the effect of delaying, deferring
or preventing a change in control.
7% Cumulative Convertible Preferred Stock. The certificate of designation
for the 7% Cumulative Convertible Preferred Stock authorizes the issuance of
624,037 shares, all of which are issued and outstanding. The convertible
preferred stock is, and any common stock issued upon the conversion or exchange
of convertible preferred stock will be, fully paid and nonassessable. The
convertible preferred stock was issued on April 22, 1998.
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Ranking. The convertible preferred stock ranks:
- senior to all classes of our common stock and to each other class of
capital stock or series of preferred stock that does not expressly
provide that it ranks senior to or on a parity with the convertible
preferred stock as to dividends and distributions upon our liquidation,
winding-up or dissolution;
- on a parity with any class of capital stock or series of preferred stock
issued by Chesapeake that expressly provides that it ranks on a parity
with the convertible preferred stock as to dividends and distributions
upon liquidation, winding-up or dissolution; and
- junior to each class of capital stock or series of preferred stock issued
by Chesapeake that expressly provides that it ranks senior to the
convertible preferred stock as to dividends and distributions upon our
liquidation, winding-up or dissolution.
Dividends. Holders of convertible preferred stock are entitled to receive
cumulative annual cash dividends of $3.50 per share, payable quarterly in
arrears out of assets legally available for dividends, on February 1, May 1,
August 1 and November 1 of each year commencing August 1, 1998, when, as and if
declared by the Board of Directors. Dividends will accumulate and be cumulative
(whether or not declared) from the issue date. Dividends will be payable to
holders of record as they appear on our stock register on the record date fixed
by the Board for a payment. The record date may not be more than 60 days nor
less than 10 days preceding the payment date.
Dividends payable on the convertible preferred stock for each full dividend
period will be computed by dividing the annual dividend rate by four. Dividends
payable on the convertible preferred stock for any period less than a full
dividend period (based upon the number of days elapsed during the period) will
be computed on the basis of a 360-day year consisting of twelve 30-day months.
We will not declare and pay any dividends on or redeem or purchase any of
our stock ranking junior to or ratably with the convertible preferred stock,
unless full cumulative dividends on the convertible preferred stock have been
paid or declared and a sum sufficient for the payment of dividends is set apart.
However, regardless of whether we have paid full cumulative dividends on the
convertible preferred stock, we may do the following:
(1) declare and pay a dividend on junior stock payable solely in
shares of junior stock;
(2) redeem or purchase stock ranking junior or ratably with the
convertible preferred stock by conversion into or exchange for shares of
our stock ranking junior to the convertible preferred stock; and
(3) make cash payments in lieu of fractional shares.
If full dividends have not been declared and paid or set apart on the
convertible preferred stock and any other preferred stock ranking ratably with
the convertible preferred stock as to dividends, dividends may be declared and
paid on the convertible preferred stock and the other ratable preferred stock.
In this case, the dividends shall be declared and paid pro rata so that the
amounts of dividends declared per share on the convertible preferred stock and
the other ratable preferred stock will in all cases bear the same ratio to each
other that accrued and unpaid dividends per share on the shares of the
convertible preferred stock and the other preferred stock bear to each other.
Moreover, if the dividends are paid in cash on the other ratable preferred
stock, dividends will also be paid in cash on the convertible preferred stock.
Holders of shares of convertible preferred stock will not be entitled to
any dividend, whether payable in cash, property or stock, in excess of full
cumulative dividends. No interest, or sum of money in lieu of interest, will be
payable in respect of any dividend payment or payments which may be in arrears.
Our ability to declare and pay cash dividends and make other distributions
on our capital stock, including the convertible preferred stock, may be limited
by the terms of our indentures and other
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financing agreements and by Oklahoma law. See "Risk Factors -- Our debt
covenants restrict our operations."
Liquidation Preference. Upon any dissolution, liquidation or winding up of
Chesapeake, the holders of convertible preferred stock will be entitled to
receive a liquidation preference of $50 per share, plus accrued and unpaid
dividends to the date of payment. These amounts will be paid before any payment
or distribution is made to holders of common stock or any other stock ranking
junior to the convertible preferred stock upon liquidation. The holders of
convertible preferred stock and any other shares of stock of Chesapeake that
rank on a parity as to liquidation rights with the convertible preferred stock
are entitled to share ratably, in accordance with the respective preferential
amounts payable on the stock, in any distribution which is not sufficient to pay
in full the amounts to which the holders are entitled. After payment in full of
the liquidation preference on the convertible preferred stock, the holders of
the convertible preferred stock will have no right or claim to any of our
remaining assets. The sale of all or part of our assets and the merger or
consolidation of our company into or with another company will not be considered
a dissolution, liquidation or winding up of Chesapeake unless the sale, merger
or consolidation is in connection with the dissolution, liquidation or winding
up of Chesapeake.
Optional Redemption. The convertible preferred stock may not be redeemed
prior to May 1, 2001. Beginning May 1, 2001, we may redeem the convertible
preferred stock for the prices set forth in the certificate of designation, plus
accumulated and accrued dividends. The redemption price is $52.45 per share
during the first year and then declines by $.35 per year until May 1, 2008 when
the price is $50.00. We may use cash, our common stock or a combination of cash
and common stock to redeem the convertible preferred stock. The number of common
shares to be delivered as payment will be determined by the market value of the
shares at the time of redemption.
From and after the applicable redemption date, unless we default in the
payment of the redemption price, dividends on the shares of convertible
preferred stock to be redeemed on the redemption date will cease to accrue, the
shares will no longer be deemed to be outstanding, and all rights of the holders
of the shares as shareholders will cease, except the right to receive the
redemption price.
If any dividends on convertible preferred stock are in arrears, no shares
of convertible preferred stock will be redeemed unless all outstanding shares of
the convertible preferred stock are simultaneously redeemed.
Voting Rights. The holders of the convertible preferred stock have no
voting rights except as set forth below or as required by law. In exercising
their voting rights, the holders of convertible preferred stock are entitled to
one vote per share.
If the dividends payable on the convertible preferred stock are in arrears
for six quarterly periods, the holders of the convertible preferred stock,
voting separately as a class with the holders of any other preferred stock or
preference securities having similar voting rights, will be entitled at the next
regular or special meeting of shareholders of Chesapeake to elect two additional
directors. These voting rights and the terms of the directors so elected will
continue until the dividend arrearage on the convertible preferred stock has
been paid in full.
The affirmative vote or consent of the holders of at least 66 2/3% of the
outstanding convertible preferred stock will be required for us to issue any
class or series of stock (or security convertible into stock) ranking on a
parity or senior to the convertible preferred stock as to dividends, liquidation
rights or voting rights and to amend our certificate of incorporation so as to
affect adversely the rights of holders of the convertible preferred stock,
including any increase in the authorized number of shares of preferred stock.
Conversion Rights. The convertible preferred stock is convertible at any
time at the option of the holder into that number of whole shares of our common
stock as is equal to the liquidation preference, plus accrued and unpaid
dividends to the date the shares of convertible preferred stock are surrendered
for conversion, divided by an initial conversion price of $6.95, subject to
adjustment upon the occurrence of dilutive events described in the certificate
of designation. A share of convertible preferred stock called for
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redemption will be convertible into shares of common stock up to and including
the close of business on the date fixed for redemption, unless we default in
payment of our redemption obligation.
Change of Control. Upon a change of control of Chesapeake, holders of
convertible preferred stock will, if the market value of our common stock is
less than the conversion price, have a one-time option to convert all of their
outstanding shares of convertible preferred stock into shares of common stock at
an adjusted conversion price equal to the greater of (1) the market value of our
common stock as of the date of the change of control and (2) $3.66. In lieu of
issuing the shares of common stock issuable upon conversion in the event of a
change of control, we may, at our option, make a cash payment equal to the
market value of the common stock otherwise issuable.
The certificate of designation for the convertible preferred stock defines
a change of control as any of the following events:
1. the sale, lease or transfer, in one or a series of related
transactions, of all or substantially all of our assets to any person or
group, other than to permitted holders;
2. the adoption of a plan relating to our liquidation or dissolution;
3. the acquisition, directly or indirectly, by any person or group,
other than permitted holders, of beneficial ownership of more than 50% of
the aggregate voting power of our voting stock; provided, however, that the
permitted holders beneficially own, directly or indirectly, in the
aggregate a lesser percentage of the total voting power of the voting stock
than such other person and do not have the right or ability by voting
power, contract or otherwise to elect or designate for election a majority
of our board of directors; or
4. during any period of two consecutive years, individuals who at the
beginning of the period constituted our board of directors (together with
any new directors whose election by such board of directors or whose
nomination for election by our shareholders was approved by two-thirds of
the directors then still in office who were either directors at the
beginning of the period or whose election or nomination for election was
previously so approved) cease for any reason to constitute a majority of
the board of directors then in office. The term "permitted holders" means
Aubrey K. McClendon and Tom L. Ward and their respective affiliates.
ANTI-TAKEOVER PROVISIONS
Our certificate of incorporation and bylaws and the Oklahoma General
Corporation Act include a number of provisions which may have the effect of
encouraging persons considering unsolicited tender offers or other unilateral
takeover proposals to negotiate with our board of directors rather than pursue
non-negotiated takeover attempts. These provisions include a classified board of
directors, authorized blank check preferred stock, restrictions on business
combinations and the availability of authorized but unissued common stock.
Classified Board of Directors. Our certificate of incorporation and bylaws
contain provisions for a staggered board of directors with only one-third of the
board standing for election each year. Directors can only be removed for cause.
A staggered board makes it more difficult for shareholders to change the
majority of the directors and instead promotes a continuity of existing
management.
Oklahoma Business Combination Statute. Section 1090.3 of the Oklahoma
General Corporation Act prevents an "interested shareholder" from engaging in a
"business combination" with an Oklahoma corporation for three years following
the date the person became an interested shareholder, unless
- prior to the date the person became an interested shareholder, the board
of directors of the corporation approved the transaction in which the
interested shareholder became an interested shareholder or approved the
business combination,
- upon consummation of the transaction that resulted in the interested
shareholder becoming an interested shareholder, the interested
shareholder owns stock having at least 85% of all voting power
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of the corporation at the time the transaction commenced, excluding stock
held by directors who are also officers of the corporation and stock held
by certain employee stock plans, or
- on or subsequent to the date of the transaction in which the person
became an interested shareholder, the business combination is approved by
the board of directors of the corporation and authorized at a meeting of
shareholders by the affirmative vote of the holders of two-thirds of all
voting power not attributable to shares owned by the interested
shareholder.
The statute defines a "business combination" to include
- any merger or consolidation involving the corporation and an interested
shareholder,
- any sale, lease, exchange, mortgage, pledge, transfer or other
disposition to or with an interested shareholder of 10% or more of the
assets of the corporation,
- subject to certain exceptions, any transaction which results in the
issuance or transfer by the corporation of any stock of the corporation
to an interested shareholder,
- any transaction involving the corporation which has the effect of
increasing the proportionate share of the stock of any class or series or
voting power of the corporation owned by the interested shareholder,
- the receipt by an interested shareholder of any loans, guarantees,
pledges or other financial benefits provided by or through the
corporation, or
- any share acquisition by the interested shareholder pursuant to Section
1090.1 of the Oklahoma General Corporation Act. For purposes of Section
1090.3, the term "corporation" also includes the corporation's
majority-owned subsidiaries.
In addition, Section 1090.3 defines an "interested shareholder," generally, as
any person that owns stock having 15% or more of all voting power of the
corporation, any person that is an affiliate or associate of the corporation and
owned stock having 15% or more of all voting power of the corporation at any
time within the three-year period prior to the time of determination of
interested shareholder status, and any affiliate or associate of such person.
Stock Purchase Provisions. Our certificate of incorporation includes a
provision which requires the affirmative vote of two-thirds of the votes cast by
the holders, voting together as a single class, of all then outstanding shares
of capital stock, excluding the votes by an interested shareholder, to approve
the purchase of any of our capital stock from the interested shareholder at a
price in excess of fair market value, unless the purchase is either (1) made on
the same terms offered to all holders of the same securities or (2) made on the
open market and not the result of a privately negotiated transaction.
Share Rights Plan.
The Rights. On July 7, 1998, our board of directors declared a dividend
distribution of one preferred stock purchase right for each outstanding share of
common stock. The distribution was paid on July 27, 1998 to the shareholders of
record on that date. Each right entitles the registered holder to purchase from
us one one-thousandth of a share of Series A preferred stock at a price of
$25.00, subject to adjustment.
The following is a summary of these rights. The full description and terms
of the rights are set forth in a rights agreement with UMB Bank, N.A., as rights
agent. Copies of the rights agreement and the certificate of designation for the
Series A preferred stock are available free of charge. This summary description
of the rights and the Series A preferred stock does not purport to be complete
and is qualified in its entirety by reference to all the provisions of the
rights agreement and the certificate of designation for the Series A preferred
stock.
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Initially, the rights attached to all certificates representing shares of
our outstanding common stock, and no separate rights certificates were
distributed. The rights will separate from our common stock and the distribution
date will occur upon the earlier of:
- 10 days following the date of public announcement that a person or group
of persons has become an acquiring person, or
- 10 business days (or a later date set by the board of directors prior to
the time a person becomes an acquiring person) following the commencement
of, or the announcement of an intention to make, a tender offer or
exchange offer upon consummation of which the offeror would, if
successful, become an acquiring person. The earlier of these dates is
called the distribution date.
The term "acquiring person" means any person who or which, together with
all of its affiliates and associates, is the beneficial owner of 15% or more of
our outstanding common stock, but does not include:
- Chesapeake or any of our subsidiaries or employee benefit plans,
- Aubrey K. McClendon, his spouse, lineal descendants and ascendants,
heirs, executors or other legal representatives and any trusts
established for the benefit of the foregoing or any other person or
entity in which the foregoing persons or entities are at the time of
determination the direct record and beneficial owners of all outstanding
voting securities (each a "McClendon shareholder"),
- Tom L. Ward, his spouse, lineal descendants and ascendants, heirs,
executors or other legal representatives and any trusts established for
the benefit of the foregoing, or any other person or entity in which the
foregoing persons or entities are at the time of determination the direct
record and beneficial owners of all outstanding voting securities (each a
"Ward shareholder"),
- Morgan Guaranty Trust Company of New York, in its capacity as pledgee of
shares beneficially owned by a McClendon or Ward shareholder, or both,
under any pledge agreement in effect on September 11, 1998, to the extent
that upon the exercise by the pledgee of any of its rights or duties as
pledgee, other than the exercise of any voting power by the pledgee or
the acquisition of ownership by the pledgee, such pledgee becomes a
beneficial owner of pledged shares, or
- any person (other than the pledgee just described) that is neither a
McClendon nor Ward shareholder, but who or which is the beneficial owner
of common stock beneficially owned by a McClendon or Ward shareholder (a
"second tier shareholder"), but only if the shares of common stock
otherwise beneficially owned by a second tier shareholder ("second tier
holder shares") do not exceed the sum of (A) the holder's second tier
holder shares held on September 11, 1998 and (B) 1% of the shares of our
common stock then outstanding (collectively, "exempt persons").
The rights agreement provides that, until the distribution date, the rights
will be transferred with and only with the common stock. Until the distribution
date (or earlier redemption or expiration of the rights), new common stock
certificates issued after July 27, 1998, upon transfer or new issuance of common
stock, will contain a notation incorporating the rights agreement by reference.
Until the distribution date or earlier redemption or expiration of the rights,
the surrender for transfer of any certificate for common stock, outstanding as
of July 27, 1998, even without a notation or a copy of a summary of the rights
being attached, will also constitute the transfer of the rights associated with
the common stock represented by the certificate. As soon as practicable
following the distribution date, separate certificates evidencing the rights
will be mailed to holders of record of the common stock as of the close of
business on the distribution date and these separate rights certificates alone
will evidence the rights.
The rights are not exercisable until the distribution date. The rights will
expire on July 27, 2008.
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The purchase price payable, and the number of one one-thousandths of a
share of Series A preferred stock or other securities or property issuable, upon
exercise of the rights are subject to adjustment from time to time to prevent
dilution:
- in the event of a stock dividend on, or a subdivision, combination or
reclassification of, the Series A preferred stock;
- upon the grant to holders of the Series A preferred stock of certain
rights or warrants to subscribe for or purchase shares of Series A
preferred stock at a price, or securities convertible into Series A
preferred stock with a conversion price, less than the then current
market price of the Series A preferred stock; or
- upon the distribution to holders of the Series A preferred stock of
evidences of indebtedness or assets (excluding regular periodic cash
dividends paid or dividends payable in Series A preferred stock) or of
subscription rights or warrants (other than those referred to above).
The number of outstanding rights and the number of one one-thousandths of a
share of Series A preferred stock issuable upon exercise of each right are also
subject to adjustment in the event of a stock split of the common stock or a
stock dividend on the common stock payable in the common stock or subdivisions,
consolidations or combinations of the common stock occurring, in any such case,
prior to the distribution date.
In the event that following the date of public announcement that an
acquiring person has become an acquiring person, we are acquired in a merger or
other business combination transaction or more than 50% of our consolidated
assets or earning power is sold, proper provision will be made so that each
holder of a right will thereafter have the right to receive, upon the exercise
of the right at the then current exercise price of the right, that number of
shares of common stock of the acquiring company which at the time of such
transaction will have a market value of two times the exercise price of the
right (the "flip-over right").
In the event that a person, other than an exempt person, becomes an
acquiring person, proper provision will be made so that each holder of a right,
other than the acquiring person and its affiliates and associates, will
thereafter have the right to receive upon exercise that number of shares of
common stock, or, if applicable, cash, other equity securities or property of
Chesapeake, having a market value equal to two times the purchase price of the
rights (the "flip-in right"). Any rights that are or were at any time owned by
an acquiring person will then become void.
With certain exceptions, no adjustment in the purchase price will be
required until cumulative adjustments require an adjustment of at least 1% in
the purchase price. Upon exercise of the rights, no fractional shares of Series
A preferred stock will be issued other than fractions which are integral
multiples of one one-hundredth of a share of Series A preferred stock. Cash will
be paid in lieu of fractional shares of Series A preferred stock that are not
integral multiples of one one-hundredth of a share of Series A preferred stock.
At any time prior to the earlier to occur of (1) 5:00 p.m., Oklahoma City,
Oklahoma time on the 10th day after the stock acquisition date or (2) the
expiration of the rights, we may redeem the rights in whole, but not in part, at
a price of $0.01 per right; provided, that (a) if the board of directors
authorizes redemption on or after the time a person becomes an acquiring person,
then the authorization must be by board approval and (b) the period for
redemption may, upon board approval, be extended by amending the rights
agreement. Board approval means the approval of a majority of our directors.
Immediately upon any redemption of the rights described in this paragraph, the
right to exercise the rights will terminate and the only right of the holders of
rights will be to receive the redemption price.
Our board of directors may amend the terms of the rights without the
consent of the holders of the rights at any time and from time to time provided
that any amendment does not adversely affect the interests of the holders of the
rights. In addition, during any time that the rights are subject to redemption,
the terms of the rights may be amended by the approval of a majority of the
directors, including an
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amendment that adversely affects the interests of the holders of the rights,
without the consent of the holders of rights.
Until a right is exercised, a holder will have no rights as a shareholder,
including, without limitation, the right to vote or to receive dividends. While
the distribution of the rights will not be taxable to Chesapeake or our
shareholders, shareholders may, depending upon the circumstances, recognize
taxable income in the event that the rights become exercisable for Series A
preferred stock, or other consideration.
The Series A Preferred Stock. Each one-thousandth of a share of the Series
A preferred stock (a "preferred share fraction") that may be acquired upon
exercise of the rights will be nonredeemable and junior to any other shares of
preferred stock that we may issue.
Each preferred share fraction will have a minimum preferential quarterly
dividend rate of $0.01 per preferred share fraction but will, in any event, be
entitled to a dividend equal to the per share dividend declared on the common
stock.
In the event of liquidation, the holder of a preferred share fraction will
receive a preferred liquidation payment equal to the greater of $0.01 per
preferred share fraction or the per share amount paid in respect of a share of
common stock.
Each preferred share fraction will have one vote, voting together with the
common stock. The holders of preferred share fractions, voting as a separate
class, will be entitled to elect two directors if dividends on the Series A
preferred stock are in arrears for six fiscal quarters.
In the event of any merger, consolidation or other transaction in which
shares of common stock are exchanged, each preferred share fraction will be
entitled to receive the per share amount paid in respect of each share of common
stock.
The rights of holders of the Series A preferred stock to dividends,
liquidation and voting, and in the event of mergers and consolidations, are
protected by customary antidilution provisions.
Because of the nature of the Series A preferred stock's dividend,
liquidation and voting rights, the economic value of one preferred share
fraction that may be acquired upon the exercise of each right should approximate
the economic value of one share of our common stock.
SHAREHOLDER ACTION
Except as otherwise provided by law or in our certificate of incorporation
or bylaws, the approval by holders of a majority of the shares of common stock
present in person or represented by proxy at a meeting and entitled to vote is
sufficient to authorize, affirm, ratify or consent to a matter voted on by
shareholders. Our bylaws provide that all questions submitted to shareholders
will be decided by a plurality of the votes cast, unless otherwise required by
law, our certificate of incorporation, stock exchange requirements or any
certificate of designation. The Oklahoma General Corporation Act requires the
approval of the holders of a majority of the outstanding stock entitled to vote
for certain extraordinary corporate transactions, such as a merger, sale of
substantially all assets, dissolution or amendment of the certificate of
incorporation. Our certificate of incorporation provides for a vote of the
holders of two-thirds of the issued and outstanding stock having voting power,
voting as a single class, to amend, repeal or adopt any provision inconsistent
with the provisions of the certificate of incorporation limiting director
liability and stock purchases by Chesapeake, and providing for staggered terms
of directors and indemnity for directors. The same vote is also required for
shareholders to amend, repeal or adopt any provision of our bylaws.
Under Oklahoma law, shareholders may take actions without the holding of a
meeting by written consent or consents signed by the holders of a sufficient
number of shares to approve the transaction had all of the outstanding shares of
our capital stock entitled to vote thereon been present at a meeting. If
shareholder action is taken by written consent, the rules and regulations of the
Securities and Exchange Commission require us to send each shareholder entitled
to vote on the matter, but whose consent was not
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solicited, an information statement containing information substantially similar
to that which would have been contained in a proxy statement.
REGISTRATION RIGHTS
In connection with our purchase of Gothic's senior secured discount notes
and the 11 1/8% senior secured notes issued by Gothic's operating subsidiary, we
entered into registration rights agreements with the former noteholders. We have
recently registered for resale 12.6 million shares of our common stock pursuant
to these registration rights agreements. Registration of shares on behalf of
selling shareholders results in those shares becoming freely tradeable without
restriction. These sales could cause the market price of our stock to decline.
We are required to bear all of the expenses of registration under these
agreements except underwriting discounts and commissions. We may not publicly
sell or distribute our common stock or any securities convertible into our
common stock during any underwritten offering by the former noteholders of the
shares covered by the registration rights agreements for a maximum period of
ninety days. If we propose to register shares of common stock under the
Securities Act, other than by a registration statement on Form S-8 or Form S-4,
the former noteholders have the right to receive notice of and to include the
shares covered by the registration rights agreements in such registration,
subject to restrictions imposed by the managing underwriter in an underwritten
offering.
TRANSFER AGENT AND REGISTRAR
UMB Bank, N.A. is the transfer agent and registrar for our common stock and
preferred stock.
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COMPARATIVE RIGHTS OF CHESAPEAKE AND GOTHIC SHAREHOLDERS
GENERAL
Following the merger, holders of record of Gothic common stock as of
immediately prior to the effective time of the merger will become holders of
Chesapeake common stock and the rights of such holders will be governed by the
certificate of incorporation and bylaws of Chesapeake. The rights of
Chesapeake's shareholders differ in certain respects from the rights of Gothic's
shareholders. Because both Gothic and Chesapeake are organized and exist under
Oklahoma law and are subject to the corporate laws of Oklahoma, these
differences arise from various provisions of the certificates of incorporation
and bylaws of the two companies. Certain of the differences are summarized
below, and such summary is qualified in its entirety by reference to the full
text of such documents.
LIMITATION OF DIRECTOR LIABILITY
The Oklahoma General Corporation Act provides that a corporation may
include a provision in its certificate of incorporation eliminating or limiting
the liability of a director to the corporation or its shareholders for monetary
damages, provided that such provision may not eliminate or limit the liability
of a director for:
- any breach of such director's duty of loyalty;
- acts or omissions by such director not in good faith or which involve
intentional misconduct or a knowing violation of law;
- the payment of dividends or the redemption of stock in violation of the
Oklahoma General Corporation Act; or
- any transaction from which such director derived an improper personal
benefit.
Both Chesapeake's and Gothic's certificates of incorporation contain provisions
eliminating the liability of their directors to the corporation or its
shareholders for monetary damages, except in the situations listed above.
SPECIAL MEETINGS OF SHAREHOLDERS
The Oklahoma General Corporation Act provides that special meetings of
shareholders may be called by the board of directors or by the persons
authorized by a corporation's certificate of incorporation or bylaws.
Chesapeake. Chesapeake's bylaws provide that a special meeting of
shareholders may be called by the chairman of the board. In addition, special
meetings must be called by the president or the secretary if a request in
writing is made by a majority of the board or the holders of 10% or more of the
outstanding stock of Chesapeake.
Gothic. Gothic's bylaws provide that a special meeting of shareholders may
be called by the chairman of the board, if any, or the President. Gothic's
bylaws also provide that a special meeting must be called by the president or
the secretary if a request in writing is made by a majority of the board or the
holders of 10% or more of the outstanding stock of Gothic.
VOTING; ELECTION OF DIRECTORS
Under the Oklahoma General Corporation Act, a corporation's certificate of
incorporation or bylaws may specify the number of shares and/or the amount of
other securities having voting power required to be present or represented by
proxy at a meeting in order to constitute a quorum for, and the votes that are
necessary for, the transaction of any business, but in no event may a quorum
consist of less than one third of the shares entitled to vote at the meeting. In
the absence of any specification in the certificate of incorporation or bylaws,
a majority of the shares entitled to vote, present or represented by proxy,
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constitutes a quorum and action requires the affirmative vote of the majority of
shares present or represented by proxy at the meeting. Unless otherwise provided
in the certificate of incorporation, and except as provided in the next
sentence, any action that is required or which may be taken at any annual or
special meeting of the shareholders of a corporation, may be taken without a
meeting, without prior notice and without a vote, if a consent or consents in
writing, setting forth the action so taken, is signed by the holders of
outstanding shares having not less than the minimum number of votes that would
be necessary to authorize or take such action at a meeting at which all shares
entitled to vote on such action were present and voted. With respect to a
domestic corporation with a class of voting stock listed or traded on a national
securities exchange or registered under Section 12(g) of the Securities Exchange
Act of 1934 which has one thousand or more shareholders of record, any action
that is required or which may be taken at any annual or special meeting of the
shareholders of a corporation, may be taken without a meeting, without prior
notice and without a vote, if a consent or consents in writing, setting forth
the action so taken, is signed by the holders of all of the outstanding shares
entitled to vote on such action.
Chesapeake. Under Chesapeake's bylaws, the presence in person or by proxy
of the holders of a majority of the outstanding shares entitled to vote
constitutes a quorum at any shareholder meeting. The Chesapeake bylaws provide
that, unless otherwise required by law, the certificate of incorporation, stock
exchange requirements, or any certificate of designation, all questions
submitted to the shareholders will be decided by a plurality of the votes cast.
The Chesapeake certificate of incorporation permits shareholder action by means
of a consent in writing if the consent is signed by the holders of outstanding
shares having not less than the minimum number of votes necessary to authorize
the action at a meeting at which all shares entitled to vote on such action were
present and voted.
Gothic. Gothic's bylaws provide that the presence in person or by proxy of
the holders of a majority of the outstanding shares entitled to vote constitutes
a quorum at any shareholder meeting. Under Gothic's bylaws, all elections are
determined by plurality vote and all other matters are determined by the vote of
a majority of the shares present in person or by proxy and voting on such
matters. Gothic's bylaws provide that the shareholders may take action by means
of a written consent signed by holders of outstanding shares having not less
than the minimum number of votes that would be necessary to authorize or take
such action at a meeting at which all shares entitled to vote on such action
were present and voted. Gothic has fewer than one thousand shareholders of
record.
AMENDMENTS TO CERTIFICATES OF INCORPORATION
Under the Oklahoma General Corporation Act any amendment to a corporation's
certificate of incorporation must be approved at a special or annual meeting by
a majority of the outstanding shares of each class entitled to vote. The holders
of the outstanding shares of a class are entitled to vote as a class upon a
proposed amendment, whether or not entitled to a vote by the provisions of the
certificate of incorporation, if the amendment would increase or decrease the
aggregate number of authorized shares or par value or adversely affect the
powers, preferences or special rights of the shares of such class.
Chesapeake. Chesapeake's certificate of incorporation provides that the
approval of holders of 66 2/3% of the outstanding voting shares is required in
order to amend, repeal, or adopt provisions inconsistent with certain sections
of its certificate of incorporation dealing with the liability of directors,
certain share repurchases, the structure of the board of directors, indemnity,
and amendments to the certificate of incorporation. All other sections may be
amended by a majority vote as provided in the Oklahoma General Corporation Act.
Gothic. Gothic's certificate of incorporation does not contain any special
provisions dealing with amendments to its certificate of incorporation.
Therefore, Gothic's certificate can be amended by a majority vote of the
shareholders in accordance with the Oklahoma General Corporation Act.
AMENDMENTS TO BYLAWS
Pursuant to the Oklahoma General Corporation Act, the power to adopt, amend
or repeal bylaws is vested in the shareholders entitled to vote on such matters.
Any corporation may, however, confer the
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power to adopt, amend or repeal bylaws on the directors in the corporation's
certificate of incorporation. The fact that this power is conferred upon the
directors of a corporation will not divest the shareholders of the power, nor
limit their power to adopt, amend or repeal the bylaws.
Chesapeake. Chesapeake's certificate of incorporation gives its board of
directors the right to amend its bylaws. In addition, Chesapeake's certificate
of incorporation provides that approval by holders of 66 2/3% of its outstanding
voting securities is required for shareholders to amend the bylaws.
Gothic. Gothic's certificate of incorporation also gives the board of
directors the right to amend the bylaws. However, Gothic's certificate of
incorporation does not require a super-majority vote by its shareholders in
order for the shareholders to amend the bylaws.
SHARE PURCHASE PROVISION
Chesapeake. Chesapeake's certificate of incorporation includes a provision
which requires the affirmative vote of two thirds of the outstanding shares of
its voting capital stock held by persons who are not "interested shareholders"
to approve the repurchase of any equity securities of Chesapeake from any
interested shareholder for a price in excess of fair market value, unless such
repurchase is either (1) made on the same terms offered to all holders of the
same securities or (2) made on the open market and not the result of a privately
negotiated transaction.
Gothic. Gothic's certificate of incorporation and bylaws do not contain a
similar provision.
NUMBER OF DIRECTORS
Under the Oklahoma General Corporation Act, the board of directors of an
Oklahoma corporation must consist of one or more members and the number must be
fixed by or in a manner provided for in the corporation's bylaws, unless the
number is fixed by the corporation's certificate of incorporation.
Chesapeake. Chesapeake's bylaws provide that the number of directors
constituting its board of directors will not be less than three nor more than
15. The number of directors is determined by resolution adopted by a vote of two
thirds of the entire board or at an annual or special meeting of the
shareholders by the affirmative vote of 66 2/3% of the outstanding shares
entitled to vote.
Gothic. Gothic's bylaws provide that the number of directors constituting
its board of directors will be the number determined by resolution of the board
from time to time. If the board does not pass any such resolution, the bylaws
provide that the board will consist of three members.
ANTI-TAKEOVER PROVISIONS
Oklahoma enacted the Control Share Acquisition Act in order to discourage
hostile takeover attempts or the acquisition of a potentially controlling
ownership position without the approval of a company's board of directors. The
Control Share Acquisition Act only applies to issuing public corporations, as
defined in the statute.
Chesapeake. Chesapeake qualifies as an issuing public corporation, but
Chesapeake's certificate of incorporation contains a provision opting out of the
Control Share Acquisition Act. Chesapeake's bylaws and certificate of
incorporation do, however, contain several other provisions which would make a
hostile acquisition of Chesapeake more difficult. These provisions include:
- Chesapeake's certificate of incorporation authorizes its board of
directors to issue preferred stock, without further shareholder approval,
which could have dividend, redemption, liquidation, conversion, voting or
other rights that could adversely affect the voting power or other rights
of holders of Chesapeake's common stock.
- Chesapeake's certificate of incorporation provides for a staggered board
of directors. The board is divided into three classes. The directors of
each class are elected for three-year terms, with the terms of the three
classes staggered so that directors from a single class are elected at
each annual
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meeting of shareholders. The classification of directors has the effect
of making it more difficult for shareholders to change the composition of
the board of directors. In addition, Chesapeake's bylaws provide that
directors may only be removed for cause. These two provisions would make
it more difficult for a potential hostile acquirer to gain control of the
board of directors of Chesapeake.
- Chesapeake's bylaws contain provisions which establish an advance notice
procedure regarding the nomination of directors by shareholders and
shareholder proposals to be brought before an annual meeting.
Gothic. Gothic does not qualify as an issuing public corporation, so the
Control Share Acquisition Act does not apply to Gothic. The only anti-takeover
provision in Gothic's organizational documents is the provision in its
certificate of incorporation that authorizes its board of directors to issue
preferred stock, without further shareholder approval, which could have
dividend, redemption, liquidation, conversion, voting or other rights that could
adversely affect the voting power or other rights of holders of Gothic's common
stock.
FUTURE GOTHIC SHAREHOLDER PROPOSALS
Gothic does not currently expect to hold a 2001 annual meeting of
shareholders because, upon consummation of the merger, Gothic will become a
wholly-owned subsidiary of Chesapeake. In the event the merger is not
consummated, any proposals which Gothic's shareholders intend to present for a
vote at Gothic's 2001 annual meeting and which such shareholders desire to have
included in Gothic's proxy statement relating to that meeting must be sent to
Gothic's executive office and received by Gothic not later than January 5, 2001.
LEGAL MATTERS
The legality of the common stock offered hereby has been passed upon for
Chesapeake by Winstead Sechrest & Minick P.C., Dallas, Texas.
EXPERTS
The consolidated financial statements of Chesapeake as of December 31, 1999
and 1998, and for the years ended December 31, 1999 and 1998, the six months
ended December 31, 1997 and the year ended June 30, 1997, included in this proxy
statement/prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in accounting and auditing.
Certain estimates of Chesapeake's oil and gas reserves included in this
proxy statement/prospectus were based upon reserve reports, dated December 31,
1999, prepared by Williamson Petroleum Consultants, Inc. and Ryder Scott Company
L.P., independent petroleum engineers. These estimates are included in reliance
on the authority of each such firm as experts in such matters.
The consolidated financial statements of Gothic as of December 31, 1999 and
for the years ended December 31, 1999 and 1998 included in this proxy
statement/prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in accounting and auditing.
Certain estimates of Gothic's oil and gas reserves included in this proxy
statement/prospectus were based upon a reserve report, dated March 27, 2000,
prepared by Lee Keeling and Associates, Inc., independent petroleum engineers.
These estimates are included in reliance on the authority of each such firm as
experts in such matters.
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WHERE YOU CAN FIND MORE INFORMATION
Chesapeake and Gothic are each subject to the informational reporting
requirements of the Securities Exchange Act of 1934. In accordance with the
Exchange Act, each of Chesapeake and Gothic file annual, quarterly and current
reports, proxy statements and other information with the Securities and Exchange
Commission. You may read and copy any reports, statements or other information
regarding Chesapeake and Gothic at the following SEC locations:
<TABLE>
<S> <C> <C>
Public Reference Room New York Regional Office Chicago Regional Office
450 Fifth Street, N.W. 7 World Trade Center 500 West Madison Street
Room 1024 Suite 1300 Suite 1400
Washington, D.C. 20549 New York, New York 10048 Chicago, Illinois 60661
</TABLE>
Please call the SEC at 1-800-SEC-0300 for further information on the public
reference rooms. Chesapeake and Gothic SEC filings are also available to the
public from commercial document retrieval services and at the world wide web
site maintained by the SEC at http://www.sec.gov. Reports, proxy statements and
other information concerning Chesapeake may also be inspected at the offices of
the New York Stock Exchange, 20 Broad Street, New York, New York 10005.
Chesapeake has filed this registration statement on Form S-4 with the SEC
to register the Chesapeake common stock to be issued in the merger. This proxy
statement/prospectus is a part of the Chesapeake registration statement and
constitutes a prospectus of Chesapeake in addition to being a proxy statement of
Gothic for its special meeting. As permitted by SEC rules, this proxy
statement/prospectus does not contain all of the information you can find in the
Chesapeake registration statement or the exhibits to the Chesapeake registration
statement.
Chesapeake has supplied all information contained or incorporated by
reference in this document to Chesapeake, and Gothic has supplied all such
information relating to Gothic.
You should rely only on the information contained in this proxy
statement/prospectus in connection with deciding your vote upon the approval of
the merger agreement and the merger. Neither Chesapeake nor Gothic has
authorized anyone to provide you with information different from what is
contained in this proxy statement/prospectus. This proxy statement/prospectus is
dated November 1, 2000. You should not assume that the information contained in
this proxy statement/prospectus is accurate as of any date other than such date
or any other date specified, and neither the mailing of this proxy
statement/prospectus to shareholders nor the issuance of Chesapeake common stock
in the merger will create any implication to the contrary.
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GLOSSARY
The terms defined in this section are used throughout this proxy
statement/prospectus.
Bcf. Billion cubic feet.
Bcfe. Billion cubic feet of gas equivalent.
Bbl. One stock tank barrel, or 42 U.S. gallons liquid volume, used herein
in reference to crude oil or other liquid hydrocarbons.
Btu. British thermal unit, which is the heat required to raise the
temperature of a one-pound mass of water from 58.5 to 59.5 degrees Fahrenheit.
Commercial Well; Commercially Productive Well. An oil and gas well which
produces oil and gas in sufficient quantities such that proceeds from the sale
of such production exceed production expenses and taxes.
Developed Acreage. The number of acres which are allocated or assignable to
producing wells or wells capable of production.
Development Well. A well drilled within the proved area of an oil or gas
reservoir to the depth of a stratigraphic horizon known to be productive.
Dry Hole; Dry Well. A well found to be incapable of producing either oil or
gas in sufficient quantities to justify completion as an oil or gas well.
Exploratory Well. A well drilled to find and produce oil or gas in an
unproved area, to find a new reservoir in a field previously found to be
productive of oil or gas in another reservoir or to extend a known reservoir.
Farmout. An assignment of an interest in a drilling location and related
acreage conditional upon the drilling of a well on that location.
Formation. A succession of sedimentary beds that were deposited under the
same general geologic conditions.
Full-Cost Pool. The full-cost pool consists of all costs associated with
property acquisition, exploration, and development activities for a company
using the full-cost method of accounting. Additionally, any internal costs that
can be directly identified with acquisition, exploration and development
activities are included. Any costs related to production, general corporate
overhead or similar activities are not included.
Gross Acres or Gross Wells. The total acres or wells, as the case may be,
in which a working interest is owned.
Horizontal Wells. Wells which are drilled at angles greater than 70 degrees
from vertical.
MBbl. One thousand barrels of crude oil or other liquid hydrocarbons.
MBtu. One thousand Btus.
Mcf. One thousand cubic feet.
Mcfe. One thousand cubic feet of gas equivalent.
MMBbl. One million barrels of crude oil or other liquid hydrocarbons.
MMBtu. One million Btus.
MMcf. One million cubic feet.
MMcfe. One million cubic feet of gas equivalent.
127
<PAGE> 139
Net Acres or Net Wells. The sum of the fractional working interest owned in
gross acres or gross wells.
Present Value or PV-10. When used with respect to oil and gas reserves,
present value means the estimated future gross revenue to be generated from the
production of proved reserves, net of estimated production and future
development costs, using prices and costs in effect at the determination date,
without giving effect to non-property related expenses such as general and
administrative expenses, debt service and future income tax expense or to
depreciation, depletion and amortization, discounted using an annual discount
rate of 10%.
Productive Well. A well that is producing oil or 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 Location. A site on which a development well can be
drilled consistent with spacing rules for purposes of recovering proved
undeveloped reserves.
Proved Undeveloped Reserves. Reserves that are expected to be recovered
from new wells drilled to known reservoir on undrilled acreage or from existing
wells where a relatively major expenditure is required for recompletion.
Royalty Interest. An interest in an oil and gas property entitling the
owner to a share of oil or gas production free of costs of production.
Tcf. One trillion cubic feet.
Tcfe. One trillion cubic feet of gas equivalent.
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 oil and gas 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.
128
<PAGE> 140
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CHESAPEAKE ENERGY CORPORATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Balance Sheets at June 30, 2000 and December
31, 1999 (Unaudited)...................................... F-2
Consolidated Statements of Operations for the Three Months
and Six Months Ended June 30, 2000 and 1999 (Unaudited)... F-3
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2000 and 1999 (Unaudited).................. F-4
Consolidated Statements of Comprehensive Income (Loss) for
the Three Months and Six Months Ended June 30, 2000 and
1999 (Unaudited).......................................... F-5
Notes to Consolidated Financial Statements (Unaudited)...... F-6
Report of Independent Accountants........................... F-18
Consolidated Balance Sheets at December 31, 1999 and 1998... F-19
Consolidated Statements of Operations for the Years Ended
December 31, 1999 and 1998, for the Six Months Ended
December 31, 1997 and for the Year Ended June 30, 1997.... F-20
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999 and 1998, for the Six Months Ended
December 31, 1997 and for the Year Ended June 30, 1997.... F-21
Consolidated Statements of Stockholders' Equity (Deficit)
and Comprehensive Income (Loss) for the Years Ended
December 31, 1999 and 1998, for the Six Months Ended
December 31, 1997 and for the Year Ended June 30, 1997.... F-23
Notes to Consolidated Financial Statements.................. F-24
Schedule II -- Valuation and Qualifying Accounts............ F-60
GOTHIC ENERGY CORPORATION
Consolidated Unaudited Balance Sheet at June 30, 2000 and
December 31, 1999......................................... F-61
Consolidated Unaudited Statement of Operations for the Six
Months Ended June 30, 2000 and 1999....................... F-62
Consolidated Unaudited Statement of Operations for the Three
Months Ended June 30, 2000 and 1999....................... F-63
Consolidated Unaudited Statement of Cash Flows for the Six
Months Ended June 30, 2000 and 1999....................... F-64
Notes to Unaudited Consolidated Financial Statements........ F-65
Report of Independent Accountants........................... F-70
Consolidated Balance Sheet at December 31, 1999............. F-71
Consolidated Statement of Operations for the Years Ended
December 31, 1999 and 1998................................ F-72
Consolidated Statement of Stockholders' Equity (Deficit) for
the Years Ended December 31, 1999 and 1998................ F-73
Consolidated Statement of Cash Flows for the Years Ended
December 31, 1999 and 1998................................ F-74
Notes to Consolidated Financial Statements.................. F-75
</TABLE>
F-1
<PAGE> 141
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
----------- ------------
($ IN THOUSANDS)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 12,019 $ 38,658
Restricted cash........................................... 4,754 192
Accounts receivable:
Oil and gas sales....................................... 33,380 17,045
Oil and gas marketing sales............................. 29,141 18,199
Joint interest and other, net of allowances of
$1,714,000 and $3,218,000, respectively................ 14,399 11,247
Related parties......................................... 3,455 4,574
Inventory................................................. 3,596 4,582
Other..................................................... 3,025 3,049
----------- -----------
Total current assets............................... 103,769 97,546
----------- -----------
PROPERTY AND EQUIPMENT:
Oil and gas properties, at cost based on full-cost
accounting:
Evaluated oil and gas properties........................ 2,422,373 2,315,348
Unevaluated properties.................................. 32,146 40,008
Less: accumulated depreciation, depletion and
amortization........................................... (1,719,259) (1,670,542)
----------- -----------
735,260 684,814
Other property and equipment.............................. 70,155 67,712
Less: accumulated depreciation and amortization........... (35,099) (33,429)
----------- -----------
Total property and equipment....................... 770,316 719,097
----------- -----------
INVESTMENT IN GOTHIC ENERGY CORPORATION..................... 87,509 10,000
----------- -----------
OTHER ASSETS................................................ 19,388 23,890
----------- -----------
TOTAL ASSETS....................................... $ 980,982 $ 850,533
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable and current maturities of long-term debt.... $ 799 $ 763
Accounts payable.......................................... 23,768 24,822
Accrued liabilities and other............................. 43,103 34,713
Revenues and royalties due others......................... 33,753 27,888
----------- -----------
Total current liabilities.......................... 101,423 88,186
----------- -----------
LONG-TERM DEBT, NET......................................... 983,230 964,097
----------- -----------
REVENUES AND ROYALTIES DUE OTHERS........................... 8,405 9,310
----------- -----------
DEFERRED INCOME TAXES....................................... 7,904 6,484
----------- -----------
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred Stock, $.01 par value, 10,000,000 shares
authorized; 1,557,037 and 4,596,400 shares of 7%
cumulative convertible stock issued and outstanding at
June 30, 2000 and December 31, 1999, respectively,
entitled in liquidation (including dividends in arrears)
to $87.4 million and $249.1 million, respectively....... 77,852 229,820
Common Stock, par value of $.01, 250,000,000 shares
authorized; 143,297,346 and 105,858,580 shares issued at
June 30, 2000 and December 31, 1999, respectively....... 1,433 1,059
Paid-in capital........................................... 862,230 682,905
Accumulated earnings (deficit)............................ (1,045,984) (1,093,929)
Accumulated other comprehensive income (loss)............. (2,757) 196
Less: treasury stock, at cost; 3,806,185 and 10,856,185
common shares at June 30, 2000 and December 31, 1999,
respectively............................................ (12,754) (37,595)
----------- -----------
Total stockholders' equity (deficit)............... (119,980) (217,544)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)........................................ $ 980,982 $ 850,533
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE> 142
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES:
Oil and gas sales................................ $100,221 $ 68,272 $187,514 $120,078
Oil and gas marketing sales...................... 34,242 12,620 61,610 26,491
-------- -------- -------- --------
Total revenues........................... 134,463 80,892 249,124 146,569
-------- -------- -------- --------
OPERATING COSTS:
Production expenses.............................. 12,581 11,183 25,126 25,175
Production taxes................................. 5,717 2,798 10,933 4,788
General and administrative....................... 3,188 3,268 6,220 7,292
Oil and gas marketing expenses................... 33,122 11,673 59,666 24,958
Oil and gas depreciation, depletion and
amortization.................................. 24,877 24,233 49,360 47,386
Depreciation and amortization of other assets.... 1,836 1,972 3,702 4,138
-------- -------- -------- --------
Total operating costs.................... 81,321 55,127 155,007 113,737
-------- -------- -------- --------
INCOME FROM OPERATIONS............................. 53,142 25,765 94,117 32,832
-------- -------- -------- --------
OTHER INCOME (EXPENSE):
Interest and other income........................ 1,667 2,967 2,859 3,840
Interest expense................................. (21,813) (20,259) (42,677) (40,149)
-------- -------- -------- --------
Total other income (expense)............. (20,146) (17,292) (39,818) (36,309)
-------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES.................. 32,996 8,473 54,299 (3,477)
-------- -------- -------- --------
INCOME TAX EXPENSE................................. 1,362 326 1,463 326
-------- -------- -------- --------
NET INCOME (LOSS).................................. 31,634 8,147 52,836 (3,803)
Preferred stock dividends........................ (2,907) (4,026) (6,949) (8,052)
Gain on redemption of preferred stock............ 1,481 -- 11,895 --
-------- -------- -------- --------
NET INCOME (LOSS) AVAILABLE TO COMMON
SHAREHOLDERS..................................... $ 30,208 $ 4,121 $ 57,782 $(11,855)
======== ======== ======== ========
EARNINGS (LOSS) PER COMMON SHARE:
Basic............................................ $ 0.26 $ 0.04 $ 0.53 $ (0.12)
======== ======== ======== ========
Assuming Dilution................................ $ 0.22 $ 0.04 $ 0.36 $ (0.12)
======== ======== ======== ========
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING:
Basic............................................ 116,466 97,049 108,196 97,049
======== ======== ======== ========
Assuming dilution................................ 146,113 101,450 146,285 97,049
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 143
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------
2000 1999
--------- --------
($ IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ 52,836 $ (3,803)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation, depletion and amortization............... 51,258 49,923
Amortization of loan costs............................. 1,804 1,601
Amortization of bond discount.......................... 42 35
(Gain) loss on sale of fixed assets and other.......... (1) 98
Equity in losses (earnings) of equity investees........ 131 (35)
Bad debt expense....................................... 256 --
Other.................................................. (36) --
Deferred income taxes.................................. 1,463 326
--------- --------
Cash provided by operating activities before changes
in current assets and liabilities................... 107,753 48,145
Changes in current assets and liabilities.............. (23,883) (579)
--------- --------
Cash provided by operating activities................ 83,870 47,566
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Exploration and development of oil and gas properties..... (78,947) (79,303)
Purchases of oil and gas properties....................... (24,981) (6,484)
Sales of oil and gas properties........................... 1,368 17,387
Sales of non-oil and gas assets........................... 835 1,306
Additions to other property and equipment................. (3,390) (65)
Long-term loans made to third parties..................... -- (511)
Long-term investments..................................... (2,000) --
Investment in Gothic senior discount notes................ (22,352) --
Other..................................................... (1,102) 325
--------- --------
Cash used in investing activities................. (130,569) (67,345)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term borrowings........................ 113,000 14,000
Payments on long-term borrowings.......................... (93,500) --
Purchase of treasury stock................................ -- (53)
Cash received from exercise of stock options.............. 764 240
--------- --------
Cash provided by financing activities............. 20,264 14,187
--------- --------
EFFECT OF CHANGES IN EXCHANGE RATE ON CASH.................. (204) 3,625
--------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS................... (26,639) (1,967)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 38,658 29,520
--------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 12,019 $ 27,553
========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 144
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -----------------
2000 1999 2000 1999
-------- -------- ------- -------
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
Net income (loss)...................................... $31,634 $ 8,147 $52,836 $(3,803)
Other comprehensive income (loss) -- foreign currency
translation adjustments.............................. (2,475) 2,813 (2,953) 3,625
------- ------- ------- -------
Comprehensive income (loss)............................ $29,159 $10,960 $49,883 $ (178)
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 145
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ACCOUNTING PRINCIPLES
The accompanying unaudited consolidated financial statements of Chesapeake
Energy Corporation and Subsidiaries ("Chesapeake") have been prepared in
accordance with the instructions to Form 10-Q as prescribed by the Securities
and Exchange Commission. All material adjustments (consisting solely of normal
recurring adjustments) which, in the opinion of management, are necessary for a
fair presentation of the results for the interim periods have been reflected.
The results for the three and six months ended June 30, 2000 are not necessarily
indicative of the results to be expected for the full year.
The accompanying unaudited consolidated financial statements relate to the
three and six months ended June 30, 2000 (the "Current Quarter" and "Current
Period," respectively) and June 30, 1999 (the "Prior Quarter" and "Prior
Period," respectively).
2. LEGAL PROCEEDINGS
Bayard Securities Litigation
This putative class action alleging violations of the Securities Act of
1933 and the Oklahoma Securities Act was first filed in February 1998 against
Chesapeake and others on behalf of investors who purchased common stock of
Bayard Drilling Technologies, Inc. in, or traceable to, its initial public
offering in November 1997. Total proceeds of the offering were $254 million, of
which Chesapeake received net proceeds of $90 million as a selling shareholder.
Plaintiffs allege that Chesapeake, a major customer of Bayard's drilling
services and the owner of 30.1% of Bayard's common stock outstanding prior to
the offering, was a controlling person of Bayard. Alleged defective disclosures
are claimed to have resulted in a decline in Bayard's share price following the
public offering. Plaintiffs seek a determination that the suit is a proper class
action and damages in an unspecified amount or rescission, together with
interest and costs of litigation, including attorneys' fees.
On August 24, 1999, the court dismissed plaintiffs' claims against
Chesapeake under Section 15 of the Securities Act of 1933 alleging that
Chesapeake was a "controlling person" of Bayard. Claims under Section 11 of the
Securities Act of 1933 and Section 408 of the Oklahoma Securities Act continue
to be asserted against Chesapeake. Chesapeake believes that it has meritorious
defenses to these claims and intends to defend this action vigorously. No
estimate of loss or range of estimate of loss, if any, can be made at this time.
Bayard, which was acquired by Nabors Industries, Inc. in April 1999, has been
reimbursing Chesapeake for its costs of defense as incurred.
Patent Litigation
On September 21, 1999, judgment was entered in favor of Chesapeake in a
patent infringement lawsuit tried to the U.S. District Court for the Northern
District of Texas, Fort Worth Division. Filed in October 1996, the lawsuit
asserted that Chesapeake had infringed a patent belonging to Union Pacific
Resources Company. The court declared the patent invalid, held that Chesapeake
could not have infringed the patent, dismissed all of UPRC's claims with
prejudice and assessed court costs against UPRC. Appeals of the judgment by both
Chesapeake and UPRC are pending in the Federal Circuit Court of Appeals.
Chesapeake has appealed the trial court's ruling denying Chesapeake's request
for attorneys' fees. Management is unable to predict the outcome of these
appeals, but believes the invalidity of the patent will be upheld on appeal.
West Panhandle Field Cessation Cases
A subsidiary of Chesapeake, Chesapeake Panhandle Limited Partnership ("CP")
(f/k/a MC Panhandle, Inc.), and two subsidiaries of Kinder Morgan, Inc. are
defendants in 13 lawsuits filed between
F-6
<PAGE> 146
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
June 1997 and January 1999 by royalty owners seeking the cancellation of oil and
gas leases in the West Panhandle Field in Texas. Chesapeake acquired MC
Panhandle, Inc. on April 28, 1998. MC Panhandle, Inc. has owned the leases since
January 1, 1997, and the co-defendants are prior lessees. Plaintiffs claim the
leases terminated upon the cessation of production for various periods occurring
primarily during the 1960s. In addition, plaintiffs seek to recover conversion
damages, exemplary damages, attorneys' fees and interest. Defendants assert that
any cessation of production was excused and have pled affirmative defenses of
limitations, waiver, temporary estoppel, laches and title by adverse possession.
Four of the 13 cases have been tried, no trial dates have been set for the other
cases.
Of the ten cases filed in the District Court of Moore County, Texas, 69th
Judicial District, three have been tried to a jury. Judgment has been entered
against CP and its co-defendants in all three cases, although there was
initially a jury verdict in two of the cases in favor of defendants.
Chesapeake's aggregate liability for these judgments is $1.3 million of actual
damages and $1.2 million of exemplary damages, and jointly and severally with
the other two defendants, $1.5 million of actual damages and $337,000 of
attorneys' fees in the event of an appeal, sanctions, interest and court costs.
The court also quieted title to the leases in dispute in plaintiffs. CP and the
other defendants have each appealed the judgments and posted supersedeas bonds
in all of these cases. There are three related cases pending in other courts.
One was tried in the U.S. District Court, Northern District of Texas, Amarillo
Division, and resulted in a jury verdict for CP and its co-defendants. Judgment
has not yet been entered in that case.
Chesapeake has previously established an accrued liability that management
believes will be sufficient to cover the estimated costs of litigation for each
of these cases. Because of the inconsistent verdicts reached by the juries in
the four cases tried to date and because the amount of damages sought is not
specified in all of the other cases, the outcome of the remaining trials and the
amount of damages that might ultimately be awarded could differ from
management's estimates. Management believes, however, that the leases are valid,
there is no basis for exemplary damages and that any findings of fraud or bad
faith will be overturned on appeal. CP and the other defendants intend to
vigorously defend against the plaintiffs' claims.
Chesapeake is currently involved in various other routine disputes
incidental to its business operations. While it is not possible to determine the
ultimate disposition of these matters, management, after consultation with legal
counsel, is of the opinion that the final resolution of all such currently
pending or threatened litigation is not likely to have a material adverse effect
on the consolidated financial position or results of operations of Chesapeake.
3. NET INCOME (LOSS) PER SHARE
Statement of Financial Accounting Standards No. 128, Earnings Per Share
("SFAS 128") requires presentation of "basic" and "diluted" earnings per share,
as defined, on the face of the statements of operations for all entities with
complex capital structures. SFAS 128 requires a reconciliation of the numerator
and denominators of the basic and diluted EPS computations.
The following weighted securities were not included in the calculation of
diluted earnings per share, as the effect was antidilutive:
- In the Prior Period, options to purchase 12.8 million shares of common
stock at a weighted average exercise price of $1.77 and the assumed
conversion of the outstanding preferred stock (convertible into 33.1
million common shares) were antidilutive as a result of Chesapeake's loss
for the period.
- For the Prior Quarter, outstanding options to purchase 2.3 million shares
of common stock at a weighted average exercise price of $5.02 were
antidilutive because the exercise prices of the options were greater than
the average market price of Chesapeake's common stock. Additionally, the
F-7
<PAGE> 147
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
assumed conversion of the outstanding preferred stock (convertible into
33.1 million common shares) was not included.
- In the Current Quarter and the Current Period, outstanding options to
purchase 0.7 million and 1.6 million shares of common stock,
respectively, at a weighted average exercise price of $10.57 and $6.76,
respectively, were antidilutive because the exercise prices of the
options were greater than the average market price of Chesapeake's common
stock.
A reconciliation for the Current Quarter, Prior Quarter and Current Period
is as follows:
<TABLE>
<CAPTION>
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------ ------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
FOR THE QUARTER ENDED JUNE 30, 2000:
BASIC EPS
Income available to common stockholders................. $ 30,208 116,466 $0.26
=====
EFFECT OF DILUTIVE SECURITIES
Assumed conversion of preferred stock at beginning of
period............................................. 2,907 21,797
Gain on redemption of preferred stock................. (1,481) --
Employee stock options................................ -- 7,850
-------- -------
DILUTED EPS
Income available to common stockholders and assumed
conversions........................................... $ 31,634 146,113 $0.22
======== ======= =====
FOR THE QUARTER ENDED JUNE 30, 1999:
BASIC EPS
Income available to common stockholders............... $ 4,121 97,049 $0.04
=====
EFFECT OF DILUTIVE SECURITIES
Employee stock options................................ -- 4,401
-------- -------
DILUTED EPS
Income available to common stockholders and assumed
conversions........................................... $ 4,121 101,450 $0.04
======== ======= =====
FOR THE SIX MONTHS ENDED JUNE 30, 2000:
BASIC EPS
Income available to common stockholders................. $ 57,782 108,196 $0.53
=====
EFFECT OF DILUTIVE SECURITIES
Assumed conversion of preferred stock at beginning of
period............................................. 6,949 31,158
Gain on redemption of preferred stock................. (11,895) --
Employee stock options................................ -- 6,931
-------- -------
DILUTED EPS
Income available to common stockholders and assumed
conversions........................................... $ 52,836 146,285 $0.36
======== ======= =====
</TABLE>
In the Current Quarter, Chesapeake engaged in a number of unsolicited stock
exchange transactions with institutional investors. Chesapeake exchanged a total
of 24.7 million shares of common stock (newly issued shares), plus a cash
payment of $8.3 million, for 2,364,363 shares of its issued and outstanding
F-8
<PAGE> 148
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
preferred stock with a liquidation value of $118.2 million plus dividends in
arrears of $13.6 million. All preferred shares acquired in these transactions
were cancelled and retired and have the status of authorized but unissued shares
of undesignated preferred stock. A gain on redemption of the preferred shares
equal to $1.5 million was recognized as an increase to net income available to
common shareholders in the Current Quarter in determining basic earnings per
share. The gain represented the excess of (i) the liquidation value of the
preferred shares that were retired plus dividends in arrears which had reduced
prior EPS over (ii) the market value of the common stock issued, and the cash
payment made, in exchange for the preferred shares.
In the Current Period, a total of 34.2 million shares of common stock, plus
a cash payment of $8.3 million, were exchanged for 3,039,363 shares of preferred
stock. These transactions reduced (i) the number of preferred shares from 4.6
million to 1.6 million, (ii) the liquidation value of the preferred stock from
$229.8 million to $77.9 million, and (iii) dividends in arrears by $16.8 million
to $9.5 million. A gain on redemption of all preferred shares exchanged through
June 30, 2000 of $11.9 million ($1.5 million related to the Current Quarter) is
reflected in net income available to common shareholders in determining basic
earnings per share.
Subsequent to June 30, 2000, Chesapeake engaged in additional transactions
in which 9.2 million shares of common stock (newly issued shares) were exchanged
for 933,000 shares of its issued and outstanding preferred stock with a
liquidation value of $46.7 million plus dividends in arrears of $6.1 million. A
$5.3 million loss on the redemption of these preferred shares will be reflected
in net income available to common shareholders in determining earnings per share
in the third quarter.
Chesapeake may acquire additional shares of preferred stock in the future
through negotiations with individual holders and, beginning May 1, 2001, it may
redeem outstanding shares of preferred stock for $52.45 per share plus
accumulated and unpaid dividends in cash and/or common stock.
4. SENIOR NOTES
9.625% Notes
Chesapeake has outstanding $500 million in aggregate principal amount of
9.625% Senior Notes which mature May 1, 2005. The 9.625% Notes bear interest at
the rate of 9.625%, payable semiannually on each May 1 and November 1. The
9.625% Notes are senior, unsecured obligations of Chesapeake and are fully and
unconditionally guaranteed, jointly and severally, by the Guarantor
Subsidiaries.
9.125% Notes
Chesapeake has outstanding $120 million in aggregate principal amount of
9.125% Senior Notes which mature April 15, 2006. The 9.125% Notes bear interest
at an annual rate of 9.125%, payable semiannually on each April 15 and October
15. The 9.125% Notes are senior, unsecured obligations of Chesapeake and are
fully and unconditionally guaranteed, jointly and severally, by the Guarantor
Subsidiaries.
7.875% Notes
Chesapeake has outstanding $150 million in aggregate principal amount of
7.875% Senior Notes which mature March 15, 2004. The 7.875% Notes bear interest
at the rate of 7.875%, payable semiannually on each March 15 and September 15.
The 7.875% Notes are senior, unsecured obligations of Chesapeake and are fully
and unconditionally guaranteed, jointly and severally, by the Guarantor
Subsidiaries.
F-9
<PAGE> 149
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8.5% Notes
Chesapeake has outstanding $150 million in aggregate principal amount of
8.5% Senior Notes which mature March 15, 2012. The 8.5% Notes bear interest at
the rate of 8.5%, payable semiannually on each March 15 and September 15. The
8.5% Notes are senior, unsecured obligations of Chesapeake and are fully and
unconditionally guaranteed, jointly and severally, by the Guarantor
Subsidiaries.
Chesapeake is a holding company and owns no operating assets and has no
significant operations independent of its subsidiaries. Chesapeake's obligations
under its Senior Notes have been fully and unconditionally guaranteed, on a
joint and several basis, by each of Chesapeake's "Restricted Subsidiaries" (as
defined in the respective indentures governing the Senior Notes) (collectively,
the "Guarantor Subsidiaries"). Each of the Guarantor Subsidiaries is a direct or
indirect wholly-owned subsidiary of Chesapeake.
The Senior Note Indentures contain certain covenants, including covenants
limiting Chesapeake and the Guarantor Subsidiaries with respect to asset sales,
restricted payments, the incurrence of additional indebtedness and the issuance
of preferred stock, liens, sale and leaseback transactions, lines of business,
dividend and other payment restrictions affecting Guarantor Subsidiaries,
mergers or consolidations, and transactions with affiliates. Chesapeake is
obligated to repurchase the 9.625% and 9.125% Senior Notes in the event of a
change of control or certain asset sales.
These senior note indentures also limit Chesapeake's ability to make
restricted payments (as defined), including the payment of preferred stock
dividends, unless certain tests are met. From December 31, 1998 through March
31, 2000, Chesapeake was unable to meet the requirements to incur additional
unsecured indebtedness, and consequently was not able to pay cash dividends on
its 7% cumulative convertible preferred stock. Chesapeake had accumulated
dividends in arrears of $9.5 million related to its preferred stock as of June
30, 2000. This restriction does not affect Chesapeake's ability to borrow under
or expand its secured commercial bank facility. Chesapeake was unable to pay a
dividend on the preferred stock on May 1, 2000, the sixth consecutive dividend
payment date on which dividends had not been paid. As a result of Chesapeake's
failure to pay dividends for six quarterly periods, the holders of preferred
stock are entitled to elect two new directors to the Board. Based on the Current
Quarter financial results, Chesapeake was able to pay a dividend on the
preferred stock on August 1, 2000, although the Board of Directors did not
declare a dividend that would have been payable on that date.
Set forth below are condensed consolidating financial statements of the
Guarantor Subsidiaries, Chesapeake's subsidiaries which are not guarantors of
the Senior Notes (the "Non-Guarantor Subsidiaries") and Chesapeake. Separate
financial statements of each Guarantor Subsidiary have not been provided because
management has determined that they are not material to investors.
Chesapeake Energy Marketing, Inc. ("CEMI") was the only Non-Guarantor
Subsidiary for all periods presented. All of Chesapeake's other subsidiaries
were Guarantor Subsidiaries during all periods presented.
F-10
<PAGE> 150
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF JUNE 30, 2000
($ IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES PARENT ELIMINATIONS CONSOLIDATED
------------ ------------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......... $ (9,048) $ 5,057 $ 20,764 $ -- $ 16,773
Accounts receivable, net.......... 68,523 29,041 -- (17,189) 80,375
Inventory......................... 3,375 221 -- -- 3,596
Other............................. 2,456 28 541 -- 3,025
----------- -------- ----------- ----------- -----------
Total current assets....... 65,306 34,347 21,305 (17,189) 103,769
----------- -------- ----------- ----------- -----------
PROPERTY AND EQUIPMENT:
Oil and gas properties............ 2,422,373 -- -- -- 2,422,373
Unevaluated leasehold............. 32,146 -- -- -- 32,146
Other property and equipment...... 29,899 20,568 19,688 -- 70,155
Less: accumulated depreciation,
depletion and amortization...... (1,734,280) (17,974) (2,104) -- (1,754,358)
----------- -------- ----------- ----------- -----------
Net property and
equipment................ 750,138 2,594 17,584 -- 770,316
----------- -------- ----------- ----------- -----------
INVESTMENTS IN SUBSIDIARIES AND
INTERCOMPANY ADVANCES............. 922,163 -- 432,912 (1,355,075) --
----------- -------- ----------- ----------- -----------
INVESTMENT IN GOTHIC ENERGY
CORPORATION....................... 10,000 -- 77,509 -- 87,509
----------- -------- ----------- ----------- -----------
OTHER ASSETS........................ 1,438 8,496 17,266 (7,812) 19,388
----------- -------- ----------- ----------- -----------
TOTAL ASSETS............... $ 1,749,045 $ 45,437 $ 566,576 $(1,380,076) $ 980,982
=========== ======== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Notes payable and current
maturities of long-term debt.... $ 799 $ -- $ -- $ -- $ 799
Accounts payable and other........ 61,540 30,312 26,087 (17,315) 100,624
----------- -------- ----------- ----------- -----------
Total current
liabilities.............. 62,339 30,312 26,087 (17,315) 101,423
----------- -------- ----------- ----------- -----------
LONG-TERM DEBT, NET................. 64,028 -- 919,202 -- 983,230
----------- -------- ----------- ----------- -----------
REVENUES AND ROYALTIES DUE OTHERS... 8,405 -- -- -- 8,405
----------- -------- ----------- ----------- -----------
DEFERRED INCOME TAXES............... 7,904 -- -- -- 7,904
----------- -------- ----------- ----------- -----------
INTERCOMPANY PAYABLES............... 1,473,601 (1,531) (1,472,070) -- --
----------- -------- ----------- ----------- -----------
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock...................... 26 1 1,424 (18) 1,433
Other............................. 132,742 16,655 1,091,933 (1,362,743) (121,413)
----------- -------- ----------- ----------- -----------
132,768 16,656 1,093,357 (1,362,761) (119,980)
----------- -------- ----------- ----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY
(DEFICIT)................ $ 1,749,045 $ 45,437 $ 566,576 $(1,380,076) $ 980,982
=========== ======== =========== =========== ===========
</TABLE>
F-11
<PAGE> 151
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 1999
($ IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES PARENT ELIMINATIONS CONSOLIDATED
------------ ------------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......... $ (6,964) $ 20,409 $ 25,405 $ -- $ 38,850
Accounts receivable............... 45,170 18,297 73 (12,475) 51,065
Inventory......................... 4,183 399 -- -- 4,582
Other............................. 1,997 700 352 -- 3,049
----------- -------- ----------- ----------- -----------
Total current assets....... 44,386 39,805 25,830 (12,475) 97,546
----------- -------- ----------- ----------- -----------
PROPERTY AND EQUIPMENT:
Oil and gas properties............ 2,311,633 3,715 -- -- 2,315,348
Unevaluated leasehold............. 40,008 -- -- -- 40,008
Other property and equipment...... 29,088 20,521 18,103 -- 67,712
Less: accumulated depreciation,
depletion and amortization...... (1,683,890) (18,205) (1,876) -- (1,703,971)
----------- -------- ----------- ----------- -----------
Net property and
equipment................ 696,839 6,031 16,227 -- 719,097
----------- -------- ----------- ----------- -----------
INVESTMENTS IN SUBSIDIARIES AND
INTERCOMPANY ADVANCES............. 806,180 -- 493,738 (1,299,918) --
----------- -------- ----------- ----------- -----------
INVESTMENT IN GOTHIC ENERGY
CORPORATION....................... 10,000 -- -- -- 10,000
OTHER ASSETS........................ 6,402 8,409 16,765 (7,686) 23,890
----------- -------- ----------- ----------- -----------
TOTAL ASSETS............... $ 1,563,807 $ 54,245 $ 552,560 $(1,320,079) $ 850,533
=========== ======== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Notes payable and current
maturities of long-term debt.... $ -- $ 763 $ -- $ -- $ 763
Accounts payable and other........ 63,194 19,265 17,466 (12,502) 87,423
----------- -------- ----------- ----------- -----------
Total current
liabilities.............. 63,194 20,028 17,466 (12,502) 88,186
----------- -------- ----------- ----------- -----------
LONG-TERM DEBT, NET................. 43,500 1,437 919,160 -- 964,097
----------- -------- ----------- ----------- -----------
REVENUES AND ROYALTIES DUE OTHERS... 9,310 -- -- -- 9,310
----------- -------- ----------- ----------- -----------
DEFERRED INCOME TAXES............... 6,484 -- -- -- 6,484
----------- -------- ----------- ----------- -----------
INTERCOMPANY PAYABLES............... 1,356,466 (2,450) (1,354,043) 27 --
----------- -------- ----------- ----------- -----------
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock...................... 27 1 1,048 (17) 1,059
Other............................. 84,826 35,229 968,929 (1,307,587) (218,603)
----------- -------- ----------- ----------- -----------
84,853 35,230 969,977 (1,307,604) (217,544)
----------- -------- ----------- ----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY
(DEFICIT)................ $ 1,563,807 $ 54,245 $ 552,560 $(1,320,079) $ 850,533
=========== ======== =========== =========== ===========
</TABLE>
F-12
<PAGE> 152
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARY PARENT ELIMINATIONS CONSOLIDATED
------------ ------------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
FOR THE THREE MONTHS ENDED JUNE 30, 2000
REVENUES:
Oil and gas sales......................... $100,221 $ -- $ -- $ -- $100,221
Oil and gas marketing sales............... -- 79,973 -- (45,731) 34,242
-------- ------- -------- -------- --------
Total revenues..................... 100,221 79,973 -- (45,731) 134,463
-------- ------- -------- -------- --------
OPERATING COSTS:
Production expenses and taxes............. 18,298 -- -- -- 18,298
General and administrative................ 2,841 299 48 -- 3,188
Oil and gas marketing expenses............ -- 78,853 -- (45,731) 33,122
Oil and gas depreciation, depletion and
amortization............................ 24,876 1 -- -- 24,877
Other depreciation and amortization....... 1,008 20 808 -- 1,836
-------- ------- -------- -------- --------
Total operating costs.............. 47,023 79,173 856 (45,731) 81,321
-------- ------- -------- -------- --------
INCOME (LOSS) FROM OPERATIONS............... 53,198 800 (856) -- 53,142
-------- ------- -------- -------- --------
OTHER INCOME (EXPENSE):
Interest and other income................. 1,165 467 20,945 (20,910) 1,667
Interest expense.......................... (21,484) -- (21,239) 20,910 (21,813)
-------- ------- -------- -------- --------
(20,319) 467 (294) -- (20,146)
-------- ------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME
TAXES..................................... 32,879 1,267 (1,150) -- 32,996
INCOME TAX EXPENSE.......................... 1,362 -- -- -- 1,362
-------- ------- -------- -------- --------
NET INCOME (LOSS).................. $ 31,517 $ 1,267 $ (1,150) $ -- $ 31,634
======== ======= ======== ======== ========
FOR THE THREE MONTHS ENDED JUNE 30, 1999
REVENUES:
Oil and gas sales......................... $ 68,272 $ -- $ -- $ -- $ 68,272
Oil and gas marketing sales............... -- 38,420 -- (25,800) 12,620
-------- ------- -------- -------- --------
Total revenues..................... 68,272 38,420 -- (25,800) 80,892
-------- ------- -------- -------- --------
OPERATING COSTS:
Production expenses and taxes............. 13,981 -- -- -- 13,981
General and administrative................ 2,942 324 2 -- 3,268
Oil and gas marketing expenses............ -- 37,473 -- (25,800) 11,673
Oil and gas depreciation, depletion and
amortization............................ 24,233 -- -- -- 24,233
Other depreciation and amortization....... 1,138 20 814 -- 1,972
-------- ------- -------- -------- --------
Total operating costs.............. 42,294 37,817 816 (25,800) 55,127
-------- ------- -------- -------- --------
INCOME (LOSS) FROM OPERATIONS............... 25,978 603 (816) -- 25,765
-------- ------- -------- -------- --------
OTHER INCOME (EXPENSE):
Interest and other income................. 440 2,408 29,188 (29,069) 2,967
Interest expense.......................... (29,009) -- (20,319) 29,069 (20,259)
-------- ------- -------- -------- --------
(28,569) 2,408 8,869 -- (17,292)
-------- ------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME
TAXES..................................... (2,591) 3,011 8,053 -- 8,473
INCOME TAX EXPENSE.......................... 326 -- -- -- 326
-------- ------- -------- -------- --------
NET INCOME (LOSS).................. $ (2,917) $ 3,011 $ 8,053 $ -- $ 8,147
======== ======= ======== ======== ========
</TABLE>
F-13
<PAGE> 153
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARY PARENT ELIMINATIONS CONSOLIDATED
------------ ------------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED JUNE 30, 2000
REVENUES:
Oil and gas sales...................... $187,167 $ 347 $ -- $ -- $187,514
Oil and gas marketing sales............ -- 149,098 -- (87,488) 61,610
-------- -------- -------- -------- --------
Total revenues.................. 187,167 149,445 -- (87,488) 249,124
-------- -------- -------- -------- --------
OPERATING COSTS:
Production expenses and taxes.......... 35,979 80 -- -- 36,059
General and administrative............. 5,561 590 69 -- 6,220
Oil and gas marketing expenses......... -- 147,154 -- (87,488) 59,666
Oil and gas depreciation, depletion and
amortization......................... 49,259 101 -- -- 49,360
Other depreciation and amortization.... 2,034 40 1,628 -- 3,702
-------- -------- -------- -------- --------
Total operating costs........... 92,833 147,965 1,697 (87,488) 155,007
-------- -------- -------- -------- --------
INCOME (LOSS) FROM OPERATIONS............ 94,334 1,480 (1,697) -- 94,117
-------- -------- -------- -------- --------
OTHER INCOME (EXPENSE):
Interest and other income.............. 1,963 803 41,912 (41,819) 2,859
Interest expense....................... (42,439) (34) (42,023) 41,819 (42,677)
-------- -------- -------- -------- --------
(40,476) 769 (111) -- (39,818)
-------- -------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME
TAXES.................................. 53,858 2,249 (1,808) -- 54,299
INCOME TAX EXPENSE....................... 1,463 -- -- -- 1,463
-------- -------- -------- -------- --------
NET INCOME (LOSS)........................ $ 52,395 $ 2,249 $ (1,808) $ -- $ 52,836
======== ======== ======== ======== ========
FOR THE SIX MONTHS ENDED JUNE 30, 1999
REVENUES:
Oil and gas sales...................... $120,078 $ -- $ -- $ -- $120,078
Oil and gas marketing sales............ -- 73,258 -- (46,767) 26,491
-------- -------- -------- -------- --------
Total revenues.................. 120,078 73,258 -- (46,767) 146,569
-------- -------- -------- -------- --------
OPERATING COSTS:
Production expenses and taxes.......... 29,963 -- -- -- 29,963
General and administrative............. 6,464 781 47 -- 7,292
Oil and gas marketing expenses......... -- 71,725 -- (46,767) 24,958
Oil and gas depreciation, depletion and
amortization......................... 47,386 -- -- -- 47,386
Other depreciation and amortization.... 2,476 40 1,622 -- 4,138
-------- -------- -------- -------- --------
Total operating costs........... 86,289 72,546 1,669 (46,767) 113,737
-------- -------- -------- -------- --------
INCOME (LOSS) FROM OPERATIONS............ 33,789 712 (1,669) -- 32,832
-------- -------- -------- -------- --------
OTHER INCOME (EXPENSE):
Interest and other income.............. 707 2,845 58,328 (58,040) 3,840
Interest expense....................... (57,415) -- (40,774) 58,040 (40,149)
-------- -------- -------- -------- --------
(56,708) 2,845 17,554 -- (36,309)
-------- -------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME
TAXES.................................. (22,919) 3,557 15,885 -- (3,477)
INCOME TAX EXPENSE....................... 326 -- -- -- 326
-------- -------- -------- -------- --------
NET INCOME (LOSS)........................ $(23,245) $ 3,557 $ 15,885 $ -- $ (3,803)
======== ======== ======== ======== ========
</TABLE>
F-14
<PAGE> 154
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARY PARENT ELIMINATIONS CONSOLIDATED
------------ ------------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED JUNE 30, 2000
CASH FLOWS FROM OPERATING ACTIVITIES....... $ 88,395 $ (4,753) $ 228 $ -- $ 83,870
--------- -------- -------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Oil and gas properties................... (104,075) 1,515 -- -- (102,560)
Proceeds from sale of assets............. 835 -- -- -- 835
Investment in Gothic senior discount
notes.................................. -- (22,352) -- -- (22,352)
Other investments........................ -- -- (2,000) -- (2,000)
Other additions.......................... (2,570) (46) (1,876) -- (4,492)
--------- -------- -------- -------- ---------
(105,810) (20,883) (3,876) -- (130,569)
--------- -------- -------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings................. 113,000 -- -- -- 113,000
Payments on borrowings................... (93,500) -- -- -- (93,500)
Cash received from exercise of stock
options................................ -- -- 764 -- 764
Intercompany advances, net............... (8,527) 10,284 (1,757) -- --
--------- -------- -------- -------- ---------
10,973 10,284 (993) -- 20,264
--------- -------- -------- -------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH.... (204) -- -- -- (204)
--------- -------- -------- -------- ---------
Net increase (decrease) in cash.......... (6,646) (15,352) (4,641) -- (26,639)
Cash, beginning of period................ (7,156) 20,409 25,405 -- 38,658
--------- -------- -------- -------- ---------
Cash, end of period...................... $ (13,802) $ 5,057 $ 20,764 $ -- $ 12,019
========= ======== ======== ======== =========
FOR THE SIX MONTHS ENDED JUNE 30, 1999
CASH FLOWS FROM OPERATING ACTIVITIES....... $ 22,128 $ 8,119 $ 17,319 $ -- $ 47,566
--------- -------- -------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Oil and gas properties................... (68,400) -- -- -- (68,400)
Proceeds from sale of other assets....... 1,306 -- -- -- 1,306
Other additions.......................... 427 308 (986) -- (251)
--------- -------- -------- -------- ---------
(66,667) 308 (986) -- (67,345)
--------- -------- -------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings................. 14,000 -- -- -- 14,000
Cash paid for purchase of treasury
stock.................................. -- (53) -- -- (53)
Cash received from exercise of stock
options................................ -- -- 240 -- 240
Intercompany advances, net............... 33,665 2,217 (35,882) -- --
--------- -------- -------- -------- ---------
47,665 2,164 (35,642) -- 14,187
--------- -------- -------- -------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH.... 3,625 -- -- -- 3,625
--------- -------- -------- -------- ---------
Net increase (decrease) in cash.......... 6,751 10,591 (19,309) -- (1,967)
Cash, beginning of period................ (17,319) 7,000 39,839 -- 29,520
--------- -------- -------- -------- ---------
Cash, end of period...................... $ (10,568) $ 17,591 $ 20,530 $ -- $ 27,553
========= ======== ======== ======== =========
</TABLE>
F-15
<PAGE> 155
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
($ IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES PARENT ELIMINATIONS CONSOLIDATED
------------ ------------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
FOR THE THREE MONTHS ENDED JUNE 30, 2000:
Net income (loss)......................... $ 31,517 $1,267 $(1,150) $ -- $31,634
Other comprehensive income (loss) --
foreign currency translation............ (2,475) -- -- -- (2,475)
-------- ------ ------- ------ -------
Comprehensive income...................... $ 29,042 $1,267 $(1,150) $ -- $29,159
======== ====== ======= ====== =======
FOR THE THREE MONTHS ENDED JUNE 30, 1999:
Net income (loss)......................... $ (2,917) $3,011 $ 8,053 $ -- $ 8,147
Other comprehensive income (loss) --
foreign currency translation............ 2,813 -- -- -- 2,813
-------- ------ ------- ------ -------
Comprehensive income (loss)............... $ (104) $3,011 $ 8,053 $ -- $10,960
======== ====== ======= ====== =======
FOR THE SIX MONTHS ENDED JUNE 30, 2000:
Net income (loss)......................... $ 52,395 $2,249 $(1,808) $ -- $52,836
Other comprehensive income (loss) --
foreign currency translation............ (2,953) -- -- -- (2,953)
-------- ------ ------- ------ -------
Comprehensive income...................... $ 49,442 $2,249 $(1,808) $ -- $49,883
======== ====== ======= ====== =======
FOR THE SIX MONTHS ENDED JUNE 30, 1999:
Net income (loss)......................... $(23,245) $3,557 $15,885 $ -- $(3,803)
Other comprehensive income (loss) --
foreign currency translation............ 3,625 -- -- -- 3,625
-------- ------ ------- ------ -------
Comprehensive income (loss)............... $(19,620) $3,557 $15,885 $ -- $ (178)
======== ====== ======= ====== =======
</TABLE>
5. INVESTMENT IN GOTHIC ENERGY CORPORATION ("GOTHIC")
On June 27, 2000, CEMI purchased in a series of private transactions 96% of
Gothic's $104 million of 14.125% Series B Senior Secured Discount Notes for
consideration of $77.5 million, comprised of $22.4 million in cash and $55.2
million of Chesapeake common stock (9,468,985 shares valued at $5.825 per
share), subject to adjustment. The acquired discount notes accrete at a rate per
annum of 14.125%, compounded semi-annually to an aggregate principal amount of
$99.7 million at May 1, 2002. Thereafter, the discount notes accrue interest at
the rate of 14.125% 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.
On June 30, 2000, Chesapeake entered into a letter of intent to acquire the
common stock of Gothic for 4.0 million shares of Chesapeake common stock. Upon
the closing of the transaction, Gothic's shareholders will own approximately
2.7% of Chesapeake's common stock. The total acquisition cost to Chesapeake will
be approximately $345 million, including $235 million of Senior Secured Notes
issued by Gothic's operating subsidiary. The Gothic acquisition is subject to
the completion of definitive documentation and approval by Gothic's
shareholders. Completion of the transaction is expected by year-end 2000.
Also included in Chesapeake's investment in Gothic is Chesapeake's April
1998 investment in Gothic's 12% Preferred Stock with a carrying value of $10.0
million.
F-16
<PAGE> 156
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. REVOLVING CREDIT FACILITY
At June 30, 2000, Chesapeake had a $75 million revolving bank credit
facility, maturing in July 2002, with a committed borrowing base of $75 million.
As of June 30, 2000, Chesapeake had borrowed $63.0 million under this facility.
Borrowings under the facility are secured by certain producing oil and gas
properties and bear interest at variable rates, which averaged 10.0% per annum
as of June 30, 2000. On August 1, 2000, the revolving bank credit facility and
the borrowing base were increased to $100 million.
7. RECENTLY ISSUED ACCOUNTING STANDARDS
On June 15, 1998, the Financial Accounting Standards Board issued FAS No.
133, Accounting for Derivative Instruments and Hedging Activities. FAS 133
establishes a new model for accounting for derivatives and hedging activities
and supersedes and amends a number of existing standards. FAS 133 (as amended by
FAS 137 and FAS 138) is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000.
FAS 133 standardizes the accounting for derivative instruments by requiring
that all derivatives be recognized as assets and liabilities and measured at
fair value. The accounting for changes in the fair value of derivatives (gains
and losses) depends on (i) whether the derivative is designated and qualifies as
a hedge, and (ii) the type of hedging relationship that exists. Changes in the
fair value of derivatives that are not designated as hedges or that do not meet
the hedge accounting criteria in FAS 133 are required to be reported in
earnings. In addition, all hedging relationships must be designated, reassessed
and documented pursuant to the provisions of FAS 133. Chesapeake has not yet
determined the impact that adoption of FAS 133 will have on the financial
statements. However, Chesapeake believes that its commodity derivatives will be
designated as hedges in accordance with the relevant accounting criteria.
F-17
<PAGE> 157
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Chesapeake Energy Corporation
In our opinion, the consolidated financial statements as of December 31,
1999 and 1998, for the years ended December 31, 1999 and 1998 and June 30, 1997
and the six months ended December 31, 1997 present fairly, in all material
respects, the financial position of Chesapeake Energy Corporation and its
subsidiaries ("Chesapeake") at December 31, 1999 and 1998, and the results of
their operations and their cash flows for the years ended December 31, 1999 and
1998, the six months ended December 31, 1997, and the year ended June 30, 1997,
in conformity with accounting principles generally accepted in the United
States. In addition, in our opinion, the financial statement schedule listed in
the accompanying index presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of Chesapeake's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule 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 audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, 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.
PRICEWATERHOUSECOOPERS LLP
Oklahoma City, Oklahoma
March 24, 2000
F-18
<PAGE> 158
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1999 1998
----------- -----------
($ IN THOUSANDS)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 38,658 $ 29,520
Restricted cash........................................... 192 5,754
Accounts receivable:
Oil and gas sales....................................... 17,045 13,835
Oil and gas marketing sales............................. 18,199 19,636
Joint interest and other, net of allowances of
$3,218,000 and $3,209,000, respectively................ 11,247 27,373
Related parties......................................... 4,574 15,455
Inventory................................................. 4,582 5,325
Other..................................................... 3,049 1,101
----------- -----------
Total Current Assets............................... 97,546 117,999
----------- -----------
PROPERTY AND EQUIPMENT:
Oil and gas properties, at cost based on full-cost
accounting:
Evaluated oil and gas properties........................ 2,315,348 2,142,943
Unevaluated properties.................................. 40,008 52,687
Less: accumulated depreciation, depletion and
amortization........................................... (1,670,542) (1,574,282)
----------- -----------
684,814 621,348
Other property and equipment.............................. 67,712 79,718
Less: accumulated depreciation and amortization........... (33,429) (37,075)
----------- -----------
Total Property and Equipment....................... 719,097 663,991
----------- -----------
OTHER ASSETS................................................ 33,890 30,625
----------- -----------
TOTAL ASSETS....................................... $ 850,533 $ 812,615
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable and current maturities of long-term debt.... $ 763 $ 25,000
Accounts payable.......................................... 24,822 36,854
Accrued liabilities and other............................. 34,713 46,572
Revenues and royalties due others......................... 27,888 22,858
----------- -----------
Total Current Liabilities.......................... 88,186 131,284
----------- -----------
LONG-TERM DEBT, NET......................................... 964,097 919,076
----------- -----------
REVENUES AND ROYALTIES DUE OTHERS........................... 9,310 10,823
----------- -----------
DEFERRED INCOME TAXES....................................... 6,484 --
----------- -----------
CONTINGENCIES AND COMMITMENTS (NOTE 4)
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred Stock, $.01 par value, 10,000,000 shares
authorized; 4,596,400 and 4,600,000 shares of 7%
cumulative convertible stock issued and outstanding at
December 31, 1999 and 1998, respectively, entitled in
liquidation to $229.8 million and 230.0 million,
respectively............................................ 229,820 230,000
Common Stock, par value of $.01, 250,000,000 shares
authorized; 105,858,580 and 105,213,750 shares issued at
December 31, 1999 and 1998, respectively................ 1,059 1,052
Paid-in capital........................................... 682,905 682,263
Accumulated earnings (deficit)............................ (1,093,929) (1,127,195)
Accumulated other comprehensive income (loss)............. 196 (4,726)
Less: treasury stock, at cost; 10,856,185 and 8,503,300
common shares at December 31, 1999 and 1998,
respectively............................................ (37,595) (29,962)
----------- -----------
Total Stockholders' Equity (Deficit)............... (217,544) (248,568)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)........................................ $ 850,533 $ 812,615
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-19
<PAGE> 159
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, SIX MONTHS ENDED YEAR ENDED
--------------------- DECEMBER 31, JUNE 30,
1999 1998 1997 1997
-------- ---------- ---------------- ----------
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
REVENUES:
Oil and gas sales...................................... $280,445 $ 256,887 $ 95,657 $ 192,920
Oil and gas marketing sales............................ 74,501 121,059 58,241 76,172
-------- ---------- -------- ---------
Total revenues................................... 354,946 377,946 153,898 269,092
-------- ---------- -------- ---------
OPERATING COSTS:
Production expenses.................................... 46,298 51,202 7,560 11,445
Production taxes....................................... 13,264 8,295 2,534 3,662
General and administrative............................. 13,477 19,918 5,847 8,802
Oil and gas marketing expenses......................... 71,533 119,008 58,227 75,140
Oil and gas depreciation, depletion and amortization... 95,044 146,644 60,408 103,264
Depreciation and amortization of other assets.......... 7,810 8,076 2,414 3,782
Impairment of oil and gas properties................... -- 826,000 110,000 236,000
Impairment of other assets............................. -- 55,000 -- --
-------- ---------- -------- ---------
Total operating costs............................ 247,426 1,234,143 246,990 442,095
-------- ---------- -------- ---------
INCOME (LOSS) FROM OPERATIONS............................ 107,520 (856,197) (93,092) (173,003)
-------- ---------- -------- ---------
OTHER INCOME (EXPENSE):
Interest and other income.............................. 8,562 3,926 78,966 11,223
Interest expense....................................... (81,052) (68,249) (17,448) (18,550)
-------- ---------- -------- ---------
Total other income (expense)..................... (72,490) (64,323) 61,518 (7,327)
-------- ---------- -------- ---------
INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY
ITEM................................................... 35,030 (920,520) (31,574) (180,330)
PROVISION (BENEFIT) FOR INCOME TAXES..................... 1,764 -- -- (3,573)
-------- ---------- -------- ---------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM.................. 33,266 (920,520) (31,574) (176,757)
EXTRAORDINARY ITEM:
Loss on early extinguishment of debt, net of applicable
income tax of $0 and $3,804,000, respectively........ -- (13,334) -- (6,620)
-------- ---------- -------- ---------
NET INCOME (LOSS)........................................ 33,266 (933,854) (31,574) (183,377)
PREFERRED STOCK DIVIDENDS................................ (16,711) (12,077) -- --
-------- ---------- -------- ---------
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS....... $ 16,555 $ (945,931) $(31,574) $(183,377)
======== ========== ======== =========
EARNINGS (LOSS) PER COMMON SHARE:
EARNINGS (LOSS) PER COMMON SHARE -- BASIC:
Income (loss) before extraordinary item.............. $ 0.17 $ (9.83) $ (0.45) $ (2.69)
Extraordinary item................................... -- (0.14) -- (0.10)
-------- ---------- -------- ---------
Net income (loss).................................... $ 0.17 $ (9.97) $ (0.45) $ (2.79)
======== ========== ======== =========
EARNINGS (LOSS) PER COMMON SHARE -- ASSUMING DILUTION:
Income (loss) before extraordinary item.............. $ 0.16 $ (9.83) $ (0.45) $ (2.69)
Extraordinary item................................... -- (0.14) -- (0.10)
-------- ---------- -------- ---------
Net income (loss).................................... $ 0.16 $ (9.97) $ (0.45) $ (2.79)
======== ========== ======== =========
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES
OUTSTANDING (IN 000'S):
Basic.................................................. 97,077 94,911 70,835 65,767
======== ========== ======== =========
Assuming dilution...................................... 102,038 94,911 70,835 65,767
======== ========== ======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-20
<PAGE> 160
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, SIX MONTHS ENDED YEAR ENDED
--------------------- DECEMBER 31, JUNE 30,
1999 1998 1997 1997
--------- --------- ---------------- ----------
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS)........................................... $ 33,266 $(933,854) $ (31,574) $(183,377)
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO CASH PROVIDED
BY OPERATING ACTIVITIES:
Depreciation, depletion and amortization.................. 99,516 152,204 62,028 105,591
Impairment of oil and gas assets.......................... -- 826,000 110,000 236,000
Impairment of other assets................................ -- 55,000 -- --
Deferred taxes............................................ 1,764 -- -- (3,573)
Amortization of loan costs................................ 3,338 2,516 794 1,455
Amortization of bond discount............................. 84 98 41 217
Bad debt expense.......................................... 9 1,589 40 299
Gain on sale of Bayard stock.............................. -- -- (73,840) --
Gain on sale of fixed assets.............................. (459) (90) (209) (1,593)
Extraordinary loss........................................ -- 13,334 -- 6,620
Equity in (earnings) losses from investments and other.... 1,209 703 592 (499)
--------- --------- --------- ---------
Cash provided by operating activities before changes in
current assets and liabilities........................ 138,727 117,500 67,872 161,140
--------- --------- --------- ---------
CHANGES IN ASSETS AND LIABILITIES:
(Increase) decrease in short-term investments............. -- 12,027 92,127 (102,858)
(Increase) decrease in accounts receivable................ 17,592 12,191 (7,173) (19,987)
(Increase) decrease in inventory.......................... 743 168 (1,584) (1,467)
(Increase) decrease in other current assets............... 3,614 7,637 (1,519) 1,466
Increase (decrease) in accounts payable, accrued
liabilities and other................................... (23,891) (46,785) (11,044) 48,085
Increase (decrease) in current and non-current revenues
and royalties due others................................ 3,517 (8,099) 478 (2,290)
Increase (decrease) in deferred income taxes.............. 4,720 -- -- --
--------- --------- --------- ---------
Changes in assets and liabilities....................... 6,295 (22,861) 71,285 (77,051)
--------- --------- --------- ---------
Cash provided by operating activities................... 145,022 94,639 139,157 84,089
--------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Exploration and development of oil and gas properties..... (153,268) (259,710) (187,252) (465,367)
Acquisitions of oil and gas companies and properties, net
of cash acquired........................................ (49,893) (279,924) -- --
Divestitures of oil and gas properties.................... 45,635 15,712 -- --
Investment in preferred stock of Gothic Energy
Corporation............................................. -- (39,500) -- --
Net proceeds from sale of Bayard stock.................... -- -- 90,380 --
Repayment of note receivable.............................. -- 2,000 18,000 --
Proceeds from sale of investment in PanEast............... -- 21,245 -- --
Other proceeds from sales................................. 5,530 3,600 17 6,428
Long-term loans made to third parties..................... -- -- -- (20,000)
Investment in oil field service company................... -- -- (200) (3,048)
Increase in deferred charges.............................. (5,865) -- -- --
Other investments......................................... (730) -- (30,434) (8,000)
Other property and equipment additions.................... (1,182) (11,473) (27,015) (33,867)
--------- --------- --------- ---------
Cash used in investing activities....................... (159,773) (548,050) (136,504) (523,854)
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock.................... -- -- -- 288,091
Proceeds from long-term borrowings........................ 116,500 658,750 -- 342,626
Payments on long-term borrowings.......................... (98,000) (474,166) -- (119,581)
Dividends paid on common stock............................ -- (5,592) (2,810) --
Dividends paid on preferred stock......................... -- (8,050) -- --
Proceeds from issuance of preferred stock................. -- 222,663 -- --
Purchase of treasury stock and preferred stock............ (53) (29,962) -- --
Cash received from exercise of stock options.............. 520 154 322 1,387
Other financing........................................... -- -- (322) (379)
--------- --------- --------- ---------
Cash provided by (used in) financing activities......... 18,967 363,797 (2,810) 512,144
--------- --------- --------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH..................... 4,922 (4,726) -- --
--------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents........ 9,138 (94,340) (157) 72,379
Cash and cash equivalents, beginning of period.............. 29,520 123,860 124,017 51,638
--------- --------- --------- ---------
Cash and cash equivalents, end of period............ $ 38,658 $ 29,520 $ 123,860 $ 124,017
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-21
<PAGE> 161
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, SIX MONTHS ENDED YEAR ENDED
------------------- DECEMBER 31, JUNE 30,
1999 1998 1997 1997
------- --------- ---------------- ----------
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
CASH PAYMENTS FOR:
Interest, net of capitalized interest............. $80,684 $ 59,881 $ 17,367 $12,919
Income taxes...................................... $ -- $ -- $ 500 $ --
DETAILS OF ACQUISITION OF ANSON PRODUCTION
CORPORATION:
Fair value of assets acquired..................... $ -- $ -- $ 43,000 $ --
Accrued liability for estimated cash
consideration................................... $ -- $ -- $(15,500) $ --
Stock issued (3,792,724 shares)................... $ -- $ -- $(27,500) $ --
DETAILS OF ACQUISITION OF DLB OIL & GAS, INC.:
Fair value of assets acquired..................... $ -- $ 136,500 $ -- $ --
Cash consideration................................ $ -- $ (17,500) $ -- $ --
Stock issued (5,000,000 shares)................... $ -- $ (30,000) $ -- $ --
Debt assumed...................................... $ -- $ (85,000) $ -- $ --
Acquisition costs paid............................ $ -- $ (4,000) $ -- $ --
DETAILS OF ACQUISITION OF HUGOTON ENERGY
CORPORATION:
Fair value of assets acquired..................... $ -- $ 343,371 $ -- $ --
Stock options granted............................. $ -- $ (2,050) $ -- $ --
Stock issued (25,790,146 shares).................. $ -- $(206,321) $ -- $ --
Debt assumed...................................... $ -- $(120,000) $ -- $ --
Acquisition costs paid............................ $ -- $ (15,000) $ -- $ --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
In November 1999, the Chief Executive Officer and Chief Operating Officer
of Chesapeake tendered to Chesapeake Energy Marketing, Inc. ("CEMI") 2,320,107
shares of Chesapeake common stock in full satisfaction of two notes payable to
CEMI with a combined outstanding balance of $7.6 million.
During 1999, Chesapeake issued a $2.2 million note payable as consideration
for the acquisition of certain oil and gas properties.
Chesapeake had a financing arrangement with a vendor to supply certain oil
and gas equipment inventory, which was terminated during the Transition Period.
The total amount owed at June 30, 1997 was $1,380,000. No cash consideration is
exchanged for inventory under this financing arrangement until actual draws on
the inventory are made.
In fiscal 1997, Chesapeake recognized income tax benefits of $4,808,000
related to the disposition of stock options by directors and employees of
Chesapeake. The tax benefits were recorded as an adjustment to deferred income
taxes and paid-in capital.
Proceeds from the issuance of $500 million of 9.625% senior notes in April
1998 and $300 million of senior notes ($150 million of 7.875% senior notes and
$150 million of 8.5% senior notes) in March 1997, are net of $11.7 million and
$6.4 million, respectively, in offering fees and expenses which were deducted
from the actual cash received.
On December 22, 1997, Chesapeake declared a dividend of $0.02 per common
share, or $1,486,000, which was paid on January 15, 1998. On June 13, 1997
Chesapeake declared a dividend of $0.02 per common share, or $1,405,000, which
was paid on July 15, 1997.
F-22
<PAGE> 162
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) AND
COMPREHENSIVE INCOME (LOSS)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, SIX MONTHS ENDED YEAR ENDED
------------------------- DECEMBER 31, JUNE 30,
1999 1998 1997 1997
----------- ----------- ----------------- ----------
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
PREFERRED STOCK:
Balance, beginning of period................. $ 230,000 $ -- $ -- $ --
Purchase of preferred stock.................. (180) -- -- --
Issuance of preferred stock.................. -- 230,000 -- --
----------- ----------- --------- ---------
Balance, end of period....................... 229,820 230,000 -- --
----------- ----------- --------- ---------
COMMON STOCK:
Balance, beginning of period................. 1,052 743 703 3,008
Issuance of 8,972,000 shares of common
stock...................................... -- -- -- 90
Exercise of stock options and warrants....... 6 -- 2 12
Issuance of 3,792,724 shares of common stock
to AnSon Production Corporation............ -- -- 38 --
Issuance of 25,790,146 shares of common stock
to Hugoton Energy Corporation.............. -- 258 -- --
Issuance of 5,000,000 shares of common stock
to DLB Oil and Gas, Inc. .................. -- 50 -- --
Change in par value and other................ 1 1 -- (2,407)
----------- ----------- --------- ---------
Balance, end of period....................... 1,059 1,052 743 703
----------- ----------- --------- ---------
PAID-IN CAPITAL:
Balance, beginning of period................. 682,263 460,770 432,991 136,782
Exercise of stock options and warrants....... 514 153 320 1,375
Issuance of common stock..................... -- 236,013 27,459 301,593
Offering expenses and other.................. 1 (16,723) -- (13,974)
Stock options issued in Hugoton purchase..... -- 2,050 -- --
Purchase of preferred stock at discount...... 127 -- -- --
Tax benefit from exercise of stock options... -- -- -- 4,808
Change in par value.......................... -- -- -- 2,407
----------- ----------- --------- ---------
Balance, end of period....................... 682,905 682,263 460,770 432,991
----------- ----------- --------- ---------
ACCUMULATED EARNINGS (DEFICIT):
Balance, beginning of period................. (1,127,195) (181,270) (146,805) 37,977
Net income (loss)............................ 33,266 (933,854) (31,574) (183,377)
Dividends on common stock.................... -- (4,021) (2,891) (1,405)
Dividends on preferred stock................. -- (8,050) -- --
----------- ----------- --------- ---------
Balance, end of period....................... (1,093,929) (1,127,195) (181,270) (146,805)
----------- ----------- --------- ---------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS):
Balance, beginning of period................. (4,726) (37) -- --
Foreign currency translation adjustments..... 4,922 (4,689) (37) --
----------- ----------- --------- ---------
Balance, end of period....................... 196 (4,726) (37) --
----------- ----------- --------- ---------
TREASURY STOCK -- COMMON:
Balance, beginning of period................. (29,962) -- -- --
Exchange of notes receivable for common stock
from related parties....................... (7,633) (29,962) -- --
----------- ----------- --------- ---------
Balance, end of period....................... (37,595) (29,962) -- --
----------- ----------- --------- ---------
TOTAL STOCKHOLDERS' EQUITY
(DEFICIT)........................... $ (217,544) $ (248,568) $ 280,206 $ 286,889
=========== =========== ========= =========
COMPREHENSIVE INCOME (LOSS):
Net income (loss)............................ $ 33,266 $ (933,854) $ (31,574) $(183,377)
Other comprehensive income (loss) -- foreign
currency translation adjustments........... 4,922 (4,689) (37) --
----------- ----------- --------- ---------
Comprehensive income (loss)........... $ 38,188 $ (938,543) $ (31,611) $(183,377)
=========== =========== ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-23
<PAGE> 163
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Company
Chesapeake Energy Corporation is an oil and natural gas exploration and
production company engaged in the acquisition, exploration, and development of
properties for the production of crude oil and natural gas from underground
reservoirs. Chesapeake's properties are located in Oklahoma, Texas, Arkansas,
Louisiana, Kansas, Montana, Colorado, North Dakota, New Mexico and British
Columbia and Saskatchewan, Canada.
These consolidated financial statements relate to the years ended December
31, 1999 ("1999"), December 31, 1998 ("1998") and June 30, 1997 ("fiscal 1997").
Chesapeake changed its fiscal year end from June 30 to December 31 in 1997.
Chesapeake's results of operations and cash flows for the six months ended
December 31, 1997 (the "Transition Period") are also included in these
consolidated financial statements.
Principles of Consolidation
The accompanying consolidated financial statements of Chesapeake Energy
Corporation include the accounts of its direct and indirect wholly-owned
subsidiaries ("Chesapeake"). All significant intercompany accounts and
transactions have been eliminated. Investments in companies and partnerships
which give Chesapeake significant influence, but not control, over the investee
are accounted for using the equity method.
Accounting 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 dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
Cash Equivalents
For purposes of the consolidated financial statements, Chesapeake considers
investments in all highly liquid debt instruments with maturities of three
months or less at date of purchase to be cash equivalents.
Investments in Securities
Chesapeake invests in various equity securities and short-term debt
instruments including corporate bonds and auction preferreds, commercial paper
and government agency notes. Chesapeake has classified all of its short-term
investments in equity and debt instruments as trading securities, which are
carried at fair value with unrealized holding gains and losses included in
earnings. Investments in equity securities and limited partnerships that do not
have readily determinable fair values are stated at cost and are included in
noncurrent other assets. In determining realized gains and losses, the cost of
securities sold is based on the average cost method.
Inventory
Inventory consists primarily of tubular goods and other lease and well
equipment which Chesapeake plans to utilize in its ongoing exploration and
development activities and is carried at the lower of cost or market using the
specific identification method.
F-24
<PAGE> 164
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Oil and Gas Properties
Chesapeake follows the full-cost method of accounting under which all costs
associated with property acquisition, exploration and development activities are
capitalized. Chesapeake capitalizes internal costs that can be directly
identified with its acquisition, exploration and development activities and does
not include any costs related to production, general corporate overhead or
similar activities (see Note 11). Capitalized costs are amortized on a composite
unit-of-production method based on proved oil and gas reserves. As of December
31, 1999, approximately 66% of Chesapeake's proved reserve value (based on SEC
PV-10%) was evaluated by independent petroleum engineers, with the balance
evaluated by Chesapeake's engineers. In addition, Chesapeake's engineers
evaluate all properties quarterly. The average composite rates used for
depreciation, depletion and amortization were $0.71 ($0.73 in U.S. and $0.52 in
Canada) per equivalent Mcf in 1999, $1.13 ($1.17 in U.S. and $0.43 in Canada)
per equivalent Mcf in 1998, $1.57 per equivalent Mcf in the Transition Period
and $1.31 per equivalent Mcf in fiscal 1997. Chesapeake did not have operations
in Canada prior to 1998.
Proceeds from the sale of properties are accounted for as reductions to
capitalized costs unless such sales involve a significant change in the
relationship between costs and the value of proved reserves or the underlying
value of unproved properties, in which case a gain or loss is recognized. The
costs of unproved properties are excluded from amortization until the properties
are evaluated. Chesapeake reviews all of its unevaluated properties quarterly to
determine whether or not and to what extent proved reserves have been assigned
to the properties, and otherwise if impairment has occurred. Unevaluated
properties are grouped by major producing area where individual property costs
are not significant, and assessed individually when individual costs are
significant.
Chesapeake reviews the carrying value of its oil and gas properties under
the full-cost accounting rules of the Securities and Exchange Commission on a
quarterly basis. Under these rules, capitalized costs, less accumulated
amortization and related deferred income taxes, may not exceed an amount equal
to the sum of the present value of estimated future net revenues less estimated
future expenditures to be incurred in developing and producing the proved
reserves, less any related income tax effects. During 1998, capitalized costs of
oil and gas properties exceeded the estimated present value of future net
revenues from Chesapeake's proved reserves, net of related income tax
considerations, resulting in writedowns in the carrying value of oil and gas
properties of $826 million. During the Transition Period, capitalized costs of
oil and gas properties exceeded the estimated present value of future net
revenues from Chesapeake's proved reserves, net of related income tax
considerations, resulting in a writedown in the carrying value of oil and gas
properties of $110 million. During fiscal 1997, capitalized costs of oil and gas
properties exceeded the estimated present value of future net revenues from
Chesapeake's proved reserves, net of related income tax considerations,
resulting in a writedown in the carrying value of oil and gas properties of $236
million.
Other Property and Equipment
Other property and equipment consists primarily of gas gathering and
processing facilities, vehicles, land, office buildings and equipment, and
software. Major renewals and betterments are capitalized while the costs of
repairs and maintenance are charged to expense as incurred. The costs of assets
retired or otherwise disposed of and the applicable accumulated depreciation are
removed from the accounts, and the resulting gain or loss is reflected in
operations. Other property and equipment costs are depreciated on both
straight-line and accelerated methods. Buildings are depreciated on a
straight-line basis over 31.5 years. All other property and equipment are
depreciated over the estimated useful lives of the assets, which range from five
to seven years.
F-25
<PAGE> 165
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Capitalized Interest
During 1999, 1998, the Transition Period and fiscal 1997, interest of
approximately $3.5 million, $6.5 million, $5.1 million and $12.9 million,
respectively, was capitalized on significant investments in unproved properties
that were not being currently depreciated, depleted, or amortized and on which
exploration activities were in progress.
Income Taxes
Chesapeake has adopted Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes ("SFAS 109"). SFAS 109 requires deferred tax
liabilities or assets to be recognized for the anticipated future tax effects of
temporary differences that arise as a result of the differences in the carrying
amounts and the tax bases of assets and liabilities.
Net Income (Loss) Per Share
Statement of Financial Accounting Standards No. 128, Earnings Per Share
("SFAS 128") requires presentation of "basic" and "diluted" earnings per share,
as defined, on the face of the statement of operations for all entities with
complex capital structures. SFAS 128 requires a reconciliation of the numerator
and denominator of the basic and diluted EPS computations. For 1998, the
Transition Period and fiscal 1997, there was no difference between actual
weighted average shares outstanding, which are used in computing basic EPS, and
diluted weighted average shares, which are used in computing diluted EPS.
Options to purchase 12.9 million, 11.3 million, 8.3 million and 7.9 million
shares of common stock at weighted average exercise prices of $1.76, $1.86,
$5.49 and $7.09 were outstanding during 1999, 1998, the Transition Period and
fiscal 1997 but were not included in the computation of diluted EPS in 1998, the
Transition Period and fiscal 1997 because the effect of these outstanding
options would be antidilutive. Also, the convertible preferred stock was not
included in the 1999 and 1998 calculation because the effect was antidilutive. A
reconciliation for 1999 is as follows:
<TABLE>
<CAPTION>
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
FOR THE YEAR ENDED DECEMBER 31, 1999:
BASIC EPS
Income available to common stockholders.......... $16,555 97,077 $0.17
=====
EFFECT OF DILUTIVE SECURITIES
Employee stock options........................... -- 4,961
------- -------
DILUTED EPS
Income available to common stockholders and
assumed conversions............................ $16,555 102,038 $0.16
======= ======= =====
</TABLE>
Gas Imbalances -- Revenue Recognition
Revenues from the sale of oil and gas production are recognized when title
passes, net of royalties. Chesapeake follows the "sales method" of accounting
for its gas revenue whereby Chesapeake recognizes sales revenue on all gas sold
to its purchasers, regardless of whether the sales are proportionate to
Chesapeake's ownership in the property. A liability is recognized only to the
extent that Chesapeake has a net imbalance in excess of the remaining gas
reserves on the underlying properties. Chesapeake's net imbalance positions at
December 31, 1999 and 1998 were not material.
F-26
<PAGE> 166
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Hedging
Chesapeake periodically uses certain instruments to hedge its exposure to
price fluctuations on oil and natural gas transactions and interest rates.
Recognized gains and losses on hedge contracts are reported as a component of
the related transaction. Results of oil and gas hedging transactions are
reflected in oil and gas sales to the extent related to Chesapeake's oil and gas
production, in oil and gas marketing sales to the extent related to Chesapeake's
marketing activities, and in interest expense to the extent so related.
Debt Issue Costs
Included in other assets are costs associated with the issuance of the
senior notes. The remaining unamortized costs on these issuances of senior notes
at December 31, 1999 totaled $16.6 million and are being amortized over the life
of the senior notes.
Comprehensive Income
In 1998, Chesapeake adopted SFAS No. 130, Reporting Comprehensive Income.
This statement establishes rules for the reporting of comprehensive income and
its components. Comprehensive income consists of net income and foreign currency
translation adjustments and is presented in the Consolidated Statements of
Stockholders' Equity (Deficit) and Comprehensive Income (Loss). The adoption of
SFAS 130 had no impact on total stockholders' equity. Prior year financial
statements have been reclassified to conform to the SFAS 130 requirements. All
balance sheet accounts of foreign operations are translated into U.S. dollars at
the year-end rate of exchange and statement of operations items are translated
at the weighted average exchange rates for the year.
Reclassifications
Certain reclassifications have been made to the consolidated financial
statements for 1998, the Transition Period, and fiscal 1997 to conform to the
presentation used for the 1999 consolidated financial statements.
2. SENIOR NOTES
On April 22, 1998, Chesapeake issued $500 million principal amount of
9.625% Senior Notes due 2005 ("9.625% Senior Notes"). The 9.625% Senior Notes
are redeemable at the option of Chesapeake at any time on or after May 1, 2002
at the redemption prices set forth in the indenture or at the make-whole prices,
as set forth in the indenture, if redeemed prior to May 1, 2002. Chesapeake may
also redeem at its option up to $167 million of the 9.625% Senior Notes at
109.625% of their principal amount with the proceeds of an equity offering
completed prior to May 1, 2001.
On March 17, 1997, Chesapeake issued $150 million principal amount of
7.875% Senior Notes due 2004 ("7.875% Senior Notes"). The 7.875% Senior Notes
are redeemable at the option of Chesapeake at any time prior to March 15, 2004
at the make-whole prices determined in accordance with the indenture.
Also on March 17, 1997, Chesapeake issued $150 million principal amount of
8.5% Senior Notes due 2012 ("8.5% Senior Notes"). The 8.5% Senior Notes are
redeemable at the option of Chesapeake at any time prior to March 15, 2004 at
the make-whole prices determined in accordance with the indenture and, on or
after March 15, 2004 at the redemption prices set forth therein.
On April 9, 1996, Chesapeake issued $120 million principal amount of 9.125%
Senior Notes due 2006 ("9.125% Senior Notes"). The 9.125% Senior Notes are
redeemable at the option of Chesapeake at any time prior to April 15, 2001 at
the make-whole prices determined in accordance with the indenture and, on or
after April 15, 2001 at the redemption prices set forth therein.
F-27
<PAGE> 167
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On May 25, 1995, Chesapeake issued $90 million principal amount of 10.5%
Senior Notes due 2002 ("10.5% Senior Notes"). In April 1998, Chesapeake
purchased all of its 10.5% Senior Notes for approximately $99 million. The early
retirement of these notes resulted in an extraordinary charge of $13.3 million.
Chesapeake is a holding company and owns no operating assets and has no
significant operations independent of its subsidiaries. Chesapeake's obligations
under the 9.625% Senior Notes, the 9.125% Senior Notes, the 7.875% Senior Notes
and the 8.5% Senior Notes have been fully and unconditionally guaranteed, on a
joint and several basis, by each of Chesapeake's "Restricted Subsidiaries" (as
defined in the respective indentures governing the Senior Notes) (collectively,
the "Guarantor Subsidiaries"). Each of the Guarantor Subsidiaries is a direct or
indirect wholly-owned subsidiary of Chesapeake.
The senior note indentures contain certain covenants, including covenants
limiting Chesapeake and the Guarantor Subsidiaries with respect to asset sales;
restricted payments; the incurrence of additional indebtedness and the issuance
of preferred stock; liens; sale and leaseback transactions; lines of business;
dividend and other payment restrictions affecting Guarantor Subsidiaries;
mergers or consolidations; and transactions with affiliates. Chesapeake is
obligated to repurchase the 9.625% and 9.125% Senior Notes in the event of a
change of control or certain asset sales.
The senior note indentures also limit Chesapeake's ability to make
restricted payments (as defined), including the payment of preferred stock
dividends, unless certain tests are met. From December 31, 1998 through December
31, 1999, Chesapeake was unable to meet the requirements to incur additional
unsecured indebtedness, and consequently was not able to pay cash dividends on
its 7% cumulative convertible preferred stock. Chesapeake had accumulated
dividends in arrears of $19.3 million related to its preferred stock as of
February 29, 2000. Subsequent payments will be subject to the same restrictions
and are dependent upon variables that are beyond Chesapeake's ability to
predict. This restriction does not affect Chesapeake's ability to borrow under
or expand its secured commercial bank facility. If Chesapeake fails to pay
dividends for six quarterly periods, the holders of preferred stock will be
entitled to elect two new directors to the Board. Based on current projections
of cash flow and fixed charges, Chesapeake does not expect to be able to pay a
dividend on the preferred stock on May 1, 2000, which would be the sixth
consecutive dividend payment date on which dividends have not been paid.
Set forth below are condensed consolidating financial statements of the
Guarantor Subsidiaries, Chesapeake's subsidiaries which are not guarantors of
the Senior Notes (the "Non-Guarantor Subsidiaries") and Chesapeake. Separate
audited financial statements of each Guarantor Subsidiary have not been provided
because management has determined that they are not material to investors.
Chesapeake Energy Marketing, Inc. ("CEMI") was a Non-Guarantor Subsidiary
for all periods presented. The following were additional Non-Guarantor
Subsidiaries: Chesapeake Acquisition Corporation during the Transition Period
and Chesapeake Canada Corporation during fiscal 1997. All of Chesapeake's other
subsidiaries were Guarantor Subsidiaries during all periods presented.
F-28
<PAGE> 168
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 1999
($ IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES PARENT ELIMINATIONS CONSOLIDATED
------------ ------------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......... $ (6,964) $ 20,409 $ 25,405 $ -- $ 38,850
Accounts receivable............... 45,170 18,297 73 (12,475) 51,065
Inventory......................... 4,183 399 -- -- 4,582
Other............................. 1,997 700 352 -- 3,049
----------- -------- ----------- ----------- -----------
Total current assets....... 44,386 39,805 25,830 (12,475) 97,546
----------- -------- ----------- ----------- -----------
PROPERTY AND EQUIPMENT:
Oil and gas properties............ 2,311,633 3,715 -- -- 2,315,348
Unevaluated leasehold............. 40,008 -- -- -- 40,008
Other property and equipment...... 29,088 20,521 18,103 -- 67,712
Less: accumulated depreciation,
depletion and amortization...... (1,683,890) (18,205) (1,876) -- (1,703,971)
----------- -------- ----------- ----------- -----------
Net property and
equipment................ 696,839 6,031 16,227 -- 719,097
----------- -------- ----------- ----------- -----------
INVESTMENTS IN SUBSIDIARIES AND
INTERCOMPANY ADVANCES............. 806,180 -- 493,738 (1,299,918) --
----------- -------- ----------- ----------- -----------
OTHER ASSETS........................ 16,402 8,409 16,765 (7,686) 33,890
----------- -------- ----------- ----------- -----------
TOTAL ASSETS............... $ 1,563,807 $ 54,245 $ 552,560 $(1,320,079) $ 850,533
=========== ======== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Notes payable and current
maturities of long-term debt.... $ -- $ 763 $ -- $ -- $ 763
Accounts payable and other........ 63,194 19,265 17,466 (12,502) 87,423
----------- -------- ----------- ----------- -----------
Total current
liabilities.............. 63,194 20,028 17,466 (12,502) 88,186
----------- -------- ----------- ----------- -----------
LONG-TERM DEBT...................... 43,500 1,437 919,160 -- 964,097
----------- -------- ----------- ----------- -----------
REVENUES AND ROYALTIES DUE OTHERS... 9,310 -- -- -- 9,310
----------- -------- ----------- ----------- -----------
DEFERRED INCOME TAXES............... 6,484 -- -- -- 6,484
----------- -------- ----------- ----------- -----------
INTERCOMPANY PAYABLES............... 1,356,466 (2,450) (1,354,043) 27 --
----------- -------- ----------- ----------- -----------
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock...................... 27 1 1,048 (17) 1,059
Other............................. 84,826 35,229 968,929 (1,307,587) (218,603)
----------- -------- ----------- ----------- -----------
84,853 35,230 969,977 (1,307,604) (217,544)
----------- -------- ----------- ----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY
(DEFICIT)................ $ 1,563,807 $ 54,245 $ 552,560 $(1,320,079) $ 850,533
=========== ======== =========== =========== ===========
</TABLE>
F-29
<PAGE> 169
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 1998
($ IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES PARENT ELIMINATIONS CONSOLIDATED
------------ ------------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......... $ (11,565) $ 7,000 $ 39,839 $ -- $ 35,274
Accounts receivable............... 54,384 29,641 270 (7,996) 76,299
Inventory......................... 4,919 406 -- -- 5,325
Other............................. 721 15 365 -- 1,101
----------- ------- ----------- --------- -----------
Total current assets....... 48,459 37,062 40,474 (7,996) 117,999
----------- ------- ----------- --------- -----------
PROPERTY AND EQUIPMENT:
Oil and gas properties............ 2,142,943 -- -- -- 2,142,943
Unevaluated leasehold............. 52,687 -- -- -- 52,687
Other property and equipment...... 47,628 15,109 16,981 -- 79,718
Less: accumulated depreciation,
depletion and amortization...... (1,601,931) (8,036) (1,390) -- (1,611,357)
----------- ------- ----------- --------- -----------
Net property and
equipment................ 641,327 7,073 15,591 -- 663,991
----------- ------- ----------- --------- -----------
INVESTMENTS IN SUBSIDIARIES AND
INTERCOMPANY ADVANCES............. 473,578 -- 481,150 (954,728) --
----------- ------- ----------- --------- -----------
OTHER ASSETS........................ 10,610 560 19,455 -- 30,625
----------- ------- ----------- --------- -----------
TOTAL ASSETS............... $ 1,173,974 $44,695 $ 556,670 $(962,724) $ 812,615
=========== ======= =========== ========= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Notes payable and current
maturities of long-term debt.... $ 25,000 $ -- $ -- $ -- $ 25,000
Accounts payable and other........ 80,786 15,992 17,529 (8,023) 106,284
----------- ------- ----------- --------- -----------
Total current
liabilities.............. 105,786 15,992 17,529 (8,023) 131,284
----------- ------- ----------- --------- -----------
LONG-TERM DEBT...................... -- -- 919,076 -- 919,076
----------- ------- ----------- --------- -----------
REVENUES AND ROYALTIES DUE OTHERS... 10,823 -- -- -- 10,823
----------- ------- ----------- --------- -----------
DEFERRED INCOME TAXES............... -- -- -- -- --
----------- ------- ----------- --------- -----------
INTERCOMPANY PAYABLES............... 1,338,948 11,376 (1,350,351) 27 --
----------- ------- ----------- --------- -----------
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock...................... 26 1 1,042 (17) 1,052
Other............................. (281,609) 17,326 969,374 (954,711) (249,620)
----------- ------- ----------- --------- -----------
(281,583) 17,327 970,416 (954,728) (248,568)
----------- ------- ----------- --------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY
(DEFICIT)................ $ 1,173,974 $44,695 $ 556,670 $(962,724) $ 812,615
=========== ======= =========== ========= ===========
</TABLE>
F-30
<PAGE> 170
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES PARENT ELIMINATIONS CONSOLIDATED
------------ ------------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED DECEMBER 31, 1999:
REVENUES:
Oil and gas sales............................ $ 279,740 $ -- $ -- $ 705 $ 280,445
Oil and gas marketing sales.................. -- 194,605 -- (120,104) 74,501
---------- -------- -------- --------- ----------
Total revenues............................... 279,740 194,605 -- (119,399) 354,946
---------- -------- -------- --------- ----------
OPERATING COSTS:
Production expenses and taxes................ 59,158 404 -- -- 59,562
Oil and gas marketing expenses............... -- 190,932 -- (119,399) 71,533
Impairment of oil and gas properties......... -- -- -- -- --
Impairment of other assets................... -- -- -- -- --
Oil and gas depreciation, depletion and
amortization............................... 94,649 395 -- -- 95,044
Other depreciation and amortization.......... 4,474 80 3,256 -- 7,810
General and administrative................... 12,143 1,251 83 -- 13,477
---------- -------- -------- --------- ----------
Total operating costs........................ 170,424 193,062 3,339 (119,399) 247,426
---------- -------- -------- --------- ----------
INCOME (LOSS) FROM OPERATIONS.................. 109,316 1,543 (3,339) -- 107,520
---------- -------- -------- --------- ----------
OTHER INCOME (EXPENSE):
Interest and other income.................... 3,257 4,823 84,120 (83,638) 8,562
Interest expense............................. (82,852) (96) (81,742) 83,638 (81,052)
---------- -------- -------- --------- ----------
Total other income (expense)................. (79,595) 4,727 2,378 -- (72,490)
---------- -------- -------- --------- ----------
INCOME (LOSS) BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM........................... 29,721 6,270 (961) -- 35,030
INCOME TAX EXPENSE (BENEFIT)................... 1,764 -- -- -- 1,764
---------- -------- -------- --------- ----------
NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEM.... 27,957 6,270 (961) -- 33,266
EXTRAORDINARY ITEM:
Loss on early extinguishment of debt, net of
applicable income tax...................... -- -- -- -- --
---------- -------- -------- --------- ----------
NET INCOME (LOSS)...................... $ 27,957 $ 6,270 $ (961) $ -- $ 33,266
========== ======== ======== ========= ==========
FOR THE YEAR ENDED DECEMBER 31, 1998:
REVENUES:
Oil and gas sales............................ $ 254,541 $ -- $ -- $ 2,346 $ 256,887
Oil and gas marketing sales.................. -- 225,195 -- (104,136) 121,059
---------- -------- -------- --------- ----------
Total revenues............................... 254,541 225,195 -- (101,790) 377,946
---------- -------- -------- --------- ----------
OPERATING COSTS:
Production expenses and taxes................ 59,497 -- -- -- 59,497
Oil and gas marketing expenses............... -- 220,798 -- (101,790) 119,008
Impairment of oil and gas properties......... 826,000 -- -- -- 826,000
Impairment of other assets................... 47,000 8,000 -- -- 55,000
Oil and gas depreciation, depletion and
amortization............................... 146,644 -- -- -- 146,644
Other depreciation and amortization.......... 5,204 126 2,746 -- 8,076
General and administrative................... 18,081 1,766 71 -- 19,918
---------- -------- -------- --------- ----------
Total operating costs........................ 1,102,426 230,690 2,817 (101,790) 1,234,143
---------- -------- -------- --------- ----------
INCOME (LOSS) FROM OPERATIONS.................. (847,885) (5,495) (2,817) -- (856,197)
---------- -------- -------- --------- ----------
OTHER INCOME (EXPENSE):
Interest and other income.................... 649 2,259 100,886 (99,868) 3,926
Interest expense............................. (96,214) (382) (71,521) 99,868 (68,249)
---------- -------- -------- --------- ----------
Total other income (expense)................. (95,565) 1,877 29,365 -- (64,323)
---------- -------- -------- --------- ----------
INCOME (LOSS) BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM........................... (943,450) (3,618) 26,548 -- (920,520)
INCOME TAX EXPENSE (BENEFIT)................... -- -- -- -- --
---------- -------- -------- --------- ----------
NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEM.... (943,450) (3,618) 26,548 -- (920,520)
EXTRAORDINARY ITEM:
Loss on early extinguishment of debt, net of
applicable income tax...................... (2,164) -- (11,170) -- (13,334)
---------- -------- -------- --------- ----------
NET INCOME (LOSS)...................... $ (945,614) $ (3,618) $ 15,378 $ -- $ (933,854)
========== ======== ======== ========= ==========
</TABLE>
F-31
<PAGE> 171
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS -- (CONTINUED)
($ IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES PARENT ELIMINATIONS CONSOLIDATED
------------ ------------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED DECEMBER 31, 1997:
REVENUES:
Oil and gas sales................................. $ 93,384 $ 1,199 $ -- $ 1,074 $ 95,657
Oil and gas marketing sales....................... -- 101,689 -- (43,448) 58,241
--------- -------- -------- -------- ---------
Total revenues.................................... 93,384 102,888 -- (42,374) 153,898
--------- -------- -------- -------- ---------
OPERATING COSTS:
Production expenses and taxes..................... 9,905 189 -- -- 10,094
Oil and gas marketing expenses.................... -- 100,601 -- (42,374) 58,227
Impairment of oil and gas properties.............. 96,000 14,000 -- -- 110,000
Oil and gas depreciation, depletion and
amortization.................................... 59,758 650 -- -- 60,408
Other depreciation and amortization............... 1,383 40 991 -- 2,414
General and administrative........................ 4,598 1,132 117 -- 5,847
--------- -------- -------- -------- ---------
Total operating costs............................. 171,644 116,612 1,108 (42,374) 246,990
--------- -------- -------- -------- ---------
INCOME (LOSS) FROM OPERATIONS....................... (78,260) (13,724) (1,108) -- (93,092)
--------- -------- -------- -------- ---------
OTHER INCOME (EXPENSE):
Interest and other income......................... 515 192 110,751 (32,492) 78,966
Interest expense.................................. (27,481) (39) (22,420) 32,492 (17,448)
--------- -------- -------- -------- ---------
Total other income (expense)...................... (26,966) 153 88,331 -- 61,518
--------- -------- -------- -------- ---------
INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY
ITEM.............................................. (105,226) (13,571) 87,223 -- (31,574)
INCOME TAX EXPENSE (BENEFIT)........................ -- -- -- -- --
--------- -------- -------- -------- ---------
NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEM......... (105,226) (13,571) 87,223 -- (31,574)
EXTRAORDINARY ITEM.................................. -- -- -- -- --
--------- -------- -------- -------- ---------
NET INCOME (LOSS)........................... $(105,226) $(13,571) $ 87,223 $ -- $ (31,574)
========= ======== ======== ======== =========
FOR THE YEAR ENDED JUNE 30, 1997:
REVENUES:
Oil and gas sales................................. $ 191,303 $ -- $ -- $ 1,617 $ 192,920
Oil and gas marketing sales....................... -- 145,942 -- (69,770) 76,172
--------- -------- -------- -------- ---------
Total revenues.................................... 191,303 145,942 -- (68,153) 269,092
--------- -------- -------- -------- ---------
OPERATING COSTS:
Production expenses and taxes..................... 15,107 -- -- -- 15,107
Oil and gas marketing expenses.................... -- 143,293 -- (68,153) 75,140
Impairment of oil and gas properties.............. 236,000 -- -- -- 236,000
Oil and gas depreciation, depletion and
amortization.................................... 103,264 -- -- -- 103,264
Other depreciation and amortization............... 2,152 80 1,550 -- 3,782
General and administrative........................ 6,313 921 1,568 -- 8,802
--------- -------- -------- -------- ---------
Total operating costs............................. 362,836 144,294 3,118 (68,153) 442,095
--------- -------- -------- -------- ---------
INCOME (LOSS) FROM OPERATIONS....................... (171,533) 1,648 (3,118) -- (173,003)
--------- -------- -------- -------- ---------
OTHER INCOME (EXPENSE):
Interest and other income......................... 778 749 49,224 (39,528) 11,223
Interest expense.................................. (37,644) (10) (20,424) 39,528 (18,550)
--------- -------- -------- -------- ---------
Total other income (expense)...................... (36,866) 739 28,800 -- (7,327)
--------- -------- -------- -------- ---------
INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY
ITEM.............................................. (208,399) 2,387 25,682 -- (180,330)
INCOME TAX EXPENSE (BENEFIT)........................ (4,129) 47 509 -- (3,573)
--------- -------- -------- -------- ---------
NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEM......... (204,270) 2,340 25,173 -- (176,757)
EXTRAORDINARY ITEM:
Loss on early extinguishment of debt, net of
applicable income tax........................... (769) -- (5,851) -- (6,620)
--------- -------- -------- -------- ---------
NET INCOME (LOSS)........................... $(205,039) $ 2,340 $ 19,322 $ -- $(183,377)
========= ======== ======== ======== =========
</TABLE>
F-32
<PAGE> 172
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES PARENT ELIMINATIONS CONSOLIDATED
------------ ------------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED DECEMBER 31, 1999:
CASH FLOWS FROM OPERATING ACTIVITIES.......... $ 135,303 $ 7,193 $ 2,526 $-- $ 145,022
--------- -------- --------- --- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Oil and gas properties, net................. (159,888) 2,362 -- -- (157,526)
Proceeds from sale of assets................ 2,082 3,448 -- -- 5,530
Other investments........................... (480) (250) -- -- (730)
Other additions............................. (5,777) (72) (1,198) -- (7,047)
--------- -------- --------- --- ---------
(164,063) 5,488 (1,198) -- (159,773)
--------- -------- --------- --- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term borrowings.......... 116,500 -- -- -- 116,500
Payments on long-term borrowings............ (98,000) -- -- -- (98,000)
Cash paid for purchase of preferred stock... -- (53) -- -- (53)
Exercise of stock options................... -- -- 520 -- 520
Intercompany advances, net.................. 15,501 781 (16,282) -- --
--------- -------- --------- --- ---------
34,001 728 (15,762) -- 18,967
--------- -------- --------- --- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH....... 4,922 -- -- -- 4,922
--------- -------- --------- --- ---------
Net increase (decrease) in cash and cash
equivalents................................. 10,163 13,409 (14,434) -- 9,138
Cash, beginning of period..................... (17,319) 7,000 39,839 -- 29,520
--------- -------- --------- --- ---------
Cash, end of period........................... $ (7,156) $ 20,409 $ 25,405 $-- $ 38,658
========= ======== ========= === =========
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED DECEMBER 31, 1998:
CASH FLOWS FROM OPERATING ACTIVITIES.......... $ 66,960 $(13,137) $ 40,816 $-- $ 94,639
--------- -------- --------- --- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Oil and gas properties...................... (523,922) -- -- -- (523,922)
Proceeds from sale of assets................ -- -- 3,600 -- 3,600
Investment in preferred stock of Gothic
Energy Corporation........................ (39,500) -- -- -- (39,500)
Repayment of note receivable................ 2,000 -- -- -- 2,000
Proceeds from sale of PanEast Petroleum
Corporation............................... -- -- 21,245 -- 21,245
Other additions............................. (2,510) 8,408 (17,371) -- (11,473)
--------- -------- --------- --- ---------
(563,932) 8,408 7,474 -- (548,050)
--------- -------- --------- --- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term borrowings.......... -- -- 658,750 -- 658,750
Payments on long-term borrowings............ -- -- (474,166) -- (474,166)
Cash received from issuance of preferred
stock..................................... -- -- 222,663 -- 222,663
Cash paid for purchase of treasury stock.... -- -- (29,962) -- (29,962)
Dividends paid on common stock and preferred
stock..................................... -- -- (13,642) -- (13,642)
Exercise of stock options................... -- -- 154 -- 154
Intercompany advances, net.................. 476,663 6,035 (482,698) -- --
--------- -------- --------- --- ---------
476,663 6,035 (118,901) -- 363,797
--------- -------- --------- --- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH....... (4,726) -- -- -- (4,726)
--------- -------- --------- --- ---------
Net increase (decrease) in cash and cash
equivalents................................. (25,035) 1,306 (70,611) -- (94,340)
Cash, beginning of period..................... (284) 13,694 110,450 -- 123,860
--------- -------- --------- --- ---------
Cash, end of period........................... $ (25,319) $ 15,000 $ 39,839 $-- $ 29,520
========= ======== ========= === =========
</TABLE>
F-33
<PAGE> 173
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES PARENT ELIMINATIONS CONSOLIDATED
------------ ------------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED DECEMBER 31,
1997:
CASH FLOWS FROM OPERATING ACTIVITIES... $ 28,598 $(10,842) $ 121,401 $ -- $ 139,157
--------- -------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Oil and gas properties............... (187,252) -- -- -- (187,252)
Investment in service operations..... (200) -- -- -- (200)
Other investments.................... (26,472) -- 99,380 -- 72,908
Other additions...................... (22,864) 1,357 (453) -- (21,960)
--------- -------- --------- --------- ---------
(236,788) 1,357 98,927 -- (136,504)
--------- -------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid on common stock....... -- -- (2,810) -- (2,810)
Exercise of stock options............ -- -- 322 -- 322
Other financing...................... -- (322) -- -- (322)
Intercompany advances, net........... 214,135 19,443 (233,578) -- --
--------- -------- --------- --------- ---------
214,135 19,121 (236,066) -- (2,810)
--------- -------- --------- --------- ---------
Net increase (decrease) in cash and
cash equivalents..................... 5,945 9,636 (15,738) -- (157)
Cash, beginning of period.............. (6,534) 4,363 126,188 -- 124,017
--------- -------- --------- --------- ---------
Cash, end of period.................... $ (589) $ 13,999 $ 110,450 $ -- $ 123,860
========= ======== ========= ========= =========
FOR THE YEAR ENDED JUNE 30, 1997:
CASH FLOWS FROM OPERATING ACTIVITIES... $ 165,850 $(11,008) $ (70,753) $ -- $ 84,089
--------- -------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Oil and gas properties............... (465,424) 57 -- -- (465,367)
Proceeds from sale of assets......... 6,428 -- -- -- 6,428
Investment in service operations..... (3,048) -- -- -- (3,048)
Long-term loans to third parties..... (2,000) -- (18,000) -- (20,000)
Other investments.................... -- -- (8,000) -- (8,000)
Other additions...................... (24,318) (1,999) (7,550) -- (33,867)
--------- -------- --------- --------- ---------
(488,362) (1,942) (33,550) -- (523,854)
--------- -------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings............. 50,000 -- 292,626 -- 342,626
Payments on borrowings............... (118,901) -- (680) -- (119,581)
Exercise of stock options............ -- -- 1,387 -- 1,387
Issuance of common stock............. -- -- 288,091 -- 288,091
Other financing...................... -- -- (379) -- (379)
Intercompany advances, net........... 380,735 14,645 (395,380) -- --
--------- -------- --------- --------- ---------
311,834 14,645 185,665 -- 512,144
--------- -------- --------- --------- ---------
Net increase (decrease) in cash and
cash equivalents..................... (10,678) 1,695 81,362 -- 72,379
Cash, beginning of period.............. 4,144 2,668 44,826 -- 51,638
--------- -------- --------- --------- ---------
Cash, end of period.................... $ (6,534) $ 4,363 $ 126,188 $ -- $ 124,017
========= ======== ========= ========= =========
</TABLE>
F-34
<PAGE> 174
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
($ IN THOUSANDS)
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR
SUBSIDIARIES SUBSIDIARIES PARENT ELIMINATIONS CONSOLIDATED
------------ ------------ ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED DECEMBER 31, 1999:
Net income (loss)........................ $ 27,957 $ 6,270 $ (961) $-- $ 33,266
Other comprehensive income
(loss) -- foreign currency
translation............................ 4,922 -- -- -- 4,922
--------- -------- ------- --- ---------
Comprehensive income..................... $ 32,879 $ 6,270 $ (961) $-- $ 38,188
========= ======== ======= === =========
FOR THE YEAR ENDED DECEMBER 31, 1998:
Net income (loss)........................ $(945,614) $ (3,618) $15,378 $-- $(933,854)
Other comprehensive income
(loss) -- foreign currency
translation............................ (4,689) -- -- -- (4,689)
--------- -------- ------- --- ---------
Comprehensive income (loss).............. $(950,303) $ (3,618) $15,378 $-- $(938,543)
========= ======== ======= === =========
FOR THE SIX MONTHS ENDED DECEMBER 31, 1997:
Net income (loss)........................ $(105,226) $(13,571) $87,223 $-- $ (31,574)
Other comprehensive income
(loss) -- foreign currency
translation............................ (37) -- -- -- (37)
--------- -------- ------- --- ---------
Comprehensive income (loss).............. $(105,263) $(13,571) $87,223 $-- $ (31,611)
========= ======== ======= === =========
FOR THE YEAR ENDED JUNE 30, 1997:
Net income (loss)........................ $(205,039) $ 2,340 $19,322 $-- $(183,377)
Other comprehensive income
(loss) -- foreign currency
translation............................ -- -- -- -- --
--------- -------- ------- --- ---------
Comprehensive income (loss).............. $(205,039) $ 2,340 $19,322 $-- $(183,377)
========= ======== ======= === =========
</TABLE>
F-35
<PAGE> 175
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
($ IN THOUSANDS)
<S> <C> <C>
7.875% Senior Notes (see Note 2)............................ $150,000 $150,000
Discount on 7.875% Senior Notes............................. (73) (90)
8.5% Senior Notes (see Note 2).............................. 150,000 150,000
Discount on 8.5% Senior Notes............................... (715) (774)
9.125% Senior Notes (see Note 2)............................ 120,000 120,000
Discount on 9.125% Senior Notes............................. (52) (60)
9.625% Senior Notes (see Note 2)............................ 500,000 500,000
Note payable................................................ 2,200 --
Other collateralized........................................ 43,500 25,000
-------- --------
Total notes payable and long-term debt...................... 964,860 944,076
Less -- current maturities.................................. (763) (25,000)
-------- --------
Notes payable and long-term debt, net of current
maturities................................................ $964,097 $919,076
======== ========
</TABLE>
The aggregate scheduled maturities of notes payable and long-term debt for
the next five fiscal years ending December 31, 2004 and thereafter were as
follows as of December 31, 1999 (in thousands of dollars):
<TABLE>
<S> <C>
2000..................................................... $ 763
2001..................................................... 44,336
2002..................................................... 601
2003..................................................... --
2004..................................................... 149,927
After 2004............................................... 769,233
--------
$964,860
========
</TABLE>
4. CONTINGENCIES AND COMMITMENTS
Bayard Securities Litigation
A purported class action alleging violations of the Securities Act of 1933
and the Oklahoma Securities Act was first filed in February 1998 against
Chesapeake and others on behalf of investors who purchased common stock of
Bayard Drilling Technologies, Inc. ("Bayard") in, or traceable to, its initial
public offering in November 1997. Total proceeds of the offering were $254
million, of which Chesapeake received net proceeds of $90 million as a selling
shareholder. Plaintiffs allege that Chesapeake, a major customer of Bayard's
drilling services and the owner of 30.1% of Bayard's common stock outstanding
prior to the offering, was a controlling person of Bayard. Alleged defective
disclosures are claimed to have resulted in a decline in Bayard's share price
following the public offering. Plaintiffs seek a determination that the suit is
a proper class action and damages in an unspecified amount or rescission,
together with interest and costs of litigation, including attorneys' fees.
On August 24, 1999, the court dismissed plaintiffs' claims against
Chesapeake under Section 15 of the Securities Act of 1933 alleging that
Chesapeake was a "controlling person" of Bayard. Claims under Section 11 of the
Securities Act of 1933 and Section 408 of the Oklahoma Securities Act continue
to be asserted against Chesapeake. Chesapeake believes that it has meritorious
defenses to these claims and
F-36
<PAGE> 176
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
intends to defend this action vigorously. No estimate of loss or range of
estimate of loss, if any, can be made at this time. Bayard, which was acquired
by Nabors Industries, Inc. in April 1999, has been reimbursing Chesapeake for
its costs of defense as incurred.
Patent Litigation
On September 21, 1999, judgment was entered in favor of Chesapeake in a
patent infringement lawsuit tried to the U.S. District Court for the Northern
District of Texas, Fort Worth Division. Filed in October 1996, the lawsuit
asserted that Chesapeake had infringed a patent belonging to Union Pacific
Resources Company. The court declared the patent invalid, held that Chesapeake
could not have infringed the patent, dismissed all of UPRC's claims with
prejudice and assessed court costs against UPRC. Appeals of the judgment by both
Chesapeake and UPRC are pending in the Federal Circuit Court of Appeals.
Chesapeake has appealed the trial court's ruling denying Chesapeake's request
for attorneys' fees. Management is unable to predict the outcome of these
appeals but believes the invalidity of the patent will be upheld on appeal.
West Panhandle Field Cessation Cases
A subsidiary of Chesapeake, Chesapeake Panhandle Limited Partnership ("CP")
(f/k/a MC Panhandle, Inc.), and two subsidiaries of Kinder Morgan, Inc. are
defendants in 13 lawsuits filed between June 1997 and January 1999 by royalty
owners seeking the cancellation of oil and gas leases in the West Panhandle
Field in Texas. Chesapeake acquired MC Panhandle, Inc. on April 28, 1998. MC
Panhandle, Inc. has owned the leases since January 1, 1997, and the
co-defendants are prior lessees. Plaintiffs claim the leases terminated upon the
cessation of production for various periods primarily during the 1960s. In
addition, plaintiffs seek to recover conversion damages, exemplary damages,
attorneys' fees and interest. Defendants assert that any cessation of production
was excused and have pled affirmative defenses of limitations, waiver, temporary
estoppel, laches and title by adverse possession.
Of the ten cases filed in the District Court of Moore County, Texas, 69th
Judicial District, three have been tried to a jury. Judgment has been entered
against CP and its co-defendants in all three cases, although there was a jury
verdict in two of the cases in favor of defendants. Chesapeake's aggregate
liability for these judgments is $1.3 million of actual damages and $1.2 million
of exemplary damages and, jointly and severally with the other two defendants,
$1.5 million of actual damages and $337,000 of attorneys' fees in the event of
an appeal, sanctions, interest and court costs. The court also quieted title to
the leases in dispute in plaintiffs. CP and the other defendants have each
appealed the judgments and posted supersedeas bonds in two of these cases and
post-trial motions are pending in the other one. One of the other Moore County,
Texas cases has been set for trial in May 2000. There are three related cases
pending in other courts. One is set for trial in June 2000, and another, in the
U.S. District Court, Northern District of Texas, Amarillo Division, resulted in
a jury verdict for CP and its co-defendants. Judgment has not yet been entered
in this case.
Chesapeake has previously established an accrued liability that management
believes will be sufficient to cover the estimated costs of litigation for each
of these cases. Because of the inconsistent verdicts reached by the juries in
the four cases tried to date and because the amount of damages sought is not
specified in all of the other cases, the outcome of the remaining trials and the
amount of damages that might ultimately be awarded could differ from
management's estimates. Management believes, however, that the leases are valid,
there is no basis for exemplary damages and that any findings of fraud or bad
faith will be overturned on appeal. CP and the other defendants intend to
vigorously defend against the plaintiffs' claims.
Chesapeake is currently involved in various other routine disputes
incidental to its business operations. While it is not possible to determine the
ultimate disposition of these matters, management, after
F-37
<PAGE> 177
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
consultation with legal counsel, is of the opinion that the final resolution of
all such currently pending or threatened litigation is not likely to have a
material adverse effect on the consolidated financial position or results of
operations of Chesapeake.
Chesapeake has employment contracts with its two principal shareholders and
its chief financial officer and various other senior management personnel which
provide for annual base salaries, bonus compensation and various benefits. The
contracts provide for the continuation of salary and benefits for varying terms
in the event of termination of employment without cause. These agreements expire
at various times from June 30, 2000 through June 30, 2003.
Due to the nature of the oil and gas business, Chesapeake and its
subsidiaries are exposed to possible environmental risks. Chesapeake has
implemented various policies and procedures to avoid environmental contamination
and risks from environmental contamination. Chesapeake is not aware of any
potential material environmental issues or claims.
5. INCOME TAXES
The components of the income tax provision (benefit) for each of the
periods are as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, SIX MONTHS ENDED YEAR ENDED
-------------- DECEMBER 31, JUNE 30,
1999 1998 1997 1997
------ ----- ---------------- ----------
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
Current.................................. $ -- $ -- $ -- $ --
Deferred................................. 1,764 -- -- (3,573)
------ ----- -------- -------
Total.......................... $1,764 $ -- $ -- $(3,573)
====== ===== ======== =======
</TABLE>
The effective income tax expense (benefit) differed from the computed
"expected" federal income tax expense (benefit) on earnings before income taxes
for the following reasons:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, SIX MONTHS ENDED YEAR ENDED
-------------------- DECEMBER 31, JUNE 30,
1999 1998 1997 1997
-------- --------- ---------------- ----------
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
Computed "expected" income tax
provision (benefit)............... $ 12,720 $(322,182) $(11,051) $(63,116)
Tax percentage depletion............ (240) (430) (48) (294)
Change in valuation allowance....... (10,956) 380,969 13,818 64,116
State income taxes and other........ 240 (58,357) (2,719) (4,279)
-------- --------- -------- --------
$ 1,764 $ -- $ -- $ (3,573)
======== ========= ======== ========
</TABLE>
F-38
<PAGE> 178
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income taxes are provided to reflect temporary differences in the
basis of net assets for income tax and financial reporting purposes. The tax
effected temporary differences and tax loss carryforwards which comprise
deferred taxes are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1999 1998
----------- -----------
($ IN THOUSANDS)
<S> <C> <C>
Deferred tax liabilities:
Acquisition, exploration and development costs and related
depreciation, depletion and amortization.................. $ (13,251) $ --
--------- ---------
Deferred tax assets:
Acquisition, exploration and development costs and related
depreciation, depletion and amortization.................. 218,728 242,765
Net operating loss carryforwards............................ 228,279 214,602
Percentage depletion carryforward........................... 1,776 1,536
--------- ---------
448,783 458,903
--------- ---------
Net deferred tax asset (liability).......................... 435,532 458,903
Less: Valuation allowance................................... (442,016) (458,903)
--------- ---------
Total deferred tax asset (liability).............. $ (6,484) $ --
========= =========
</TABLE>
SFAS 109 requires that Chesapeake record a valuation allowance when it is
more likely than not that some portion or all of the deferred tax assets will
not be realized. In 1998, Chesapeake recorded an $826 million writedown related
to the impairment of oil and gas properties. The writedown and significant tax
net operating loss carryforwards (caused primarily by expensing intangible
drilling costs for tax purposes) resulted in a net deferred tax asset at
December 31, 1999 and 1998. Chesapeake expects to generate future U.S. tax net
operating losses for the foreseeable future. Management has determined that it
is more likely than not that the net U.S. deferred tax assets will not be
realized and has recorded a valuation allowance equal to the net U.S. deferred
tax asset.
At December 31, 1998, $5.7 million of the valuation allowance was related
to Chesapeake's Canadian deferred tax assets. During 1999, this valuation
allowance was eliminated as part of a purchase price reallocation related to a
1998 acquisition.
At December 31, 1999, Chesapeake had a U.S. regular tax net operating loss
carryforward of approximately $613 million and a U.S. alternative minimum tax
net operating loss carryforward of approximately $267 million. The U.S. loss
carryforward amounts will expire during the years 2007 through 2019. Chesapeake
also had a U.S. percentage depletion carryforward of approximately $5 million at
December 31, 1999, which is available to offset future U.S. federal income taxes
payable and has no expiration date.
In accordance with certain provisions of the Tax Reform Act of 1986, a
change of greater than 50% of the beneficial ownership of Chesapeake within a
three-year period (an "Ownership Change") would place an annual limitation on
Chesapeake's ability to utilize its existing tax carryforwards. Under
regulations issued by the Internal Revenue Service, Chesapeake has had two
Ownership Changes. However, these ownership changes have not resulted in a
significant limitation of the tax carryforwards.
6. RELATED PARTY TRANSACTIONS
Certain directors, shareholders and employees of Chesapeake have acquired
working interests in certain of Chesapeake's oil and gas properties. The owners
of such working interests are required to pay
F-39
<PAGE> 179
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
their proportionate share of all costs. As of December 31, 1999 and 1998,
Chesapeake had accounts receivable from related parties, primarily related to
such participation, of $4.6 million and $5.6 million, respectively.
As of December 31, 1998, the Chief Executive Officer and Chief Operating
Officer of Chesapeake had notes payable to CEMI in the principal amount of $9.9
million. In November 1999, the Chief Executive Officer and the Chief Operating
Officer tendered to CEMI 2,320,107 shares of Chesapeake common stock in full
satisfaction of the notes payable to CEMI with a combined outstanding balance of
$7.6 million. The common stock was valued at $3.29 per share, which was the
market value of the stock at the time of the transaction.
During 1999, 1998, the Transition Period and fiscal 1997, Chesapeake
incurred legal expenses of $398,000, $493,000, $388,000 and $207,000,
respectively, for legal services provided by a law firm of which a director is a
member.
7. EMPLOYEE BENEFIT PLANS
Chesapeake maintains the Chesapeake Energy Corporation Savings and
Incentive Stock Bonus Plan, a 401(k) profit sharing plan. Eligible employees may
make voluntary contributions to the plan which are matched by Chesapeake for up
to 10% of the employee's annual salary with Chesapeake's common stock purchased
in the open-market. The amount of employee contribution is limited as specified
in the plan. Chesapeake may, at its discretion, make additional contributions to
the plan. Chesapeake contributed $1,163,000, $1,359,000, $418,000 and $603,000
to the plan during 1999, 1998, the Transition Period and fiscal 1997,
respectively.
8. MAJOR CUSTOMERS AND SEGMENT INFORMATION
Sales to individual customers constituting 10% or more of total oil and gas
sales were as follows:
<TABLE>
<CAPTION>
PERCENT OF OIL
AMOUNT AND GAS SALES
---------------- -----------------
($ IN THOUSANDS)
<S> <C> <C>
YEAR ENDED DECEMBER 31,
1999 Aquila Southwest Pipeline Corporation............ $31,505 11%
1998 Koch Oil Company................................. $30,564 12%
Aquila Southwest Pipeline Corporation........... 28,946 11
SIX MONTHS ENDED DECEMBER 31,
1997 Aquila Southwest Pipeline Corporation............ $20,138 21%
Koch Oil Company................................ 18,594 19
GPM Gas Corporation............................. 12,610 13
FISCAL YEAR ENDED JUNE 30,
1997 Aquila Southwest Pipeline Corporation............ $53,885 28%
Koch Oil Company................................ 29,580 15
GPM Gas Corporation............................. 27,682 14
</TABLE>
Management believes that the loss of any of the above customers would not
have a material impact on Chesapeake's results of operations or its financial
position.
Chesapeake believes all of its material operations are part of the oil and
gas industry, and therefore reports as a single industry segment. Beginning in
1998, Chesapeake began foreign operations in Canada.
F-40
<PAGE> 180
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The geographic distribution of Chesapeake's revenue, operating income and
identifiable assets are summarized below ($ in thousands):
<TABLE>
<CAPTION>
UNITED
STATES CANADA CONSOLIDATED
--------- -------- ------------
<S> <C> <C> <C>
1999:
Revenue.......................................... $ 340,969 $ 13,977 $ 354,946
Operating income (loss).......................... 103,188 4,332 107,520
Identifiable assets.............................. 735,320 115,213 850,533
1998:
Revenue.......................................... $ 369,968 $ 7,978 $ 377,946
Operating income (loss).......................... (842,798) (13,399) (856,197)
Identifiable assets.............................. 724,713 87,902 812,615
</TABLE>
9. STOCKHOLDERS' EQUITY AND STOCK BASED COMPENSATION
In November 1999, the Chief Executive Officer and the Chief Operating
Officer of Chesapeake tendered to CEMI 2,320,107 shares of Chesapeake common
stock in full satisfaction of two notes payable to CEMI with a combined
outstanding balance of $7.6 million. See Note 6.
During 1998, Chesapeake's Board of Directors approved the expenditure of up
to $30 million to purchase outstanding Company common stock. As of August 25,
1998, Chesapeake had purchased approximately 8.5 million shares of common stock
for an aggregate amount of $30 million pursuant to such authorization.
On April 28, 1998, Chesapeake acquired by merger the Mid-Continent
operations of DLB Oil & Gas, Inc. ("DLB") for $17.5 million in cash, 5 million
shares of Chesapeake's common stock, and the assumption of $90 million in
outstanding debt and working capital obligations.
On April 22, 1998, Chesapeake issued $230 million (4.6 million shares) of
its 7% Cumulative Convertible Preferred Stock, $50 per share liquidation
preference, resulting in net proceeds to Chesapeake of $223 million.
On March 10, 1998, Chesapeake acquired Hugoton Energy Corporation
("Hugoton") pursuant to a merger by issuing approximately 25.8 million shares of
Chesapeake's common stock in exchange for 100% of Hugoton's common stock.
On December 16, 1997, Chesapeake acquired AnSon Production Corporation.
Consideration for this merger was approximately $43 million consisting of the
issuance of approximately 3.8 million shares of Company common stock and cash
consideration in accordance with the terms of the merger agreement.
On December 2, 1996, Chesapeake completed a public offering of
approximately 9.0 million shares of common stock at a price of $33.63 per share,
resulting in net proceeds to Chesapeake of approximately $288.1 million.
A 2-for-1 stock split of the common stock in December 1996 has been given
retroactive effect in these financial statements.
Stock Option Plans
Chesapeake's 1992 Incentive Stock Option Plan (the "ISO Plan") terminated
on December 16, 1994. Until then, Chesapeake granted incentive stock options to
purchase common stock under the ISO Plan to employees. Subject to any adjustment
as provided by the ISO Plan, the aggregate number of shares which may be issued
and sold may not exceed 3,762,000 shares. The maximum period for exercise of an
option
F-41
<PAGE> 181
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
may not be more than 10 years (or five years for an optionee who owns more than
10% of the common stock) from the date of grant, and the exercise price may not
be less than the fair market value of the shares underlying the options on the
date of grant (or 110% of such value for an optionee who owns more than 10% of
the common stock). Options granted become exercisable at dates determined by the
Stock Option Committee of the Board of Directors.
Under Chesapeake's 1992 Nonstatutory Stock Option Plan (the "NSO Plan"),
non-qualified options to purchase common stock may be granted only to directors
and consultants of Chesapeake. Subject to any adjustment as provided by the NSO
Plan, the aggregate number of shares which may be issued and sold may not exceed
3,132,000 shares. The maximum period for exercise of an option may not be more
than 10 years from the date of grant, and the exercise price may not be less
than the fair market value of the shares underlying the options on the date of
grant. Options granted become exercisable at dates determined by the Stock
Option Committee of the Board of Directors. The NSO Plan also contains a formula
award provision pursuant to which each director who is not an executive officer
receives every quarter a ten-year immediately exercisable option to purchase
6,250 shares of common stock at an option price equal to the fair market value
of the shares on the date of grant. The amount of the award was changed from
20,000 shares (post-split) to 15,000 shares per year in 1998 and to 25,000
shares per year in 1999. No options can be granted under the NSO Plan after
December 10, 2002.
Under Chesapeake's 1994 Stock Option Plan (the "1994 Plan"), and its 1996
Stock Option Plan (the "1996 Plan"), incentive and nonqualified stock options to
purchase Common Stock may be granted to employees and consultants of Chesapeake
and its subsidiaries. Subject to any adjustment as provided by the respective
plans, the aggregate number of shares which may be issued and sold may not
exceed 4,886,910 shares under the 1994 Plan and 6,000,000 shares under the 1996
Plan. The maximum period for exercise of an option may not be more than 10 years
from the date of grant and the exercise price of nonqualified stock options may
not be less than par value and, under the 1996 Plan, 85% of the fair market
value of the shares underlying the options on the date of grant. Options granted
become exercisable at dates determined by the Stock Option Committee of the
Board of Directors. No options can be granted under the 1994 Plan after October
17, 2004 or under the 1996 Plan after October 14, 2006.
Under Chesapeake's 1999 Stock Option Plan (the "1999 Plan"), nonqualified
stock options to purchase Common Stock may be granted to employees and
consultants of Chesapeake and its subsidiaries. Subject to any adjustment as
provided by the plan, the aggregate number of shares which may be issued and
sold may not exceed 3,000,000 shares. The maximum period for exercise of an
option may not be more than 10 years from the date of grant and the exercise
price may not be less than the fair market value of the shares underlying the
options on the date of grant; provided, however, nonqualified stock options not
exceeding 10% of the options issuable under the 1999 Plan may be granted at an
exercise price which is not less than 85% of the grant date fair market value.
Options granted become exercisable at dates determined by the Stock Option
Committee of the Board of Directors. No options can be granted under the 1999
Plan after March 4, 2009.
Chesapeake has elected to follow APB No. 25, Accounting for Stock Issued to
Employees and related interpretations in accounting for its employee stock
options. Under APB No. 25, compensation expense is recognized for the difference
between the option price and market value on the measurement date. No
compensation expense has been recognized because the exercise price of the stock
options granted under the plans equaled the market price of the underlying stock
on the date of grant.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123 and has been determined as if Chesapeake had accounted
for its employee stock options under the fair value method of the statement. The
fair value for these options was estimated at the date of grant using a Black-
Scholes option pricing model with the following weighted-average assumptions for
1999, 1998, the Transition Period and fiscal 1997, respectively: interest rates
(zero-coupon U.S. government issues with a
F-42
<PAGE> 182
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
remaining life equal to the expected term of the options) of 5.88%, 5.20%, 6.45%
and 6.74%; dividend yields of 0.0%, 0.0%, 0.9% and 0.9%; volatility factors of
the expected market price of Chesapeake's common stock of .82, .96, .67 and .60;
and weighted-average expected life of the options of five years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because Chesapeake's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
Chesapeake's pro forma information follows:
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS
DECEMBER 31, ENDED YEAR ENDED
------------------- DECEMBER 31, JUNE 30,
1999 1998 1997 1997
------- --------- ------------ ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Net Income (Loss)
As reported................................... $33,266 $(933,854) $(31,574) $(183,377)
Pro forma..................................... 24,802 (948,014) (35,084) (190,160)
Basic Earnings (Loss) per Share
As reported................................... $ 0.17 $ (9.97) $ (0.45) $ (2.79)
Pro forma..................................... 0.08 (10.12) (0.50) (2.89)
Diluted Earnings (Loss) per Share
As reported................................... $ 0.16 $ (9.97) $ (0.45) $ (2.79)
Pro forma..................................... 0.08 (10.12) (0.50) (2.89)
</TABLE>
For purposes of the pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period, which is four
years. Because Chesapeake's stock options vest over four years and additional
awards are typically made each year, the above pro forma disclosures are not
likely to be representative of the effects on pro forma net income for future
years. A summary of Chesapeake's stock option activity and related information
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS
---------------------------------------------------------- ENDED
1999 1998 DECEMBER 31, 1997
--------------------------- ---------------------------- ---------------------------
WEIGHTED-AVG WEIGHTED-AVG WEIGHTED-AVG
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
---------- -------------- ----------- -------------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding beginning of period..... 11,260,375 $1.86 8,330,381 $5.49 7,903,659 $ 7.09
Granted............................. 3,210,493 1.11 14,580,063 2.78 3,362,207 8.29
Exercised........................... (622,120) 0.99 (108,761) 1.35 (219,349) 3.13
Cancelled/forfeited................. (990,319) 1.87 (11,541,308) 5.64 (2,716,136) 13.87
---------- ----- ----------- ----- ---------- ------
Outstanding end of period........... 12,858,429 $1.76 11,260,375 $1.86 8,330,381 $ 5.49
---------- ----- ----------- ----- ---------- ------
Exercisable end of period........... 5,040,302 3,535,126 3,838,869
---------- ----------- ----------
Shares authorized for future
grants............................. 2,560,687 1,761,359 4,585,973
---------- ----------- ----------
Fair value of options granted during
the period......................... $0.77 $2.34 $ 4.98
----- ----- ------
<CAPTION>
YEAR ENDED JUNE 30,
1997
---------------------------
WEIGHTED-AVG
OPTIONS EXERCISE PRICE
---------- --------------
<S> <C> <C>
Outstanding beginning of period..... 7,602,884 $ 4.66
Granted............................. 3,564,884 19.35
Exercised........................... (1,197,998) 1.95
Cancelled/forfeited................. (2,066,111) 22.26
---------- ------
Outstanding end of period........... 7,903,659 $ 7.09
---------- ------
Exercisable end of period........... 3,323,824
----------
Shares authorized for future
grants............................. 5,212,056
----------
Fair value of options granted during
the period......................... $ 7.51
------
</TABLE>
F-43
<PAGE> 183
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------- ----------------------------
NUMBER WEIGHTED-AVG. NUMBER
RANGE OF OUTSTANDING REMAINING WEIGHTED-AVG. EXERCISABLE WEIGHTED-AVG.
EXERCISE PRICES @ 12/31/99 CONTRACTUAL LIFE EXERCISE PRICE @ 12/31/99 EXERCISE PRICE
--------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.08-$ 0.78 897,982 4.02 $ 0.62 897,982 $ 0.62
$ 0.94-$ 0.94 2,538,000 9.04 0.94 42,500 0.94
$ 1.00-$ 1.00 31,250 9.01 1.00 31,250 1.00
$ 1.13-$ 1.13 6,679,130 8.68 1.13 1,627,898 1.13
$ 1.33-$ 2.25 1,320,204 4.34 2.00 1,320,204 2.00
$ 2.38-$10.69 1,263,300 6.74 4.75 1,005,405 4.97
$14.25-$14.25 27,000 7.32 14.25 13,500 14.25
$17.67-$17.67 938 0.08 17.67 938 17.67
$25.88-$25.88 625 0.08 25.88 625 25.88
$30.63-$30.63 100,000 6.77 30.63 100,000 30.63
---------- ---- ------ --------- ------
$ 0.08-$30.63 12,858,429 7.77 $ 1.76 5,040,302 $ 2.66
========== =========
</TABLE>
The exercise of certain stock options results in state and federal income
tax benefits to Chesapeake related to the difference between the market price of
the common stock at the date of disposition and the option price. During fiscal
1997, $4,808,000 was recorded as an adjustment to additional paid-in capital and
deferred income taxes with respect to such tax benefits. During 1999, 1998 and
the Transition Period, Chesapeake did not recognize any such tax benefits.
10. FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
Chesapeake has only limited 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. Chesapeake's primary
objective is to hedge a portion of its exposure to price volatility from
producing crude oil and natural gas. These arrangements may expose Chesapeake to
credit risk from its counterparties and to basis risk. Chesapeake does not
expect that the counterparties will fail to meet their obligations given their
high credit ratings.
Hedging Activities
Periodically Chesapeake utilizes hedging strategies to hedge the price of a
portion of its future oil and gas production. These strategies include:
(i) swap arrangements that establish an index-related price above
which Chesapeake pays the counterparty and below which Chesapeake is paid
by the counterparty,
(ii) the purchase of index-related puts that provide for a "floor"
price below which the counterparty pays Chesapeake the amount by which the
price of the commodity is below the contracted floor,
(iii) the sale of index-related calls that provide for a "ceiling"
price above which Chesapeake pays the counterparty the amount by which the
price of the commodity is above the contracted ceiling, and
(iv) basis protection swaps, which are arrangements that guarantee the
price differential of oil or gas from a specified delivery point or points.
F-44
<PAGE> 184
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Results from commodity hedging transactions are reflected in oil and gas
sales to the extent related to Chesapeake's oil and gas production. Chesapeake
only enters into commodity hedging transactions related to Chesapeake's oil and
gas production volumes or CEMI's physical purchase or sale commitments. Gains or
losses on crude oil and natural gas hedging transactions are recognized as price
adjustments in the months of related production.
As of December 31, 1999, Chesapeake had the following open natural gas swap
arrangements designed to hedge a portion of Chesapeake's domestic gas production
for periods after December 1999:
<TABLE>
<CAPTION>
NYMEX -- INDEX
VOLUME STRIKE PRICE
MONTHS (MMBtu) (PER MMBtu)
------ ------- --------------
<S> <C> <C>
April 2000................................................. 600,000 $2.50
May 2000................................................... 620,000 2.50
June 2000.................................................. 600,000 2.50
July 2000.................................................. 620,000 2.50
August 2000................................................ 620,000 2.50
September 2000............................................. 600,000 2.50
October 2000............................................... 620,000 2.50
</TABLE>
If the swap arrangements listed above had been settled on December 31,
1999, Chesapeake would have incurred a gain of $0.5 million.
As of December 31, 1999, Chesapeake had no open oil swap arrangements.
Chesapeake has also closed transactions designed to hedge a portion of
Chesapeake's domestic oil and natural gas production. The net unrecognized
losses resulting from these transactions, $3.9 million as of December 31, 1999,
will be recognized as price adjustments in the months of related production.
These hedging gains and losses are set forth below ($ in thousands):
<TABLE>
<CAPTION>
HEDGING GAINS (LOSSES)
--------------------------
MONTH GAS OIL TOTAL
----- ------ ------- -------
<S> <C> <C> <C>
January 2000............................................. $ -- $ (995) $ (995)
February 2000............................................ -- (1,061) (1,061)
March 2000............................................... 689 (851) (162)
April 2000............................................... 71 (647) (576)
May 2000................................................. 73 (668) (595)
June 2000................................................ 71 (647) (576)
July 2000................................................ 73 (231) (158)
August 2000.............................................. 73 -- 73
September 2000........................................... 71 -- 71
October 2000............................................. 73 -- 73
------ ------- -------
$1,194 $(5,100) $(3,906)
====== ======= =======
</TABLE>
F-45
<PAGE> 185
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Subsequent to December 31, 1999, Chesapeake entered into the following
natural gas swap arrangements designed to hedge a portion of Chesapeake's
domestic gas production for periods after December 1999:
<TABLE>
<CAPTION>
NYMEX -- INDEX
VOLUME STRIKE PRICE
MONTHS (MMBtu) (PER MMBtu)
------ --------- --------------
<S> <C> <C>
April 2000................................................ 8,900,000 $2.593
May 2000.................................................. 3,410,000 2.737
June 2000................................................. 3,300,000 2.737
July 2000................................................. 3,410,000 2.741
August 2000............................................... 3,410,000 2.741
September 2000............................................ 2,100,000 2.696
October 2000.............................................. 2,170,000 2.696
</TABLE>
Subsequent to December 31, 1999, Chesapeake entered into the following
crude oil swap arrangements designed to hedge a portion of Chesapeake's domestic
crude oil production for periods after December 1999:
<TABLE>
<CAPTION>
MONTHLY NYMEX -- INDEX
VOLUME STRIKE PRICE
MONTHS (Bbls) (PER Bbl)
------ ------- --------------
<S> <C> <C>
March 2000................................................. 183,000 $27.512
April 2000................................................. 89,000 27.251
</TABLE>
In addition to commodity hedging transactions related to Chesapeake's oil
and gas production, CEMI periodically enters into various hedging transactions
designed to hedge against physical purchase and sale commitments made by CEMI.
Gains or losses on these transactions are recorded as adjustments to oil and gas
marketing sales in the consolidated statements of operations and are not
considered by management to be material.
Interest Rate Risk
Chesapeake also utilizes hedging strategies to manage fixed-interest rate
exposure. Through the use of a swap arrangement, Chesapeake believes it can
benefit from stable or falling interest rates and reduce its current interest
expense. During 1999, Chesapeake's interest rate swap resulted in a $2.0 million
reduction of interest expense. The terms of the swap agreement are as follows:
<TABLE>
<CAPTION>
MONTHS NOTIONAL AMOUNT FIXED RATE FLOATING RATE
------ --------------- ---------- -------------
<S> <C> <C> <C>
May 1998 -- April 2001 $230,000,000 7% Average of three-month Swiss
Franc LIBOR, Deutsche Mark
and Australian Dollar plus
300 basis points
May 2001 -- April 2008 $230,000,000 7% U.S. three-month LIBOR plus
300 basis points
</TABLE>
If the floating rate is less than the fixed rate, the counterparty will pay
Chesapeake accordingly. If the floating rate exceeds the fixed rate, Chesapeake
will pay the counterparty. The interest rate swap agreement contains a
"knock-out provision" whereby the agreement will terminate on or after May 1,
2001 if the average closing price for the previous twenty business days for the
shares of Chesapeake's common stock is greater than or equal to $7.50 per share.
The agreement also provides for a maximum floating rate of 8.5% from May 2001
through April 2008.
F-46
<PAGE> 186
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
If the interest rate swap agreement had been settled on December 31, 1999,
Chesapeake would have been required to pay the counterparty approximately $16.7
million. However, because of the knock-out provision discussed above and the
volatility of interest rates, Chesapeake does not believe that this worst-case
scenario is a fair measure of the market value of the swap agreement and,
therefore, would not pay this amount to cancel the transaction. Results from
interest rate hedging transactions are reflected as adjustments to interest
expense in the corresponding months covered by the swap agreement.
The table below presents principal cash flows and related weighted average
interest rates by expected maturity dates. The fair value of the long-term debt
has been estimated based on quoted market prices.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
YEARS OF MATURITY
------------------------------------------------------------------
FAIR
2000 2001 2002 2003 2004 THEREAFTER TOTAL VALUE
---- ----- ---- ---- ------ ---------- ------ ------
($ IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LIABILITIES:
Long-term debt, including current portion --
fixed rate.................................... $0.8 $ 0.8 $0.6 $ -- $150.0 $770.0 $922.2 $838.7
Average interest rate......................... 9.1% 9.1% 9.1% -- 7.9% 9.3% 9.1% --
Long-term debt -- variable rate................. $ -- $43.5 $ -- $ -- $ -- $ -- $ 43.5 $ 43.5
Average interest rate......................... -- 9.75% -- -- -- -- 9.75% --
</TABLE>
Concentration of Credit Risk
Other financial instruments which potentially subject Chesapeake to
concentrations of credit risk consist principally of cash, short-term
investments in debt instruments and trade receivables. Chesapeake's accounts
receivable are primarily from purchasers of oil and natural gas products and
exploration and production companies which own interests in properties operated
by Chesapeake. The industry concentration has the potential to impact
Chesapeake'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. Chesapeake generally requires letters of credit for
receivables from customers which are judged to have sub-standard credit, unless
the credit risk can otherwise be mitigated. The cash and cash equivalents are
deposited with major banks or institutions with high credit ratings.
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
Chesapeake using available market information and valuation methodologies.
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. Chesapeake estimates the fair value of its long-term (including
current maturities), fixed-rate debt using primarily quoted market prices.
Chesapeake's carrying amount for such debt at December 31, 1999 and 1998 was
$921.4 million and $919.1 million, respectively, compared to approximate fair
values of $838.7 million and $654.7 million, respectively. The carrying value of
other long-term debt approximates its fair value as interest rates are primarily
variable, based on prevailing market rates. Chesapeake estimates the fair value
of its convertible preferred stock, which was issued in April 1998, using quoted
market prices. Chesapeake's carrying amount for such preferred stock at December
31, 1999 and 1998 was $229.8 million and $230.0 million, compared to an
approximate fair value of $119.0 million and $48.9 million, respectively.
F-47
<PAGE> 187
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. DISCLOSURES ABOUT OIL AND GAS PRODUCING ACTIVITIES
Net Capitalized Costs
Evaluated and unevaluated capitalized costs related to Chesapeake's oil and
gas producing activities are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 U.S. CANADA COMBINED
----------------- ----------- -------- -----------
($ IN THOUSANDS)
<S> <C> <C> <C>
Oil and gas properties:
Proved........................................ $ 2,193,492 $121,856 $ 2,315,348
Unproved...................................... 36,225 3,783 40,008
----------- -------- -----------
Total................................. 2,229,717 125,639 2,355,356
Less accumulated depreciation, depletion and
amortization.................................. (1,645,185) (25,357) (1,670,542)
----------- -------- -----------
Net capitalized costs........................... $ 584,532 $100,282 $ 684,814
=========== ======== ===========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998 U.S. CANADA COMBINED
----------------- ----------- -------- -----------
($ IN THOUSANDS)
<S> <C> <C> <C>
Oil and gas properties:
Proved........................................ $ 2,060,076 $ 82,867 $ 2,142,943
Unproved...................................... 44,780 7,907 52,687
----------- -------- -----------
Total................................. 2,104,856 90,774 2,195,630
Less accumulated depreciation, depletion and
amortization.................................. (1,556,284) (17,998) (1,574,282)
----------- -------- -----------
Net capitalized costs........................... $ 548,572 $ 72,776 $ 621,348
=========== ======== ===========
</TABLE>
Unproved properties not subject to amortization at December 31, 1999 and
1998 consisted mainly of lease acquisition costs. Chesapeake capitalized
approximately $3.5 million, $6.5 million, $5.1 million and $12.9 million of
interest during 1999, 1998, the Transition Period and fiscal 1997, respectively,
on significant investments in unproved properties that were not yet included in
the amortization base of the full-cost pool. Chesapeake will continue to
evaluate its unevaluated properties; however, the timing of the ultimate
evaluation and disposition of the properties has not been determined.
Costs Incurred in Oil and Gas Acquisition, Exploration and Development
Costs incurred in oil and gas property acquisition, exploration and
development activities which have been capitalized are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999 U.S. CANADA COMBINED
---------------------------- -------- ------- --------
($ IN THOUSANDS)
<S> <C> <C> <C>
Development and leasehold costs....................... $ 95,329 $31,536 $126,865
Exploration costs..................................... 23,651 42 23,693
Acquisition costs..................................... 47,993 4,100 52,093
Sales of oil and gas properties....................... (44,822) (813) (45,635)
Capitalized internal costs............................ 2,710 -- 2,710
-------- ------- --------
Total....................................... $124,861 $34,865 $159,726
======== ======= ========
</TABLE>
F-48
<PAGE> 188
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998 U.S. CANADA COMBINED
---------------------------- -------- ------- --------
($ IN THOUSANDS)
<S> <C> <C> <C>
Development and leasehold costs....................... $169,491 $ 7,119 $176,610
Exploration costs..................................... 63,245 5,427 68,672
Acquisition costs..................................... 662,104 78,176 740,280
Sales of oil and gas properties....................... (15,712) -- (15,712)
Capitalized internal costs............................ 5,262 -- 5,262
-------- ------- --------
Total....................................... $884,390 $90,722 $975,112
======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED DECEMBER 31, 1997 U.S. CANADA COMBINED
---------------------------------- -------- ------- --------
($ IN THOUSANDS)
<S> <C> <C> <C>
Development and leasehold costs....................... $144,283 $ -- $144,283
Exploration costs..................................... 40,534 -- 40,534
Acquisition costs..................................... 39,245 -- 39,245
Capitalized internal costs............................ 2,435 -- 2,435
-------- ------- --------
Total....................................... $226,497 $ -- $226,497
======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1997 U.S. CANADA COMBINED
------------------------ -------- ------- --------
($ IN THOUSANDS)
<S> <C> <C> <C>
Development and leasehold costs....................... $324,989 $ -- $324,989
Exploration costs..................................... 136,473 -- 136,473
Capitalized internal costs............................ 3,905 -- 3,905
-------- ------- --------
Total....................................... $465,367 $ -- $465,367
======== ======= ========
</TABLE>
Results of Operations from Oil and Gas Producing Activities (unaudited)
Chesapeake's results of operations from oil and gas producing activities
are presented below for 1999, 1998, the Transition Period and fiscal 1997. The
following table includes revenues and expenses associated directly with
Chesapeake's oil and gas producing activities. It does not include any
allocation of Chesapeake's interest costs and, therefore, is not necessarily
indicative of the contribution to consolidated net operating results of
Chesapeake's oil and gas operations.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999 U.S. CANADA COMBINED
---------------------------- --------- -------- ---------
($ IN THOUSANDS)
<S> <C> <C> <C>
Oil and gas sales................................... $ 266,468 $ 13,977 $ 280,445
Production expenses................................. (44,165) (2,133) (46,298)
Production taxes.................................... (13,264) -- (13,264)
Depletion and depreciation.......................... (88,901) (6,143) (95,044)
Imputed income tax (provision) benefit(a)........... (45,052) (2,565) (47,617)
--------- -------- ---------
Results of operations from oil and gas producing
activities........................................ $ 75,086 $ 3,136 $ 78,222
========= ======== =========
</TABLE>
F-49
<PAGE> 189
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998 U.S. CANADA COMBINED
---------------------------- --------- -------- ---------
($ IN THOUSANDS)
<S> <C> <C> <C>
Oil and gas sales................................... $ 248,909 $ 7,978 $ 256,887
Production expenses................................. (49,368) (1,834) (51,202)
Production taxes.................................... (8,295) -- (8,295)
Impairment of oil and gas properties................ (810,610) (15,390) (826,000)
Depletion and depreciation.......................... (143,283) (3,361) (146,644)
Imputed income tax (provision) benefit(a)........... 285,981 5,673 291,654
--------- -------- ---------
Results of operations from oil and gas producing
activities........................................ $(476,666) $ (6,934) $(483,600)
========= ======== =========
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED DECEMBER 31, 1997 U.S. CANADA COMBINED
---------------------------------- --------- -------- ---------
($ IN THOUSANDS)
<S> <C> <C> <C>
Oil and gas sales................................... $ 95,657 $ -- $ 95,657
Production expenses................................. (7,560) -- (7,560)
Production taxes.................................... (2,534) -- (2,534)
Impairment of oil and gas properties................ (110,000) -- (110,000)
Depletion and depreciation.......................... (60,408) -- (60,408)
Imputed income tax (provision) benefit(a)........... 31,817 -- 31,817
--------- -------- ---------
Results of operations from oil and gas producing
activities........................................ $ (53,028) $ -- $ (53,028)
========= ======== =========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1997 U.S. CANADA COMBINED
------------------------ --------- -------- ---------
($ IN THOUSANDS)
<S> <C> <C> <C>
Oil and gas sales................................... $ 192,920 $ -- $ 192,920
Production expenses................................. (11,445) -- (11,445)
Production taxes.................................... (3,662) -- (3,662)
Impairment of oil and gas properties................ (236,000) -- (236,000)
Depletion and depreciation.......................... (103,264) -- (103,264)
Imputed income tax (provision) benefit(a)........... 60,544 -- 60,544
--------- -------- ---------
Results of operations from oil and gas producing
activities........................................ $(100,907) $ -- $(100,907)
========= ======== =========
</TABLE>
---------------
(a) The imputed income tax provision is hypothetical (at the statutory rate)
and determined without regard to Chesapeake's deduction for general and
administrative expenses, interest costs and other income tax credits and
deductions, nor whether the hypothetical tax benefits will be realized.
Capitalized costs, less accumulated amortization and related deferred
income taxes, cannot exceed an amount equal to the sum of the present value
(discounted at 10%) of estimated future net revenues less estimated future
expenditures to be incurred in developing and producing the proved reserves,
less any related income tax effects. At December 31, 1998 and 1997 and June 30,
1997, capitalized costs of oil and gas properties exceeded the estimated present
value of future net revenues for Chesapeake's proved reserves, net of related
income tax considerations, resulting in writedowns in the carrying value of oil
and gas properties of $826 million, $110 million and $236 million, respectively.
Oil and Gas Reserve Quantities (unaudited)
The reserve information presented below is based upon reports prepared by
independent petroleum engineers and Chesapeake's petroleum engineers.
- As of December 31, 1999, Williamson Petroleum Consultants, Inc.
("Williamson"), Ryder Scott Company L.P. ("Ryder Scott"), and
Chesapeake's internal reservoir engineers evaluated 50%, 16%,
F-50
<PAGE> 190
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and 34% of Chesapeake's combined discounted future net revenues from
Chesapeake's estimated proved reserves, respectively.
- As of December 31, 1998, Williamson, Ryder Scott, H.J. Gruy and
Associates, Inc. and Chesapeake's internal reservoir engineers evaluated
63%, 12%, 1% and 24% of Chesapeake's combined discounted future net
revenues from Chesapeake's estimated proved reserves, respectively.
- As of December 31, 1997, Williamson, Porter Engineering Associates,
Netherland, Sewell & Associates, Inc. and internal reservoir engineers
evaluated approximately 53%, 42%, 3% and 2% of Chesapeake's combined
discounted future net revenues from Chesapeake's estimated proved
reserves, respectively.
- As of June 30, 1997, the reserves evaluated by Williamson constituted
approximately 41% of Chesapeake's combined discounted future net revenues
from Chesapeake's estimated proved reserves, with the remaining reserves
being evaluated internally. The reserves evaluated internally in fiscal
1997 were subsequently evaluated by Williamson with a variance of
approximately 4% of total proved reserves.
The information is presented in accordance with regulations prescribed by
the Securities and Exchange Commission. Chesapeake emphasizes that reserve
estimates are inherently imprecise. Chesapeake's reserve estimates were
generally based upon extrapolation of historical production trends, analogy to
similar properties and volumetric calculations. Accordingly, these estimates are
expected to change, and such changes could be material and occur in the near
term as future information becomes available.
Proved oil and gas reserves represent the estimated quantities of crude
oil, natural gas, and natural gas liquids which geological and engineering data
demonstrate with reasonable certainty to be recoverable in future years from
known reservoirs under existing economic and operating conditions. Proved
developed oil and gas reserves are those expected to be recovered through
existing wells with existing equipment and operating methods. As of December 31,
1997 and June 30, 1997, all of Chesapeake's oil and gas reserves were located in
the United States.
Presented below is a summary of changes in estimated reserves of Chesapeake
for 1999, 1998, the Transition Period and fiscal 1997:
<TABLE>
<CAPTION>
U.S. CANADA COMBINED
---------------- ---------------- ------------------
OIL GAS OIL GAS OIL GAS
DECEMBER 31, 1999 (MBbl) (MMcf) (MBbl) (MMcf) (MBbl) (MMcf)
----------------- ------ ------- ------ ------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Proved reserves, beginning of
period....................... 22,560 724,018 33 231,773 22,593 955,791
Extensions, discoveries and
other additions.............. 4,593 158,801 -- 37,835 4,593 196,636
Revisions of previous
estimates.................... 3,404 59,904 -- (98,571) 3,404 (38,667)
Production..................... (4,147) (96,873) -- (11,737) (4,147) (108,610)
Sale of reserves-in-place...... (4,371) (31,616) (33) (796) (4,404) (32,412)
Purchase of
reserves-in-place............ 2,756 64,350 -- 19,738 2,756 84,088
------ ------- ----- ------- ------ ---------
Proved reserves, end of
period....................... 24,795 878,584 -- 178,242 24,795 1,056,826
====== ======= ===== ======= ====== =========
Proved developed reserves:
Beginning of period.......... 18,003 552,953 33 105,990 18,036 658,943
====== ======= ===== ======= ====== =========
End of period................ 17,750 627,120 -- 136,203 17,750 763,323
====== ======= ===== ======= ====== =========
</TABLE>
F-51
<PAGE> 191
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
U.S. CANADA COMBINED
---------------- ---------------- ----------------
OIL GAS OIL GAS OIL GAS
DECEMBER 31, 1998 (MBbl) (MMcf) (MBbl) (MMcf) (MBbl) (MMcf)
----------------- ------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Proved reserves, beginning of
period...................... 18,226 339,118 -- -- 18,226 339,118
Extensions, discoveries and
other additions............. 3,448 90,879 -- -- 3,448 90,879
Revisions of previous
estimates................... (4,082) (60,477) -- -- (4,082) (60,477)
Production.................... (5,975) (86,681) (1) (7,740) (5,976) (94,421)
Sale of reserves-in-place..... (30) (3,515) -- -- (30) (3,515)
Purchase of
reserves-in-place........... 10,973 444,694 34 239,513 11,007 684,207
------ ------- ----- ------- ------ -------
Proved reserves, end of
period...................... 22,560 724,018 33 231,773 22,593 955,791
====== ======= ===== ======= ====== =======
Proved developed reserves:
Beginning of period......... 10,087 178,082 -- -- 10,087 178,082
====== ======= ===== ======= ====== =======
End of period............... 18,003 552,953 33 105,990 18,036 658,943
====== ======= ===== ======= ====== =======
</TABLE>
<TABLE>
<CAPTION>
U.S. CANADA COMBINED
---------------- ---------------- ----------------
OIL GAS OIL GAS OIL GAS
DECEMBER 31, 1997 (MBbl) (MMcf) (MBbl) (MMcf) (MBbl) (MMcf)
----------------- ------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Proved reserves, beginning of
period...................... 17,373 298,766 -- -- 17,373 298,766
Extensions, discoveries and
other additions............. 5,573 68,813 -- -- 5,573 68,813
Revisions of previous
estimates................... (3,428) (24,189) -- -- (3,428) (24,189)
Production.................... (1,857) (27,327) -- -- (1,857) (27,327)
Sale of reserves-in-place..... -- -- -- -- -- --
Purchase of
reserves-in-place........... 565 23,055 -- -- 565 23,055
------ ------- ----- ------- ------ -------
Proved reserves, end of
period...................... 18,226 339,118 -- -- 18,226 339,118
====== ======= ===== ======= ====== =======
Proved developed reserves:
Beginning of period......... 7,324 151,879 -- -- 7,324 151,879
====== ======= ===== ======= ====== =======
End of period............... 10,087 178,082 -- -- 10,087 178,082
====== ======= ===== ======= ====== =======
</TABLE>
<TABLE>
<CAPTION>
U.S. CANADA COMBINED
----------------- ---------------- -----------------
OIL GAS OIL GAS OIL GAS
JUNE 30, 1997 (MBbl) (MMcf) (MBbl) (MMcf) (MBbl) (MMcf)
------------- ------ -------- ------ ------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Proved reserves, beginning of
period...................... 12,258 351,224 -- -- 12,258 351,224
Extensions, discoveries and
other additions............. 13,874 147,485 -- -- 13,874 147,485
Revisions of previous
estimates................... (5,989) (137,938) -- -- (5,989) (137,938)
Production.................... (2,770) (62,005) -- -- (2,770) (62,005)
Sale of reserves-in-place..... -- -- -- -- -- --
Purchase of
reserves-in-place........... -- -- -- -- -- --
------ -------- ----- ------- ------ --------
Proved reserves, end of
period...................... 17,373 298,766 -- -- 17,373 298,766
====== ======== ===== ======= ====== ========
Proved developed reserves:
Beginning of period......... 3,648 144,721 -- -- 3,648 144,721
====== ======== ===== ======= ====== ========
End of period............... 7,324 151,879 -- -- 7,324 151,879
====== ======== ===== ======= ====== ========
</TABLE>
F-52
<PAGE> 192
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 1999, Chesapeake acquired approximately 101 Bcfe of proved reserves
through purchases of oil and gas properties for consideration of $52 million.
Chesapeake also sold 59 Bcfe of proved reserves for consideration of
approximately $46 million. During 1999, Chesapeake recorded upward revisions of
80 Bcfe to the December 31, 1998 estimates of its U.S. reserves, and downward
revisions of 99 Bcfe to the December 31, 1998 estimates of its Canadian
reserves, for a net Company wide revision of 19 Bcfe, or approximately 1.7%. The
upward revisions to its U.S. reserves were caused by higher oil and gas prices
at December 31, 1999, and actual performance in excess of predicted performance.
Higher prices extend the economic lives of the underlying oil and gas properties
and thereby increase the estimated future reserves. The downward revisions to
its Canadian reserves were caused by a reduction of Chesapeake's proved
undeveloped locations and an increase in projected transportation and operating
costs in Canada, which decreased the economic lives of the underlying
properties.
During 1998, Chesapeake acquired approximately 750 Bcfe of proved reserves
through mergers or through purchases of oil and gas properties. The total
consideration given for the acquisitions was 30.8 million shares of Company
common stock, $280 million of cash, the assumption of $205 million of debt, and
the incurrence of approximately $20 million of other acquisition related costs.
Also during 1998, Chesapeake recorded downward revisions to the December 31,
1997 estimates of approximately 4,082 MBbl and 60,477 MMcf, or approximately 85
Bcfe. These reserve revisions were primarily attributable to lower oil and gas
prices at December 31, 1998. The weighted average prices used to value
Chesapeake's reserves at December 31, 1998 were $10.48 per barrel of oil and
$1.68 per Mcf of gas, as compared to the prices used at December 31, 1997 of
$17.62 per barrel of oil and $2.29 per Mcf of gas.
For the six months ended December 31, 1997, Chesapeake recorded downward
revisions to the June 30, 1997 reserve estimates of approximately 3,428 MBbl and
24,189 MMcf, or approximately 45 Bcfe. The reserve revisions were primarily
attributable to lower than expected results from development drilling and
production which eliminated certain previously established proved reserves.
On December 16, 1997, Chesapeake acquired AnSon Production Corporation, a
privately owned oil and gas producer based in Oklahoma City. Consideration for
this acquisition was approximately $43 million. Chesapeake estimates that it
acquired approximately 26.4 Bcfe in connection with this acquisition.
For the fiscal year ended June 30, 1997, Chesapeake recorded downward
revisions to the previous year's reserve estimates of approximately 5,989 MBbl
and 137,938 MMcf, or approximately 174 Bcfe. The reserve revisions were
primarily attributable to the decrease in oil and gas prices between periods,
higher drilling and completion costs, and unfavorable developmental drilling and
production results during fiscal 1997. Specifically, Chesapeake recorded
aggregate downward adjustments to proved reserves of 159 Bcfe for the Knox,
Giddings and Louisiana Trend areas.
Standardized Measure of Discounted Future Net Cash Flows (unaudited)
Statement of Financial Accounting Standards No. 69 ("SFAS 69") prescribes
guidelines for computing a standardized measure of future net cash flows and
changes therein relating to estimated proved reserves. Chesapeake has followed
these guidelines which are briefly discussed below.
Future cash inflows and future production and development costs are
determined by applying year-end prices and costs to the estimated quantities of
oil and gas to be produced. Estimates are made of quantities of proved reserves
and the future periods during which they are expected to be produced based on
year-end economic conditions. Estimated future income taxes are computed using
current statutory income tax rates including consideration for the current tax
basis of the properties and related carryforwards, giving effect to permanent
differences and tax credits. The resulting future net cash flows are reduced to
present value amounts by applying a 10% annual discount factor.
F-53
<PAGE> 193
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The assumptions used to compute the standardized measure are those
prescribed by the Financial Accounting Standards Board and, as such, do not
necessarily reflect Chesapeake's expectations of actual revenue to be derived
from those reserves nor their present worth. The limitations inherent in the
reserve quantity estimation process, as discussed previously, are equally
applicable to the standardized measure computations since these estimates are
the basis for the valuation process.
The following summary sets forth Chesapeake's future net cash flows
relating to proved oil and gas reserves based on the standardized measure
prescribed in SFAS 69:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 U.S. CANADA COMBINED
----------------- ---------- --------- ----------
($ IN THOUSANDS)
<S> <C> <C> <C>
Future cash inflows(a)........................... $2,555,241 $ 437,928 $2,993,169
Future production costs.......................... (671,431) (195,464) (866,895)
Future development costs......................... (209,921) (20,950) (230,871)
Future income tax provision...................... (219,866) (29,410) (249,276)
---------- --------- ----------
Net future cash flows............................ 1,454,023 192,104 1,646,127
Less effect of a 10% discount factor............. (545,125) (94,390) (639,515)
---------- --------- ----------
Standardized measure of discounted future net
cash flows..................................... $ 908,898 $ 97,714 $1,006,612
========== ========= ==========
Discounted (at 10%) future net cash flows before
income taxes................................... $ 991,748 $ 97,748 $1,089,496
========== ========= ==========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998 U.S. CANADA COMBINED
----------------- ---------- --------- ----------
($ IN THOUSANDS)
<S> <C> <C> <C>
Future cash inflows (b)............................ $1,374,280 $ 474,143 $1,848,423
Future production costs............................ (432,876) (52,493) (485,369)
Future development costs........................... (124,717) (29,634) (154,351)
Future income tax provision........................ (6,464) (143,747) (150,211)
---------- --------- ----------
Net future cash flows.............................. 810,223 248,269 1,058,492
Less effect of a 10% discount factor............... (303,096) (132,281) (435,377)
---------- --------- ----------
Standardized measure of discounted future net cash
flows............................................ $ 507,127 $ 115,988 $ 623,115
========== ========= ==========
Discounted (at 10%) future net cash flows before
income taxes..................................... $ 504,148 $ 156,843 $ 660,991
========== ========= ==========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997 U.S. CANADA COMBINED
----------------- ---------- --------- ----------
($ IN THOUSANDS)
<S> <C> <C> <C>
Future cash inflows(c)............................. $1,100,807 $ -- $1,100,807
Future production costs............................ (223,030) -- (223,030)
Future development costs........................... (158,387) -- (158,387)
Future income tax provision........................ (108,027) -- (108,027)
---------- --------- ----------
Net future cash flows.............................. 611,363 -- 611,363
Less effect of a 10% discount factor............... (181,253) -- (181,253)
---------- --------- ----------
Standardized measure of discounted future net cash
flows............................................ $ 430,110 $ -- $ 430,110
========== ========= ==========
Discounted (at 10%) future net cash flows before
income taxes..................................... $ 466,509 $ -- $ 466,509
========== ========= ==========
</TABLE>
F-54
<PAGE> 194
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
JUNE 30, 1997 U.S. CANADA COMBINED
------------- ---------- --------- ----------
($ IN THOUSANDS)
<S> <C> <C> <C>
Future cash inflows(d)............................. $ 954,839 $ -- $ 954,839
Future production costs............................ (190,604) -- (190,604)
Future development costs........................... (152,281) -- (152,281)
Future income tax provision........................ (104,183) -- (104,183)
---------- --------- ----------
Net future cash flows.............................. 507,771 -- 507,771
Less effect of a 10% discount factor............... (92,273) -- (92,273)
---------- --------- ----------
Standardized measure of discounted future net cash
flows............................................ $ 415,498 $ -- $ 415,498
========== ========= ==========
Discounted (at 10%) future net cash flows before
income taxes..................................... $ 437,386 $ -- $ 437,386
========== ========= ==========
</TABLE>
---------------
(a) Calculated using weighted average prices of $24.72 per barrel of oil and
$2.25 per Mcf of gas.
(b) Calculated using weighted average prices of $10.48 per barrel of oil and
$1.68 per Mcf of gas.
(c) Calculated using weighted average prices of $17.62 per barrel of oil and
$2.29 per Mcf of gas.
(d) Calculated using weighted average prices of $18.38 per barrel of oil and
$2.12 per Mcf of gas.
The principal sources of change in the standardized measure of discounted
future net cash flows are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 U.S. CANADA COMBINED
----------------- --------- -------- ----------
($ IN THOUSANDS)
<S> <C> <C> <C>
Standardized measure, beginning of period.......... $ 507,127 $115,988 $ 623,115
Sales of oil and gas produced, net of production
costs............................................ (209,039) (11,844) (220,883)
Net changes in prices and production costs......... 320,123 (55,156) 264,967
Extensions and discoveries, net of production and
development costs................................ 200,787 14,333 215,120
Changes in future development costs................ (15,011) 20,679 5,668
Development costs incurred during the period that
reduced future development costs................. 14,114 1,985 16,099
Revisions of previous quantity estimates........... 88,250 (49,034) 39,216
Purchase of reserves-in-place...................... 66,895 18,476 85,371
Sales of reserves-in-place......................... (25,838) (920) (26,758)
Accretion of discount.............................. 50,415 15,684 66,099
Net change in income taxes......................... (85,828) 40,821 (45,007)
Changes in production rates and other.............. (3,097) (13,298) (16,395)
--------- -------- ----------
Standardized measure, end of period................ $ 908,898 $ 97,714 $1,006,612
========= ======== ==========
</TABLE>
F-55
<PAGE> 195
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1998 U.S. CANADA COMBINED
----------------- --------- -------- ----------
($ IN THOUSANDS)
<S> <C> <C> <C>
Standardized measure, beginning of period.......... $ 430,110 $ -- $ 430,110
Sales of oil and gas produced, net of production
costs............................................ (191,246) (6,144) (197,390)
Net changes in prices and production costs......... (189,817) -- (189,817)
Extensions and discoveries, net of production and
development costs................................ 85,464 -- 85,464
Changes in future development costs................ 72,279 -- 72,279
Development costs incurred during the period that
reduced future development costs................. 28,191 -- 28,191
Revisions of previous quantity estimates........... (64,770) -- (64,770)
Purchase of reserves-in-place...................... 288,694 164,821 453,515
Sales of reserves-in-place......................... (3,079) -- (3,079)
Accretion of discount.............................. 46,651 -- 46,651
Net change in income taxes......................... 39,377 (40,855) (1,478)
Changes in production rates and other.............. (34,727) (1,834) (36,561)
--------- -------- ----------
Standardized measure, end of period................ $ 507,127 $115,988 $ 623,115
========= ======== ==========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997 U.S. CANADA COMBINED
----------------- -------- ------ --------
($ IN THOUSANDS)
<S> <C> <C> <C>
Standardized measure, beginning of period............... $415,498 $-- $415,498
Sales of oil and gas produced, net of production
costs................................................. (85,563) -- (85,563)
Net changes in prices and production costs.............. 26,106 -- 26,106
Extensions and discoveries, net of production and
development costs..................................... 92,597 -- 92,597
Changes in future development costs..................... (7,422) -- (7,422)
Development costs incurred during the period that
reduced future development costs...................... 47,703 -- 47,703
Revisions of previous quantity estimates................ (62,655) -- (62,655)
Purchase of reserves-in-place........................... 25,236 -- 25,236
Sales of reserves-in-place.............................. -- -- --
Accretion of discount................................... 43,739 -- 43,739
Net change in income taxes.............................. (14,510) -- (14,510)
Changes in production rates and other................... (50,619) -- (50,619)
-------- --- --------
Standardized measure, end of period..................... $430,110 $-- $430,110
======== === ========
</TABLE>
F-56
<PAGE> 196
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
JUNE 30, 1997 U.S. CANADA COMBINED
------------- --------- ------ ---------
($ IN THOUSANDS)
<S> <C> <C> <C>
Standardized measure, beginning of period............. $ 461,411 $-- $ 461,411
Sales of oil and gas produced, net of production
costs............................................... (177,813) -- (177,813)
Net changes in prices and production costs............ (99,234) -- (99,234)
Extensions and discoveries, net of production and
development costs................................... 287,068 -- 287,068
Changes in future development costs................... (12,831) -- (12,831)
Development costs incurred during the period that
reduced future development costs.................... 46,888 -- 46,888
Revisions of previous quantity estimates.............. (199,738) -- (199,738)
Purchase of reserves-in-place......................... -- -- --
Sales of reserves-in-place............................ -- -- --
Accretion of discount................................. 54,702 -- 54,702
Net change in income taxes............................ 63,719 -- 63,719
Changes in production rates and other................. (8,674) -- (8,674)
--------- --- ---------
Standardized measure, end of period................... $ 415,498 $-- $ 415,498
========= === =========
</TABLE>
12. TRANSITION PERIOD COMPARATIVE DATA
The following table presents certain financial information for the twelve
months ended December 31, 1998 and 1997, and the six months ended December 31,
1997 and 1996, respectively:
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
----------------------- ----------------------
1998 1997 1997 1996
--------- ----------- -------- -----------
(UNAUDITED) (UNAUDITED)
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues................................. $ 377,946 $ 302,804 $153,898 $120,186
========= ========= ======== ========
Gross profit (loss)(a)................... $(856,197) $(309,041) $(93,092) $ 42,946
========= ========= ======== ========
Income (loss) before income taxes and
extraordinary item..................... $(920,520) $(251,150) $(31,574) $ 39,246
Income taxes............................. -- (17,898) -- 14,325
--------- --------- -------- --------
Income (loss) before extraordinary
item................................... (920,520) (233,252) (31,574) 24,921
Extraordinary item....................... (13,334) (177) -- (6,443)
--------- --------- -------- --------
Net income (loss)........................ $(933,854) $(233,429) $(31,574) $ 18,478
========= ========= ======== ========
Earnings per share -- basic
Income (loss) before extraordinary
item................................ $ (9.83) $ (3.30) $ (0.45) $ 0.40
Extraordinary item..................... (0.14) -- -- (0.10)
--------- --------- -------- --------
Net income (loss)...................... $ (9.97) $ (3.30) $ (0.45) $ 0.30
========= ========= ======== ========
Earnings per share -- assuming dilution
Income (loss) before extraordinary
item................................ $ (9.83) $ (3.30) $ (0.45) $ 0.38
Extraordinary item..................... (0.14) -- -- (0.10)
--------- --------- -------- --------
Net income (loss)...................... $ (9.97) $ (3.30) $ (0.45) $ 0.28
========= ========= ======== ========
Weighted average common shares
outstanding (in 000's)
Basic.................................. 94,911 70,672 70,835 61,985
========= ========= ======== ========
Assuming dilution...................... 94,911 70,672 70,835 66,300
========= ========= ======== ========
</TABLE>
---------------
(a) Total revenue less total operating costs.
F-57
<PAGE> 197
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized unaudited quarterly financial data for 1999 and 1998 are as
follows ($ in thousands except per share data):
<TABLE>
<CAPTION>
QUARTERS ENDED
------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1999 1999 1999 1999
--------- -------- ------------- ------------
<S> <C> <C> <C> <C>
Net sales................................... $ 65,677 $80,892 $102,140 $106,237
Gross profit (loss)(a)...................... 7,067 25,765 36,498 38,190
Net income (loss)........................... (11,950) 8,147 18,115 18,954
Net income (loss) per share:
Basic..................................... (0.17) 0.04 0.14 0.15
Diluted................................... (0.17) 0.04 0.13 0.14
</TABLE>
<TABLE>
<CAPTION>
QUARTERS ENDED
----------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1998 1998 1998 1998
--------- --------- ------------- ------------
<S> <C> <C> <C> <C>
Net sales.................................... $ 76,765 $ 109,310 $106,338 $ 85,533
Gross profit (loss)(a)....................... (246,036) (218,645) 13,650 (405,166)
Net income (loss) before extraordinary
item....................................... (256,500) (234,739) (4,149) (425,132)
Net income (loss)............................ (256,500) (248,073) (4,149) (425,132)
Net income (loss) per share before
extraordinary item:
Basic...................................... (3.19) (2.29) (0.08) (4.44)
Diluted.................................... (3.19) (2.29) (0.08) (4.44)
</TABLE>
---------------
(a) Total revenue less total operating costs.
Capitalized costs, less accumulated amortization and related deferred
income taxes, cannot exceed an amount equal to the sum of the present value of
estimated future net revenues less estimated future expenditures to be incurred
in developing and producing the proved reserves, less any related income tax
effects. At December 31, 1998, June 30, 1998 and March 31, 1998, capitalized
costs of oil and gas properties exceeded the estimated present value of future
net revenues for Chesapeake's proved reserves, net of related income tax
considerations, resulting in writedowns in the carrying value of oil and gas
properties of $360 million, $216 million and $250 million, respectively.
During the fourth quarter of 1998, Chesapeake incurred a $55 million
impairment charge to adjust certain non-oil and gas producing assets to their
estimated fair values. Of this amount, $30 million related to Chesapeake's
investment in preferred stock of Gothic Energy Corporation, and the remainder
was related to certain of Chesapeake's gas processing and transportation assets
located in Louisiana.
14. ACQUISITIONS
During 1998, Chesapeake acquired approximately 750 Bcfe of proved reserves
through mergers or through purchases of oil and gas properties. The total
consideration given for the acquisitions was $280 million of cash, 30.8 million
shares of Company common stock, the assumption of $205 million of debt, and the
incurrence of approximately $20 million of other acquisition related costs.
In March 1998, Chesapeake acquired Hugoton Energy Corporation ("Hugoton")
pursuant to a merger by issuing 25.8 million shares of Chesapeake's common stock
in exchange for 100% of Hugoton's
F-58
<PAGE> 198
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
common stock. The acquisition of Hugoton was accounted for using the purchase
method as of March 1, 1998, and the results of operations of Hugoton have been
included since that date.
The following unaudited pro forma information has been prepared assuming
Hugoton had been acquired as of the beginning of the periods presented. The pro
forma information is presented for informational purposes only and is not
necessarily indicative of what would have occurred if the acquisition had been
made as of those dates. In addition, the pro forma information is not intended
to be a projection of future results and does not reflect the efficiencies
expected to result from the integration of Hugoton.
Pro Forma Information (Unaudited)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1998 1997
----------- -----------
($ IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
Revenues.................................................... $ 387,638 $ 379,546
Loss before extraordinary item.............................. (921,969) (215,350)
Net loss.................................................... (935,303) (215,527)
Loss before extraordinary item per common share............. (9.41) (2.23)
Net loss per common share................................... (9.55) (2.23)
</TABLE>
Chesapeake acquired other businesses and oil and gas properties during 1999
and 1998. The results of operations of each of these businesses and properties,
taken individually, were not material in relation to Chesapeake's consolidated
results of operations.
15. SUBSEQUENT EVENTS
In January and February 2000, Chesapeake engaged in five separate
transactions with two institutional investors in which Chesapeake exchanged a
total of 8.8 million shares of common stock (both newly issued and treasury
shares) for 625,000 shares of its issued and outstanding preferred stock with a
liquidation value of $31.3 million plus dividends in arrears of $2.9 million.
All preferred shares acquired in these transactions were cancelled and retired
and will have the status of authorized but unissued shares of undesignated
preferred stock.
In connection with a potential restructuring of Gothic Energy Corporation
("Gothic"), Chesapeake and Gothic agreed in March 2000 to substantially revise
their joint venture originally entered into in March 1998. In addition,
Chesapeake granted Gothic an option to redeem the preferred and common shares of
Gothic held by Chesapeake in exchange for rights to certain undeveloped
leasehold interests covered by the joint venture agreement. The terms of the
agreement are subject to certain conditions, including the approval by certain
of Gothic's creditors. Significant terms of the proposed agreement are as
follows:
- the joint venture is extended for three years to April 30, 2006,
- Chesapeake is granted a right of first refusal on any property
disposition by Gothic,
- Chesapeake becomes operator of 28 wells currently operated by Gothic,
- Chesapeake will have the first right to drill, complete and operate wells
in certain areas covered by the joint venture,
- Chesapeake granted Gothic the option to redeem its investment in $50
million liquidation amount of Gothic Series B preferred stock, including
dividends in arrears, and 2.4 million shares of Gothic common stock, for
a permanent assignment to Chesapeake of certain undeveloped leasehold
interests that were originally subject to a reassignment obligation to
Gothic.
F-59
<PAGE> 199
SCHEDULE II
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
---------------------
BALANCE AT CHARGED BALANCE AT
BEGINNING CHARGED TO OTHER END OF
DESCRIPTION OF PERIOD TO EXPENSE ACCOUNTS DEDUCTIONS PERIOD
----------- ---------- ---------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
December 31, 1999:
Allowance for doubtful accounts.............. $ 3,209 $ 9 $ -- $ -- $ 3,218
Valuation allowance for deferred tax
assets..................................... $458,903 $ -- $(5,931)(a) $10,956 $442,016
December 31, 1998:
Allowance for doubtful accounts.............. $ 691 $ 1,589 $ 1,000 $ 71 $ 3,209
Valuation allowance for deferred tax
assets..................................... $ 77,934 $380,969 $ -- $ -- $458,903
December 31, 1997:
Allowance for doubtful accounts.............. $ 387 $ 40 $ 264 $ -- $ 691
Valuation allowance for deferred tax
assets..................................... $ 64,116 $ 13,818 $ -- $ -- $ 77,934
June 30, 1997:
Allowance for doubtful accounts.............. $ 340 $ 299 $ -- $ 252 $ 387
Valuation allowance for deferred tax
assets..................................... $ -- $ 64,116 $ -- $ -- $ 64,116
</TABLE>
---------------
(a) At December 31, 1998, $5.7 million of the valuation allowance was related to
Chesapeake's Canadian deferred tax assets. During 1999, this valuation
allowance was eliminated as part of a purchase price reallocation related to
a 1998 acquisition.
F-60
<PAGE> 200
GOTHIC ENERGY CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT PAR VALUE)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 5,317 $ 2,583
Natural gas and oil receivables........................... 12,486 8,163
Receivable from officers and employees.................... 110 77
Other..................................................... 878 624
--------- ---------
TOTAL CURRENT ASSETS.............................. 18,791 11,447
PROPERTY AND EQUIPMENT:
Natural gas and oil properties on full cost method:
Properties being amortized............................. 269,380 258,818
Unproved properties not subject to amortization........ 5,911 5,473
Equipment, furniture and fixtures......................... 6,311 6,123
Accumulated depreciation, depletion and amortization...... (64,005) (54,170)
--------- ---------
PROPERTY AND EQUIPMENT, NET................................. 217,597 216,244
OTHER ASSETS, NET........................................... 9,738 10,706
--------- ---------
TOTAL ASSETS...................................... $ 246,126 $ 238,397
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable trade.................................... $ 3,828 $ 4,630
Revenues payable.......................................... 7,931 6,047
Accrued interest expense.................................. 4,477 4,357
Other accrued liabilities................................. 368 893
Current portion long-term debt............................ 14,723 --
--------- ---------
TOTAL CURRENT LIABILITIES......................... 31,327 15,927
LONG-TERM DEBT, NET......................................... 315,958 319,857
GAS IMBALANCE LIABILITY..................................... 3,274 3,648
STOCKHOLDERS' EQUITY (DEFICIT):
Series B Preferred Stock, Par Value $.05, authorized
165,000 shares; 62,827 and 59,216 shares issued and
outstanding............................................ 50,252 45,612
Common stock, par value $.01, authorized 100,000,000
shares; 18,685,765 shares issued and outstanding....... 187 187
Additional paid in capital................................ 42,987 42,987
Accumulated deficit....................................... (197,859) (189,821)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT).............. (104,433) (101,035)
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)....................................... $ 246,126 $ 238,397
========= =========
</TABLE>
See accompanying notes
F-61
<PAGE> 201
GOTHIC ENERGY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30,
-------------------------
2000 1999
----------- -----------
<S> <C> <C>
REVENUES:
Natural gas and oil sales................................. $ 31,863 $ 23,417
Well operations........................................... 1,356 1,259
-------- --------
TOTAL REVENUES.................................... 33,219 24,676
COSTS AND EXPENSES:
Lease operating expenses.................................. 4,443 4,601
Depletion, depreciation and amortization.................. 9,975 10,652
General and administrative expense........................ 1,976 1,984
Investment banking and related fees....................... 785 --
-------- --------
Operating income............................................ 16,040 7,439
Interest expense and amortization of debt issuance costs.... (19,490) (18,727)
Interest and other income................................... 50 817
-------- --------
NET LOSS.................................................... (3,400) (10,471)
PREFERRED DIVIDEND ($60.00 AND $59.84 PER PREFERRED
SHARE).................................................... 3,715 3,291
PREFERRED DIVIDEND -- AMORTIZATION OF PREFERRED DISCOUNT.... 923 923
-------- --------
NET LOSS AVAILABLE FOR COMMON SHARES........................ $ (8,038) $(14,685)
======== ========
NET LOSS PER COMMON SHARE, BASIC AND DILUTED................ $ (.43) $ (.90)
======== ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING, BASIC AND
DILUTED................................................... 18,686 16,286
======== ========
</TABLE>
See accompanying notes
F-62
<PAGE> 202
GOTHIC ENERGY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED JUNE 30,
---------------------
2000 1999
--------- ---------
<S> <C> <C>
REVENUES:
Natural gas and oil sales................................. $17,048 $12,564
Well operations........................................... 612 642
------- -------
TOTAL REVENUES.................................... 17,660 13,206
COSTS AND EXPENSES:
Lease operating expenses.................................. 2,455 2,262
Depletion, depreciation and amortization.................. 4,738 5,367
General and administrative expense........................ 979 1,013
Investment banking and related fees....................... 291 --
------- -------
Operating income............................................ 9,197 4,564
Interest expense and amortization of debt issuance costs.... (9,740) (9,450)
Interest and other income................................... 26 36
------- -------
NET LOSS.................................................... (517) (4,850)
PREFERRED DIVIDEND ($30.16 AND $30.26 PER PREFERRED
SHARE).................................................... 1,895 1,688
PREFERRED DIVIDEND -- AMORTIZATION OF PREFERRED DISCOUNT.... 461 461
------- -------
NET LOSS AVAILABLE FOR COMMON SHARES........................ $(2,873) $(6,999)
======= =======
NET LOSS PER COMMON SHARE, BASIC AND DILUTED................ $ (.15) $ (.43)
======= =======
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING, BASIC AND
DILUTED................................................... 18,686 16,292
======= =======
</TABLE>
See accompanying notes
F-63
<PAGE> 203
GOTHIC ENERGY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30,
-------------------------
2000 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $ (3,400) $(10,471)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH PROVIDED BY
OPERATING ACTIVITIES:
Depreciation, depletion and amortization.................. 9,975 10,652
Amortization of discount and loan costs................... 907 832
Accretion of interest on discount notes................... 5,101 4,674
CHANGES IN ASSETS AND LIABILITIES:
Increase in accounts receivable........................... (4,332) (2,482)
Increase in other current assets.......................... (254) (80)
Increase (decrease) in accounts and revenues payable...... 1,082 (275)
Increase (decrease) in accrued liabilities................ (405) 243
Decrease in gas imbalance liability....................... (374) (76)
Decrease in other assets.................................. 39 --
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES................... 8,339 3,017
NET CASH USED BY INVESTING ACTIVITIES:
Proceeds from sale of property and equipment.............. 1,638 2,104
Purchase of property and equipment........................ (779) (3,659)
Property development costs................................ (12,187) (9,306)
-------- --------
NET CASH USED BY INVESTING ACTIVITIES....................... (11,328) (10,861)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term borrowings........................ 13,473 17,500
Payments of long-term borrowings.......................... (7,750) (10,000)
Payment of loan fees...................................... -- (76)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES................... 5,723 7,424
NET CHANGE IN CASH AND CASH EQUIVALENTS..................... 2,734 (420)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 2,583 2,289
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD.......... $ 5,317 $ 1,869
======== ========
SUPPLEMENTAL DISCLOSURE OF INTEREST PAID.......... $ 13,361 $ 13,221
======== ========
</TABLE>
See accompanying notes
F-64
<PAGE> 204
GOTHIC ENERGY CORPORATION AND SUBSIDIARY
NOTES TO UNAUDITED 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 ("Gothic Production") since its formation in April of
1998, (collectively referred to as "Gothic"). All significant intercompany
balances and transactions have been eliminated. Gothic is primarily engaged in
the business of acquiring, developing and exploiting natural gas and oil
reserves in Oklahoma, Texas, New Mexico and Kansas. Substantially all of
Gothic's natural gas and oil production is being sold regionally in the "spot
market" or under short-term contracts, not extending beyond twelve months.
Preparation of Financial Statements
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 the
opinion of management of Gothic, the accompanying financial statements contain
all adjustments, none of which were other than normal recurring accruals,
necessary to present fairly the financial position of Gothic as of June 30,
2000, and the results of its operations and cash flows for the periods ended
June 30, 2000 and 1999. The results of operations for the 2000 period are not
necessarily indicative of the results of operations to be expected for the full
year. Our independent accountants have performed a review of these interim
financial statements in accordance with standards established by the American
Institute of Certified Public Accountants. Pursuant to Rule 436(c) under the
Securities Act of 1933, their report of that review should not be considered as
part of any registration statements prepared or certified by them within the
meaning of Section 7 and 11 of that Act. The financial statements should be read
in conjunction with Gothic's Annual Report on Form 10-KSB for the year ended
December 31, 1999.
Loss per Common Share
Net loss per common share is 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 18,830,309 and
21,575,000 shares were outstanding as of June 30, 2000 and 1999, and were
excluded from the computation of diluted loss per share due to their
anti-dilutive impact.
Hedging Activities
In January 2000, Gothic 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, Gothic 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 was in effect for the
months of April and May 2000. The commodity reference price for both contracts
is the Panhandle Eastern Pipeline Company, Texas, and Oklahoma Mainline Index.
If the open gas hedges noted above had been settled on June 30, 2000, Gothic
would have recognized a loss of approximately $11,096,000.
F-65
<PAGE> 205
GOTHIC ENERGY CORPORATION AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In August 1999, Gothic 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 as price adjustments in the
months of related production. If the open crude oil hedge noted above had been
settled on June 30, 2000, Gothic would have recognized a loss of approximately
$338,000.
In July 1999 Gothic entered into a costless collar agreement with respect
to the production of 50,000 MMBTU per day during the period of November 1999
through March 2000, which placed a floor of $2.30 per MMBTU and a ceiling of
$3.03 per MMBTU. The collar represented approximately 70% of Gothic's current
daily natural gas production. Collar arrangements limit the benefits Gothic will
realize if actual prices rise above the ceiling price. These arrangements
provide for Gothic to exchange a floating market price for a fixed range
contract price. Payments are made by Gothic 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 the contract
was the Panhandle Eastern Pipeline Company, Texas, Oklahoma Mainline Index.
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 Gothic). 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. Gothic is evaluating the
impact on its financial position and results of operations of adopting FAS 133.
NOTE 2. GOING CONCERN
Gothic 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 Gothic 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 Gothic during early
1999, resulting in a net loss of $17,309,000 for the year ended December 31,
1999, raising doubt about Gothic's ability to continue as a going concern.
Management's plans to mitigate these conditions are as follows:
It is the intention of Gothic 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. In the current commodity price environment
and pending the merger with Chesapeake Energy Corporation, Gothic does not
anticipate hedging additional natural gas or oil production. Should commodity
prices fall below current levels, Gothic may 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 in the first half of 2000 had increased over levels prevailing during
much of 1999 but there is no assurance that prices will continue to increase or
remain at the current levels. Further, the borrowing base amount available under
Gothic's Credit Facility was redetermined in April 2000 and was reduced to
$15,000,000. The next scheduled redetermination date is October 1, 2000 and
there is no assurance that Gothic's lender will maintain the available amount at
this current level.
As part of its ongoing efforts to restructure and improve its balance
sheet, Gothic had negotiated agreements with the holders of its 14 1/8% Senior
Secured Discount Notes intended to result in the conversion of that indebtedness
into equity securities of Gothic Energy. Subsequently, Chesapeake Energy
F-66
<PAGE> 206
GOTHIC ENERGY CORPORATION AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Corporation purchased approximately 96% of the principal amount of those notes.
Negotiations between Gothic and Chesapeake followed and Gothic announced on June
30, 2000 its intention to merge with a subsidiary of Chesapeake Energy
Corporation in exchange for 4,000,000 shares of Chesapeake's common stock (See
Note 4 -- Subsequent Event). Gothic is unable to predict when and if this
transaction will be completed.
If management's plans are not completed in the manner contemplated, there
will remain substantial doubt about Gothic's ability to continue as a going
concern.
NOTE 3. SUMMARIZED FINANCIAL INFORMATION
Gothic Production was organized in March 1998 as a wholly owned subsidiary
of Gothic Energy. On April 27, 1998, Gothic Energy transferred to Gothic
Production its ownership of all its natural gas and oil properties. Following is
the summarized financial information related to Gothic as of June 30, 2000 and
December 31, 1999 and for the six and three months ended June 30, 2000 and 1999
(in thousands):
<TABLE>
<CAPTION>
AS OF JUNE 30, 2000
-------------------------------------------------
GOTHIC ENERGY
GOTHIC ENERGY GOTHIC PRODUCTION CORPORATION
CORPORATION CORPORATION CONSOLIDATED
------------- ----------------- -------------
<S> <C> <C> <C>
Current assets............................. $ -- $ 18,791 $ 18,791
Non-current assets......................... 1,632(1) 225,703 227,335
Current liabilities........................ -- 31,207 31,207
Non-current liabilities.................... 80,958(2) 238,274 319,232
</TABLE>
<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(1) 225,178 226,950
Current liabilities........................ -- 15,927 15,927
Non-current liabilities.................... 75,857(2) 247,648 323,505
</TABLE>
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 2000
-------------------------------------------------
GOTHIC ENERGY
GOTHIC ENERGY GOTHIC PRODUCTION CORPORATION
CORPORATION CORPORATION CONSOLIDATED
------------- ----------------- -------------
<S> <C> <C> <C>
Total revenues............................. $ -- $ 33,219 $ 33,219
Operating costs and expenses............... -- 17,179 17,179
Interest expense and amortization of debt
issuance cost............................ 5,241 14,249 19,490
Net income (loss).......................... (5,241) 1,841 (3,400)
</TABLE>
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 1999
-------------------------------------------------
GOTHIC ENERGY
GOTHIC ENERGY GOTHIC PRODUCTION CORPORATION
CORPORATION CORPORATION CONSOLIDATED
------------- ----------------- -------------
<S> <C> <C> <C>
Total revenues............................. $ -- $ 24,676 $ 24,676
Operating costs and expenses............... -- 17,237 17,237
Interest expense and amortization of debt
issuance cost............................ 4,814 13,913 18,727
Net loss................................... (4,814) (5,657) (10,471)
</TABLE>
F-67
<PAGE> 207
GOTHIC ENERGY CORPORATION AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED JUNE 30, 2000
-------------------------------------------------
GOTHIC ENERGY
GOTHIC ENERGY GOTHIC PRODUCTION CORPORATION
CORPORATION CORPORATION CONSOLIDATED
------------- ----------------- -------------
<S> <C> <C> <C>
Total revenues............................. $ -- $17,660 $17,660
Operating costs and expenses............... -- 8,463 8,463
Interest expense and amortization of debt
issuance cost............................ 2,554 7,186 9,740
Net income (loss).......................... (2,554) 2,037 (517)
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED JUNE 30, 1999
-------------------------------------------------
GOTHIC ENERGY
GOTHIC ENERGY GOTHIC PRODUCTION CORPORATION
CORPORATION CORPORATION CONSOLIDATED
------------- ----------------- -------------
<S> <C> <C> <C>
Total revenues............................. $ -- $13,206 $13,206
Operating costs and expenses............... -- 8,642 8,642
Interest expense and amortization of debt
issuance cost............................ 2,460 6,990 9,450
Net loss................................... (2,460) (2,390) (4,850)
</TABLE>
---------------
(1) Includes unamortized debt issuance costs.
(2) Includes 14 1/8% Senior Secured Discount Notes.
NOTE 4. SUBSEQUENT EVENTS
On June 30, 2000 Gothic announced it had reached an agreement with
Chesapeake Energy Corporation to merge with a wholly owned subsidiary of
Chesapeake, in exchange for 4,000,000 shares of Chesapeake's common stock.
Gothic's previously announced plan of restructuring, which contemplated the
redemption of Chesapeake's holding of Gothic's preferred and common stock for
oil and gas properties and other considerations, the exchange of the
$104,000,000 Senior Discount Notes in exchange for 94% of Gothic's equity and an
equity rights offering of $15,000,000, have been terminated in anticipation of
this transaction.
Although the merger is subject to the completion of definitive
documentation, normal regulatory approvals and a Gothic shareholder vote, both
Boards of Directors have unanimously approved the transaction. Gothic plans to
hold a special shareholder's meeting as soon as possible following completion of
the SEC's review of a proxy statement, describing the transaction, which it
anticipates filing in August 2000. Completion of the transaction is expected by
year-end 2000.
At June 30, 2000, Gothic had 18,685,765 common shares outstanding, plus
employee and director options to purchase 4,435,000 shares, all of which are
expected to be exercised on or before closing of the transaction. Of the
outstanding shares, Chesapeake owns 2,394,125 shares and will not participate in
the exchange for the 4,000,000 Chesapeake common shares to be received by
Gothic's other shareholders.
Gothic loaned $90,000 to certain employees and one director in the form of
a note payable to Gothic, at an interest rate of 6% per annum, due and payable
on July 31, 2001. On July 11, 2000, the employees and the director of Gothic
exercised 225,000 outstanding common stock options. The options were exercised
upon the payment of $90,000 to Gothic.
F-68
<PAGE> 208
GOTHIC ENERGY CORPORATION AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Gothic loaned $1,739,500 to certain employees, two officers and two
directors in the form of a note payable to Gothic, at an interest rate of 6% per
annum, due and payable on July 31, 2001. On August 1, 2000 the individuals
exercised an additional 4,165,000 outstanding common stock options. Of the total
options exercised, 4,155,000 options were exercised upon payment of $1,739,500
to Gothic, and 10,000 options were exercised under the cashless exercise
provisions of the option plan.
Reflecting the exercise of these options, 45,000 common stock options
remain outstanding at August 4, 2000.
F-69
<PAGE> 209
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, 1999 and 1998,
in conformity with accounting principles generally accepted in the United
States. These financial statements are the responsibility of Gothic'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 Gothic will continue as a going concern. As discussed in Note 2 to
the financial statements, Gothic 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-70
<PAGE> 210
GOTHIC ENERGY CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
(DOLLARS IN THOUSANDS, EXCEPT PAR VALUE)
<TABLE>
<CAPTION>
1999
---------
<S> <C>
ASSETS
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-71
<PAGE> 211
GOTHIC ENERGY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1999 1998
-------- ---------
<S> <C> <C>
REVENUES:
Natural gas and oil sales................................. $ 52,967 $ 50,714
Well operations........................................... 2,657 2,319
-------- ---------
Total revenues............................................ 55,624 53,033
COSTS AND EXPENSES:
Lease operating expense................................... 9,605 12,129
Depletion, depreciation and amortization.................. 20,969 24,001
General and administrative expense........................ 4,675 3,823
Investment banking and related fees....................... 638 --
Provision for impairment of natural gas and oil
properties............................................. -- 76,000
-------- ---------
Operating income (loss)..................................... 19,737 (62,920)
Interest expense and amortization of debt issuance costs.... (37,988) (35,438)
Interest and other income................................... 942 433
Loss on sale of investments................................. -- (305)
-------- ---------
LOSS BEFORE EXTRAORDINARY ITEM.............................. (17,309) (98,230)
LOSS ON EARLY EXTINGUISHMENT OF DEBT........................ -- 31,459
-------- ---------
NET LOSS.................................................... (17,309) (129,689)
PREFERRED DIVIDEND ($120.32 and $125.76 PER PREFERRED
SHARE).................................................... 6,820 5,599
PREFERRED DIVIDEND -- AMORTIZATION OF PREFERRED DISCOUNT.... 1,847 5,095
-------- ---------
NET LOSS AVAILABLE FOR COMMON SHARES.............. $(25,976) $(140,383)
======== =========
LOSS PER COMMON SHARE BEFORE EXTRAORDINARY ITEM,
BASIC AND DILUTED............................... $ (1.51) $ (6.70)
======== =========
NET LOSS PER COMMON SHARE, BASIC AND DILUTED...... $ (1.51) $ (8.63)
======== =========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING........ 17,219 16,262
======== =========
</TABLE>
See accompanying notes to consolidated financial statements
F-72
<PAGE> 212
GOTHIC ENERGY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON PREFERRED ADDITIONAL OTHER
SHARES SHARES COMMON PREFERRED PAID-IN ACCUMULATED COMPREHENSIVE NOTE
OUTSTANDING OUTSTANDING STOCK STOCK CAPITAL DEFICIT INCOME RECEIVABLE
----------- ----------- ------ --------- ---------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, AT DECEMBER 31,
1997.................... 16,262 -- $162 $ -- $36,043 $ (23,462) $(121) $(169)
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........... -- -- -- -- -- -- 121 --
Advance to officer...... -- -- -- -- -- -- -- (10)
------ --- ---- -------- ------- --------- ----- -----
BALANCE, AT DECEMBER 31,
1998.................... 16,262 54 162 36,945 42,996 (163,845) -- (179)
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....... -- -- -- -- -- -- -- 179
Net loss................ -- -- -- -- -- (17,309) -- --
------ --- ---- -------- ------- --------- ----- -----
BALANCE, AT DECEMBER 31,
1999.................... 18,686 60 $187 $ 45,612 $42,987 $(189,821) $ -- $ --
====== === ==== ======== ======= ========= ===== =====
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
BALANCE, AT DECEMBER 31,
1997.................... $ 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
Advance to officer...... (10)
---------
BALANCE, AT DECEMBER 31,
1998.................... (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
Net loss................ (17,309)
---------
BALANCE, AT DECEMBER 31,
1999.................... $(101,035)
=========
</TABLE>
See accompanying notes to consolidated financial statements
F-73
<PAGE> 213
GOTHIC ENERGY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
-------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(17,309) $(129,689)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH PROVIDED
BY OPERATING ACTIVITIES:
Depreciation, depletion and amortization.................. 20,969 24,001
Amortization of discount and loan costs................... 1,769 1,994
Provision for impairment of natural gas and oil
properties............................................. -- 76,000
Accretion of interest on discount notes................... 9,678 6,023
Loss on early extinguishment of debt...................... -- 31,459
Other..................................................... 179 --
CHANGES IN ASSETS AND LIABILITIES:
Increase in accounts receivable........................... (949) (4,009)
Increase in other current assets.......................... (403) (143)
Increase in accounts and revenues payable................. 1,438 5,605
Increase (decrease) in gas imbalance and other
liabilities............................................ (2,532) 65
Increase in accrued liabilities........................... 639 411
Decrease (increase) in other assets....................... 228 (150)
-------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES................... 13,707 11,567
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.............. 2,228 44,678
Purchase of property and equipment........................ (3,413) (218,738)
Property development costs................................ (21,056) (18,379)
-------- ---------
NET CASH USED BY INVESTING ACTIVITIES....................... (22,241) (191,375)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings....................... -- 60,000
Payments of short-term borrowings......................... -- (60,000)
Proceeds from long-term borrowings........................ 31,000 431,290
Payments of long-term borrowings.......................... (22,000) (259,884)
Redemption of preferred stock, net........................ -- (40,809)
Proceeds from sale of preferred stock, net................ -- 73,475
Payment of loan and offering fees......................... (172) (38,535)
Other..................................................... -- (162)
-------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES................... 8,828 165,375
NET CHANGE IN CASH AND CASH EQUIVALENTS..................... 294 (14,433)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 2,289 16,722
-------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 2,583 $ 2,289
======== =========
SUPPLEMENTAL DISCLOSURE OF INTEREST PAID.................... $ 26,541 $ 23,063
======== =========
</TABLE>
See accompanying notes to consolidated financial statements
F-74
<PAGE> 214
GOTHIC ENERGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. GENERAL AND ACCOUNTING POLICIES
Organization and Nature of Operation
The consolidated financial statements include the accounts of Gothic Energy
Corporation, a "holding company," and its subsidiary, Gothic Production
Corporation ("Production Corp.") since its formation in April of 1998,
(collectively Gothic Energy Corporation and Production Corp. are referred to as
"Gothic"). All significant intercompany balances and transactions have been
eliminated. Gothic 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 Gothic to concentrations of
credit risk consist principally of derivative contracts (see "Hedging
Activities" below), cash, cash equivalents and trade receivables. Gothic'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 Gothic. The industry
concentration has the potential to impact Gothic'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. Gothic generally
does not require collateral from customers and Gothic 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, Gothic 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
Gothic 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. Gothic estimates the fair value of its 11 1/8% Senior Secured Notes
and 14 1/8% Senior Secured Discount Notes using estimated market prices.
Gothic's carrying
F-75
<PAGE> 215
GOTHIC ENERGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
Gothic 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. Gothic's objective is to hedge a portion of its
exposure to price volatility from producing natural gas. These arrangements may
expose Gothic to credit risk from its counterparty.
In April 1999, Gothic 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 Gothic. Additionally, in July 1999
Gothic 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 Gothic's current daily natural
gas production. Collar arrangements limit the benefits Gothic will realize if
actual prices rise above the ceiling price. These arrangements provide for
Gothic to exchange a floating market price for a fixed range contract price.
Payments are made by Gothic 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, Gothic 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, Gothic
would have recognized a gain of $769,000. If the open crude oil hedge noted
above had been settled on December 31, 1999, Gothic would have recognized a loss
of $282,000.
Additionally, in January 2000, Gothic 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, Gothic
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
Gothic 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. Gothic
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.
F-76
<PAGE> 216
GOTHIC ENERGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Gothic's natural gas and oil reserves are estimated annually by independent
petroleum engineers. Gothic'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 $0.77 and $0.91 per Mcfe in 1999 and 1998, respectively.
DD&A of natural gas and oil properties amounted to $20,444,000 and $23,600,000
in 1999 and 1998, 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 Gothic's natural gas and oil properties. Gothic 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 Gothic in the
near-term to reduce the carrying value of its natural gas and oil properties.
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 Gothic'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
Gothic's 11 1/8% Senior Secured Notes Due 2005 and 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 Gothic'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, 1999 and 1998 amounted to
$1,769,000 and $1,994,000, respectively.
Natural Gas and Oil Sales and Natural Gas Balancing
Gothic uses the sales method for recording natural gas sales. Gothic'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 Gothic'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 Gothic'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 Gothic'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 Gothic'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 Gothic does not expect to settle the liability during the next
twelve months.
Gothic 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
F-77
<PAGE> 217
GOTHIC ENERGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
for underproduced wells were less than Gothic'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.
Gothic 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
Gothic'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
Gothic 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 19,940,000 and 20,775,000 shares were outstanding as of
December 31, 1999 and 1998 and were excluded from the computation of diluted
loss per share due to their anti-dilutive impact.
Stock Based Compensation
Gothic 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 Gothic's grants in 1999 and 1998, 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 Gothic). 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. Gothic is evaluating the
impact on its financial position and results of operations of adopting FAS 133.
F-78
<PAGE> 218
GOTHIC ENERGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2. GOING CONCERN
Gothic 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 Gothic 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 Gothic during early
1999, resulting in a net loss of $17,309,000 for the year ended December 31,
1999.
It is the intention of Gothic 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 Gothic. This should
help to stabilize cash flow, which is necessary to ensure Gothic'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, Gothic 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 Gothic'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 Gothic's lender will maintain the
available amount at this current level.
NOTE 3. SUBSEQUENT EVENTS
On February 29, 2000, Gothic 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 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
Gothic.
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 34 degrees North from the provisions of
the JV;
- Granting a right of first refusal to Chesapeake on any property
dispositions made by Gothic;
- Segregation of first development rights, with Gothic 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 Gothic;
- A permanent assignment to Chesapeake of the undeveloped leasehold
interest originally assigned to Chesapeake on March 31, 1998 that was
subject to reassignment to Gothic by Chesapeake in 2003;
- A permanent assignment to Chesapeake of Gothic'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 Gothic. Gothic'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;
F-79
<PAGE> 219
GOTHIC ENERGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- Chesapeake will have the right to acquire all of Gothic's participation
in wells in the 16 county area (excluding the participation in the 15
proved undeveloped locations retained by Gothic) 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 Gothic's unrecovered
cost of drilling, completing and operating the wells;
- Redemption by Gothic 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's common stock.
NOTE 4. FINANCING ACTIVITIES
Credit Facility
On April 27, 1998, Gothic 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. Gothic 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). Gothic 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 Gothic, whether currently owned or hereafter
acquired. As of December 31, 1999, Gothic 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 Gothic, 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 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 Gothic 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. Gothic 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 Gothic.
F-80
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GOTHIC ENERGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
Corporation. 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 Gothic under the Senior Secured Notes are collateralized by a
second priority lien on substantially all of Gothic's natural gas and oil
properties, subject to certain permitted liens.
Gothic 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, Gothic 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 Gothic consummates one or more Equity
Offerings (as defined in the Senior Note Indenture) on or prior to May 1, 2001,
Gothic, 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 Gothic 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), Gothic 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 Gothic 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 Gothic 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 Corp. to be a wholly owned subsidiary of
Gothic Energy Corporation, and certain other bankruptcy and other court
proceedings, among other matters.
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 Corporation 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
F-81
<PAGE> 221
GOTHIC ENERGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
also issued seven-year warrants to purchase, at an exercise price of $2.40 per
share, 825,000 shares of Gothic'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 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 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 consummates one or more Equity
Offerings (as defined in the Discount Note Indenture) on or prior to May 1,
2001, Gothic, 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 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 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 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 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 Corporation, and certain other bankruptcy and other court proceedings,
among other matters.
NOTE 5. STOCKHOLDERS' EQUITY
In January 1999, Gothic 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
F-82
<PAGE> 222
GOTHIC ENERGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
purchase warrant issued to it in April 1998 and purchased 2,394,125 shares of
Gothic's common stock. The warrant had been issued to Chesapeake as part of the
transaction involving the sale to Chesapeake of shares of Gothic's Series B
Senior Redeemable Preferred Stock, a 50% interest in Gothic's Arkoma basin
natural gas and oil properties and a 50% interest in substantially all of
Gothic'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'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 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'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 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'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 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
in whole or in part, in cash, at a redemption price equal to the Liquidation
Preference.
Gothic 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, 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.
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. (See Note 3)
Other Warrants
In connection with past financing arrangements and as compensation for
consulting and professional services, Gothic has issued other warrants to
purchase its common stock.
F-83
<PAGE> 223
GOTHIC ENERGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the status of Gothic's warrants as of December 31, 1999, 1998
and 1997, and changes during the years ended December 31, 1999 and 1998 is
presented below:
<TABLE>
<CAPTION>
WARRANTS EXERCISABLE
WARRANTS OUTSTANDING ----------------------
---------------------- 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'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 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, 1999 and 1998, options to purchase 2,500,000 and 2,095,000
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 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
F-84
<PAGE> 224
GOTHIC ENERGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 Gothic and consultants to Gothic can be given an
opportunity to purchase stock in Gothic. The Plan provides that a total of
1,000,000 shares of Gothic's Common 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. As of December 31, 1999 and 1998, options to
purchase 1,000,000 and 600,000 shares of common stock, respectively, had been
issued under the Non-Employee Plan.
A summary of the status of Gothic's stock options as of December 31, 1999,
1998 and 1997, and changes during December 31, 1999 and 1998, is presented
below:
<TABLE>
<CAPTION>
OPTIONS EXERCISABLE
OPTIONS OUTSTANDING ----------------------
---------------------- 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'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 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
1999 or 1998.
F-85
<PAGE> 225
GOTHIC ENERGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
1999 1998
-------- ---------
(IN THOUSANDS)
<S> <C> <C>
Net loss available for common shares:
As reported............................................... $(25,976) $(140,383)
======== =========
Pro Forma................................................. $(26,439) $(141,232)
======== =========
Basic and diluted loss per share:
As reported............................................... $ (1.51) $ (8.63)
======== =========
Pro Forma................................................. $ (1.54) $ (8.68)
======== =========
</TABLE>
The fair value of each option granted is estimated using the Black-Scholes
model. Gothic's stock volatility was 0.95 and 0.81 in 1999 and 1998,
respectively, based on previous stock performance. Dividend yield was estimated
to remain at zero with an average risk free interest rate of 5.59 percent and
4.81 percent in 1999 and 1998, respectively. Expected life was three years for
options issued in both 1999 and 1998 based on the vesting periods involved and
the make up of participating employees within each grant. Fair value of options
granted during 1999 and 1998 under the Stock Option Plan were $646,000 and
$643,000, 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.
F-86
<PAGE> 226
GOTHIC ENERGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Pursuant to Section 382 of the Internal Revenue Code of 1986, as amended,
in the event that a substantial change in the ownership of Gothic were to occur
in the future (whether through the sale of stock by a significant shareholder or
shareholders, new issuances of stock by Gothic, 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 Gothic's capital
stock changed during any three-year period, Gothic'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. Gothic 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
Gothic 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 Gothic's Board of Directors. The President is also entitled to
participate in such incentive compensation and benefit programs as Gothic 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 Gothic (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 Gothic 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 Gothic, the President has the right to terminate his
employment agreement with Gothic within sixty days thereafter, whereupon Gothic
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.
Gothic 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 Gothic's Board of Directors. The
CFO is also entitled to participate in such incentive compensation and benefit
programs as Gothic 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 Gothic (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 Gothic 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 Gothic, the CFO has the right to terminate his
employment with Gothic within sixty days thereafter, whereupon Gothic would be
obligated to pay to him a sum equal to three years base salary, plus a lump sum
payment of $200,000.
Gothic leases its corporate offices and certain office equipment and
automobiles under non-cancelable operating leases. Rental expense under
non-cancelable operating leases was $240,000 and $190,000 for the years ended
December 31, 1999 and 1998, respectively.
F-87
<PAGE> 227
GOTHIC ENERGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Remaining minimum annual rentals under non-cancelable lease agreements
subsequent to December 31, 1999 are as follows:
<TABLE>
<S> <C>
2000...................................................... 327,000
2001...................................................... 295,000
2002...................................................... 282,000
2003...................................................... 267,000
2004...................................................... 247,000
</TABLE>
Gothic 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, Gothic does not believe
that the outcome of these matters will have a material adverse effect on
Gothic's financial position or results of operations.
NOTE 9. BENEFIT PLAN
Gothic 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. Gothic makes limited matching
contributions to the Plan, and may also make other discretionary contributions.
Gothic's contributions for 1999 and 1998 were $85,000 and $62,000, respectively.
NOTE 10. MAJOR CUSTOMERS
During the year ended December 31, 1999, Gothic 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.
Gothic 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 made advances totaling $336,000 to two officers and
directors of Gothic. 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 during
1999.
NOTE 12. SUMMARIZED FINANCIAL INFORMATION
Production Corp. was organized in March 1998 as a wholly owned subsidiary
of Gothic Energy Corporation. On April 27, 1998, Gothic Energy Corporation
transferred to Production Corp. its ownership of all its natural gas and oil
properties. Following is the summarized financial information related to
Production Corp. as of December 31, 1999 and for the years ended December 31,
1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
--------------------------------------------------------------
GOTHIC ENERGY GOTHIC PRODUCTION GOTHIC ENERGY 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>
F-88
<PAGE> 228
GOTHIC ENERGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1999
--------------------------------------------------------------
GOTHIC ENERGY GOTHIC PRODUCTION GOTHIC ENERGY 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 PRODUCTION GOTHIC ENERGY 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
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) Gothic expects to evaluate the unproved properties during the next two
years.
F-89
<PAGE> 229
GOTHIC ENERGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Costs Incurred
Costs incurred in natural gas and oil property acquisition, exploration and
development activities for the years ended December 31, 1999 and 1998 were as
follows:
<TABLE>
<CAPTION>
1999 1998
------- --------
(IN THOUSANDS)
<S> <C> <C>
Proved property acquisition................................. $ 1,499 $225,103
Unproved property acquisition............................... 2,611 2,109
Development costs........................................... 18,445 16,270
------- --------
Total costs incurred.............................. $22,555 $243,482
======= ========
</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 Gothic's reserves are
located onshore in the states of Oklahoma, Texas, New Mexico, Arkansas and
Kansas.
F-90
<PAGE> 230
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>
1999 1998
--------------- ----------------
Bbls Mcf Bbls Mcf
----- ------- ------ -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Proved Reserves:
Beginning of year....................................... 1,761 306,668 3,585 127,460
Revisions of previous estimates......................... 319 6,598 (872) 39,577
Purchases of reserves in place.......................... -- 1,402 1,362 233,007
Production.............................................. (158) (25,477) (257) (24,455)
Sales of reserves in place.............................. -- -- (2,057) (68,921)
----- ------- ------ -------
End of year............................................. 1,922 289,191 1,761 306,668
===== ======= ====== =======
Proved Developed:
Beginning of year....................................... 1,523 254,762 2,503 91,690
End of year............................................. 1,683 251,631 1,523 254,762
</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
Gothic'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). Gothic estimates the
capital required to develop its undeveloped natural gas and oil reserves during
2000 to be approximately $23,000,000. Gothic'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 Gothic's unaudited estimated standardized
measure of discounted future net cash flows.
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Cash Flows Relating to Proved Reserves:
Future cash inflows....................................... $ 596,216 $ 573,604
Future production costs................................... (139,458) (141,253)
Future development costs.................................. (26,969) (37,028)
Future income tax expense................................. (30,113) (47,264)
--------- ---------
399,676 348,059
Ten percent annual discount factor........................ (201,291) (169,297)
--------- ---------
Standardized measure of discounted future net cash
flows.................................................. $ 198,385 $ 178,762
========= =========
</TABLE>
F-91
<PAGE> 231
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,
1999 1998
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Standardized measure of discounted future cash
flows -- beginning of period.............................. $178,762 $ 94,102
Sales of natural gas and oil produced, net of operating
expenses.................................................. (43,362) (38,585)
Purchases of reserves-in-place.............................. 1,000 231,184
Sales of reserves-in-place.................................. -- (62,933)
Revisions of previous quantity estimates and changes in
sales prices and production costs......................... 44,109 (54,416)
Accretion of discount....................................... 17,876 9,410
-------- --------
Standardized measure of discounted future cash flows -- end
of period................................................. $198,385 $178,762
======== ========
</TABLE>
F-92
<PAGE> 232
ANNEX A
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement") is made and entered
into this 8th day of September, 2000, by and among CHESAPEAKE ENERGY
CORPORATION, an Oklahoma corporation ("Parent"), CHESAPEAKE MERGER 2000 CORP.,
an Oklahoma corporation ("Sub"), and GOTHIC ENERGY CORPORATION, an Oklahoma
corporation ("Gothic").
RECITALS
WHEREAS, the board of directors of each of Parent, Sub and Gothic has
determined that it is in the best interest of its respective stockholders for
Parent to acquire Gothic by means of the merger of Sub with and into Gothic upon
the terms and subject to the conditions set forth in this Agreement;
WHEREAS, for federal income tax purposes, the parties hereto intend that
such merger qualify as a tax free "reorganization" within the meaning of Section
368 of the Internal Revenue Code of 1986, as amended;
WHEREAS, the board of directors of Gothic has approved the execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby and has resolved and agreed to recommend that the stockholders of Gothic
approve the same; and
WHEREAS, Parent, Sub and Gothic desire to make certain representations,
warranties, covenants and agreements in connection with such merger and also to
prescribe various conditions to such merger.
NOW, THEREFORE, for and in consideration of the recitals and the mutual
covenants and agreements set forth in this Agreement, the parties hereto hereby
agree as follows:
1. DEFINITIONS. As used in this Agreement, each of the following terms has
the meaning given in this paragraph or in the paragraphs referred to below:
1.1 Affiliate(s). With respect to any Person, each other Person that
directly or indirectly (through one or more intermediaries or
otherwise) controls, is controlled by, or is under common control with
such Person.
1.2 Agreement. This Agreement and Plan of Merger, as amended, supplemented
or modified from time to time.
1.3 Alternative Proposal. As defined in paragraph 5.4.2.
1.4 Bank Credit Agreement. The Loan Agreement dated April 27, 1998, by and
among Gothic, the Gothic Subsidiary and Bank One Corp., as amended May
7, 1999 and March 27, 2000.
1.5 CERCLA. The Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended.
1.6 Certificate of Merger. The Certificate of Merger, prepared and
executed in accordance with the applicable provisions of the OGCA,
filed with the Secretary of State of Oklahoma to reflect the
consummation of the Merger.
1.7 Closing. The closing of the Merger and the consummation of the other
transactions contemplated by this Agreement.
1.8 Closing Date. Unless otherwise agreed by the Parent and Gothic in
writing, the date on which the Closing occurs, which will be the later
of: (a) the first business day following the day on which the Gothic
Stockholder Meeting is held and the conditions to the Merger are
satisfied or waived; or (b) January 15, 2001.
1.9 Code. The Internal Revenue Code of 1986, as amended.
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<PAGE> 233
1.10 Confidentiality Agreement. The letter agreements dated January 18,
1999 and October 7, 1999 between Gothic and Parent relating to
Gothic's furnishing of information to Parent in connection with
Parent's evaluation of a possible transaction between Parent and
Gothic, as modified by that certain letter agreement dated June 6,
2000 relating to Gothic's permission for the Parent to negotiate the
purchase of the Senior Discount Notes.
1.11 Contract Employee. As defined in paragraph 5.14.
1.12 Defensible Title. Such right, title and interest to an asset that is:
(a) evidenced by an instrument or instruments filed of record in
accordance with the conveyance and recording laws of the applicable
jurisdiction to the extent necessary to prevail against competing
claims of bona fide purchasers for value without notice; (b) subject
to Permitted Encumbrances; and (c) free and clear of all other Liens,
claims, infringements, burdens or other defects.
1.13 Dissenting Stockholders. Any holder or holders of Gothic Common Stock
who validly perfect appraisal rights under Section 1091 of the OGCA.
1.14 Effective Time. As defined in paragraph 2.6.
1.15 Environmental Law. Any federal, state, local or foreign statute, code,
ordinance, rule, regulation, policy, guideline, permit, consent,
approval, license, judgment, order, writ, decree, injunction or other
authorization relating to: (a) emissions, discharges, releases or
threatened releases of Hazardous Materials into the natural
environment (including, without limitation, ambient air, soil,
sediments, land surface or subsurface, buildings or facilities,
surface water, groundwater, publicly-owned treatment works, septic
systems or land); (b) the generation, treatment, storage, disposal,
use, handling, manufacture, transportation or shipment of Hazardous
Materials; or (c) the pollution of the environment, solid waste or
operation or reclamation of mines.
1.16 ERISA. The Employee Retirement Income Security Act of 1974, as amended
from time to time.
1.17 Exchange. The New York Stock Exchange, Inc.
1.18 Exchange Act. The Securities Exchange Act of 1934, as amended from
time to time.
1.19 Exchange Agent. UMB Bank, N.A., the transfer agent for shares of
Parent Common Stock.
1.20 Exchange Fund. As defined in paragraph 2.4.1.
1.21 Exchange Ratio. The quotient obtained by dividing the Merger
Consideration by the Gothic Aggregate Number as of the date of the
computation.
1.22 GAAP. Generally accepted accounting principles, as recognized by the
U.S. Financial Accounting Standards Board (or any generally recognized
successor).
1.23 Gothic. Gothic Energy Corporation, an Oklahoma corporation.
1.24 Gothic Aggregate Number. The number equal to: (a) the total number of
shares of Gothic Common Stock that are issued and outstanding as of
the Effective Time; plus (b) the aggregate number of shares of Gothic
Common Stock issuable as of the Effective Time under the in the money
Gothic Warrants identified in Section 1.24 of the Gothic Disclosure
Schedule; less (c) to the extent included in clause (a) above, any
Gothic Common Stock owned by the Parent Companies as of the date of
this Agreement or issuable to the Parent Companies with respect to any
convertible securities, options, warrants or other rights to acquire
Gothic Common Stock.
1.25 Gothic Certificate. A certificate representing shares of Gothic Common
Stock.
1.26 Gothic Common Stock. Gothic's common stock, $0.01 par value per share.
1.27 Gothic Companies. Gothic and the Gothic Subsidiary.
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<PAGE> 234
1.28 Gothic Disclosure Schedule. The disclosure schedule attached hereto
entitled Gothic Disclosure Schedule and any documents listed on such
disclosure schedule or expressly incorporated therein by reference.
1.29 Gothic Employee(s). As defined in paragraph 5.14.
1.30 Gothic Employee Benefit Plans. As defined in paragraph 3.15.
1.31 Gothic Financial Statements. The audited and unaudited consolidated
financial statements of the Gothic Companies (including the related
notes) included (or incorporated by reference) in Gothic's Annual
Report on Form 10-K for the year ended December 31, 1999, and Gothic's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, in
each case as filed with the SEC.
1.32 Gothic Material Agreements. The: (a) Bank Credit Agreement; (b) Senior
Secured GPC Notes; (c) Senior Discount Notes; (d) all agreements or
instruments filed as material contracts with the Gothic SEC Documents;
or (e) any other written or oral agreements, contracts, commitments or
understandings to which any of the Gothic Companies is a party, by
which any of the Gothic Companies is directly or indirectly bound, or
to which any asset of any of the Gothic Companies may be subject,
involving total value, consideration or obligation in excess of One
Million Dollars ($1,000,000.00).
1.33 Gothic Permits. As defined in paragraph 3.12.
1.34 Gothic Plans. The stock option plans and related agreements listed on
Section 2.3.4 of the Gothic Disclosure Schedule.
1.35 Gothic Preferred Stock. Gothic's Series B Senior Redeemable Preferred
Stock, par value $.05 per share, together with the right to receive
accrued and unpaid dividends.
1.36 Gothic Proposal. The proposal to approve this Agreement and the
Merger, which proposal is to be presented to the stockholders of
Gothic in the Proxy Statement/Prospectus.
1.37 Gothic Representative. Any director, officer, employee, agent, advisor
(including legal, accounting and financial advisors), Affiliate or
other representative of any of the Gothic Companies.
1.38 Gothic SEC Documents. As defined in paragraph 3.5.
1.39 Gothic Severance Policy. As defined in paragraph 5.14.
1.40 Gothic Stock Option(s). Any unexpired option or other right to
purchase Gothic Common Stock issued under the Gothic Plans and
outstanding as of the Effective Time (regardless of whether vested,
unvested or currently exercisable).
1.41 Gothic Stockholder Meeting. The meeting of the stockholders of Gothic
for the purpose of voting on this Agreement and the Merger.
1.42 Gothic Subsidiary. Gothic Production Corporation, an Oklahoma
corporation.
1.43 Gothic Warrants. Any unexpired warrants or other right to acquire
Gothic Common Stock or any security convertible or exchangeable into
Gothic Common Stock (excluding all Gothic Stock Options and the Gothic
Preferred Stock) and outstanding as of the Effective Time (regardless
of whether vested, unvested or currently exercisable).
1.44 Governmental Authority. Any national, state, county or municipal
government, (whether domestic or foreign), agency, board, bureau,
commission, court, department or other instrumentality of any such
government, or any arbitrator in any case that has jurisdiction over
any of the Gothic Companies, Parent or Sub or any of their respective
properties or assets.
1.45 Hazardous Material. Any: (a) "hazardous substance" as defined by
CERCLA; (b) "hazardous waste" as defined by the Resource Conservation
and Recovery Act, as amended; (c) hazardous,
A-3
<PAGE> 235
dangerous or toxic chemical, material, waste or substance, within the
meaning of and regulated by any Environmental Law; (d) radioactive
material, including any naturally occurring radioactive material, and
any source, special or byproduct material as defined in 42 U.S.C. 2011
et seq. and any amendments or authorizations thereof; (e)
asbestos-containing materials in any form or condition; or (f)
polychlorinated biphenyls in any form or condition.
1.46 HSR Act. The Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended from time to time.
1.47 Hydrocarbons. Oil, condensate, gas, casinghead gas and other liquid or
gaseous hydrocarbons.
1.48 Indemnified Parties. As defined in paragraph 5.13.
1.49 Irrevocable Proxy. The irrevocable proxy in the form attached hereto
as Exhibit "1.49" to be executed by the shareholders of Gothic who are
on Gothic's board of directors and the executive officers of Gothic
granting to Parent the right to vote such holders' Gothic Common Stock
in connection with the stockholders' vote concerning the Merger and
any and all related matters.
1.50 Lien(s). Any lien, mortgage, security interest, pledge, deposit,
production payment, restriction, burden, encumbrance, rights of a
vendor under any title retention or conditional sale agreement, or
lease or other arrangement substantially equivalent thereto.
1.51 Major Gothic Stockholder(s). Any holders of Gothic Common Stock who
are Affiliates of Gothic and who, as a result of the Merger, will hold
in excess of three percent (3%) of the issued and outstanding shares
of Parent Common Stock.
1.52 Material Adverse Effect. When used with respect to: (a) Gothic, is an
event or condition that has an adverse financial impact of more than
One Million Dollars ($1,000,000.00) on the Gothic Companies (taken as
a whole) or a result or consequence that would materially and
adversely affect the condition (financial or otherwise), results of
operations or businesses of the Gothic Companies (taken as a whole) or
the aggregate value of their assets, would materially impair the
ability of the Gothic Companies (taken as a whole) to own, hold,
develop and operate their assets, or would impair Gothic's ability to
perform its obligations hereunder or consummate the transactions
contemplated hereby; and (b) Parent, is an event or condition that has
an adverse financial impact of more than Five Million Dollars
($5,000,000.00) on the Parent Companies (taken as a whole) or a result
or consequence that would materially and adversely affect the
condition (financial or otherwise), results of operations or
businesses of the Parent Companies (taken as a whole) or the aggregate
value of their assets, would materially impair the ability of the
Parent Companies (taken as a whole) to own, hold, develop and operate
their assets, or would impair Parent's or Sub's ability to perform its
obligations hereunder or consummate the transactions contemplated
hereby.
1.53 Merger. As defined in paragraph 2.
1.54 Merger Consideration. Four Million (4,000,000) shares of Parent Common
Stock.
1.55 Net Revenue Interests. Gothic's overall interest in Hydrocarbons
produced from or attributable to Gothic's Oil and Gas Interests, after
deducting all lessor's royalties, overriding royalties, production
payments, and other interests or burdens on Hydrocarbons produced from
Gothic's oil and gas properties or any well thereon.
1.56 OGCA. The Oklahoma General Corporation Act, as amended.
1.57 Oil and Gas Interests. Any and all: (a) direct and indirect interests
in and rights with respect to oil, gas, mineral and related properties
and assets of any kind and nature, direct or indirect, including
working, royalty and overriding royalty interests, production
payments, operating rights, net profits interests, other non-working
interests and non-operating interests; (b) interests in and rights
with respect to Hydrocarbons and other minerals or revenues therefrom
and contracts in connection therewith and claims and rights thereto
(including oil and gas leases, operating
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<PAGE> 236
agreements, unitization and pooling agreements and orders, division
orders, transfer orders, mineral deeds, royalty deeds, oil and gas
sales, exchange and processing contracts and agreements and interests
related to any of the foregoing), surface interests, fee interests,
reversionary interests, reservations and concessions; (c) easements,
rights of way, licenses, permits, leases, and other interests
associated with, appurtenant to, or necessary for the operation of any
of the foregoing; and (d) interests in fixtures, equipment and
machinery (including well equipment and machinery), oil and gas
production, gathering, transmission, compression, treating, processing
and storage facilities (including tanks, tank batteries, pipelines and
gathering systems), pumps, water plants, electric plants, gasoline and
gas processing plants, refineries and other tangible personal property
and fixtures associated with, appurtenant to, or necessary for the
operation of any of the foregoing.
1.58 Ownership Interests. The ownership interests of Gothic in its assets,
as set forth in Section 1.58 of the Gothic Disclosure Schedule.
1.59 Parent. Chesapeake Energy Corporation, an Oklahoma corporation.
1.60 Parent Benefit Plans. "Employee benefit plans" within the meaning of
Section 3(3) of ERISA, which the Parent Companies maintain or sponsor
or with respect to which the Parent Companies have any material
liability (actual, contingent, primary or secondary), and all other:
(a) director or employee compensation or benefit plans, programs or
arrangements; (b) stock purchase, stock option, severance, bonus,
incentive and deferred compensation plans; (c) written employment or
consulting contracts; and (d) change-in-control agreements which the
Parent Companies maintain, sponsor or are a party to or with respect
to which the Gothic Companies have or could have any material
liability.
1.61 Parent Certificate. A certificate representing shares of Parent Common
Stock.
1.62 Parent Common Stock. Parent's common stock, par value $0.01 per share.
1.63 Parent Companies. Parent and the Parent Subsidiaries.
1.64 Parent Disclosure Schedule. The disclosure schedule attached hereto
entitled Parent Disclosure Schedule and any documents listed on such
disclosure schedule and expressly incorporated therein by reference.
1.65 Parent Employee Benefit Plan(s). As defined in paragraph 4.17.
1.66 Parent Financial Statements. The audited and unaudited consolidated
financial statements of the Parent Companies (including the related
notes) included (or incorporated by reference) in Parent's Annual
Report on Form 10-K for the year ended December 31, 1999, and Parent's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, in
each case as filed with the SEC.
1.67 Parent Permits. As defined in paragraph 4.13.
1.68 Parent Preferred Stock. Parent's preferred stock, par value $0.01 per
share.
1.69 Parent Representative. Any director, officer, employee, agent, advisor
(including legal, accounting and financial advisors), Affiliate or
other representative of Parent or Parent Subsidiaries.
1.70 Parent SEC Documents. As defined in paragraph 4.5.
1.71 Parent Subsidiaries. Sub and all other direct or indirect wholly owned
subsidiaries of Parent.
1.72 Permitted Encumbrances. Any: (a) Liens for Taxes, assessments or other
governmental charges or levies that are not at the particular time in
question due and delinquent, foreclosure, distraint, sale or other
similar proceedings have not been commenced or if commenced, have been
stayed or are being contested in good faith by appropriate proceedings
and if any of the Gothic Companies will have set aside on its books
such reserves (segregated to the extent required by
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<PAGE> 237
sound accounting practices) as may be required by GAAP or otherwise
determined by its board of directors to be adequate with respect
thereto; (b) Liens of carriers, warehousemen, mechanics, laborers,
materialmen, landlords, vendors, workmen and operators arising by
operation of law in the ordinary course of business or by a written
agreement existing as of the date hereof and necessary or incident to
the exploration, development, operation and maintenance of Hydrocarbon
properties and related facilities and assets for sums not yet due or
being contested in good faith by appropriate proceedings, if any of
the Gothic Companies will have set aside on its books such reserves
(segregated to the extent required by sound accounting practices) as
may be required by GAAP or otherwise determined by its board of
directors to be adequate with respect thereto; (c) Liens incurred in
the ordinary course of business in connection with worker's
compensation, unemployment insurance and other social security
legislation (other than ERISA); (d) Liens incurred in the ordinary
course of business to secure the performance of bids, tenders, trade
contracts, leases, statutory obligations, surety and appeal bonds,
performance and repayment bonds and other obligations of a like
nature; (e) Liens, easements, rights-of-way, restrictions, servitudes,
permits, conditions, covenants, exceptions, reservations and other
similar encumbrances incurred in the ordinary course of business or
existing on property and not (i) reducing the Gothic Net Revenue
Interest set forth in Section 1.58 of the Gothic Disclosure Schedule,
(ii) increasing the Gothic Working Interests in any Oil and Gas
Interest set forth in Section 1.58 of the Gothic Disclosure Schedule
or (iii) impairing the value of the assets of any of the Gothic
Companies or interfering with the ordinary conduct of the business of
any of the Gothic Companies or rights to any of their assets; (f)
Liens created or arising by operation of law to secure a party's
obligations as a purchaser of oil and gas; (g) all rights to consent
by, required notices to, filings with, or other actions by any
Governmental Authority to the extent customarily obtained subsequent
to Closing; (h) farmout, carried working interest, joint operating,
unitization, royalty, overriding royalty, sales and similar agreements
relating to the exploration or development of, or production from,
Hydrocarbon properties entered into in the ordinary course of
business; (i) any defects, irregularities or deficiencies in title to
easements, rights-of-way or other surface use agreements that do not
(x) reduce the Gothic Net Revenue Interests set forth in Section 1.58
of the Gothic Disclosure Schedule, (y) increase the Gothic Working
Interests in any Oil and Gas Interest set forth in Section 1.58 of the
Gothic Disclosure Schedule or (z) adversely affect the value of any
asset of any of the Gothic Companies; (j) preferential rights to
purchase and Third-Party Consents disclosed in Section 1.72 of the
Gothic Disclosure Schedule; (k) Liens arising under or created
pursuant to the Bank Credit Agreement and the Senior Secured GPC
Notes; and (l) Liens specifically described in Section 1.72 of the
Gothic Disclosure Schedule.
1.73 Person(s). Any natural person, corporation, company, limited or
general partnership, joint stock company, joint venture, association,
limited liability company, limited liability partnership, trust, bank,
trust company, land trust, business trust or other entity or
organization, whether or not a Governmental Authority.
1.74 Proxy Statement/Prospectus. A proxy statement in a definitive form
relating to the Gothic Stockholder Meeting, which proxy statement will
be included as a prospectus in the Registration Statement.
1.75 Registration Statement. The Registration Statement on Form S-4 to be
filed by Parent in connection with the issuance of Parent Common Stock
pursuant to the Merger.
1.76 Returns. As defined in paragraph 3.14.1.
1.77 SEC. The Securities and Exchange Commission.
1.78 Securities Act. The Securities Act of 1933, as amended from time to
time.
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1.79 Senior Discount Notes. The 14 1/8% Series B Senior Secured Discount
Notes Due 2006 issued by Gothic and the related indenture, collateral
documents and other agreements and instruments in connection
therewith.
1.80 Senior Secured GPC Notes. The 11 1/8% Senior Secured Notes due 2005
issued by the Gothic Subsidiary and the related indenture, collateral
documents and other agreements and instruments in connection
therewith.
1.81 Sub. Chesapeake Merger 2000 Corp., an Oklahoma corporation and
wholly-owned subsidiary of Parent.
1.82 Sub Common Stock. Sub's common stock, par value $1.00 per share.
1.83 Superior Proposal. As defined in paragraph 5.4.2.
1.84 Surviving Corporation. As defined in paragraph 2.1.
1.85 Tax(es). Any and all taxes, fees, levies, duties, tariffs, imposts,
and other charges of any kind (together with any and all interest,
penalties, additions to tax and additional amounts imposed with
respect thereto) imposed by any Governmental Authority or taxing
authority including, without limitation, taxes or other charges on or
with respect to income, franchises, windfall or other profits, gross
receipts, property, sales, use, capital stock, payroll, employment,
social security, workers' compensation, unemployment compensation, or
net worth, taxes or other charges in the nature of excise,
withholding, ad valorem, stamp, transfer, value added, or gains taxes,
license, registration and documentation fees, and custom duties,
tariffs, and similar charges.
1.86 Third-Party Consent. The consent or approval of any Person other than
Gothic, Parent, Sub or any Governmental Authority.
1.87 Working Interest. Gothic's share of all of the costs, expenses,
burdens, and obligations of any type or nature attributable to
Gothic's interests in its oil and gas properties or any well thereon.
2. MERGER. Subject to the terms and conditions set forth in this
Agreement, at the Effective Time, Sub will be merged with and into Gothic in
accordance with the provisions of this Agreement and the OGCA. Such merger is
referred to herein as the "Merger."
2.1 Effect of the Merger. Upon the effectiveness of the Merger, the
separate existence of Sub will cease and Gothic, as the surviving
corporation in the Merger (the "Surviving Corporation"), will continue
its corporate existence under the laws of the State of Oklahoma. The
Merger will have the effects specified in this Agreement and the OGCA.
2.2 Governing Instruments, Directors and Officers of the Surviving
Corporation. As of the Effective Time: (a) the certificate of
incorporation of Sub including the Amended and Restated Certificate of
Designation of Preferences and Rights of the Gothic Preferred Stock in
the form attached hereto as Exhibit "2.2," as in effect immediately
prior to the Effective Time, will be the certificate of incorporation
of the Surviving Corporation until duly amended in accordance with the
terms of the certificate of incorporation and applicable law; (b) the
name of the Surviving Corporation will be Gothic Energy Corporation,
however, at the option of Parent, the name of the Surviving
Corporation may be changed; (c) the bylaws of Sub, as in effect
immediately prior to the Effective Time, will be the bylaws of the
Surviving Corporation until duly amended in accordance with the terms
of the bylaws and applicable law; and (d) the directors and officers
of Sub at the Effective Time will be the directors and officers,
respectively, of the Surviving Corporation from the Effective Time
until their respective successors have been duly elected or appointed
in accordance with the certificate of incorporation and bylaws of the
Surviving Corporation and applicable law.
2.3 Effect on Securities. As of the Effective Time, by virtue of the
Merger and without any action on the part of any holder thereof, the
Sub Common Stock, the Gothic Common Stock and other
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Gothic securities will be treated as follows subject to the terms and
conditions of this Agreement:
2.3.1 Sub Common Stock. Each share of Sub Common Stock outstanding
immediately prior to the Effective Time will be automatically
converted into and become one (1) share of common stock of the
Surviving Corporation. As a result of the Merger the foregoing
stock will represent one hundred percent (100%) of the issued and
outstanding capital stock of the Surviving Corporation
immediately after the Effective Time.
2.3.2 Gothic Common Stock. As of the Effective Time, by virtue of the
Merger and automatically without any action on the part of any
holder thereof, each share of Gothic Common Stock that is issued
and outstanding immediately prior to the Effective Time (other
than shares of Gothic Common Stock held by Dissenting
Stockholders, shares of Gothic Common Stock held by the Parent
Companies as of the date of this Agreement and shares of Gothic
Common Stock held by the Parent Companies as a result of the
conversion of Gothic Preferred Stock) will be automatically
converted into a portion of a share of validly issued, fully paid
and non-assessable Parent Common Stock equal to the Exchange
Ratio. Each share of Gothic Common Stock converted under this
paragraph 2.3.2 will be canceled and retired, cease to exist and
no longer be outstanding. Any holder of a Gothic Certificate
representing any such share of Gothic Common Stock will cease to
have any rights with respect thereto except the right to receive
the share of Parent Common Stock to be issued in exchange
therefor (along with any cash in lieu of fractional shares of
Parent Common Stock as provided in paragraph 2.4.5 and any unpaid
dividends and distributions with respect to such shares of Parent
Common Stock as provided in paragraph 2.4.3, without interest),
on the surrender of such Gothic Certificate in accordance with
paragraph 2.4. Notwithstanding anything herein to the contrary as
of the Effective Time, by virtue of the Merger: (a) no shares of
Parent Common Stock or other consideration will be paid or
payable in exchange for shares of Gothic Common Stock that are
issued and held as treasury stock, if any, and all of the
foregoing shares of Gothic Common Stock will be automatically
canceled and retired, cease to exist and no longer be
outstanding; (b) no shares of Parent Common Stock or other
consideration will be paid or payable in exchange for shares of
Gothic Common Stock that are owned by the Parent Companies and
all of the foregoing shares of Gothic Common Stock will remain
outstanding and in full force and effect; and (c) any obligations
relating to the payment of the purchase price for Gothic Common
Stock will not be discharged and will constitute valid and
binding obligations owned by the Surviving Corporation.
2.3.3 Gothic Preferred Stock. As of the Effective Time, by virtue of
the Merger, all of the shares of Gothic Preferred Stock and all
rights with respect thereto will remain outstanding and in full
force and effect in accordance with the Certificate of
Designation of Preferences and Rights of the Gothic Preferred
Stock as amended by the Amended and Restated Certificate of
Designation of Preferences and Rights of Gothic Preferred Stock
attached hereto as Exhibit "2.2" pursuant to which the right to
convert the Gothic Preferred Stock into Gothic Common Stock will
be eliminated. Notwithstanding anything herein to the contrary,
no shares of Parent Common Stock or other consideration will be
paid or payable to any holder of Gothic Preferred Stock in
exchange for Gothic Preferred Stock.
2.3.4 Options and Warrants. Section 2.3.4 of the Gothic Disclosure
Schedule lists: (a) each of the Gothic Plans; (b) each Gothic
Stock Option outstanding specifying the Gothic Plan under which
such Gothic Stock Option was issued, the number of shares of
Gothic Common Stock covered by such Gothic Stock Option, the term
of such Gothic Stock Option, the vesting schedule for such Gothic
Stock Option and the exercise price for such Gothic Stock Option;
and (c) each Gothic Warrant outstanding specifying the agreement
under which such Gothic Warrant was issued, the number of shares
of Gothic Common
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Stock covered by such Gothic Warrant, the term of such Gothic
Warrant and the exercise price for each share of Gothic Common
Stock which can be acquired thereunder (in each case after giving
effect to the Merger and all previous transactions). As of the
Effective Time, as a result of the Merger, each Gothic Stock
Option and Gothic Warrant described in the foregoing clauses (b)
and (c) of this paragraph 2.3.4 will be assumed by Parent under
the operative documents for such Gothic Stock Option and Gothic
Warrant and converted into options or warrants to purchase the
whole number of shares of Parent Common Stock determined in
accordance with the terms and conditions of the documents
evidencing such Gothic Stock Option or Gothic Warrant. Except as
expressly stated otherwise in this Agreement, the parties agree
that the terms, exercisability, vesting schedule, vesting
commencement date, status as an "incentive stock option" under
Section 422 of the Code, if applicable, and all other terms and
conditions of any Gothic Stock Option or Gothic Warrant will
otherwise be unchanged as a result of the transactions
contemplated by this Agreement, except by operation of law. The
parties agree that to the extent that any of the Gothic Stock
Options have not been exercised or terminated prior to the
Effective Time, any cashless exercise rights under any of the
Gothic Stock Options will be terminated prior to the Merger and
will not be included in the terms assumed by the Parent. Without
limiting the foregoing, except as expressly disclosed in Section
2.3.4 of the Gothic Disclosure Schedule, Gothic further hereby
represents and warrants to Parent that: (i) all adjustments
required to be made to the number of shares issuable or the
exercise price for exercise under each of the Gothic Stock
Options and Gothic Warrants has been accurately made as disclosed
in Section 2.3.4 of the Gothic Disclosure Schedule; (ii) all
required notices have been given to the holders of the Gothic
Stock Options and the Gothic Warrants including, without
limitation, adjustment notices; and (iii) no Gothic Stock Options
or Gothic Warrants will vest, nor will the vesting schedule of
any Gothic Stock Options or Gothic Warrants accelerate, as a
result of the transactions contemplated by this Agreement. As of
the Effective Time, as a result of the Merger, other than those
Gothic Stock Options or Gothic Warrants assumed by the Parent in
accordance with this paragraph 2.3.4, the provisions in any of
the Gothic Plans or any other program, arrangement, option,
warrant or other agreement providing for the issuance or grant of
any interest in respect of the capital stock of the Gothic
Companies will be canceled, cease to exist and no longer be
outstanding as of the Effective Time and Gothic will take all
action necessary to ensure that following the Effective Time no
Person will have any right thereunder to acquire equity
securities of Gothic, the Surviving Corporation or any subsidiary
thereof.
2.3.5 Dissenting Stockholder Shares. Except as provided herein, any
issued and outstanding shares of Gothic Common Stock held by a
Dissenting Stockholder will be converted into the right to
receive such consideration as may be determined to be due to such
Dissenting Stockholder pursuant to the OGCA. If a Dissenting
Stockholder effectively withdraws the demand for appraisal or
loses the right of appraisal as provided under the OGCA, the
shares of Gothic Common Stock held by such Dissenting Stockholder
will be deemed to be converted under paragraph 2.3.2 of this
Agreement (without interest). Gothic will provide prompt notice
to the Parent of any written demands for appraisal, withdrawals
of demands for appraisal and any other instruments served
pursuant to the OGCA and will provide to the Parent the
opportunity to direct all negotiations and proceedings with
respect to demands for appraisal under the OGCA. Absent the prior
written consent of Parent and Sub, Gothic will not negotiate,
settle or offer to settle any demand for appraisal, provided,
however that any and all payments made to settle such appraisal
rights or made pursuant to the OGCA will be made solely out of
Gothic assets and neither Parent nor Sub will have any liability
therefor. Notwithstanding anything contained in this paragraph
2.3.5, if the Merger is rescinded or abandoned or if the
stockholders of Gothic revoke the authority to effect the Merger,
then the right of any
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Dissenting Stockholder to receive such consideration as may be
determined to be due in respect of such Dissenting Stockholder's
Gothic Common Stock pursuant to the OGCA will cease.
2.4 Exchange of Certificates. The exchange of Gothic Common Stock for
Parent Common Stock will be consummated as follows:
2.4.1 Exchange Fund. Immediately after the Effective Time, Parent will
deposit with the Exchange Agent, for the benefit of the holders
of shares of Gothic Common Stock and for exchange in accordance
with this Agreement, certificates representing the Merger
Consideration to be issued in exchange for shares of Gothic
Common Stock pursuant to paragraph 2.4.2, less the number of
shares of Parent Common Stock which: (i) would have been issuable
to Dissenting Stockholders; (ii) will be subject to pledge
agreement by directors of the Gothic Companies securing loans
from the Gothic Companies for the acquisition of Gothic Common
Stock; and (iii) will be issuable on exercise of the Gothic
Warrants listed in Section 1.24 of the Gothic Disclosure
Schedule. Such shares of Parent Common Stock delivered to the
Exchange Agent, together with any dividends or distributions with
respect thereto (as provided in paragraph 2.4.3), are referred to
herein as the "Exchange Fund." The Exchange Agent, pursuant to
irrevocable instructions consistent with the terms of this
Agreement, will deliver the Parent Common Stock to be issued or
paid pursuant to paragraph 2.4.2 out of the Exchange Fund, and
the Exchange Fund will not be used for any other purpose
whatsoever. The Exchange Fund will not be entitled to vote or
exercise any rights of ownership with respect to the Parent
Common Stock held by it from time to time hereunder, except that
it will receive and hold all dividends or other distributions
paid or distributed with respect thereto for the account of
Persons entitled thereto.
2.4.2 Notice and Surrender. As soon as reasonably practicable after the
Effective Time, Parent will cause the Exchange Agent to mail to
each holder of record of a Gothic Certificate that, immediately
prior to the Effective Time, represented shares of Gothic Common
Stock which were converted into the right to receive Parent
Common Stock pursuant to paragraph 2.3.2, a letter of transmittal
to be used to effect the exchange of such Gothic Certificate for
a Parent Certificate (and cash in lieu of fractional shares),
along with instructions for using such letter of transmittal to
effect such exchange. The letter of transmittal (or the
instructions thereto) will specify that delivery of any Gothic
Certificate will be effected, and the risk of loss and title
thereto will pass, only upon delivery of such Gothic Certificate
to the Exchange Agent and will be in such form and have such
other provisions as Parent may reasonably specify. Upon surrender
to the Exchange Agent of a Gothic Certificate for cancellation,
together with a duly completed and executed letter of transmittal
and any other required documents (including, in the case of any
Person constituting an "affiliate" of Gothic for purposes of Rule
145(c) and (d) under the Securities Act, a written agreement from
such Person as described in paragraph 5.10, if not previously
delivered to Parent): (a) the holder of such Gothic Certificate
will be entitled to receive in exchange therefor a Parent
Certificate representing the number of whole shares of Parent
Common Stock that such holder has the right to receive pursuant
to paragraph 2.3.2, any cash in lieu of fractional shares of
Parent Common Stock as provided in paragraph 2.4.5, and any
unpaid dividends and distributions that such holder has the right
to receive pursuant to paragraph 2.4.3 (after giving effect to
any required withholding of Taxes); and (b) the Gothic
Certificate so surrendered will forthwith be canceled. No
interest will be paid or accrued on the cash in lieu of
fractional shares or unpaid dividends and distributions, if any,
payable to holders of Gothic Certificates. In the event of a
transfer of ownership of Gothic Common Stock that is not
registered in the transfer records of Gothic, a Parent
Certificate representing the appropriate number of shares of
Parent Common Stock (along with any cash in lieu of
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fractional shares and any unpaid dividends and distributions that
such holder has the right to receive) may be issued or paid to a
transferee if the Gothic Certificate representing such shares of
Gothic Common Stock is presented to the Exchange Agent
accompanied by all documents required to evidence and effect such
transfer and to evidence that any applicable stock transfer Taxes
have been paid. Until surrendered as contemplated by this
paragraph 2.4.2, each Gothic Certificate will be deemed at any
time after the Effective Time to represent only the right to
receive upon such surrender a Parent Certificate representing
shares of Parent Common Stock as provided in paragraph 2.3.2
(along with any cash in lieu of fractional shares and any unpaid
dividends and distributions to the extent specified herein).
2.4.3 Dividends and Distributions. No dividends or other distributions
with respect to Parent Common Stock declared or made after the
Effective Time with a record date after the Effective Time will
be paid to the holder of any unsurrendered Gothic Certificate.
Subject to the effect of applicable laws: (i) at the time of the
surrender of a Gothic Certificate for exchange in accordance with
the provisions of this paragraph 2.4, there will be paid to the
surrendering holder, without interest, the amount of dividends or
other distributions (having a record date after the Effective
Time but on or prior to surrender and a payment date on or prior
to surrender) theretofore paid with respect to the number of
whole shares of Parent Common Stock that such holder is entitled
to receive (less the amount of any withholding Taxes that may be
required with respect thereto); and (ii) at the appropriate
payment date, there will be paid to the surrendering holder,
without interest, the amount of dividends or other distributions
(having a record date after the Effective Time but on or prior to
surrender and a payment date subsequent to surrender) payable
with respect to the number of whole shares of Parent Common Stock
that such holder receives (less the amount of any withholding
Taxes that may be required with respect thereto).
2.4.4 Full Satisfaction. All shares of Parent Common Stock issued upon
the surrender for exchange of shares of Gothic Common Stock in
accordance with the terms hereof (including any cash paid
pursuant to paragraph 2.4.3 or 2.4.5) will be deemed to have been
issued in full satisfaction of all rights pertaining to such
shares of Gothic Common Stock. After the Effective Time, there
will be no further registration of transfers on the Surviving
Corporation's stock transfer books of the shares of Gothic Common
Stock that were outstanding immediately prior to the Effective
Time. If, after the Effective Time, a Gothic Certificate is
presented to the Surviving Corporation or Parent for any reason,
it will be canceled and exchanged as provided in this paragraph
2.4.
2.4.5 Fractional Shares. No Parent Certificate or scrip representing
fractional shares of Parent Common Stock will be issued in the
Merger and, except as provided in this paragraph 2.4.5, no
dividend or other distribution, stock split or interest will
relate to any such fractional shares, and such fractional share
will not entitle the owner thereof to vote or to any other rights
of a stockholder of Parent. In lieu of any fractional security,
each holder of shares of Gothic Common Stock who would otherwise
have been entitled to a fraction of a share of Parent Common
Stock upon surrender of the Gothic Certificate(s) representing
such Gothic Common Stock for exchange pursuant to this paragraph
2.4 will be paid an amount in cash (without interest) equal to
such holder's proportionate interest in the amount of the net
proceeds from the sale or sales by the Exchange Agent in
accordance with the provisions of this paragraph 2.4.5, on behalf
of all such holders, of the aggregate fractional shares of Parent
Common Stock issued pursuant to paragraph 2.3. As soon as
practicable following the Effective Time, the Exchange Agent will
determine the excess of: (a) the number of whole shares of Parent
Common Stock delivered to the Exchange Agent by Parent pursuant
to paragraph 2.4.1; over (b) the aggregate number of whole shares
of Parent Common Stock to be distributed to holders
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of Gothic Common Stock pursuant to paragraph 2.3.2 (such excess
being herein called the "Excess Securities") and the Exchange
Agent, as agent for the former holders of Gothic Common Stock,
will sell the Excess Securities at the prevailing prices on the
Exchange. The sale of the Excess Securities by the Exchange Agent
will be executed on the Exchange through one or more member firms
of the Exchange and will be executed in round lots to the extent
practicable. Parent will pay all commissions, transfer taxes and
other out-of-pocket transaction costs, including the expenses and
compensation of the Exchange Agent, incurred in connection with
such sale of Excess Securities. Until the net proceeds of such
sale of Excess Securities have been distributed to the former
stockholders of Gothic, the Exchange Agent will hold such
proceeds and dividends in trust for such former stockholders. As
soon as practicable after the determination of the amount of cash
to be paid to former stockholders of Gothic in lieu of any
fractional interests, the Exchange Agent will make available in
accordance with this Agreement such amounts to any such former
stockholders.
2.4.6 Unclaimed Exchange Fund. Any portion of the Exchange Fund and
cash held by the Exchange Agent in accordance with the terms of
this paragraph 2.4 that remains unclaimed by the former
stockholders of Gothic for a period of one (1) year following the
Effective Time will be delivered to Parent, upon demand.
Thereafter, any former stockholders of Gothic who have not
theretofore complied with the provisions of this paragraph 2.4
will look only to Parent for payment of their claim for Parent
Common Stock, any cash in lieu of fractional shares of Parent
Common Stock and any dividends or distributions with respect to
Parent Common Stock (all without interest).
2.4.7 No Liability. Neither Parent, Sub, Gothic, the Surviving
Corporation, the Exchange Agent nor any other Person will be
liable to any former holder of shares of Gothic Common Stock for
any amount properly delivered to any public official pursuant to
any applicable abandoned property, escheat or similar law. Any
amounts remaining unclaimed by former holders of Gothic Common
Stock for a period of three (3) years following the Effective
Time (or such earlier date immediately prior to the time at which
such amounts would otherwise escheat to or become property of any
Governmental Authority) will, to the extent permitted by
applicable law, become the property of Parent, free and clear of
any claims or interest of any such holders or their successors,
assigns or personal representatives previously entitled thereto.
2.4.8 Lost, Stolen or Destroyed Certificates. If any Gothic Certificate
is lost, stolen or destroyed, upon the making of an affidavit of
that fact by the Person claiming such Gothic Certificate to be
lost, stolen or destroyed and, if required by Parent, the posting
by such Person of a bond, in such reasonable amount as Parent may
direct, as indemnity against any claim that may be made against
Parent with respect to such Gothic Certificate, the Exchange
Agent will issue in exchange for such lost, stolen or destroyed
Gothic Certificate the shares of Parent Common Stock (along with
any cash in lieu of fractional shares pursuant to paragraph 2.4.5
and any unpaid dividends and distributions pursuant to paragraph
2.4.3) deliverable with respect thereto pursuant to this
Agreement.
2.4.9 Encumbered Shares. All shares of Gothic Common Stock which were
acquired by directors of the Gothic Companies through a loan or
purchase money sale by any of the Gothic Companies secured by a
pledge agreement covering such Gothic Common Stock will be
converted into shares of Parent Common Stock in accordance with
the provisions of paragraph 2.3.2 hereof and will continue to
secure such indebtedness until it is paid in full in accordance
with the terms thereof. Upon payment in full of the entire unpaid
purchase price therefor plus all accrued unpaid interest thereon
such Parent Common Stock will be delivered in accordance with the
instructions of the pledgor thereof. At the option of the Parent,
a legend may be included on the Gothic Certificate or the Parent
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Certificate disclosing the existence of the unpaid obligation and
the Lien on the Parent Common Stock to secure the payment of such
indebtedness.
2.5 Closing. The Closing will take place on the Closing Date at such time
and place as is agreed upon by Parent and Gothic.
2.6 Effective Time of the Merger. The Merger will become effective
immediately when the Certificate of Merger is accepted for filing by
the Secretary of State of Oklahoma or at such time thereafter as is
provided in the Certificate of Merger (the "Effective Time"). The
Certificate of Merger will be filed on the Closing Date as soon as
practicable after the Closing; provided, however, that the Certificate
of Merger may be filed prior to the Closing Date or prior to the
Closing so long as it provides for an Effective Time that occurs after
the Closing.
2.7 Taking of Necessary or Further Action. Each of Parent, Sub and Gothic
will use all reasonable efforts to take all such actions as may be
necessary or appropriate in order to effectuate the Merger under the
OGCA as promptly as commercially practicable. If, at any time after
the Effective Time, any further action is necessary or desirable to
carry out the purposes of this Agreement and to vest the Surviving
Corporation with full right, title and possession to all assets,
property, rights, privileges, powers and franchises of either Sub or
Gothic, the officers and directors of the Surviving Corporation are
fully authorized, in the name of the Surviving Corporation or
otherwise to take, and will take all such lawful and necessary action.
3. GOTHIC REPRESENTATIONS AND WARRANTIES. Except as set forth in the
Gothic Disclosure Schedule, Gothic hereby represents and warrants to Parent and
Sub that:
3.1 Corporate Organization. Each of the Gothic Companies: (a) is a
corporation duly organized, validly existing and in good standing
under the laws of its state of incorporation; (b) has all requisite
corporate power and authority to own, lease and operate its properties
and assets and to carry on its business as it is presently being
conducted; and (c) is duly qualified to do business as a foreign
corporation, and is in good standing, in each jurisdiction where the
character of the properties owned or leased by it or the nature of its
activities makes such qualification necessary (except where any
failure to be so qualified as a foreign corporation or to be in good
standing would not, individually or in the aggregate, have a Material
Adverse Effect on Gothic). Copies of the certificate or articles of
incorporation and bylaws of each of the Gothic Companies have
heretofore been delivered to Parent and such copies are accurate and
complete as of the date hereof.
3.2 Authority and Enforceability. The board of directors of Gothic (at a
meeting duly called and held) has: (a) determined that the Merger is
advisable; and (b) resolved to approve the Merger and recommend the
approval and adoption of this Agreement by Gothic's stockholders.
Gothic is not governed by the Control Share Acquisition Act, Sections
1145 through 1155 of Title 18 of the Oklahoma Statutes and Section
1090.3 of the OGCA. Gothic has the requisite corporate power and
authority to execute and deliver this Agreement and (with respect to
consummation of this Agreement and the Merger, subject to the approval
of the stockholders of Gothic) to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and
(with the approval by the stockholders of Gothic) the consummation of
the transactions contemplated hereby have been duly and validly
authorized by all necessary corporate action on the part of Gothic,
including approval by the board of directors of Gothic, and no other
corporate proceedings on the part of Gothic are necessary to authorize
the execution or delivery of this Agreement or (with approval by the
stockholders of Gothic) to consummate the transactions contemplated
hereby. This Agreement has been duly and validly executed and
delivered by Gothic (with respect to consummation of this Agreement
and the Merger, subject to the approval by the stockholders of Gothic
and assuming that this Agreement constitutes a valid and binding
obligation of Parent and Sub) and constitutes a valid and binding
obligation of Gothic, enforceable against Gothic in accordance with
its terms.
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3.3 No Violations. Except as set forth in Section 3.3 of the Gothic
Disclosure Schedule, the execution and delivery of this Agreement does
not, and the consummation of the transactions contemplated hereby and
compliance by Gothic with the provisions hereof will not, conflict
with, result in any violation of or default (with or without notice or
lapse of time or both) under, give rise to a right of termination,
cancellation or acceleration of any obligation (excluding any change
of control put or acceleration) or to the loss of a material benefit
under, or result in the creation of any Lien on any of the properties
or assets of the Gothic Companies under, any provision of: (a) the
certificate of incorporation or bylaws of the Gothic Companies; (b)
any loan or credit agreement, note, bond, mortgage, indenture, lease,
permit, concession, franchise, license or other agreement or
instrument applicable to the Gothic Companies; or (c) assuming the
consents, approvals, authorizations or permits and filings or
notifications referred to in paragraph 3.4 are duly and timely
obtained or made, any judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to the Gothic Companies or
any of their respective properties or assets, other than, in the case
of clause (b) or (c) above, any such conflict, violation, default,
right, loss or Lien that, individually or in the aggregate, would not
have a Material Adverse Effect on Gothic.
3.4 Consents and Approvals. No consent, approval, order or authorization
of, registration, declaration, or filing with, or permit from, any
Governmental Authority is required by or with respect to Gothic in
connection with the execution and delivery of this Agreement by Gothic
or the consummation by Gothic of the transactions contemplated hereby
except for the following: (a) any such consent, approval, order,
authorization, registration, declaration, filing or permit which the
failure to obtain or make would not, individually or in the aggregate,
have a Material Adverse Effect on Gothic or Gothic's ability to
consummate the transactions contemplated hereby in accordance with
this Agreement; (b) the filing of the Certificate of Merger with the
Secretary of State of Oklahoma pursuant to the provisions of the OGCA;
(c) the filing, if necessary, of a pre-merger notification report by
Parent under the HSR Act and the expiration or termination of the
applicable waiting period; (d) the filing with the SEC of the Proxy
Statement/Prospectus and such other reports under Section 13(a) of the
Exchange Act and such other compliance with the Exchange Act and the
Securities Act and the rules and regulations of the SEC thereunder as
may be required in connection with this Agreement and the transactions
contemplated hereby and the obtaining from the SEC of such orders as
may be so required; and (e) such filings and approvals as may be
required by any applicable state securities, "blue sky" or takeover
laws or Environmental Laws. No Third-Party Consent is required by or
with respect to Gothic in connection with the execution and delivery
of this Agreement or the consummation of the transactions contemplated
hereby, except for: (i) any such Third-Party Consent which the failure
to obtain would not, individually or in the aggregate, have a Material
Adverse Effect on Gothic or Gothic's ability to consummate the
transactions contemplated in this Agreement; (ii) the valid approval
of this Agreement and the Merger by the stockholders of Gothic; and
(iii) any consent, approval or waiver required by the terms of the
Bank Credit Agreement, which consent, approval or waiver Gothic
undertakes to seek and obtain promptly after the date of this
Agreement.
3.5 Gothic SEC Documents. Parent has had or will have available to it a
true, correct and complete copy of each report, schedule, registration
statement and definitive proxy statement filed by Gothic with the SEC
since December 31, 1997, and prior to the Effective Time (the "Gothic
SEC Documents"), which are all the documents (other than preliminary
material) that Gothic was or will be required to file with the SEC
since such date. Except as set forth in Section 3.5 of the Gothic
Disclosure Schedule, as of their respective dates, the Gothic SEC
Documents complied or will comply in all material respects with the
requirements of the Securities Act or the Exchange Act, as the case
may be, and the rules and regulations of the SEC thereunder applicable
to such Gothic SEC Documents, and none of the Gothic SEC Documents
contained or will contain any untrue statement of a material fact or
omitted or will omit to state a material
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fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
3.6 Financial Statements. The Gothic Financial Statements were prepared in
accordance with the applicable published rules and regulations of the
SEC with respect thereto and in accordance with GAAP applied on a
consistent basis during the periods involved (except as may be
indicated in the notes thereto or, in the case of unaudited
statements, as permitted by Rule 10-01 of Regulation S-X of the SEC)
and fairly present in all material respects, in accordance with
applicable requirements of GAAP (in the case of unaudited statements,
subject to normal, recurring adjustments), the consolidated financial
position of the Gothic Companies as of their respective dates and the
consolidated results of operations and the consolidated cash flows of
the Gothic Companies for the periods presented therein. There are no
material imbalances of production from the oil and gas properties of
the Gothic Companies whether required to be disclosed pursuant to GAAP
or otherwise.
3.7 Capital Structure. The authorized capital stock of Gothic consists of
100,000,000 shares of Gothic Common Stock and 500,000 shares of Gothic
Preferred Stock. As of September 5, 2000: (a) 23,305,076 shares of
Gothic Common Stock were validly issued and outstanding; (b)
14,796,297 shares of Gothic Common Stock were reserved for issuance
pursuant to the Gothic Plans and the Gothic Warrants, of which Gothic
Stock Options and Gothic Warrants to purchase a total of 14,731,297
shares of Gothic Common Stock were issued and outstanding; (c) except
for the Gothic Preferred Stock owned by the Parent Companies, there
were no shares of Gothic Preferred Stock validly issued and
outstanding; and (d) no shares of Gothic Common Stock were held by
Gothic as treasury stock and no shares of Gothic Preferred Stock were
held by Gothic as treasury stock. Gothic will notify Parent in writing
simultaneously with any change after September 5, 2000, in any of the
numbers of securities set forth in the immediately preceding sentence
together with a detailed explanation of the event giving rise to such
change. The authorized capital stock of the Gothic Subsidiary consists
of 50,000 shares of common stock, $1.00 par value per share, of which
100 shares are validly issued and outstanding and are now and as of
the Effective Time will be owned by Gothic. Except as described in
subpart (a) above or in Section 2.3.4 of the Gothic Disclosure
Schedule, there are: (i) no outstanding shares of capital stock or
other voting securities of Gothic; (ii) no outstanding securities of
Gothic or any other Person convertible into or exchangeable or
exercisable for shares of capital stock or other voting securities of
any Gothic Company; and (iii) no outstanding subscriptions, options,
warrants, calls, rights (including preemptive rights, stock
appreciation rights, phantom stock rights, conversion rights,
commitments, understandings or agreements to which any Gothic Company
is a party or by which it is bound) obligating any Gothic Company to
issue, deliver, sell, purchase, redeem or acquire shares of capital
stock or other securities of any Gothic Company or obligating any
Gothic Company to grant, extend or enter into any such subscription,
option, warrant, call, right, commitment, understanding or agreement.
All outstanding shares of capital stock of each of the Gothic
Companies are validly issued, fully paid and nonassessable and not
subject to any preemptive right. Except as set forth in Section 3.7 of
the Gothic Disclosure Schedule, as of the date hereof there is no, and
at the Effective Time there will not be any, stockholder agreement,
voting trust or other agreement or understanding to which any of the
Gothic Companies is a party or by which it is bound relating to the
voting of any shares of the capital stock of any of the Gothic
Companies.
3.8 Governmental Regulation. None of the Gothic Companies is subject to
regulation under the Public Utility Holding Company Act of 1935, the
Federal Power Act, the Interstate Commerce Act, the Investment Company
Act of 1940 or any state public utilities laws.
3.9 Litigation. Except as set forth in Section 3.9 of the Gothic Disclosure
Schedule, there is no litigation, arbitration, investigation or other
proceeding of any Governmental Authority or other Person pending or, to
the knowledge of Gothic, threatened against any of the Gothic Companies
or their respective assets which, if adversely determined, could
reasonably be expected to have a
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Material Adverse Effect on any of the Gothic Companies or Gothic's
ability to consummate the transactions contemplated hereby in
accordance with this Agreement. Gothic has no knowledge of any facts
that are likely to give rise to any litigation, arbitration,
investigation or other proceeding of any Governmental Authority or
other Person which, individually or in the aggregate, is reasonably
likely to have a Material Adverse Effect on any of the Gothic
Companies or Gothic's ability to consummate the transactions
contemplated hereby in accordance with this Agreement. No Gothic
Company is subject to any outstanding injunction, judgment, order,
decree or ruling (other than routine oil and gas field regulatory
orders and any injunction, judgment, order, decree or ruling that,
either individually or in the aggregate, would not have a Material
Adverse Effect on any of the Gothic Companies or Gothic's ability to
consummate the transactions contemplated hereby in accordance with
this Agreement). There is no litigation, investigation or other
proceeding of any Governmental Authority or other Person pending or,
to the knowledge of Gothic, threatened against or affecting any of the
Gothic Companies that questions the validity or enforceability of this
Agreement or any other document, instrument or agreement to be
executed and delivered by Gothic in connection with the transactions
contemplated hereby.
3.10 Brokers. Except for the agreement attached hereto as Section 3.10 of
the Gothic Disclosure Schedule, no broker, finder, investment banker
or other Person is or will be, in connection with the transactions
contemplated by this Agreement, entitled to any brokerage, finder's or
other fee or compensation based on any arrangement or agreement made
by or on behalf of Gothic for which the Gothic Companies or Parent or
Sub will have any obligation or liability.
3.11 Absence of Certain Changes or Events. Except as set forth in Section
3.11 of the Gothic Disclosure Schedule, since March 31, 2000, Gothic
has conducted its business only in the ordinary course of business
consistent with past practices and, since such date, there has not
been any event (financial or otherwise, whether or not in the ordinary
course of business), circumstance or condition that: (a) would be
reasonably likely to have a Material Adverse Effect on any of the
Gothic Companies or Gothic's ability to consummate the transactions
contemplated hereby in accordance with this Agreement; or (b) would
have required the consent of Parent pursuant to paragraph 5.1 had such
event occurred after the date of this Agreement (other than changes,
including changes in commodity prices, generally affecting the oil and
gas industry, changes resulting from exploration or development
results reported in the ordinary course of business and changes
arising from the announcement of the Merger).
3.12 Compliance with Laws, Material Agreements and Permits. None of the
Gothic Companies is in violation of, or in default under, and no event
has occurred that (with notice or the lapse of time or both) would
constitute a violation of or default under: (a) its certificate or
articles of incorporation or bylaws or other governing document: (b)
any applicable law, rule, regulation, order, writ, decree or judgment
of any Governmental Authority; or (c) any Gothic Material Agreement,
except (in the case of clause (b) or (c) above) for any violation or
default that would not, individually or in the aggregate, have a
Material Adverse Effect on any of the Gothic Companies or Gothic's
ability to consummate the transactions contemplated hereby in
accordance with this Agreement. Each of the Gothic Companies has
obtained and holds all permits, licenses, variances, exemptions,
orders, franchises, approvals and authorizations of all Governmental
Authorities necessary for the lawful conduct of its business or the
lawful ownership, use and operation of its assets ("Gothic Permits"),
except for Gothic Permits which the failure to obtain or hold would
not, individually or in the aggregate, have a Material Adverse Effect
on any of the Gothic Companies or Gothic's ability to consummate the
transactions contemplated hereby in accordance with this Agreement.
Each of the Gothic Companies is in compliance with the terms of its
Gothic Permits, except where the failure to comply would not,
individually or in the aggregate, have a Material Adverse Effect on
any of the Gothic Companies or Gothic's ability to consummate the
transactions contemplated hereby in accordance with this Agreement. No
investigation or review by any Governmental Authority with respect to
any of
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the Gothic Companies is pending or, to the knowledge of Gothic,
threatened, other than those the outcome of which would not,
individually or in the aggregate, have a Material Adverse Effect on
any of the Gothic Companies or Gothic's ability to consummate the
transactions contemplated hereby in accordance with this Agreement. To
the knowledge of Gothic, no party to any Gothic Material Agreement is
in material breach of the terms, provisions and conditions of such
Gothic Material Agreement.
3.13 No Restrictions. Except as otherwise set forth in Section 3.13 of the
Gothic Disclosure Schedule, none of the Gothic Companies is a party
to: (a) any agreement, indenture or other instrument that contains
restrictions with respect to the payment of dividends or other
distributions with respect to its capital stock; (b) any financial
arrangement with respect to or creating any indebtedness to any Person
(other than indebtedness reflected in the Gothic Financial Statements
or indebtedness incurred in the ordinary course of business); (c) any
agreement, contract or commitment relating to the making of any
advance to, or investment in, any Person (other than advances in the
ordinary course of business); (d) any guaranty or other contingent
liability with respect to any indebtedness or obligation of any Person
(other than guaranties undertaken in the ordinary course of business
and other than the endorsement of negotiable instruments for
collection in the ordinary course of business); or (e) any agreement,
contract or commitment limiting in any respect its ability to compete
with any Person or otherwise conduct business of any line or nature.
3.14 Taxes. Except as set forth in Section 3.14 of the Gothic Disclosure
Schedule:
3.14.1 The Gothic Companies and any affiliated, combined or unitary
group of which Gothic or any subsidiary is or was a member has
properly completed and timely (taking into account any
extensions) filed all material federal, state, local and foreign
returns, declarations, reports, estimates, information returns
and statements ("Returns") required to be filed in respect of any
Tax and has timely paid all Taxes that are shown by such Returns
to be due and payable and the Returns correctly and accurately
(except for one or more matters the aggregate effect of which is
not material) reflect the facts regarding the income, business
and assets, operations, activities, status or other matters of
the Gothic Companies required to be shown thereon or any other
information required to be shown thereon and are not subject to
penalties under Section 6662 of the Code, relating to
accuracy-related penalties, or any corresponding provision of
applicable state, local or foreign tax law or any predecessor
provision. The Gothic Companies have established reserves that
are adequate in the aggregate for the payment of all material
Taxes not yet due and payable with respect to the results of
operations of each the Gothic Companies through the date hereof,
and have complied in all material respects with all applicable
laws, rules and regulations relating to the payment and
withholding of Taxes and the filing of material federal, state or
local Returns.
3.14.2 Section 3.14.2 of the Gothic Disclosure Schedule sets forth the
last taxable period through which the federal income Tax Returns
of the Gothic Companies have been examined by the IRS. Except to
the extent being contested in good faith, all material
deficiencies asserted as a result of such examinations and any
examination by any applicable state or local taxing authority
have been paid, fully settled or adequately provided for in
Gothic's most recent audited financial statements. No material
Tax audits or other administrative proceedings or court
proceedings are presently pending with regard to any Taxes for
which any of the Gothic Companies would be liable, and no
material deficiency which has not yet been paid for any such
Taxes has been proposed, asserted or assessed against any of the
Gothic Companies with respect to any period. No claim has been
asserted by an authority in any jurisdiction where the Gothic
Companies do not file Returns that any Gothic Company is subject
to Tax in that jurisdiction.
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3.14.3 None of the Gothic Companies has executed or entered into (or
prior to the close of business on the Closing Date will execute
or enter into) with the IRS or any taxing authority: (a) any
agreement extending the period for assessment or collection of
any Tax for which any of the Gothic Companies is liable for any
period that is open under the applicable statute of limitations;
or (b) a closing agreement pursuant to Section 7121 of the Code
or any similar provision of state or local income tax law that
relates to any of the Gothic Companies for the current or any
future taxable period. None of the Gothic Companies has made an
election under Section 341(f) of the Code or has agreed to have
Section 341(f)(2) of the Code apply to any disposition of a
subsection (f) asset (as such term is defined in Section
341(f)(4) of the Code) owned by any of the Gothic Companies. None
of the Gothic Companies is a party to, is bound by or has any
obligation under any tax sharing agreement or similar agreement
or arrangement. None of the Gothic Companies is a party to any
agreement or other arrangement that would result separately or in
the aggregate in the payment of any "excess parachute payments"
within the meaning of Section 280G of the Code.
3.14.4 There are no Liens for Taxes (other than for current Taxes not
yet due and payable) on the assets of any of the Gothic
Companies.
3.14.5 Except for the group of which Gothic is presently a member, none
of the Gothic Companies has ever been a member of an "affiliated
group of corporations" within the meaning of Section 1504 of the
Code, other than as a common parent corporation.
3.14.6 After the date hereof, no election which is inconsistent with
past practices with respect to Taxes will be made without the
written consent of Parent.
3.14.7 None of the assets of any of the Gothic Companies is property
that is required to be treated as being owned by any other person
pursuant to the "safe harbor lease" provisions of former Section
168(f)(8) of the Code.
3.14.8 None of the assets of the Gothic Companies directly or indirectly
secures any debt the interest on which is tax-exempt under
Section 103(a) of the Code. None of the assets of any of the
Gothic Companies is "tax-exempt use property" within the meaning
of Section 168(h) of the Code.
3.14.9 None of the Gothic Companies has agreed to make nor is it
required to make any adjustment under Section 481(a) of the Code
by reason of a change in accounting method or otherwise which
will have any adverse effect on any Tax for a period which ends
after December 31, 1999.
3.14.10 None of the Gothic Companies has participated in an international
boycott within the meaning of Section 999 of the Code.
3.14.11 None of the Gothic Companies has had a permanent establishment in
any foreign country, as defined in any applicable tax treaty or
convention between the United States and such foreign country.
3.14.12 Section 3.14.12 of the Gothic Disclosure Schedule identifies each
arrangement to which any of the Gothic Companies is a party and
which is a partnership for federal income tax purposes and which
was required to file an income tax return for a taxable year of
such partnership which ended in 1999 (taking into account any
election which permitted such arrangement not to file a return).
3.14.13 Gothic did not have an excess loss account in any subsidiary
which had on December 31, 1999, assets with a fair market value
in excess of $500,000.
3.15 Employee Benefit Plans. (a) Section 3.15(a) of the Gothic Disclosure
Schedule lists: (i) the "employee benefit plans" (within the meaning
of Section 3(3) of ERISA), which any of the
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Gothic Companies maintains or sponsors or with respect to which any of
the Gothic Companies has any material liability (actual or contingent,
primary or secondary); and (ii) all other (A) director or employee
compensation or benefit plans, programs or arrangements, (B) stock
purchase, stock option, severance, bonus, incentive and deferred
compensation plans, (C) written employment or consulting contracts,
and (D) change-in-control agreements which any of the Gothic Companies
maintains, sponsors or is a party to or with respect to which any of
the Gothic Companies has or could have any material liability (such
plans, programs, arrangements, contracts and agreements are
collectively referred to herein as the "Gothic Employee Benefit
Plans"). (b) Except as set forth on Section 3.15(b) of the Gothic
Disclosure Schedule: (i) the reserves reflected in the balance sheet
contained in the unaudited financial statements for the period ending
June 30, 2000 (together with all footnotes attached thereto, the
"Balance Sheet") relating to any unfunded benefits under the Gothic
Employee Benefit Plans were adequate in the aggregate under GAAP as of
June 30, 2000; and (ii) neither Gothic nor any of its subsidiaries has
incurred any material unfunded liability in respect of any such Gothic
Employee Benefit Plans since that date. (c) There are no suits,
investigations or claims (other than undisputed claims for benefits)
pending or, to the knowledge of Gothic threatened (or any basis
therefor) relating to or for benefits under the Gothic Employee
Benefit Plans, except for those suits or claims set forth in Section
3.15(c) of the Gothic Disclosure Schedule or which, individually or in
the aggregate, are immaterial. (d) Each Gothic Employee Benefit Plan
has been established and administered in all material respects in
accordance with its terms, and in all material respects in compliance
with the applicable provisions of ERISA, the Code and other applicable
laws, rules and regulations and each Gothic Employee Benefit Plan
which is intended to be qualified within the meaning of Code Section
401(a) is so qualified. (e) Except as set forth in Section 3.15(e) of
the Gothic Disclosure Schedule: (i) no Gothic Employee Benefit Plan
currently has any "accumulated funding deficiency" as such term is
defined in ERISA Section 302 and Code Section 412 (whether or not
waived); (ii) no event or condition exists or is expected to occur
which is a reportable event within the meaning of ERISA Section 4043
with respect to any Gothic Employee Benefit Plan that is subject to
Title IV of ERISA and with respect to which the 30-day notice
requirement has not been waived; (iii) each member of Gothic's
Controlled Group (as defined below) has made all required premium
payments when due to the Pension Benefit Guaranty Corporation
("PBGC"); (iv) neither Gothic nor any member of its Controlled Group
is subject to any liability to the PBGC for any Gothic Employee
Benefit Plan termination; (v) no amendment has occurred which requires
Gothic or any member of its Controlled Group to provide security
pursuant to Code Section 401(a)(29); and (vi) neither Gothic nor any
member of its Controlled Group has engaged in a transaction which is
reasonably likely to subject it to liability under ERISA Section 4069.
For the purposes of this paragraph 3.15, the term "Controlled Group"
means all corporations, trades or businesses which, together with
Gothic, are treated as a single employer under Section 414 of the
Code. (f) No Gothic Employee Benefit Plan is a multiemployer plan
(within the meaning of Section 3(37) of ERISA) and neither Gothic nor
any member of its Controlled Group has incurred or is reasonably
likely to incur any liability to any multiemployer plan nor has or is
engaged in a transaction which is reasonably expected to subject
Gothic or any member of its Controlled Group to any liability under
ERISA Section 4212(c). (g) Except as set forth in Section 3.15(g) of
the Gothic Disclosure Schedule, each Gothic Employee Benefit Plan
described in subpart (a)(i) above can be unilaterally terminated at
any time by the Gothic Companies without material liability to any of
the Gothic Companies.
3.16 Environmental Matters. (a) Except as set forth in Section 3.16 of the
Gothic Disclosure Schedule: (i) the reserves reflected in the Gothic
Financial Statements relating to environmental matters were adequate
under GAAP as of June 30, 2000, and neither Gothic nor any other
Gothic Company has incurred any material liability in respect of any
environmental matter since that date; and (ii) the Gothic SEC
Documents include all information relating to environmental matters
required to be included therein under the rules and regulations of the
SEC applicable
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thereto. (b) Except as set forth in Section 3.16 of the Gothic
Disclosure Schedule, to the knowledge of Gothic: (i) each of the
Gothic Companies has conducted its business and operated its assets,
and is conducting its business and operating its assets, in material
compliance with all Environmental Laws; (ii) none of the Gothic
Companies has been notified by any Governmental Authority that any of
the operations or assets of any of the Gothic Companies is the subject
of any investigation or inquiry by any Governmental Authority
evaluating whether any material remedial action is needed to respond
to a release of any Hazardous Material or to the improper storage or
disposal (including storage or disposal at offsite locations) of any
Hazardous Material; (iii) none of the Gothic Companies and no other
Person has filed any notice under any federal, state or local law
indicating that (A) any of the Gothic Companies is responsible for the
improper release into the environment, or the improper storage or
disposal of any Hazardous Material, or (B) any Hazardous Material is
improperly stored or disposed of upon any property of any of the
Gothic Companies; (iv) none of the Gothic Companies has any material
contingent liability in connection with a release into the environment
at or on the property now or previously owned or leased by any of the
Gothic Companies, or the storage or disposal of any Hazardous
Material; (v) none of the Gothic Companies has received any claim,
complaint, notice, inquiry or request for information which remains
unresolved as of the date hereof with respect to any alleged violation
of any Environmental Law or regarding potential liability under any
Environmental Law relating to operations or conditions of any
facilities or property owned, leased or operated by any of the Gothic
Companies; (vi) there are no sites, locations or operations at which
any of the Gothic Companies is currently undertaking, or has
completed, any remedial or response action relating to any such
disposal or release, as required by Environmental Laws; and (vii) all
underground storage tanks and solid waste disposal facilities owned or
operated by the Gothic Companies are used and operated in material
compliance with Environmental Laws.
3.17 Vote Required. The affirmative vote of the holders of a majority of
the outstanding shares of Gothic Common Stock and Gothic Preferred
Stock voting as one class is the only vote of the holders of any class
or series of Gothic capital stock or other voting securities necessary
to approve this Agreement, the Merger and the transactions
contemplated hereby.
3.18 Gothic Board of Directors Actions. The board of directors of Gothic
has by requisite vote of all directors present: (a) determined that
the Merger is advisable; (b) approved the Merger in accordance with
the provisions of Section 1081 of the OGCA and the transactions
contemplated by this Agreement; and (c) recommended the approval of
this Agreement and the Merger by the holders of Gothic Common Stock
and directed that the Merger be submitted for consideration by the
holders of Gothic Common Stock and Gothic Preferred Stock at a meeting
of such stockholders contemplated by paragraph 5.5 hereof.
3.19 Employment Contracts and Benefits. Except as otherwise set forth in
Section 3.19 of the Gothic Disclosure Schedule or otherwise provided
for in any Gothic Employee Benefit Plan: (a) none of the Gothic
Companies is subject to or obligated under any consulting, employment,
severance, termination or similar arrangement, any employee benefit,
incentive or deferred compensation plan with respect to any Person, or
any bonus, profit sharing, pension, stock option, stock purchase or
similar plan or other arrangement or other fringe benefit plan entered
into or maintained for the benefit of employees or any other Person;
and (b) no employee of any of the Gothic Companies or any other Person
owns, or has any rights granted by any of the Gothic Companies to
acquire, any interest in any of the assets or business of any of the
Gothic Companies. Section 3.19 of the Gothic Disclosure Schedule sets
forth all indebtedness, promissory notes and other obligations owing
by any employee, officer or non-employee director of the Gothic
Companies including, without limitation, by employee, officer or
non-employee director, the principal amount thereof, the interest rate
applicable thereto, any collateral securing payment thereof, the
payment terms and the maturity date thereof.
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3.20 Labor Matters. No employees of any of the Gothic Companies are
represented by any labor organization. No labor organization or group
of employees of any of the Gothic Companies has made a demand for
recognition or certification as a union or other labor organization,
and there are no representation or certification proceedings or
petitions seeking a representation proceeding presently pending or
threatened in writing to be brought or filed with the National Labor
Relations Board or any other labor relations tribunal or authority.
There are no organizing activities involving any of the Gothic
Companies pending with any labor organization or group of employees of
any of the Gothic Companies. Each of the Gothic Companies is in
material compliance with all laws, rules, regulations and orders
relating to the employment of labor, including all such laws, rules,
regulations and orders relating to wages, hours, collective
bargaining, discrimination, civil rights, safety and health, workers'
compensation and the collection and payment of withholding or social
security Taxes and similar Taxes, except where the failure to comply
would not, individually or in the aggregate, have a Material Adverse
Effect on the Gothic Companies.
3.21 Insurance. Each of the Gothic Companies maintains, and through the
Closing Date will maintain, insurance with reputable insurers (or
pursuant to prudent self-insurance programs) in such amounts and
covering such risks as are in accordance with normal industry practice
for companies engaged in businesses similar to those of the Gothic
Companies and owning properties in the same general area in which the
Gothic Companies conduct their businesses. Each of the insurance
policies currently maintained by the Gothic Companies is described in
Section 3.21 of the Gothic Disclosure Schedule. Each of the Gothic
Companies may terminate each of its insurance policies or binders at
or after the Closing and will incur no penalties or other material
costs in doing so. None of the such policies or binders was obtained
through the use of false or misleading information or the failure to
provide the insurer with all information requested in order to
evaluate the liabilities and risks insured. There is no material
default with respect to any provision contained in any such policy or
binder, nor has any of the Gothic Companies failed to give any notice
or present any claim under any such policy or binder in due and timely
fashion. There are no billed but unpaid premiums past due under any
such policy or binder. Except as otherwise set forth in Section 3.21
of the Gothic Disclosure Schedule: (a) there are no outstanding claims
under any such policies or binders and, to the knowledge of Gothic,
there has not occurred any event that might reasonably form the basis
of any claim against or relating to any of the Gothic Companies that
is not covered by any of such policies or binders; (b) no notice of
cancellation or non-renewal of any such policies or binders has been
received; and (c) there are no performance bonds outstanding with
respect to any of the Gothic Companies.
3.22 Intangible Property. Except as set forth in Section 3.22 of the Gothic
Disclosure Schedule, there are no material trademarks, trade names,
patents, service marks, brand names, computer programs, databases,
industrial designs, copyrights or other intangible property that are
necessary for the operation, or continued operation, of the business
of any of the Gothic Companies or for the ownership and operation, or
continued ownership or operation, of any of their assets, for which
the Gothic Companies do not hold valid and continuing authority in
connection with the use thereof. Section 3.22 of the Gothic Disclosure
Schedule lists each seismic agreement to which any of the Gothic
Companies is a party.
3.23 Title to Assets. The Gothic Companies (individually or collectively)
have Defensible Title to all Oil and Gas Interests of Gothic included
or reflected in the Ownership Interests and all of their other assets,
subject only to Permitted Encumbrances. Each Oil and Gas Interest
included or reflected in the Ownership Interests entitles the Gothic
Companies (individually or collectively) to receive not less than the
undivided Net Revenue Interest set forth in (or derived from) the
Ownership Interests of all Hydrocarbons produced, saved and sold from
or attributable to such Oil and Gas Interest, and the portion of such
costs and expenses of operation and development of such Oil and Gas
Interest that is borne or to be borne by the Gothic Companies
(individually
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or collectively) is not greater than the undivided Working Interest
set forth in (or derived from) the Ownership Interests.
3.24 Opinion of Financial Advisor. On the date of execution of this
Agreement, the board of directors of Gothic will receive the opinion
of CIBC Worldmarkets that, as of such date, the consideration
contemplated by paragraph 2.3.2 is fair from a financial point of view
to the holders of Gothic Common Stock.
3.25 Oil and Gas Operations. Except as otherwise set forth in Section 3.25
of the Gothic Disclosure Schedule: (a) all wells included in the Oil
and Gas Interests of Gothic have been drilled and (if completed)
completed, operated and produced in accordance with generally accepted
oil and gas field practices and in compliance in all material respects
with applicable oil and gas leases and applicable laws, rules,
regulations, except where the failure or violation could not
reasonably be expected to have a Material Adverse Effect on Gothic or
Gothic's ability to consummate the transactions contemplated hereby in
accordance with this Agreement; and (b) proceeds from the sale of
Hydrocarbons produced from Gothic's Oil and Gas Interests are being
received by the Gothic Companies in a timely manner and are not being
held in suspense for any reason (except for amounts, individually or
in the aggregate, not in excess of $250,000 and held in suspense in
the ordinary course of business).
3.26 Financial and Commodity Hedging. Section 3.26 of the Gothic Disclosure
Schedule accurately summarizes the outstanding Hydrocarbon and
financial hedging positions of the Gothic Companies (including fixed
price controls, collars, swaps, caps, hedges and puts) as of the date
reflected on the Gothic Disclosure Schedule. After July 1, 2000,
Gothic has not entered into and will not enter into any new hedging
positions without Parent's prior written consent, which will not be
unreasonably withheld.
3.27 Books and Records. All books, records and files of the Gothic
Companies (including those pertaining to Gothic's Oil and Gas
Interests, wells and other assets, the production, gathering,
transportation and sale of Hydrocarbons, and corporate, accounting,
financial and employee records): (a) have been prepared, assembled and
maintained in accordance with usual and customary policies and
procedures; and (b) fairly and accurately reflect the ownership, use,
enjoyment and operation by the Gothic Companies of their respective
assets.
3.28 Other Entities. Gothic has no direct or indirect equity interest in
any corporation, partnership, limited liability company, joint
venture, business association or other entity other than the entities
included in the Gothic Companies (other than joint venture, joint
operating or ownership arrangements entered into in the ordinary
course of business or other partnerships that, individually or in the
aggregate, are not material to the operations or businesses of the
Gothic Companies, taken as a whole). Except as disclosed in Section
3.28 of the Gothic Disclosure Schedule, and except as may be required
under the securities laws of any jurisdiction: (i) all of the
outstanding capital stock of, or other ownership interests in, each
subsidiary of Gothic, has been validly issued, is (in the case of
capital stock) fully paid and nonassessable and (in the case of
partnership interests) not subject to current or future capital calls,
and is owned by Gothic, directly or indirectly, free and clear of any
lien and free of any other charge, claim, encumbrance, limitation or
restriction (including any restriction on the right to vote, sell or
otherwise dispose of such capital stock or other ownership interests);
and (ii) there are not now, and at the Effective Time there will not
be, any outstanding subscriptions, options, warrants, calls, rights,
convertible securities or other agreements or commitments of any
character relating to the issued or unissued capital stock or other
securities of any of Gothic's subsidiaries, or otherwise obligating
Gothic or any such subsidiary to issue, transfer or sell any such
securities or to make any payments in respect of any of its securities
or its equity.
3.29 Account Information. Section 3.29 of the Gothic Disclosure Schedule
contains an accurate list of the names and addresses of every bank and
other financial institution in which any Gothic Company maintains an
account (whether checking, savings or otherwise), lock box or safe
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deposit box, and the account numbers and Persons having signature
authority or legal access thereto.
3.30 Powers of Attorney. There are no outstanding powers of attorney
relating to or affecting any Gothic Company.
3.31 Plugging Status. All wells operated by any Gothic Company that have
been permanently plugged and abandoned have been so plugged and
abandoned in accordance in all material respects with all applicable
requirements of each Governmental Authority having jurisdiction over
the Gothic Companies and the Oil and Gas Interests.
3.32 No Knowledge of Breach of Representations. Gothic has no actual
knowledge that any of the representations of Parent or Sub contained
in this Agreement are untrue as of the date of this Agreement. If and
to the extent that Gothic has any such knowledge as of the date of
this Agreement, Gothic will not assert any remedy under this Agreement
for breach of such representation (including, but not limited to, any
right to not close the Merger due to a failure to satisfy the
condition to Closing set forth in Section 6.3.1 arising solely as a
result of any such breach).
3.33 Proxy Statement/Prospectus; Registration Statement. None of the
information supplied or to be supplied by Gothic for inclusion or
incorporation by reference in (1) the Proxy Statement/ Prospectus and
any amendments or supplements thereto, or (2) the Registration
Statement and any amendments or supplements thereto, will, at the
respective times such documents are filed, (i) in the case of the
Proxy Statement/Prospectus, at the time the Proxy Statement/Prospectus
or any amendment or supplement thereto is first mailed to stockholders
of Gothic, at the time such stockholders vote on approval and adoption
of this Agreement and at the Effective Time, contain any untrue
statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the
statements made therein, in light of the circumstances under which
they were made, not misleading and (ii) in the case of the
Registration Statement, when it becomes effective under the Securities
Act, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make
the statements therein not misleading. If at any time prior to
Effective Time any event with respect to any of the Gothic Companies
or their officers and directors will occur which is required to be
described in an amendment of, or a supplement to, the Proxy
Statement/Prospectus or the Registration Statement, such event will be
so described, and such amendment or supplement will be promptly filed
with the SEC and, as required by law, disseminated to the stockholders
of Gothic. The Registration Statement will comply (with respect to
Gothic) as to form in all material respects with the provisions of the
Securities Act, and the Proxy Statement/Prospectus will comply (with
respect to Gothic) as to form in all material respects with the
provisions of the Exchange Act.
3.34 Equipment. All equipment constituting part of the Oil and Gas
Interests has been installed, maintained, and operated by the Gothic
Companies as a prudent operator in accordance with oil and gas
industry standards, and is currently in a state of repair so as to be
adequate for normal operations by the Gothic Companies, except where
the failure to do so would not, individually or in the aggregate, have
a Material Adverse Effect on the Gothic Companies (taken as a whole).
3.35 Current Commitments. Section 3.35 of the Gothic Disclosure Schedule
and the expenses specifically permitted under the terms of paragraph
5.1.10 contain a true and reasonably complete list as of July 31,
2000, of all oral or written commitments for capital expenditures of
more than $50,000 with respect to any of the wells or the Oil and Gas
Interests for which all of the activities anticipated in such
commitments will not have been completed by the Effective Time. Except
for those set forth in Section 3.35 of the Gothic Disclosure Schedule,
as of Closing there will be no oral or written commitments for capital
expenditures with respect to the Oil and Gas Interests.
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3.36 Payout Balances. Section 3.36 of the Gothic Disclosure Schedule
contains a reasonably complete and accurate list of the status, as of
June 30, 2000 with respect to Gothic Company operated wells and as of
March 31, 2000 with respect to third party operated wells, of: (a) the
"payout" balance for each Oil and Gas Interest that is subject to a
reversion or other adjustment at some level of cost recovery or payout
(or passage of time or other event, other than cessation of
production); and (b) all gas balancing obligations and rights for each
Oil and Gas Interest which is subject to a gas balancing overage or
underage.
3.37 Full Disclosure. The representations, warranties or other statements
by all Gothic Companies in this Agreement or in the Gothic Disclosure
Schedule or Exhibits hereto or any documents distributed generally to
Gothic's stockholders, taken as a whole, do not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements contained therein not misleading.
3.38 Certain Agreements. There are no contracts, agreements, arrangements
or understandings to which any of the Gothic Companies is a party
which create, govern or purport to govern the right of another party
(other than Parent or Sub) to acquire any of the Gothic Companies.
3.39 Affiliate Transactions. There are no transactions between any of the
Gothic Companies and any of their respective Affiliates, which are
required to be disclosed in the Gothic SEC Documents which are not
disclosed.
3.40 Employees, Officers and Directors Loans. With respect to each loan by
any of the Gothic Companies to any officer, director or employee of
any of the Gothic Companies: (a) prior to the execution of this
Agreement each officer and employee has executed and delivered to the
Gothic Companies a letter in the form set forth in Section 3.40 of the
Gothic Disclosure Schedule irrevocably directing the Gothic Companies
to apply the severance payments due to such officers and employees to
the payment in full of such loans; and (b) prior to the execution of
this Agreement each non-employee director of the Gothic Companies has
executed and delivered to Gothic a pledge agreement in the form set
forth in Section 3.40 of the Gothic Disclosure Schedule pledging to
Gothic the Gothic Common Stock acquired with such loan (the "Pledged
Stock"), has delivered possession of the Pledged Stock to Gothic and
taken any additional or other actions appropriate to create and
maintain a first perfected security interest in such Gothic Common
Stock in favor of Gothic. On or before the Closing Date: (y) the
Gothic Companies will first apply the severance payments due to such
officers and employees against the unpaid principle balance and any
accrued but unpaid interest owing under such officers and employees'
loans, with any remaining amount to be paid in accordance with the
terms and conditions of the Gothic severance policy; and (z) the
Gothic Companies will deliver any remaining unpaid promissory notes,
the pledge agreements for the non-employee directors and the Pledged
Stock for the non-employee directors to Parent together with the
promissory notes secured thereby. The Gothic Companies will: (i) take
any and all action necessary to maintain in full force and effect the
foregoing promissory notes, instruction letters, pledge agreements and
first perfected security interests in all Pledged Stock; (ii) not
amend, forgive, waive compliance with or otherwise release any rights
under any of the foregoing except on payment in full of the applicable
obligation; and (iii) assist in the collection and enforcement of the
foregoing agreements and obligations. All of the parties hereto agree
that the first perfected security interest in the Pledged Stock will
continue in all of the Parent Common Stock which is exchanged or
exchangeable for the Pledged Stock pursuant to this Agreement. Gothic
hereby acknowledges and agrees that any failure to comply with the
provisions of this paragraph 3.40 by Michael Paulk, Steven Ensz or the
non-employee directors at any time to and including the Closing Date
will constitute a Material Adverse Effect.
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4. PARENT AND SUB REPRESENTATIONS AND WARRANTIES. Except as set forth in
the Parent Disclosure Schedule, Parent and Sub hereby jointly and severally
represent and warrant to Gothic that:
4.1 Corporate Organization. Each of Parent and Sub: (a) is a corporation
duly organized, validly existing and in good standing under the laws
of its state of incorporation; (b) has all requisite corporate power
and authority to own, lease and operate its properties and assets and
to carry on its business as it is presently being conducted; and (c)
is duly qualified to do business as a foreign corporation, and is in
good standing, in each jurisdiction where the character of the
properties owned or leased by it or the nature of its activities makes
such qualification necessary (except where any failure to be so
qualified as a foreign corporation or to be in good standing would
not, individually or in the aggregate, have a Material Adverse Effect
on Parent). Copies of the certificate or articles of incorporation and
bylaws of each of Parent and Sub have heretofore been delivered to
Gothic, and such copies are accurate and complete as of the date
hereof.
4.2 Authority and Enforceability. Each of Parent and Sub has the requisite
corporate power and authority to execute and deliver this Agreement
and (with respect to consummation of this Agreement and the Merger,
subject to the approval of the Parent as the sole stockholder of Sub)
to consummate the transactions contemplated hereby. The execution and
delivery of this Agreement and the consummation of the transactions
contemplated hereby have been duly and validly authorized by all
necessary corporate action on the part of Parent and Sub, including
approval by the respective boards of directors of Parent and Sub and
by Parent as the sole stockholder of Sub, and no other corporate
proceedings on the part of Parent or Sub are necessary to authorize
the execution or delivery of this Agreement or (with approval by the
Parent as the stockholder of Sub) to consummate the transactions
contemplated hereby. This Agreement has been duly and validly executed
and delivered by each of Parent and Sub and (with respect to
consummation of this Agreement and the Merger, assuming that this
Agreement constitutes a valid and binding obligation of Gothic)
constitutes a valid and binding obligation of each of Parent and Sub,
enforceable against Parent and Sub in accordance with its terms.
4.3 No Violations. The execution and delivery of this Agreement does not,
and the consummation of the transactions contemplated hereby and
compliance by Parent and Sub with the provisions hereof will not,
conflict with, result in any violation of or default (with or without
notice or lapse of time or both) under, give rise to a right of
termination, cancellation or acceleration of any obligation or to the
loss of a material benefit under, or result in the creation of any
Lien on any of the properties or assets of Parent or any Parent
Subsidiary under, any provision of: (a) the certificate of
incorporation or bylaws of Parent or Sub or any provision of the
comparable charter or organizational documents of any Parent
Subsidiary; (b) any loan or credit agreement, note, bond, mortgage,
indenture, lease, permit, concession, franchise, license or other
agreement or instrument applicable to Parent or any Parent Subsidiary;
or (c) assuming the consents, approvals, authorizations or permits and
filings or notifications referred to in paragraph 4.4 are duly and
timely obtained or made, any judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to Parent or any Parent
Subsidiary or any of their respective properties or assets, other
than, in the case of clause (b) or (c) above, any such conflict,
violation, default, right, loss or Lien that has been waived or
consented to or that, individually or in the aggregate, would not have
a Material Adverse Effect on Parent or Parent's or Sub's ability to
consummate the transactions contemplated hereby in accordance with
this Agreement.
4.4 Consents and Approvals. No consent, approval, order or authorization
of, registration, declaration, or filing with, or permit from, any
Governmental Authority is required by or with respect to Parent or Sub
in connection with the execution and delivery of this Agreement by
Parent or Sub or the consummation by Parent and Sub of the
transactions contemplated hereby except for the following: (a) any
such consent, approval, order, authorization, registration,
declaration, filing or permit which the failure to obtain or make
would not, individually or in the
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aggregate, have a Material Adverse Effect on Parent or Parent's or
Sub's ability to consummate the transactions contemplated hereby in
accordance with this Agreement; (b) the filing of the Certificate of
Merger with the Secretary of State of Oklahoma pursuant to the
provisions of the OGCA; (c) the filing, if necessary, of a pre-merger
notification report by Parent under the HSR Act and the expiration or
termination of the applicable waiting period; (d) the filing with the
SEC of the Proxy Statement/Prospectus and the Registration Statement
and such reports under Section 13(a) of the Exchange Act and such
other compliance with the Exchange Act and the Securities Act and the
rules and regulations of the SEC thereunder as may be required in
connection with this Agreement and the transactions contemplated
hereby and the obtaining from the SEC of such orders as may be so
required; (e) the filing with the Exchange of a listing application
relating to the shares of Parent Common Stock to be issued pursuant
the Merger and the obtaining from the Exchange of its approval
thereof; (f) such filings and approvals as may be required by any
applicable state securities, "blue sky" or takeover laws or
Environmental Laws; and (g) the valid approval of this Agreement and
the Merger by the board of directors of Parent and Sub.
4.5 Parent SEC Documents. Gothic has had available to it a true, correct
and complete copy of each report, schedule, registration statement and
definitive proxy statement filed by Parent with the SEC since December
31, 1998, and prior to the date of this Agreement (the "Parent SEC
Documents"), which are all the documents (other than preliminary
material) that Parent was required to file with the SEC since such
date. As of their respective dates, the Parent SEC Documents complied
in all material respects with the requirements of the Securities Act
or the Exchange Act, as the case may be, and the rules and regulations
of the SEC thereunder applicable to such Parent SEC Documents, and
none of the Parent SEC Documents contained any untrue statement of a
material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein, in light
of the circumstances under which they were made, not misleading.
4.6 Financial Statements. The Parent Financial Statements were prepared in
accordance with the applicable published rules and regulations of the
SEC with respect thereto and in accordance with GAAP applied on a
consistent basis during the periods involved (except as may be
indicated in the notes thereto or, in the case of unaudited
statements, as permitted by Rule 10-01 of Regulation S-X of the SEC)
and fairly present in all material respects, in accordance with
applicable requirements of GAAP (in the case of unaudited statements,
subject to normal, recurring adjustments), the consolidated financial
position of Parent and the Parent Subsidiaries as of their respective
dates and the consolidated results of operations and the consolidated
cash flows of Parent and the Parent Subsidiaries for the periods
presented therein.
4.7 Capital Structure. The authorized capital stock of Parent consists of
250,000,000 shares of Parent Common Stock and 10,000,000 shares of
preferred stock of which 148,768,103 shares of Parent Common Stock and
624,037 shares of preferred stock were issued and outstanding as of
August 23, 2000. The authorized capital stock of Sub consists of 1,000
shares of Sub Common Stock. Except as set forth in the two preceding
sentences and in Section 4.7 of the Parent Disclosure Schedule, there
are: (a) no outstanding shares of capital stock or other voting
securities of Parent (other than shares issued since August 23, 2000,
upon the exercise of outstanding options described in Section 4.7 of
the Parent Disclosure Schedule); (b) no outstanding securities of
Parent convertible into or exchangeable or exercisable for shares of
capital stock or other voting securities of Parent; and (c) no
outstanding subscriptions, options, warrants, calls, rights (including
preemptive rights, commitments, understandings or agreements to which
Parent is a party or by which it is bound) obligating Parent to issue,
deliver, sell, purchase, redeem or acquire shares of capital stock or
other voting securities of Parent (or securities of Parent) or
obligating Parent to grant, extend or enter into any such
subscription, option, warrant, call, right, commitment, understanding
or agreement. All outstanding shares of Parent capital stock are, and
(when issued) the shares of Parent Common Stock to be issued
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pursuant to the Merger will be, validly issued, fully paid and
nonassessable and not subject to any preemptive right. There are 1,000
shares of Sub Common Stock issued and outstanding, all of which are
owned by Parent. All outstanding shares of Sub Common Stock are
validly issued, fully paid and nonassessable and not subject to any
preemptive right. As of the date hereof there is no, and at the
Effective Time there will not be any, stockholder agreement, voting
trust or other agreement or understanding to which Parent is a party
or by which it is bound relating to the voting of any shares of the
capital stock of Parent.
4.8 Governmental Regulation. Neither Parent nor any of the Parent
Subsidiaries is subject to regulation under the Public Utility Holding
Company Act of 1935, the Federal Power Act, the Interstate Commerce
Act, the Investment Company Act of 1940 or any state public utilities
laws.
4.9 Litigation. Except as set forth in Section 4.9 of the Parent
Disclosure Schedule, there is no litigation, arbitration,
investigation or other proceeding of any Governmental Authority or
other Person pending or, to the knowledge of Parent, threatened
against Parent or a Parent Subsidiary or their respective assets
which, if adversely determined, could reasonably be expected to have a
Material Adverse Effect on Parent or Parent's ability to consummate
the transactions contemplated hereby in accordance with this
Agreement. Parent has no knowledge of any facts that are likely to
give rise to any litigation, arbitration, investigation or other
proceeding of any Governmental Authority or other Person which,
individually or in the aggregate, is reasonably likely to have a
Material Adverse Effect on Parent or Parent's ability to consummate
the transactions contemplated hereby in accordance with this
Agreement. No Parent Company is subject to any outstanding injunction,
judgment, order, decree or ruling (other than routine oil and gas
field regulatory orders and any injunction, judgment, order, decree or
ruling that, either individually or in the aggregate, would not have a
Material Adverse Effect) on Parent or Parent's ability to consummate
the transactions contemplated hereby in accordance with this
Agreement. There is no litigation, investigation or other proceeding
of any Governmental Authority or other Person pending or, to the
knowledge of Parent, threatened against or affecting Parent, Sub or a
Parent Subsidiary that questions the validity or enforceability of
this Agreement or any other document, instrument or agreement to be
executed and delivered by Parent or Sub in connection with the
transactions contemplated hereby.
4.10 Interim Operations of Sub. Sub was formed solely for the purpose of
engaging in the transactions contemplated by this Agreement and has
not engaged in any business or activity (or conducted any operations)
of any kind, entered into any agreement or arrangement with any
Person, or incurred, directly or indirectly, any material liabilities
or obligations, except in connection with its incorporation, the
negotiation of this Agreement, the Merger and transactions
contemplated hereby.
4.11 Brokers. Other than Bear, Stearns & Co. Inc. (the "Financial
Advisor"), no broker, finder, investment banker or other Person is or
will be, in connection with the transactions contemplated by this
Agreement, entitled to any brokerage, finder's or other fee or
compensation based on any arrangement or agreement made by or on
behalf of Parent or Sub and for which Parent or Sub or any of the
Gothic Companies will have any obligation or liability.
4.12 Absence of Certain Changes. Except as set forth in Section 4.12 of the
Parent Disclosure Schedule, since June 30, 2000, the Parent Companies
have conducted their businesses only in the ordinary course of
business consistent with past practices and, since such date, there
has not been any event (financial or otherwise, whether or not in the
ordinary course of business), circumstance or condition that: (a)
would be reasonably likely to have a Material Adverse Effect on Parent
or Parent's ability to consummate the transactions contemplated hereby
in accordance with this Agreement; or (b) would have required the
consent of Gothic pursuant to paragraph 5.2 had such event occurred
after the date of this Agreement (other than changes, including
changes in commodity prices generally affecting the oil and gas
industry, changes
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resulting from exploration or development results reported in the
ordinary course of business and changes arising from the announcement
of the Merger).
4.13 Compliance with Laws and Permits. None of the Parent Companies is in
violation of, or in default under, and no event has occurred that
(with notice or the lapse of time or both) would constitute a
violation of or default under: (a) its certificate or articles of
incorporation or bylaws or partnership agreement or other governing
document; or (b) any applicable law, rule, regulation, order, writ,
decree or judgment of any Governmental Authority, except (in the case
of clause (b) above) for any violation or default that would not,
individually or in the aggregate, have a Material Adverse Effect on
Parent or Parent's or Sub's ability to consummate the transactions
contemplated hereby in accordance with this Agreement. Each of the
Parent Companies has obtained and holds all permits, licenses,
variances, exemptions, orders, franchises, approvals and
authorizations of all Governmental Authorities necessary for the
lawful conduct of its business or the lawful ownership, use and
operation of its assets ("Parent Permits"), except for Parent Permits
which the failure to obtain or hold would not, individually or in the
aggregate, have a Material Adverse Effect on Parent or Parent's or
Sub's ability to consummate the transactions contemplated hereby in
accordance with this Agreement. Each of the Parent Companies is in
compliance with the terms of its Parent Permits, except where the
failure to comply would not, individually or in the aggregate, have a
Material Adverse Effect on Parent or Parent's or Sub's ability to
consummate the transactions contemplated hereby in accordance with
this Agreement. No investigation or review by any Governmental
Authority with respect to any of the Parent Companies is pending or,
to the knowledge of Parent, threatened, other than those the outcome
of which would not, individually or in the aggregate, have a Material
Adverse Effect on Parent or Parent's or Sub's ability to consummate
the transactions contemplated hereby in accordance with this
Agreement.
4.14 No Restrictions. Except as otherwise set forth in Section 4.14 of the
Parent Disclosure Schedule, none of the Parent Companies is a party
to: (a) any agreement, indenture or other instrument that contains
restrictions with respect to the payment of dividends or other
distributions with respect to its capital stock; (b) any financial
arrangement with respect to or creating any indebtedness to any Person
(other than indebtedness reflected in the Parent Financial Statements
or indebtedness incurred in the ordinary course of business); (c) any
agreement, contract or commitment relating to the making of any
advance to, or investment in, any Person (other than advances in the
ordinary course of business); (d) any guaranty or other contingent
liability with respect to any indebtedness or obligation of any Person
(other than guaranties undertaken in the ordinary course of business
and other than the endorsement of negotiable instruments for
collection in the ordinary course of business); or (e) any agreement,
contract or commitment limiting in any respect its ability to compete
with any Person or otherwise conduct business of any line or nature.
4.15 Taxes. Except as set forth in Section 4.15 of the Parent Disclosure
Schedule:
4.15.1 Parent and each Parent Subsidiary, and any affiliated, combined
or unitary group of which Parent or any Parent Subsidiary is or
was a member has properly completed and timely (taking into
account any extensions) filed all material federal, state, local
and foreign returns, declarations, reports, estimates,
information returns and statements ("Parent Returns") required to
be filed in respect of any Tax and has timely paid all Taxes that
are shown by such Parent Returns to be due and payable. The
Parent Returns correctly and accurately (except for one or more
matters the aggregate effect of which is not material) reflect
the facts regarding the income, business and assets, operations,
activities, status or other matters of Parent required to be
shown thereon or any other information required to be shown
thereon and are not subject to penalties under Section 6662 of
the Code, relating to accuracy-related penalties, or any
corresponding provision of applicable state, local or foreign tax
law or any predecessor provision. Parent and each Parent
Subsidiary has established reserves that are adequate in the
aggregate for
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the payment of all material Taxes not yet due and payable with
respect to the results of operations of Parent and each Parent
Subsidiary through the date hereof Parent and each Parent
Subsidiary have complied in all material respects with all
applicable laws, rules and regulations relating to the payment
and withholding of Taxes and the filing of material federal,
state or local Parent Returns.
4.15.2 Section 4.15.2 of the Parent Disclosure Schedule sets forth the
last taxable period through which the federal income Tax Returns
of Parent and each Parent Subsidiary have been examined by the
IRS. Except to the extent being contested in good faith, all
material deficiencies asserted as a result of such examinations
and any examination by any applicable state or local taxing
authority have been paid, fully settled or adequately provided
for in Parent's most recent audited financial statements. No
material federal, state or local income or franchise tax audits
or other administrative proceedings or court proceedings are
presently pending with regard to any Taxes for which Parent or
any of the Parent Subsidiaries would be liable, and no material
deficiency which has not yet been paid for any such Taxes has
been proposed, asserted or assessed against Parent or any of the
Parent Subsidiaries with respect to any period. No claim has been
asserted by any authority in any jurisdiction where the Parent
Companies do not file Returns that any Parent Company is subject
to Tax in that jurisdiction.
4.15.3 Except as disclosed on Section 4.15.3 of the Parent Disclosure
Schedule, neither Parent nor any Parent Subsidiary has executed
or entered into (or prior to the close of business on the Closing
Date will execute or enter into) with the IRS or any taxing
authority: (i) any agreement extending the period for assessment
or collection of any Tax for which Parent or any Parent
Subsidiary is liable for any period that is open under the
applicable statute of limitations; or (ii) a closing agreement
pursuant to Section 7121 of the Code or any similar provision of
state or local income tax law that relates to Parent or any
Parent Subsidiary for the current or any future taxable period.
Neither Parent nor any Parent Subsidiary has made an election
under Section 341(f) of the Code or has agreed to have Section
341(f)(2) of the Code apply to any disposition of a subsection
(f) asset (as such term is defined in Section 341(f)(4) of the
Code) owned by Parent or any Parent Subsidiary. Neither Parent
nor any Parent Subsidiary is a party to, is bound by or has any
obligation under any tax sharing agreement or similar agreement
or arrangement. Neither Parent nor any Parent Subsidiary is a
party to any agreement or other arrangement that, as a
consequence of the Merger would result separately or in the
aggregate in the payment of any "excess parachute payments"
within the meaning of Section 280G of the Code.
4.15.4 There are no liens for Taxes (other than for current Taxes not
yet due and payable) on the assets of Parent or any Parent
Subsidiary.
4.15.5 Except for the group of which Parent is presently a member,
neither Parent nor any Parent Subsidiary has ever been a member
of an "affiliated group of corporations" within the meaning of
Section 1504 of the Code, other than as a common parent
corporation.
4.15.6 After the date hereof, no election which is inconsistent with
past practices with respect to Taxes will be made without the
written consent of Gothic.
4.15.7 None of the assets of Parent or any Parent Subsidiary is property
that Parent is required to treat as being owned by any other
person pursuant to the "safe harbor lease" provisions of former
Section 168(f)(8) of the Code.
4.15.8 None of the assets of Parent or any Parent Subsidiary directly or
indirectly secures any debt the interest on which is tax-exempt
under Section 103(a) of the Code.
4.15.9 None of the assets of Parent or any Parent Subsidiary is
"tax-exempt use property" within the meaning of Section 168(h) of
the Code.
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4.15.10 Neither Parent nor any Parent Subsidiary has agreed to make nor
is it required to make any adjustment under Section 481(a) of the
Code by reason of a change in accounting method or otherwise
which will have any Material Adverse Effect on any Tax for a
period which ends after December 31, 1999.
4.16 Environmental Matters. Except as set forth in Section 4.16 of the
Parent Disclosure Schedule or the Parent SEC Documents: (i) the
reserves reflected in the Parent Financial Statements relating to
environmental matters were adequate under GAAP as of June 30, 2000,
and neither Parent nor any of the Parent Subsidiaries has incurred any
material liability in respect of any environmental matter since that
date; and (ii) the Parent SEC Documents include all information
relating to environmental matters required to be included therein
under the rules and regulations of the SEC applicable thereto. Except
as set forth in Section 4.16 of the Parent Disclosure Schedule or the
Parent SEC Documents, to the knowledge of Parent: (a) each of the
Parent Companies has conducted its business and operated its assets,
and is conducting its business and operating its assets, in material
compliance with all Environmental Laws; (b) none of the Parent
Companies has been notified by any Governmental Authority that any of
the operations or assets of any of the Parent Companies is the subject
of any investigation or inquiry by any Governmental Authority
evaluating whether any material remedial action is needed to respond
to a release of any Hazardous Material or to the improper storage or
disposal (including storage or disposal at offsite locations) of any
Hazardous Material; (c) none of the Parent Companies and no other
Person has filed any notice under any federal, state or local law
indicating that: (i) any of the Parent Companies is responsible for
the improper release into the environment, or the improper storage or
disposal of any Hazardous Material; or (ii) any Hazardous Material is
improperly stored or disposed of upon any property of any of the
Parent Companies; (d) none of the Parent Companies has any material
contingent liability in connection with a release into the environment
at or on the property now or previously owned or leased by any of the
Parent Companies or the storage or disposal of any Hazardous Material;
(e) none of the Parent Companies has received any claim, complaint,
notice, inquiry or request for information which remains unresolved as
of the date hereof with respect to any alleged violation of any
Environmental Law or regarding potential liability under any
Environmental Law relating to operations or conditions of any
facilities or property owned, leased or operated by any of the Parent
Companies; (f) there are no sites, locations or operations at which
any of the Parent Companies is currently undertaking, or has
completed, any remedial or response action relating to any such
disposal or release, as required by Environmental Laws; and (g) all
underground storage tanks and solid waste disposal facilities owned or
operated by the Parent Companies are used and operated in material
compliance with Environmental Laws.
4.17 Employment Contracts and Benefits. Section 4.17 of the Parent
Disclosure Schedule sets forth each of the Parent's employee benefit
plans ("Parent Employee Benefit Plan") and except as otherwise set
forth in Section 4.17 of the Parent Disclosure Schedule or otherwise
provided for in any Parent Employee Benefit Plan: (a) none of the
Parent Companies is subject to or obligated under any consulting,
employment, severance, termination or similar arrangement, any
employee benefit, incentive or deferred compensation plan with respect
to any Person, or any bonus, profit sharing, pension, stock option,
stock purchase or similar plan or other arrangement or other fringe
benefit plan entered into or maintained for the benefit of employees
of any other Person; and (b) no employee of any of the Parent
Companies owns, or has any rights granted by any of the Parent
Companies to acquire, any interest in any of the assets or business of
any of the Parent Companies.
4.18 Labor Matters. No employees of any of the Parent Companies are
represented by any labor organization. No labor organization or group
of employees of any of the Parent Companies has made a demand for
recognition or certification as a union or other labor organization,
and there are no representation or certification proceedings or
petitions seeking a representation proceeding presently pending or
threatened in writing to be brought or filed with the National Labor
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Relations Board or any other labor relations tribunal or authority.
There are no organizing activities involving any of the Parent
Companies pending with any labor organization or group of employees of
any of the Parent Companies. Each of the Parent Companies is in
material compliance with all laws, rules, regulations and orders
relating to the employment of labor, including all such laws, rules,
regulations and orders relating to wages, hours, collective
bargaining, discrimination, civil rights, safety and health, workers'
compensation and the collection and payment of withholding or Social
Security Taxes and similar Taxes, except where the failure to comply
would not, individually or in the aggregate, have a Material Adverse
Effect on Parent.
4.19 Insurance. Each of the Parent Companies maintains, and through the
Closing Date will maintain, insurance with reputable insurers (or
pursuant to prudent self-insurance programs) in such amounts and
covering such risks as are in accordance with normal industry practice
for companies engaged in businesses similar to those of the Parent
Companies and owning properties in the same general area in which the
Parent Companies conduct their businesses. None of the policies or
binders was obtained through the use of false or misleading
information or the failure to provide the insurer with all information
requested in order to evaluate the liabilities and risks insured.
There is no material default with respect to any provision contained
in any such policy or binder, nor has any of the Parent Companies
failed to give any notice or present any claim under any such policy
or binder in due and timely fashion.
4.20 Intangible Property. Except as set forth in Section 4.20 of the Parent
Disclosure Schedule, there are no material trademarks, trade names,
patents, service marks, brand names, computer programs, databases,
industrial designs, copyrights or other intangible property that are
necessary for the operation, or continued operation, of the business
of any of the Parent Companies or for the ownership and operation, or
continued ownership or operation, of any their assets, for which the
Parent Companies do not hold valid and continuing authority in
connection with the use thereof.
4.21 Opinion of Financial Advisor. The board of directors of Parent has
received the opinion dated as of the date hereof of the Financial
Advisor addressed to such board of directors that the Merger is fair
from a financial point of view to the holders of Parent Common Stock.
4.22 Books and Records. All books, records and files of the Parent
Companies (including those pertaining to Parent's Oil and Gas
Interests, wells and other assets, the production, gathering,
transportation and sale of Hydrocarbons, and corporate, accounting,
financial and employee records): (a) have been prepared, assembled and
maintained in accordance with usual and customary policies and
procedures; and (b) fairly and accurately reflect the ownership, use,
enjoyment and operation by the Parent Companies of their respective
assets.
4.23 Employee Benefit Plans. Each Parent Benefit Plan has been established
and administered in all material respects in accordance with its
terms, and in all material respects in compliance with the applicable
provisions of ERISA, the Code and other applicable laws, rules and
regulations and each Parent Benefit Plan which is intended to be
qualified within the meaning of Code Section 401(a) is so qualified.
Except as set forth in Section 4.23(b) of the Parent Disclosure
Schedule: (i) no Parent Benefit Plan currently has any "accumulated
funding deficiency" as such term is defined in ERISA Section 302 and
Code Section 412 (whether or not waived); (ii) no event or condition
exists or is expected to occur which is a reportable event within the
meaning of ERISA Section 4043 with respect to any Parent Benefit Plan
that is subject to Title IV of ERISA and with respect to which the
30-day notice requirement has not been waived; (iii) each member of
Parent's Controlled Group (as defined below) has made all required
premium payments when due to the PBGC; (iv) neither Parent nor any
member of its Controlled Group is subject to any liability to the PBGC
for any Parent Benefit Plan termination; (v) no amendment has occurred
which requires Parent or any member of its Controlled Group to provide
security pursuant to Code Section 401(a)(29); and (vi) neither
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Parent nor any member of its Controlled Group has engaged in a
transaction which is reasonably likely to subject it to liability
under ERISA Section 4069. For the purposes of this paragraph 4.23, the
term "Controlled Group" means all corporations, trades or businesses
which, together with Parent, are treated as a single employer under
Section 414 of the Code.
4.24 Proxy Statement/Prospectus; Registration Statement. None of the
information supplied or to be supplied by Parent for inclusion or
incorporation by reference in (1) the Proxy Statement/ Prospectus, and
any amendments or supplements thereto, or (2) the Registration
Statement, and any amendments or supplements thereto, will, at the
respective times such documents are filed, (i) in the case of the
Proxy Statement/Prospectus, at the time the Proxy Statement/Prospectus
or any amendment or supplement thereto is first mailed to stockholders
of Gothic, at the time such stockholders vote on approval and adoption
of this Agreement and at the Effective Time, contain any untrue
statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the
statements made therein, in light of the circumstances under which
they were made, not misleading and, (ii) in the case of the
Registration Statement, when it becomes effective under the Securities
Act, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make
the statements therein not misleading. If at any time prior to
Effective Time any event with respect to any of the Parent Companies
or their officers and directors will occur which is required to be
described in an amendment of, or a supplement to, the Proxy
Statement/Prospectus or the Registration Statement, such event will be
so described, and such amendment or supplement will be promptly filed
with the SEC and, as required by law, disseminated to the stockholders
of Gothic. The Registration Statement will comply (with respect to
Parent) as to form in all material respects with the provisions of the
Securities Act, and the Proxy Statement/Prospectus will comply (with
respect to Parent) as to form in all material respects with the
provisions of the Exchange Act.
4.25 No Knowledge of Breach of Representations. Parent has no actual
knowledge that any of Gothic's representations contained in this
Agreement are untrue as of the date of this Agreement. If and to the
extent that Parent has any such knowledge as of the date of this
Agreement, Parent will not assert any remedy under this Agreement for
breach of such representation (including, but not limited to, any
right to not close the Merger due to a failure to satisfy the
condition to Closing set forth in paragraph 6.2.1 arising solely as a
result of any such breach).
5. COVENANTS. From the date hereof until the Effective Time, Parent, Sub
and Gothic hereby covenant and agree as follows:
5.1 Conduct of Gothic Business Pending Closing. From the date hereof until
the Effective Time, Gothic covenants and agrees that, unless Parent
otherwise agrees in writing, the businesses of the Gothic Companies
will be conducted only in, and the Gothic Companies will not take any
action except in, the ordinary course of business and in a manner
consistent with past practice, and Gothic will use its reasonable best
efforts to preserve substantially intact the business organization of
the Gothic Companies, to keep available the services of the current
officers, employees and consultants of the Gothic Companies and to
preserve the goodwill of those current relationships of the Gothic
Companies with customers, suppliers and other Persons with which the
Gothic Companies have significant business relations. By way of
amplification and not limitation, except as contemplated by this
Agreement, the Gothic Companies will not, between the date of this
Agreement and the Effective Time, directly or indirectly do, or
propose to do, any of the following without the prior written consent
of Parent:
5.1.1 Amend or otherwise change the certificate of incorporation or
bylaws or equivalent organizational documents of the Gothic
Companies;
5.1.2 Issue, sell, pledge, dispose of, grant, encumber, or authorize
the issuance, sale, pledge, disposition, grant or encumbrance of:
(a) any shares of any class of capital stock of the
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Gothic Companies, or any options, warrants, convertible
securities or other rights of any kind to acquire any shares of
such capital stock, or any other ownership interest (including,
without limitation, any phantom interest), of the Gothic
Companies (except for the issuance of shares of Gothic Common
Stock issuable on conversion of the Gothic Preferred Stock and
issuable pursuant to Gothic Stock Options and Gothic Warrants
outstanding on the date hereof and disclosed in the Gothic
Disclosure Schedule); or (b) any assets of the Gothic Companies,
except for sales of products in the ordinary course of business;
5.1.3 Declare, set aside, make or pay any dividend or other
distribution, payable in cash, stock, property or otherwise, with
respect to any of its capital stock (except for such
declarations, set asides, dividends and other distributions made
from the Gothic Subsidiary to Gothic or payment-in-kind dividends
to Parent on the Gothic Preferred Stock);
5.1.4 Reclassify, combine, split, subdivide or redeem, purchase or
otherwise acquire, directly or indirectly, any capital stock or
amend or modify any warrant or other right to acquire any capital
stock;
5.1.5 (a) Acquire (including, without limitation, by merger,
consolidation, or acquisition of stock or assets) any
corporation, partnership, other business organization or any
division thereof or any material amount of assets other than in
the ordinary course of business; (b) incur any indebtedness for
borrowed money in excess of the existing borrowing base under the
current Bank Credit Agreement or issue any debt securities or
assume, guarantee or endorse, or otherwise as an accommodation
become responsible for, the obligations of any Person, or make
any loans, advances or capital contribution to, or investments
in, any other Person (other than such of the foregoing as are
made by Gothic to or in a wholly-owned subsidiary of Gothic),
except in the ordinary course of business and consistent with
past practice, but in no event in excess of $1.0 million; or (c)
enter into or amend any contract, agreement, commitment or
arrangement with respect to any matter set forth in this
paragraph 5.1.5;
5.1.6 Increase the compensation payable or to become payable to any
officers or employees, except for increases in accordance with
past practices in salaries or wages of employees of the Gothic
Companies who are not officers of the Gothic Companies, or grant
any severance or termination pay to, or enter into any employment
or severance agreement with, any director, officer or other
employee of the Gothic Companies, or establish, adopt, enter
into, modify or amend any collective bargaining, bonus, profit
sharing, thrift, compensation, stock option except as set forth
in paragraph 2.3.4, restricted stock, pension, retirement,
deferred compensation, employment, termination, severance phantom
stock plan or other plan, agreement, trust, fund, policy or
arrangement for the benefit of any director, officer or employee;
5.1.7 Make any material Tax election or settle or compromise any
material federal, state, local or foreign income Tax liability;
5.1.8 Pay, discharge or satisfy any claim, liability or obligation
(absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge or satisfaction, in
the ordinary course of business and consistent with past
practice, of liabilities reflected or reserved against in the
Gothic Financial Statements or subsequently incurred in the
ordinary course of business and consistent with past practices;
5.1.9 Settle or compromise any pending or threatened suit, action or
claim which is material or which relates to any of the
transactions contemplated hereby, except if such settlement or
compromise would not have a Material Adverse Effect;
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5.1.10 Undertake: (a) any capital commitment outside Arkansas, Kansas,
Oklahoma and that portion of the State of Texas located north of
latitude 34 degrees N (the "Midcontinent Area"); (b) any new land
or lease initiatives; (c) any capital expenditures in the
Midcontinent Area in an individual amount greater than $75,000
or, when aggregated with all other capital commitments, in an
aggregate amount greater than $500,000, unless such capital
expenditure is in an oil and gas well proposed by a Parent
Company or proposed by a third party and participated in by a
Parent Company; or (d) any new well proposals or regulatory or
governmental action with respect to any well activities;
provided, however, the restrictions on capital expenditures set
forth in this paragraph 5.1.10 will not apply to the McClellan
MOC Federal 21 Well, the McClellan MOC Federal 22 Well or the
Sinclair 2-4 Well so long as such wells are drilled to the depths
and in accordance with the terms set forth in the respective AFEs
for such wells dated April 25, 2000, June 19, 2000 and July 18,
2000;
5.1.11 Take or cause to be taken any action which would disqualify the
Merger as a 368 Reorganization for Tax purposes;
5.1.12 Amend, modify, terminate, waive or permit to lapse any material
right of first refusal, preferential right, right of first offer
or any other material right of any of the Gothic Companies; or
5.1.13 Take or offer or propose to take, or agree to take in writing, or
otherwise, any of the actions described in paragraphs 5.1.1
through 5.1.12 of this paragraph 5.1 or any action which would
result in any of the conditions to the Merger not being
satisfied.
5.2 Conduct of Parent Business Pending Closing. From the date hereof until
the Effective Time, Parent covenants and agrees that, except to the
extent contemplated in the Parent SEC Documents, as set forth below,
or as otherwise agreed to in writing, the businesses of Parent and the
Parent Subsidiaries will be conducted only in, and Parent and the
Parent Subsidiaries will not take any action except in, the ordinary
course of business and in a manner consistent with past practice, and
Parent will use its reasonable best efforts to preserve substantially
intact the business organization of Parent and the Parent
Subsidiaries, to keep available the services of the current officers,
employees and consultants of Parent and the Parent Subsidiaries and to
preserve the goodwill of those current relationships of Parent and the
Parent Subsidiaries with customers, suppliers and other Persons with
which Parent or any Parent Subsidiary has significant business
relations. By way of amplification and not limitation, except as
contemplated by this Agreement, Parent will not, between the date of
this Agreement and the Effective Time, directly or indirectly do, or
propose to do, any of the following without the prior written consent
of Gothic:
5.2.1 Amend or otherwise change the certificate of incorporation
(excluding any certificate of elimination filed with respect to
the Parent Preferred Stock) or bylaws of Parent;
5.2.2 Reclassify, combine, split, subdivide or redeem, purchase or
otherwise acquire, directly or indirectly, any Parent Common
Stock; or
5.2.3 Take or cause to be taken any action which would disqualify the
Merger as a 368 Reorganization for Tax purposes.
5.3 Access to Information. The Parent Companies and the Gothic Companies
agree that:
5.3.1 Gothic will (and will cause each of the other Gothic Companies
to) afford to Parent and Parent Representatives (including,
without limitation, directors, officers and employees of Parent
and its Affiliates, and counsel, accountants and other
professionals retained by Parent) such access, during normal
business hours throughout the period prior to the Effective Time,
to Gothic's books, records (including, without limitation, Tax
returns and work papers of Gothic's independent auditors),
properties, personnel and to such other information as Parent
reasonably requests and will permit Parent to make such
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inspections as Parent may reasonably request and will cause the
officers of all of the Gothic Companies to furnish Parent with
such financial and operating data and other information with
respect to the business, properties and personnel of the Gothic
Companies as Parent may from time to time reasonably request,
provided, however, that no investigation pursuant to this
paragraph 5.3 will affect or be deemed to modify any of the
representations or warranties made by Gothic in this Agreement.
5.3.2 If and to the extent necessary for the preparation of the opinion
specified in paragraph 3.24 hereof, the Parent Companies will
afford to Gothic's financial advisors reasonable access during
normal business hours to the executive officers of the Parent
Companies, provided that such advisors first execute a
confidentiality agreement satisfactory to the Parent Companies
and their counsel and conduct such investigation in a manner that
does not interfere unreasonably with the schedules of the Parent
Companies' executive officers.
5.4 No Solicitation. Immediately following the execution of this
Agreement, the Gothic Companies:
5.4.1 Will (and will cause each of the Gothic Representatives to)
terminate any and all existing activities, discussions and
negotiations with third parties (other than Parent) with respect
to any possible transaction involving any proposal to acquire all
or any part of the Gothic Common Stock or all or a material
portion of the assets, business or equity interest of Gothic
(other than the transactions contemplated by this Agreement),
whether by merger, purchase of assets, tender offer, exchange
offer or otherwise.
5.4.2 Will not (and will cause the Gothic Representatives not to),
directly or indirectly: (a) solicit, initiate or encourage the
submission of, any offer or proposal to acquire all or more than
three percent (3%) of the Gothic Common Stock or all or any
material portion of the assets, business or equity interests of
Gothic or any other transaction the consummation of which would
or could reasonably be expected to impede, interfere with,
prevent or materially delay the consummation of the Merger (other
than the transactions contemplated by this Agreement), whether by
merger, purchase of assets, tender offer, exchange offer or
otherwise (an "Alternative Proposal"); (b) engage in negotiations
or discussions concerning or provide any non-public information
to any Person relating to an Alternative Proposal; or (c) agree
to, approve or recommend, or otherwise facilitate any effort or
attempt to make or implement, any Alternative Proposal, or
withdraw its recommendation of the Merger, provided, however,
that: (i) Gothic's board of directors may take and disclose to
the stockholders of Gothic a position contemplated by Rule
14e-2(a) promulgated under the Exchange Act with regard to an
Alternative Proposal; and (ii) following receipt from a third
party (without any solicitation, initiation or encouragement,
directly or indirectly, by Gothic or any Gothic Representatives)
of a bona fide written Alternative Proposal, (x) Gothic may, upon
written notice to Parent, engage in discussions or negotiations
with such third party and may furnish such third party non-public
information concerning Gothic, and Gothic's business, properties
and assets if, prior to furnishing such information to such third
party, such third party executes a confidentiality agreement in
reasonably customary form and on terms, including so called
"standstill" provisions, satisfactory in form and substance to
Parent and (y) the board of directors of Gothic may recommend
such Alternative Proposal or withdraw, modify or not make its
recommendation referred to in paragraph 3.18, if and only to the
extent that Gothic's board of directors determines in good faith
that: (1) based on the advice of Gothic's counsel, the failure to
recommend such Alternative Proposal would constitute a breach of
the board's fiduciary duties; and (2) based on the advice of
Gothic's financial advisor, such Alternative Proposal, if
consummated, would result in a transaction more favorable to
Gothic's stockholders from a financial point of view than the
transaction contemplated by this Agreement (a "Superior
Proposal") and
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the Person making such Superior Proposal has the financial means,
or the ability to obtain the necessary financing, to conclude
such transaction.
5.4.3 Will promptly notify Parent after receipt by Gothic or any of the
Gothic Representatives of any Alternative Proposal, any inquiries
indicating that any Person is considering making or wishes to
make an Alternative Proposal or any requests for nonpublic
information and the terms and conditions of any proposals or
offers and the status of any actions, including any discussions,
taken pursuant to such Alternative Proposal. Gothic agrees that
it will keep Parent informed, on a current basis, of the status
and terms of any such Alternative Proposal and of any discussions
or negotiations regarding same.
5.4.4 Will cause each of the Irrevocable Proxies to be executed and
delivered to Parent within ten (10) days after the execution of
this Agreement, all in form and substance satisfactory to Parent
and its legal counsel.
Nothing in this paragraph 5.4 will permit Gothic to terminate this
Agreement or to change or withdraw its recommendation except as
specifically provided in paragraph 7.1.
5.5 Gothic Stockholder Meeting. Gothic will take all action necessary in
accordance with applicable law and its certificate of incorporation
and bylaws to convene a meeting of its stockholders as promptly as
practicable after the date hereof for the purpose of voting on this
Agreement and the Merger. The board of directors of Gothic will
recommend approval of this Agreement and the Merger (unless Gothic's
board of directors determines in good faith based on the advice of
Gothic's financial advisor that Gothic has received a Superior
Proposal from a Person with the financial means or ability to obtain
the necessary financing to conclude such transaction, subject,
however, to the provisions of paragraph 7 hereof) and will take all
lawful action to solicit such approval, including timely mailing the
Proxy Statement/Prospectus to the stockholders of Gothic.
5.6 Parent Tax Determination. As a condition precedent to the mailing of
the Proxy Statement/ Prospectus, Parent will have made a good faith
determination to the effect that: (a) the Merger should be treated for
federal income tax purposes as a reorganization within the meaning of
Section 368(a) of the Code; (b) each of Parent and Sub should be a
party to such reorganization within the meaning of Section 368(b) of
the Code; and (c) no gain or loss should be recognized by Parent or
Sub as a result of the Merger.
5.7 Registration Statement and Proxy Statement/Prospectus. With respect to
the Registration Statement and the Proxy Statement/Prospectus, the
parties agree that:
5.7.1 Parent and Gothic will cooperate and promptly prepare (i) a
Preliminary Proxy Statement and (ii) the Registration Statement,
and Gothic and Parent will file the Preliminary Proxy Statement
and the Registration Statement with the SEC as soon as
practicable after the date hereof. Parent will use its
commercially reasonable efforts, and Gothic will cooperate with
Parent (including furnishing all information concerning Gothic
and the holders of Gothic Common Stock as may be reasonably
requested by Parent), to have the Registration Statement declared
effective under the Securities Act as promptly as practicable
after such filing. Parent will use its best efforts, and Gothic
will cooperate with Parent, to obtain all necessary state
securities laws or "blue sky" permits, approvals and
registrations in connection with the issuance of Parent Common
Stock pursuant to the Merger.
5.7.2 Parent and Gothic will cause the Registration Statement
(including the Proxy Statement/ Prospectus), at the time it
becomes effective under the Securities Act, to comply as to form
in all material respects with the applicable provisions of the
Securities Act, the Exchange Act and the rules and regulations of
the SEC thereunder.
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5.7.3 Gothic hereby covenants and agrees with Parent that: (a) the
Registration Statement (at the time it becomes effective under
the Securities Act and at the Effective Time) will not contain an
untrue statement of material fact or omit to state a material
fact required to be stated therein or necessary to make the
statements therein not misleading (provided, however, that this
clause (a) will apply only to information contained in the
Registration Statement that was supplied by Gothic specifically
for inclusion therein); and (b) the Proxy Statement/Prospectus
(at the time it is first mailed to stockholders of Gothic, at the
time of the Gothic Stockholder Meeting, and at the Effective
Time) will not contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of
the circumstances under which they are made, not misleading
(provided, however, that this clause (b) will only apply to any
information contained in the Proxy Statement/ Prospectus that was
supplied by Gothic specifically for inclusion therein). If, at
any time prior to the Effective Time, any event with respect to
Gothic, or with respect to other information supplied by Gothic
specifically for inclusion in the Registration Statement, occurs
and such event is required to be described in an amendment to the
Registration Statement, Gothic will promptly notify Parent of
such occurrence and will cooperate with Parent in the preparation
and filing of such amendment. If, at any time prior to the
Effective Time, any event with respect to Gothic, or with respect
to other information included in the Proxy Statement/Prospectus,
occurs and such event is required to be described in a supplement
to the Proxy Statement/Prospectus, such event will be so
described and such supplement will be promptly prepared, filed
and disseminated.
5.7.4 Parent hereby covenants and agrees with Gothic that: (a) the
Registration Statement (at the time it becomes effective under
the Securities Act and at the Effective Time) will not contain an
untrue statement of material fact or omit to state a material
fact required to be stated therein or necessary to make the
statements therein not misleading (provided, however, that this
clause (a) will apply only to information contained in the
Registration Statement that was supplied by Parent specifically
for inclusion therein); and (b) the Proxy Statement/Prospectus
(at the time it is first mailed to stockholders of Gothic, at the
time of the Gothic Stockholder Meeting, and at the Effective
Time) will not contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of
the circumstances under which they are made, not misleading
(provided, however, that this clause (b) will only apply to any
information contained in the Proxy Statement/ Prospectus that was
supplied by Parent specifically for inclusion therein). If, at
any time prior to the Effective Time, any event with respect to
Parent, or with respect to other information supplied by Parent
specifically for inclusion in the Registration Statement, occurs
and such event is required to be described in an amendment to the
Registration Statement, Parent will promptly notify Gothic of
such occurrence and will prepare and file such amendment. If, at
any time prior to the Effective Time, any event with respect to
Parent, or with respect to other information included in the
Proxy Statement/ Prospectus, occurs and such event is required to
be described in a supplement to the Proxy Statement/Prospectus,
such event will be so described and such supplement will be
promptly prepared, filed and disseminated.
5.7.5 Neither the Registration Statement nor the Proxy
Statement/Prospectus nor any amendment or supplement thereto will
be filed or disseminated to the stockholders of Gothic without
the approval of both Parent and Gothic which approval will not be
unreasonably withheld. Parent will advise Gothic, promptly after
it receives notice thereof, of the time when the Registration
Statement has become effective under the Securities Act, the
issuance of any stop order with respect to the Registration
Statement, the suspension of the qualification of the Parent
Common Stock issuable in connection with
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the Merger for offering or sale in any jurisdiction or any
comments or requests for additional information by the SEC with
respect to the Registration Statement.
5.8 Stock Exchange Listing. Parent will use its best efforts to list on
the Exchange or such other exchange on which Parent Common Stock is
then primarily traded, upon notice of issuance, the Parent Common
Stock to be issued pursuant to the Merger.
5.9 Additional Arrangements. Subject to the terms and conditions herein
provided, each of Gothic and Parent will take, or cause to be taken,
all action and will do, or cause to be done, all things necessary,
appropriate or desirable under applicable laws and regulations or
under applicable governing agreements to consummate and make effective
the transactions contemplated by this Agreement, including using its
best efforts to obtain all necessary waivers, consents and approvals
and effecting all necessary registrations and filings. Each of Gothic
and Parent will take, or cause to be taken, all action or will do, or
cause to be done, all things necessary, appropriate or desirable to
cause the covenants and conditions applicable to the transactions
contemplated hereby to be performed or satisfied as soon as
practicable. In addition, if any Governmental Authority will have
issued any order, decree, ruling or injunction, or taken any other
action that would have the effect of restraining, enjoining or
otherwise prohibiting or preventing the consummation of the
transactions contemplated hereby, each of Gothic and Parent will use
its reasonable efforts to have such order, decree, ruling or
injunction or other action declared ineffective as soon as
practicable.
5.10 Agreements of Affiliates. At least 30 days prior to the Effective
Time, Gothic will cause to be prepared and delivered to Parent a list
identifying all Persons who, at the time of the Gothic Stockholder
Meeting, may be deemed to be "affiliates" of Gothic as that term is
used in paragraphs (c) and (d) of Rule 145 under the Securities Act or
are Major Gothic Stockholders. Upon written request by Parent, Gothic
will use its best efforts to cause each Person who is identified as a
Major Gothic Stockholder or an "affiliate" of Gothic in such list to
execute and deliver to Parent, on or prior to the Closing Date, a
written agreement, in the form attached hereto as Exhibit "5.10" (if
such Person has not executed and delivered an agreement substantially
to the same effect contemporaneously with the execution of this
Agreement). Parent will be entitled to place legends as specified in
such agreements on the Parent Certificates representing any Parent
Common Stock to be issued in the Merger to affiliates of Gothic or
Major Gothic Stockholders. Parent agrees to use its commercially
reasonable efforts to publish, or cause to be published, within 180
days after the Closing a quarterly earnings report, an effective
registration statement filed with the SEC, a report to the SEC on Form
10-K, 10-Q or 8-K, or any other public filing or announcement which
includes the results of at least 30 days of combined operations of
Parent and Gothic.
5.11 Public Announcements. Prior to Closing, Gothic will consult with
Parent before issuing any press release or otherwise making any public
statements with respect to the transactions contemplated by this
Agreement and will not issue any press release or make any such public
statement prior to obtaining the written approval of Parent; provided,
however, that such approval will not be required where such release or
announcement is required by applicable law; and provided further, that
Gothic may respond to inquiries by the press or others regarding the
transactions contemplated by this Agreement, so long as such responses
are consistent with previously issued press releases.
5.12 Notification of Certain Matters. Gothic will give prompt notice to
Parent of: (a) any representation or warranty of Gothic contained in
this Agreement being untrue or inaccurate when made; (b) the
occurrence of any event or development that would cause (or could
reasonably be expected to cause) any representation or warranty of
Gothic contained in this Agreement to be untrue or inaccurate on the
Closing Date; or (c) any failure of Gothic to comply with or satisfy
any covenant, condition, or agreement to be complied with or satisfied
by it hereunder. Parent will give prompt notice to Gothic of: (i) any
representation or warranty of
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Parent contained in this Agreement being untrue or inaccurate when
made; (ii) the occurrence of any event or development that would cause
(or could reasonably be expected to cause) any representation or
warranty of Parent contained in this Agreement to be untrue or
inaccurate on the Closing Date; or (iii) any failure of Parent to
comply with or satisfy any covenant, condition, or agreement to be
complied with or satisfied by it hereunder.
5.13 Indemnification. From and after the Effective Time, Parent agrees
that:
5.13.1 Parent will indemnify and hold harmless each present and former
director and/or officer of Gothic, determined as of the Effective
Time (the "Indemnified Parties"), that is made a party or
threatened to be made a party to any threatened, pending or
completed, action, suit, proceeding or claim, whether civil,
criminal, administrative or investigative, by reason of the fact
that he or she was a director or officer of the Gothic Companies
prior to the Effective Time and arising out of actions or
omissions of the Indemnified Party in any such capacity occurring
at or prior to such Effective Time (a "Claim") against any costs
or expenses (including reasonable attorneys' fees), judgments,
fines, losses, claims, damages or liabilities reasonably incurred
in connection with any Claim, whether asserted or claimed prior
to, at or after the Effective Time, to the fullest extent that
Gothic would have been permitted under Oklahoma law, the
certificate of incorporation or bylaws of Gothic or written
indemnification agreements in effect at the date hereof,
including provisions therein relating to the advancement of
expenses incurred in the defense of any action or suit.
5.13.2 Any Indemnified Party wishing to claim indemnification under
paragraph 5.13.1, upon learning of any such Claim, will promptly
notify Parent thereof, but the failure to so notify Parent will
not relieve Parent of any liability it may have to such
Indemnified Party if such failure does not materially prejudice
Parent. In the event of any such Claim (whether arising before or
after the Effective Time): (a) Parent will have the right to
assume the defense thereof and Parent will not be liable to such
Indemnified Party for any legal expenses of other counsel or any
other expenses subsequently incurred by such Indemnified Party in
connection with the defense thereof, except that if Parent elects
not to assume such defense, the Indemnified Party may retain
counsel reasonably satisfactory to Parent, and Parent will pay
reasonable fees and expenses of such counsel for the Indemnified
Party; provided, however, that Parent will be obligated pursuant
to this paragraph 5.13.2 to pay for only one firm or counsel for
all Indemnified Parties unless the use of one counsel for such
Indemnified Parties would present such counsel with a conflict of
interest; (b) such Indemnified Parties will cooperate in the
defense of any such matter; and (c) Parent will not be liable for
any settlement effected without its prior written consent, which
consent will not be unreasonably withheld; and provided, further,
however, that Parent will not have any obligation hereunder to
any Indemnified Party when and if a court of competent
jurisdiction will ultimately determine, and such determination
will have become final and non-appealable, that the
indemnification of such Indemnified Party in the manner
contemplated hereby is prohibited by applicable law. If such
indemnity is not available with respect to any Indemnified Party,
then Parent and the Indemnified Party will contribute to the
amount payable in such proportion as is appropriate to reflect
relative faults and benefits, with any allocation of respective
"fault" otherwise allocable to Gothic being allocated to Parent.
5.14 Employee and Severance Matters. Attached as Section 5.14 of the Gothic
Disclosure Schedule is: (a) a current list of each of the Gothic
Companies' employees (the "Gothic Employees"); (b) a copy of Gothic's
severance policy (the "Gothic Severance Policy"); (c) a severance
package table which lists the cost of all severance pay to be paid to
each of the Gothic Employees; (d) a list of Gothic Employees with
written employment agreements (the "Contract Employees"); and (e) a
list of all contract pumpers and other independent contractors (the
"Independent Contractors") and a summary of the terms of such
arrangements including,
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without limitation, any severance package. On or immediately prior to
the Closing Date, Gothic will pay the severance pay as indicated on
the severance package table to the Gothic Employees. Notwithstanding
the immediately preceding sentence, Gothic will not pay such severance
pay to: (i) any Gothic Employee who is not a Contract Employee and to
whom Parent or Sub offers a substantially comparable job (as
determined by Parent in its reasonable discretion) with equal or
better base salary at such employee's current location; (ii) any
Contract Employee who chooses not to terminate his employment
agreement with Gothic on the Closing Date; (iii) any Independent
Contractor who is covered by the Gothic Severance Policy and chooses
not to terminate his contract with Gothic on the Closing Date; (iv)
Michael Paulk or Steve Ensz except in accordance with their respective
employment agreements and the termination agreements attached hereto
as part of Section 5.14 of the Gothic Disclosure Schedule; or (v) any
Gothic Employee who does not execute a severance agreement in
substantially the form required by the severance policy. With respect
to any Gothic Employee who is not paid severance pay on or immediately
prior to the Effective Date, all the terms and provisions of the
Gothic Severance Policy and the Contract Employees' employment
agreements will continue in full force and effect.
5.15 Restructuring of Merger. Upon the mutual agreement of Parent and
Gothic so long as no breach of any of the representations and
warranties set forth herein has occurred, the Merger may be
restructured in the form of a forward subsidiary merger of Gothic into
Sub, with Sub being the Surviving Corporation, or as a merger of
Gothic into Parent, with Parent being the Surviving Corporation. In
addition, (so long as no breach of any of the representations and
warranties of the Parent set forth herein has occurred, such
restructure will not adversely affect the tax consequences of the
Merger and such restructure will not cause a violation of paragraph
6.2.6 that is not waived by the Parent), at the election of the
Parent, the Merger may be restructured in the form of a share
acquisition under Section 1090.1 of the OGCA. In such event, this
Agreement will be deemed appropriately modified to reflect such form
of merger. Regardless of the form of the Merger, Gothic, Parent and
Sub acknowledge and agree that the effect of the Merger is that Gothic
is being acquired by Parent.
5.16 Payment of Expenses. Except as set forth in this paragraph 5.16, all
expenses incurred in connection with this Agreement will be paid by
the party incurring such expenses, whether or not the Merger is
consummated, except that Parent and Gothic each will pay one-half of
all Expenses (as defined below) relating to printing, filing and
mailing the Registration Statement and the Proxy Statement/Prospectus
and all SEC and other regulatory filing fees incurred in connection
with the Registration Statement and the Proxy Statement/Prospectus.
"Expenses" as used in this Agreement will include all reasonable
out-of-pocket expenses (including, without limitation, all fees and
expenses of counsel, accountants, experts and consultants to a party
hereto and its affiliates) incurred by a party or on its behalf in
connection with or related to the authorization, preparation,
negotiation, execution and performance of this Agreement, the
preparation, printing, filing and mailing of the Registration
Statement and the Proxy Statement/ Prospectus, the solicitation of
stockholder approvals and all other matters related to the closing of
the Merger.
5.17 Gothic Termination Fee. Parent and Gothic agree that: (a) if Gothic
terminates this Agreement pursuant to pursuant to paragraph 7.1.4(a);
or (b) if Parent terminates this Agreement pursuant to paragraph
7.1.5; or (c) if (i) Gothic or Parent terminates this Agreement
pursuant to paragraph 7.1.2 due to the failure of Gothic's
stockholders to approve and adopt this Agreement, the Merger and the
transactions contemplated hereby, and (ii) at the time of such failure
to so approve and adopt this Agreement, the Merger and the
transactions contemplated hereby, there exists an Alternative Proposal
with respect to Gothic and, prior to or within seven (7) months of the
termination of this Agreement, Gothic enters into a definitive
agreement with any third party with respect to such Alternative
Proposal with respect to Gothic; then Gothic will pay to Parent an
amount equal to $10,000,000 (the "Gothic Termination Fee"). The Gothic
Termination Fee
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will be paid prior to, and will be a pre-condition to effectiveness of
termination of this Agreement pursuant to paragraph 7.1.4 and 7.1.5
and the Gothic Termination Fee will be paid to Parent on the next
business day after a definitive agreement is entered into with a third
party with respect to an Alternative Proposal if this Agreement is
terminated pursuant to paragraph 7.1.2. Any payment of a Gothic
Termination Fee required to be made pursuant to this paragraph 5.17
will be made not later than two (2) business days after termination of
this Agreement. All payments under this paragraph 5.17 will be made by
wire transfer of immediately available funds to an account designated
by Parent.
5.18 Dissenting Stockholder Payments. Any and all payments made to settle
appraisal rights of Dissenting Stockholders or made pursuant to the
OGCA will be made solely out of Gothic assets and neither Parent nor
Sub will have any liability therefor.
6. CONDITIONS PRECEDENT. The obligations of the parties under this
Agreement will be subject to the following conditions precedent:
6.1 Conditions to Each Party's Obligation to Effect the Merger. The
respective obligations of each party to effect the Merger will be
subject to the satisfaction, at or prior to the Closing Date, of the
following conditions:
6.1.1 Stockholder Approval. This Agreement and the Merger will have been
duly and validly approved and adopted by a majority of the
outstanding Gothic Common Stock and Gothic Preferred Stock voting
as one class.
6.1.2 Other Approvals. If applicable, the waiting period applicable to
the consummation of the Merger under the HSR Act will have expired
or been terminated and all filings required to be made prior to
the Effective Time with, and all consents, approvals, permits and
authorizations required to be obtained prior to the Effective Time
from, any Governmental Authority in connection with the execution
and delivery of this Agreement and the consummation of the
transactions contemplated hereby by Gothic, Parent and Sub will
have been made or obtained (as the case may be), except where the
failure to obtain such consents, approvals, permits and
authorizations would not be reasonably likely to result in a
Material Adverse Effect on Parent (assuming the Merger has taken
place) or to materially and adversely affect the consummation of
the Merger.
6.1.3 Securities Law Matters. The Registration Statement will have
become effective under the Securities Act and will be effective at
the Effective Time, and no stop order suspending such
effectiveness will have been issued, no action, suit, proceeding
or investigation by the SEC to suspend such effectiveness will
have been initiated and be continuing, and all necessary approvals
under state securities laws relating to the issuance or trading of
the Parent Common Stock to be issued in the Merger will have been
received.
6.1.4 No Injunctions or Restraints. No temporary restraining order,
preliminary or permanent injunction or other order issued by any
court of competent jurisdiction or other legal restraint or
prohibition preventing the consummation of the Merger will be in
effect; provided, however, that prior to invoking this condition,
each party will have complied fully with its obligations under
paragraph 5.9 and, in addition, will use all reasonable efforts
to have any such decree, ruling, injunction or order vacated,
except as otherwise contemplated by this Agreement.
6.1.5 Financing Conditions. All of the terms and conditions set forth
in the financing commitment dated September 8, 2000, among Bear
Stearns & Co., Inc. and the Parent relating to the Merger will
have been satisfied, such financing commitment will be in full
force and effect as to each of the lenders which is a party
thereto and all of the funding required to consummate the
transactions contemplated hereby (including the payment of any
obligations of the Gothic Companies as a result of this
transaction together with any
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transaction costs) and covered by such financing commitment will
be available to be disbursed to Parent in accordance with the
terms of such financing commitment.
6.1.6 Bond Indenture Compliance. Prior to the Closing Date, the Gothic
Companies will deliver or cause to be delivered to the trustee
under the Senior Secured GPC Notes indenture the Officers'
Certificate in the form set forth in Section 6.1.6 of the Gothic
Disclosure Schedule together with all opinions and other required
documentation and will have provided executed copies thereof to
the Parent along with the calculations upon which such Officers'
Certificate is based and all such items will be true and correct
in all respects.
6.2 Conditions to Obligations of Parent and Sub. The obligations of Parent
and Sub to effect the Merger are subject to the satisfaction of the
following conditions, any or all of which may be waived in whole or in
part by Parent and Sub:
6.2.1 Representations and Warranties. The representations and
warranties of Gothic set forth in this Agreement and the Gothic
Disclosure Schedule will be true and correct as of the Closing
Date as though made on and as of that time, and Parent will have
received a certificate signed by the chief executive officer of
Gothic to such effect; provided, however, that the condition set
forth in this paragraph 6.2.1 will be deemed to be satisfied even
if one or more of such representations and warranties are not
true and correct, so long as the failure of such representations
and warranties to be true and correct (in the aggregate) does not
result in a Material Adverse Effect on any of the Gothic
Companies.
6.2.2 Performance of Covenants and Agreements by Gothic. Gothic will
have performed in all material respects all covenants and
agreements required to be performed by it under this Agreement at
or prior to the Closing Date, and Parent will have received a
certificate signed by the chief executive officer of Gothic to
such effect.
6.2.3 Letters from Gothic Affiliates. Parent will have received from
each Person named in the list referred to in paragraph 5.10 an
executed copy of the agreement described in paragraph 5.10.
6.2.4 Tax Determination. The determination described in paragraph 5.6
will not have been withdrawn, revoked or modified.
6.2.5 No Adverse Change. From the date of this Agreement through the
Closing, there will not have occurred any change in the condition
(financial or otherwise), operations or business of any of the
Gothic Companies that would have or would be reasonably likely to
have a Material Adverse Effect on any of the Gothic Companies
(other than changes in commodity prices, changes generally
affecting the oil and gas industry, changes resulting from
exploration or development results reported in the ordinary
course of business and changes arising from the announcement of
the Merger).
6.2.6 Dissenting Stockholders. Holders of more than five percent (5%)
of the outstanding shares of Gothic Common Stock will not have
exercised, nor will they have any continued right to exercise,
appraisal, dissenters' or similar rights under applicable law
with respect to their shares by virtue of the Merger.
6.2.7 Resignations. Each of the officers and directors of each Gothic
Company will have resigned.
6.2.8 Releases. Each officer and director of the Gothic Companies will
have executed and delivered a Release in substantially the form
attached hereto as Exhibit "6.2.8."
6.2.9 Opinion of Counsel. Parent will have received from: (a) Pray,
Walker, Jackman, Williamson & Marlar, counsel to Gothic, an
opinion in form and substance as set forth in Exhibit "6.2.9(a)"
attached hereto addressed to Parent and dated as of the Closing
Date,
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and (b) William Clarke, counsel to Gothic, an opinion in form and
substance as set forth in Exhibit "6.2.9(b)" attached hereto
addressed to Parent and dated as of the Closing Date.
6.2.10 Loans and Pledges. As of the Closing Date, the pledge agreements
referred to in paragraph 3.40 hereof covering all of the Pledged
Stock will remain in full force and effect and the officer and
employee letters directing payment of the loans to officers and
employees to be made out of severance payments will remain in
full force and effect with respect to no less than eighty percent
(80%) of the aggregate unpaid balances of all such officer and
employee loans.
6.3 Conditions to Obligation of Gothic. The obligation of Gothic to effect
the Merger is subject to the satisfaction of the following conditions,
any or all of which may be waived in whole or in part by Gothic:
6.3.1 Representations and Warranties. The representations and
warranties of Parent and Sub set forth in paragraph 4 will be
true and correct as of the Closing Date as though made on and as
of that time, and Gothic will have received a certificate signed
by the chief executive officer or the chief financial officer of
Parent to such effect; provided, however, that the condition set
forth in this paragraph 6.3.1 will be deemed to be satisfied even
if one or more of such representations and warranties are not
true and correct, so long as the failure of such representations
and warranties to be true and correct (in the aggregate) does not
result in a Material Adverse Effect on Parent and/or Sub.
6.3.2 Performance of Covenants and Agreements by Parent and Sub. Parent
and Sub will have performed in all material respects all
covenants and agreements required to be performed by them under
this Agreement at or prior to the Closing Date, and Gothic will
have received a certificate signed by the chief executive officer
or the chief financial officer of Parent to such effect.
6.3.3 Listing. The shares of Parent Common Stock issuable pursuant to
the Merger will have been authorized for listing on the Exchange
or such other exchange on which the Parent Common Stock is
traded, subject to official notice of issuance.
6.3.4 No Adverse Change. From the date of this Agreement through the
Closing, there will not have occurred any change in the condition
(financial or otherwise), operations or business of the Parent
Companies taken as a whole that would have or would be reasonably
likely to have a Material Adverse Effect on the Parent Companies
(other than changes in commodity prices, changes generally
affecting the oil and gas industry, changes resulting from
exploration and development results reported in the ordinary
course of business and changes arising from the announcement of
the Merger).
6.3.5 Opinion of Counsel. Gothic will have received from Self, Giddens
& Lees, Inc., counsel to Parent, an opinion in form and substance
as set forth in Exhibit "6.3.5" attached hereto addressed to
Gothic, and dated as of the Closing Date.
7. TERMINATION. This Agreement may be terminated and the Merger may be
abandoned at any time prior to the Effective Time, whether before or after
approval of this Agreement and the Merger by the stockholders of Gothic on the
following terms.
7.1 Termination Rights. Any termination of this Agreement will be by:
7.1.1 Mutual Consent. By mutual written consent of Parent and Gothic;
7.1.2 Date Certain. By either Gothic or Parent if: (a) the Merger has
not been consummated by June 30, 2001 (provided, however, that
the right to terminate this Agreement pursuant to this clause (a)
will not be available to any party whose breach of any
representation or warranty or failure to perform any covenant or
agreement under this Agreement has been
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the cause of or resulted in the failure of the Merger to occur on
or before such date); (b) any Governmental Authority has issued
an order, decree or ruling or taken any other action permanently
restraining, enjoining or otherwise prohibiting the Merger and
such order, decree, ruling or other action has become final and
nonappealable (provided, however, that the right to terminate
this Agreement pursuant to this clause (b) will not be available
to any party until such party has used all reasonable efforts to
remove such injunction, order or decree); or (c) this Agreement
and the Merger have not been approved by the holders of a
majority of the outstanding Gothic Common Stock and Gothic
Preferred Stock voting as one class at the Gothic Stockholder
Meeting or at any adjournment thereof;
7.1.3 By Parent. By Parent if: (a) there has been a breach of any of
the representations and warranties made by Gothic in this
Agreement or the Gothic Disclosure Schedule the aggregate of
which would have a Material Adverse Effect on Gothic (provided,
however, that Parent will not be entitled to terminate this
Agreement pursuant to this clause (a) unless Parent has given
Gothic prior written notice of such breach and Gothic has failed
to cure such breach within fifteen (15) days after such written
notice, and the condition described in paragraph 6.2.1, other
than the provision thereof relating to the certificate signed by
the chief executive officer of Gothic, would not be satisfied if
the Closing were to occur on the day on which Parent gives Gothic
notice of such termination); or (b) Gothic has failed to comply
in any material respect with any of its covenants or agreements
contained in this Agreement and such failure has not been, or
cannot be, cured within ten (10) days after notice and demand for
cure thereof;
7.1.4 By Gothic. By Gothic if: (a) as a result of a Superior Proposal
received by Gothic from a Person other than a party to this
Agreement or any of its Affiliates, Gothic's board of directors
determines in good faith based on the advice of legal counsel
that their fiduciary obligations under applicable law require
that such Superior Proposal be accepted; provided, however, that
prior to the effective date of any such termination, Gothic will
provide Parent with an opportunity (of not less than three (3)
full business days) to make such adjustments in the terms and
conditions of this Agreement or the Merger as would enable Gothic
to proceed with the transactions contemplated hereby; provided,
further, that it will be a condition to the effectiveness of
termination by Gothic pursuant to this paragraph 7.1.4, that
Gothic will have paid the Gothic Termination Fee to Parent
required by paragraph 5.17; or (b) there has been a breach of the
representations and warranties made by Parent in paragraph 4 of
this Agreement the aggregate of which would have a Material
Adverse Effect on Parent (provided, however, that Gothic will not
be entitled to terminate this Agreement pursuant to this clause
(b) unless Gothic has given Parent at least fifteen (15) days
prior written notice of such breach and Parent has failed to cure
such breach within such 15-day period, and the condition
described in Section 6.3.1, other than the provision thereof
relating to the certificate signed by the chief executive officer
or chief financial officer of Parent, would not be satisfied if
the Closing were to occur on the day on which Gothic gives Parent
notice of such termination); or (c) Parent has failed to comply
in any material respect with any of its covenants or agreements
contained in this Agreement and such failure has not been, or
cannot be, cured within a reasonable time after notice and demand
for cure thereof; or
7.1.5 Superior Proposal. By Parent if the board of directors of Gothic:
(a) accepts a Superior Proposal in accordance with paragraph
5.4.2; or (b) withdraws or modifies in a manner adverse to
Parent, its approval or recommendation of this Agreement or the
Merger, or, on request by Parent, fails to reaffirm such approval
or recommendation.
7.2 Effect of Termination. If this Agreement is terminated by either
Gothic or Parent pursuant to the provisions of paragraph 7.1, this
Agreement will forthwith become void and there will be no further
obligation on the part of any party hereto or its respective
Affiliates, directors, officers or
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stockholders except pursuant to, the provisions of this paragraph 7.2
and paragraphs 5.7.3, 5.7.4 and 5.17 (which will continue pursuant to
their terms). The termination of this Agreement will not relieve any
party hereto from any liability for damages incurred as a result of a
breach by such party of its representations, warranties, covenants,
agreements or other obligations hereunder occurring prior to such
termination, provided, however, that for any termination hereof as a
result of any of the matters outlined in: (a) subparts (b) or (c) of
paragraph 7.1.4, the Parent Companies' aggregate liability will not
exceed $1,000,000.00; and (b) paragraph 7.1.3, the Gothic Companies'
aggregate liability will not exceed $1,000,000.00.
8. MISCELLANEOUS. It is further agreed as follows:
8.1 Nonsurvival of Representations, Warranties, Covenants and
Agreements. None of the representations, warranties, covenants or
agreements contained in this Agreement or in any instrument delivered
pursuant to this Agreement, and no agreements or obligations arising
under the Confidentiality Agreement, will survive the consummation of
the Merger, except for the agreements contained in paragraphs 2, 5.13,
5.14, 5.17, 7 and in this paragraph 8 and the agreements delivered
pursuant to paragraph 5.10.
8.2 Amendment. This Agreement may be amended by the parties hereto at any
time before or after approval of the Merger and this Agreement by the
stockholders of Gothic; provided, however, that after any such
approval, no amendment will be made that by law requires further
approval by such stockholders without such further approval. This
Agreement may not be amended except by a written instrument signed on
behalf of each of the parties hereto.
8.3 Notices. Any notice or other communication required or permitted
hereunder will be in writing and either delivered personally, by
facsimile transmission or by registered or certified mail (postage
prepaid and return receipt requested) and will be deemed given when
received (or, if mailed, five (5) business days after the date of
mailing) at the following addresses or facsimile transmission numbers
(or at such other address or facsimile transmission number for a party
as will be specified by like notice):
To Parent or Sub: Chesapeake Energy Corporation
6100 North Western Avenue
Oklahoma City, Oklahoma 73118
Attention: Aubrey K. McClendon
Telephone: 405-848-8000
Facsimile: 405-848-8588
With a copy to: Self, Giddens & Lees, Inc.
2725 Oklahoma Tower
210 Park Avenue
Oklahoma City, Oklahoma 73102
Attention: C. Ray Lees
Telephone: 405-232-3001
Facsimile: 405-232-5553
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) 477-8045
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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
and
William Clarke
457 North Harrison Street, Suite 103
Princeton, New Jersey 08540
Telephone:(609) 921-3663
Facsimile: (609) 921-3933
8.4 Counterparts. This Agreement may be executed in two or more
counterparts, all of which will be considered one and the same
agreement and will become effective when two or more counterparts have
been signed by each of the parties and delivered to the other parties,
it being understood that all parties need not sign the same
counterpart.
8.5 Severability. Any term or provision of this Agreement that is invalid
or unenforceable in any jurisdiction will, as to such jurisdiction, be
ineffective to the extent of such invalidity or unenforceability
without rendering invalid or unenforceable the remaining terms and
provisions of this Agreement or affecting the validity or
enforceability of any of the terms or provisions of this Agreement in
any other jurisdiction. If any provision of this Agreement is so broad
as to be unenforceable, such provision will be interpreted to be only
so broad as is enforceable.
8.6 Entire Agreement; No Third Party Beneficiaries. This Agreement
(together with the documents and instruments delivered by the parties
in connection with this Agreement): (a) constitutes the entire
agreement and supersedes all other prior agreements and
understandings, both written and oral, among the parties with respect
to the subject matter hereof; and (b) except as provided in paragraph
2 or paragraphs 5.13 or 5.14, is solely for the benefit of the parties
hereto and their respective successors, legal representatives and
assigns and does not confer on any other Person any rights or remedies
hereunder.
8.7 Applicable Law. This Agreement will be governed in all respects,
including validity, interpretation and effect, by the laws of the
State of Oklahoma regardless of the laws that might otherwise govern
under applicable principles of conflicts of laws thereof.
8.8 No Remedy in Certain Circumstances. Each party agrees that, should any
court or other competent authority hold any provision of this
Agreement or part hereof to be null, void or unenforceable, or order
any party to take any action inconsistent herewith or not to take an
action consistent herewith or required hereby, the validity, legality
and enforceability of the remaining provisions and obligations
contained or set forth herein will not in any way be affected or
impaired thereby, unless the foregoing inconsistent action or the
failure to take an action constitutes a material breach of this
Agreement or makes this Agreement impossible to perform, in which case
this Agreement will terminate pursuant to paragraph 7 hereof. Except
as otherwise contemplated by this Agreement, to the extent that a
party hereto took an action inconsistent herewith or failed to take
action consistent herewith or required hereby pursuant to an order or
judgment of a court or other competent Governmental Authority, such
party will not incur any liability or obligation unless such party
breached its obligation under paragraph 5.9 or did not in good faith
seek to resist or object to the imposition or entering of such order
or judgment.
8.9 Enforcement of Agreement. The parties hereto agree that irreparable
damage would occur in the event that any of the provisions of this
Agreement were not performed in accordance with the terms hereof or
were otherwise breached. Accordingly, the parties hereto hereby agree
that each
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party hereto will be entitled to specific performance of the terms and
provisions hereof in addition to any other remedy at law or in equity.
8.10 Assignment. Neither this Agreement nor any of the rights, interests or
obligations hereunder will be assigned by any of the parties hereto
(whether by operation of law or otherwise) without the prior written
consent of the other parties, except that Sub may assign, in its sole
discretion, any or all of its rights, interests and obligations
hereunder to any newly formed direct or indirect wholly-owned
subsidiary of Parent. Subject to the preceding sentence, this
Agreement will be binding upon, inure to the benefit of and be
enforceable by the parties and their respective successors and
assigns.
8.11 Waivers. At any time prior to the Effective Time, the parties hereto
may, to the extent legally allowed: (a) extend the time for the
performance of any of the obligations or other acts of the other
parties hereto; (b) waive any inaccuracies in the representations and
warranties contained herein or in any document delivered pursuant
hereto; and (c) waive performance of any of the covenants or
agreements, or satisfaction of any of the conditions, contained
herein. Any agreement on the part of a party hereto to any such
extension or waiver will be valid only if set forth in a written
instrument signed on behalf of such party. Except as provided in this
Agreement, no action taken pursuant to this Agreement, including any
investigation by or on behalf of any party, will be deemed to
constitute a waiver by the party taking such action of compliance with
any representations, warranties, covenants or agreements contained in
this Agreement. The waiver by any party hereto of a breach of any
provision hereof will not operate or be construed as a waiver of any
prior or subsequent breach of the same or any other provisions hereof.
8.12 References and Titles. All references in this Agreement to Exhibits,
Schedules, Sections, paragraphs, subsections and other subdivisions
refer to the corresponding Exhibits, Schedules, Sections, paragraphs,
subsections and other subdivisions of or to this Agreement and/or the
schedules attached hereto unless expressly provided otherwise. Except
for the defined terms in paragraph 1, titles appearing at the
beginning of any Sections, paragraphs, subsections or other
subdivisions of this Agreement are for convenience only, do not
constitute any part of this Agreement, and will be disregarded in
construing the language hereof.
8.13 Incorporation. Exhibits and Schedules referred to herein are attached
to and by this reference incorporated herein for all purposes.
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SIGNATURE PAGE
(AGREEMENT AND PLAN OF MERGER)
IN WITNESS WHEREOF, the parties have executed and delivered this Agreement
as of the date first above written.
GOTHIC ENERGY CORPORATION,
an Oklahoma corporation
By: /s/ MICHAEL PAULK
----------------------------------
Michael Paulk, President
("Gothic")
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SIGNATURE PAGE
(AGREEMENT AND PLAN OF MERGER)
IN WITNESS WHEREOF, the parties have executed and delivered this Agreement
as of the date first above written.
CHESAPEAKE ENERGY CORPORATION,
an Oklahoma corporation
By: /s/ MARCUS C. ROWLAND
----------------------------------
Marcus C. Rowland,
Executive Vice President
("Parent")
CHESAPEAKE MERGER 2000 CORP.,
an Oklahoma corporation
By: /s/ MARCUS C. ROWLAND
----------------------------------
Marcus C. Rowland,
Vice President
("Sub")
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<PAGE> 281
AMENDMENT NO. 1
TO
AGREEMENT AND PLAN OF MERGER
THIS AMENDMENT NO. 1 TO AGREEMENT AND PLAN OF MERGER (this "Amendment") is
made and entered into this 31st day of October, 2000, by and among CHESAPEAKE
ENERGY CORPORATION, an Oklahoma corporation ("Parent"), CHESAPEAKE MERGER 2000
CORP., an Oklahoma corporation ("Sub"), and GOTHIC ENERGY CORPORATION, an
Oklahoma corporation ("Gothic").
RECITALS
WHEREAS, on September 8, 2000, the parties entered into an Agreement and
Plan of Merger (the "Merger Agreement") providing for the merger of Sub into
Gothic (the "Merger");
WHEREAS, the parties have determined that the Merger Agreement will be
amended to: (a) specifically provide that the Gothic Stock Options and Gothic
Warrants to be assumed by Parent pursuant to the Merger Agreement will not
become part of any Parent Benefit Plan; (b) provide that the holders of the
Gothic Preferred Stock will not be entitled to vote on the Merger; and (c)
evidence that the Parent has made the good faith determinations required under
paragraph 5.6 of the Merger Agreement regarding federal income tax treatment of
the Merger as a tax free "reorganization" within the meaning of Section 368 of
the Internal Revenue Code of 1986, as amended; and
WHEREAS, pursuant to paragraph 8.2 of the Merger Agreement the parties now
mutually desire to amend the Merger Agreement as set forth below;
NOW, THEREFORE, for and in consideration of the recitals and the mutual
covenants and agreements set forth in the Merger Agreement and this Amendment,
the parties hereto hereby amend the Merger Agreement as follows:
1. DEFINITIONS. Unless the context otherwise requires or unless otherwise
expressly defined herein, the terms defined in the Merger Agreement will have
the same meanings whenever used in this Amendment.
2. AMENDMENTS. Parent, Sub and Gothic hereby amend the Merger Agreement as
follows:
2.1 Amendment of Paragraph 2.3.1. The last sentence of paragraph 2.3.1 of
the Merger Agreement is hereby deleted in its entirety.
2.2 Amendment of Paragraph 2.3.4. Paragraph 2.3.4 of the Merger Agreement
is hereby amended by the addition to the end of such paragraph of the
following sentence:
"Notwithstanding the Parent's assumption of the Gothic Stock Options
and the Gothic Warrants pursuant to this paragraph 2.3.4, the parties
acknowledge and agree that such assumption will not result in any such
Gothic Stock Option or Gothic Warrant becoming subject to or covered by
any Parent Benefit Plan nor will any holder thereof be entitled to any
of the rights or benefits of any Parent Benefit Plan."
2.3 Amendment of Paragraph 3.17. Paragraph 3.17 of the Merger Agreement is
hereby amended by the deletion of the words "and Gothic Preferred Stock
voting as one class" from the second line of such paragraph.
2.4 Amendment of Paragraph 3.18. Subpart (c) of paragraph 3.18 of the
Merger Agreement is hereby amended by the deletion of the words "and
Gothic Preferred Stock" from the seventh line of such paragraph.
2.5 Amendment of Paragraph 6.1.1. Paragraph 6.1.1 of the Merger Agreement
is hereby amended by the deletion of the words "and Gothic Preferred
Stock voting as one class" from the last line of such paragraph.
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2.6 Amendment of Paragraph 7.1.2. Subpart (c) of paragraph 7.1.2 of the
Merger Agreement is hereby amended by the deletion of the words "and
Gothic Preferred Stock voting as one class" from the third and second
to the last line of such paragraph.
2.7 Acknowledgment of Paragraph 5.6 Determination. The Parent hereby
acknowledges that as of the date of this Amendment the Parent has, in
good faith, determined that: (a) the Merger should be treated for
federal income tax purposes as a reorganization within the meaning of
Section 368(a) of the Code; (b) each of Parent and Sub should be a
party to such reorganization within the meaning of Section 368(b) of
the Code; and (c) no gain or loss should be recognized by Parent or Sub
as a result of the Merger.
3. MISCELLANEOUS. It is further agreed as follows:
3.1 Effectiveness. This Amendment will become effective as of the date
first above written when executed by the Parent, the Sub and Gothic.
3.2 Ratification of Merger Agreement. The Merger Agreement as hereby
amended and each other document, instrument or agreement executed in
connection therewith hereby are ratified and confirmed in all respects.
Any reference to the Merger Agreement in any other document shall be
deemed to be a reference to the Merger Agreement as hereby amended. The
execution, delivery and effectiveness of this Amendment shall not,
except as expressly provided herein, operate as a waiver of any
obligation, right, power or remedy of any of the parties to the Merger
Agreement nor constitute a waiver of any provision of the Merger
Agreement or any other related documents.
3.3 Counterparts. This Amendment may be executed in two or more
counterparts, all of which will be considered one and the same
agreement and will become effective when two or more counterparts have
been signed by each of the parties and delivered to the other parties,
it being understood that all parties need not sign the same
counterpart.
3.4 Applicable Law. This Amendment will be governed in all respects,
including validity, interpretation and effect, by the laws of the State
of Oklahoma regardless of the laws that might otherwise govern under
applicable principles of conflicts of laws thereof.
3.5 Full Force and Effect. In all respects, except as specifically amended
hereby, the Merger Agreement remains in full force and effect and
unabated and the Parent, Sub and Gothic hereby reaffirm each and every
representation, warranty, covenant or condition made in the Merger
Agreement as if and to the same extent as if made on the date of the
execution of this Amendment.
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IN WITNESS WHEREOF, the parties have executed and delivered this Amendment
as of the date first above written.
GOTHIC ENERGY CORPORATION,
an Oklahoma corporation
By:
/s/ MICHAEL PAULK
----------------------------------
Michael Paulk, President
("Gothic")
CHESAPEAKE ENERGY CORPORATION,
an Oklahoma corporation
By:
/s/ MARCUS C. ROWLAND
------------------------------------
Marcus C. Rowland, Executive Vice
President
("Parent")
CHESAPEAKE MERGER 2000 CORP.,
an Oklahoma corporation
By: /s/ MARCUS C. ROWLAND
----------------------------------
Marcus C. Rowland, Vice President
("Sub")
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ANNEX B
OPINION OF GOTHIC'S FINANCIAL ADVISOR
September 8, 2000
Personal and Confidential
The Board of Directors
Gothic Energy Corporation
Two Warren Place
6120 South Yale Avenue, Suite 1200
Tulsa, OK 74136
Gentlemen:
You have asked CIBC World Markets Corp. ("CIBC World Markets") to render a
written opinion ("Fairness Opinion") to the Board of Directors as to the
fairness to the shareholders of Gothic Energy Corporation ("Gothic" or the
"Company"), excluding those shares owned by Chesapeake Energy Corporation
("Chesapeake"), from a financial point of view, of the Exchange Ratio (as
hereinafter defined) pursuant to the Agreement and Plan of Merger dated as of
September 8, 2000 by and among Chesapeake, Chesapeake Merger 2000 Corp. (a
wholly owned subsidiary of Chesapeake) and Gothic (the "Agreement"). The
Agreement provides for, among other things, a transaction whereby Chesapeake
Merger 2000 Corp. will be merged with and into Gothic (the "Merger"). The
Agreement provides for the exchange of Gothic common stock for Chesapeake common
stock on a basis of a ratio (the "Exchange Ratio") equal to the quotient
obtained by dividing the Merger Consideration (as defined in the Agreement) by
the Gothic Aggregate Number (as defined in the Agreement) as of the date of the
computation.
In arriving at our Fairness Opinion we:
(a) reviewed the Agreement;
(b) reviewed Chesapeake's audited financial statements for the fiscal years
ended December 31, 1998 and 1999 and the unaudited financial statements
for the six months ended June 30, 2000;
(c) held discussions with senior management of Chesapeake with respect to
the business and prospects for future growth of Chesapeake;
(d) reviewed the historical market prices and trading volume of both
Chesapeake and Gothic common stock;
(e) reviewed Gothic's audited financial statements for the fiscal years
ended December 31, 1998 and 1999 and the unaudited financial statements
for the six months ended June 30, 2000;
(f) reviewed financial projections of Gothic prepared by Gothic and its
management;
(g) held discussions with senior management of Gothic with respect to the
business and prospects for future growth of Gothic;
(h) reviewed and analyzed certain publicly available financial data for
certain companies we deemed comparable to Gothic;
(i) performed discounted cash flow analyses of Gothic using certain
assumptions of future performance provided to us by the management of
Gothic;
(j) reviewed and analyzed certain publicly available financial information
for transactions that we deemed comparable to the Merger;
(k) reviewed public information concerning Gothic; and
(l) performed such other analyses and reviewed such other information as we
deemed appropriate.
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In rendering our Fairness Opinion we relied upon and assumed, without
independent verification or investigation, the accuracy and completeness of all
of the financial and other information that was publicly available or provided
to us by Gothic and its respective employees, representatives and affiliates.
With respect to forecasts of future financial condition and operating results of
Gothic provided to us, we assumed at the direction of Gothic's management,
without independent verification or investigation, that such forecasts were
reasonably prepared on bases reflecting the best available information,
estimates and judgement of Gothic's management. We have neither made nor
obtained any independent evaluations or appraisals of the assets or the
liabilities of Gothic or affiliated entities. We are not expressing any opinion
as to the underlying valuation, future performance or long term viability of
Gothic following the Merger, or the price at which Chesapeake's common stock
will trade subsequent to the Merger. We have not been asked to consider, and our
opinion does not address, the relative merits of the Merger as compared to any
alternative business strategies that might exist for Gothic or the effect of any
other transaction in which Gothic might engage. Our opinion is necessarily based
on the information available to us and general economic, financial and stock
market conditions and circumstances as they exist and can be evaluated by us on
the date hereof. It should be understood that, although subsequent developments
may affect this opinion, we do not have any obligation to update, revise or
reaffirm the opinion.
As part of our investment banking business, we are regularly engaged in
valuations of businesses and securities in connection with acquisitions and
mergers, underwritings, secondary distributions of securities, private
placements and valuations for other purposes.
We acted as financial advisor to Gothic in connection with the Merger and
to the Board of Directors of Gothic in rendering this opinion and will receive a
fee for our services. CIBC World Markets has performed investment banking and
other services for Gothic in the past and has been compensated for such
services. In the ordinary course of its business, CIBC World Markets and its
affiliates may actively trade securities of Gothic for their own account and for
the accounts of customers and, accordingly, may at any time hold a long or short
position in such securities.
Based upon and subject to the foregoing, and such other factors as we deem
relevant, it is our opinion that, as of the date hereof, the Exchange Ratio
pursuant to the Agreement is fair to the shareholders of Gothic, excluding those
shares owned by Chesapeake, from a financial point of view. This Fairness
Opinion is for the exclusive use of the Board of Directors of Gothic. Neither
this Fairness Opinion nor the services provided by CIBC World Markets in
connection herewith may be publicly disclosed or referred to in any manner by
Gothic without the prior written approval by CIBC World Markets. CIBC World
Markets consents to the inclusion of this opinion in its entirety and any
reference to this opinion in any prospectus, proxy statement or
solicitation/recommendation statement, as the case may be, required to be
distributed to the Company's shareholders in connection with the Merger.
Very truly yours,
CIBC World Markets Corp.
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<PAGE> 286
ANNEX C
OKLAHOMA STATUTORY APPRAISAL RIGHTS PROCESS
Chapter 22
Oklahoma General Corporation Act
Section 1091. Appraisal Rights
A. Any shareholder of a corporation of this state who holds shares of stock
on the date of the making of a demand pursuant to the provisions of
subsection D of this section with respect to the shares, who
continuously holds the shares through the effective date of the merger
or consolidation, who has otherwise complied with the provisions of
subsection D of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to the
provisions of Section 1073 of this title shall be entitled to an
appraisal by the district court of the fair value of the shares of stock
under the circumstances described in subsections B and C of this
section. As used in this section, the word "shareholder" means a holder
of record of stock in a stock corporation and also a member of record of
a nonstock corporation; the words "stock" and "share" mean and include
what is ordinarily meant by those words and also membership or
membership interest of a member of a nonstock corporation; and
"depository receipt" means an instrument issued by a depository
representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the
depository. The provisions of this subsection shall be effective only
with respect to mergers or consolidations consummated pursuant to an
agreement of merger or consolidation entered into after November 1,
1988.
B.1. Except as otherwise provided for in this subsection, appraisal rights
shall be available for the shares of any class or series of stock of a
constituent corporation in a merger or consolidation, or of the acquired
corporation in a share acquisition, to be effected pursuant to the
provisions of Section 1081 other than a merger effected pursuant to
subsection G of Section 1081, and Sections 1082, 1086, 1087, 1090.1 or
1090.2 of this title.
2.a. No appraisal rights under this section shall be available for the shares
of any class or series of stock which stock, or depository receipts in
respect thereof, at the record date fixed to determine the shareholders
entitled to receive notice of and to vote at the meeting of shareholders
to act upon the agreement of merger or consolidation, were either:
(1) listed on a national securities exchange or designated as a national
market system security or an interdealer quotation system by the
National Association of Securities Dealers, Inc.; or
(2) held of record by more than two thousand holders.
No appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the shareholders of the surviving
corporation as provided in subsection G of Section 1081 of this title.
b. In addition, no appraisal rights shall be available for any shares of
stock, or depository receipts in respect thereof, of the constituent
corporation surviving a merger if the merger did not require for its
approval the vote of the shareholders of the surviving corporation as
provided for in subsection F of Section 1081 of this title.
3. Notwithstanding the provisions of paragraph 2 of this subsection,
appraisal rights provided for in this section shall be available for the
shares of any class or series of stock of a constituent corporation if
the holders thereof are required by the terms of an agreement of merger
or consolidation pursuant to the provisions of Sections 1081, 1082,
1086, 1087, 1090.1 or 1090.2 of this title to accept for the stock
anything except:
a. shares of stock of the corporation surviving or resulting from such
merger or consolidation or depository receipts thereof, or
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b. shares of stock of any other corporation, or depository receipts in
respect thereof, which shares of stock or depository receipts at the
effective date of the merger or consolidation will be either listed on a
national securities exchange or designated as a national market system
security on an interdealer quotation system by the National Association
of Security Dealers, Inc. or held of record by more than two thousand
holders, or
c. cash in lieu of fractional shares or fractional depository receipts
described in subparagraphs a and b of this paragraph, or
d. any combination of the shares of stock, depository receipts, and cash in
lieu of the fractional shares or depository receipts described in
subparagraphs a, b and c of this paragraph.
4. In the event all of the stock of a subsidiary Oklahoma corporation party
to a merger effected pursuant to the provisions of Section 1083 of this
title is not owned by the parent corporation immediately prior to the
merger, appraisal rights shall be available for the shares of the
subsidiary Oklahoma corporation.
C. Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of
any class or series of its stock as a result of an amendment to its
certificate of incorporation, any merger or consolidation in which the
corporation is a constituent corporation or the sale of all or
substantially all of the assets of the corporation. If the certificate
of incorporation contains such a provision, the procedures of this
section, including those set forth in subsections D and E of this
section, shall apply as nearly as is practicable.
D. Appraisal rights shall be perfected as follows:
1. If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting
of shareholders, the corporation, not less than twenty (20) days prior
to the meeting, shall notify each of its shareholders entitled to the
appraisal rights that appraisal rights are available for any or all of
the shares of the constituent corporations, and shall include in the
notice a copy of this section. Each shareholder electing to demand the
appraisal of the shares of the shareholder shall deliver to the
corporation, before the taking of the vote on the merger or
consolidation, a written demand for appraisal of the shares of the
shareholder. The demand will be sufficient if it reasonably informs the
corporation of the identity of the shareholder and that the shareholder
intends thereby to demand the appraisal of the shares of the
shareholder. A proxy or vote against the merger or consolidation shall
not constitute such a demand. A shareholder electing to take such action
must do so by a separate written demand as herein provided. Within ten
(10) days after the effective date of the merger or consolidation, the
surviving or resulting corporation shall notify each shareholder of each
constituent corporation who has complied with the provisions of this
subsection and has not voted in favor of or consented to the merger or
consolidation as of the date that the merger or consolidation has become
effective; or
2. If the merger or consolidation is approved pursuant to the provisions of
Section 1073 or 1083 of this title, each constituent corporation, either
before the effective date of the merger or consolidation or within ten
(10) days thereafter, shall notify each of the holders of any class or
series of stock of such constituent corporation who are entitled to
appraisal rights of the approval of the merger or consolidation and that
appraisal rights are available for any or all of the shares of the class
or series of stock of the constituent corporation, and shall include in
such notice a copy of this section; provided if the notice is given on
or after the effective date of the merger or consolidation, the notice
shall be given by the surviving or resulting corporation to all the
holders of any class or series of stock of a constituent corporation
that are entitled to appraisal rights. The notice may, and, if given on
or after the effective date of the merger or consolidation, shall also
notify the shareholders of the effective date of the merger or
consolidation. Any shareholder entitled to appraisal rights may, within
twenty (20) days after the date of mailing of the notice, demand in
writing from the surviving or resulting corporation the appraisal of the
holder's shares.
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The demand will be sufficient if it reasonably informs the corporation
of the identity of the shareholder and that the shareholder intends to
demand the appraisal of the holder's shares. If the notice does not
notify shareholders of the effective date of the merger or consolidation
either:
a. each constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the
holders of any class or series of stock of the constituent corporation
that are entitled to appraisal rights of the effective date of the
merger or consolidation, or
b. the surviving or resulting corporation shall send a second notice to all
holders on or within ten (10) days after the effective date of the
merger or consolidation; provided, however, that if the second notice is
sent more than twenty (20) days following the mailing of the first
notice, the second notice need only be sent to each shareholder who is
entitled to appraisal rights and who has demanded appraisal of the
holder's shares in accordance with this subsection. An affidavit of the
secretary or assistant secretary or of the transfer agent of the
corporation that is required to give either notice that the notice has
been given shall, in the absence of fraud, be prima facie evidence of
the facts stated therein. For purposes of determining the shareholders
entitled to receive either notice, each constituent corporation may fix,
in advance, a record date that shall be not more than ten (10) days
prior to the date the notice is given; provided, if the notice is given
on or after the effective date of the merger or consolidation, the
record date shall be the effective date. If no record date is fixed and
the notice is given prior to the effective date, the record date shall
be the close of business on the day next preceding the day on which the
notice is given.
E. Within one hundred twenty (120) days after the effective date of the
merger or consolidation, the surviving or resulting corporation or any
shareholder who has complied with the provisions of subsections A and D
of this section and who is otherwise entitled to appraisal rights, may
file a petition in district court demanding a determination of the value
of the stock of all such shareholders; provided, however, at any time
within sixty (60) days after the effective date of the merger or
consolidation, any shareholder shall have the right to withdraw the
demand of the shareholder for appraisal and to accept the terms offered
upon the merger or consolidation. Within one hundred twenty (120) days
after the effective date of the merger or consolidation, any shareholder
who has complied with the requirements of subsections A and D of this
section, upon written request, shall be entitled to receive from the
corporation surviving the merger or resulting from the consolidation a
statement setting forth the aggregate number of shares not voted in
favor of the merger or consolidation and with respect to which demands
for appraisal have been received and the aggregate number of holders of
the shares. The written statement shall be mailed to the shareholder
within ten (10) days after the shareholder's written request for a
statement is received by the surviving or resulting corporation or
within ten (10) days after expiration of the period for delivery of
demands for appraisal pursuant to the provisions of subsection D of this
section, whichever is later.
F. Upon the filing of any such petition by a shareholder, service of a copy
thereof shall be made upon the surviving or resulting corporation,
which, within twenty (20) days after such service, shall file in the
office of the court clerk of the district court in which the petition
was filed a duly verified list containing the names and addresses of all
shareholders who have demanded payment for their shares and with whom
agreements regarding the value of their shares have not been reached by
the surviving or resulting corporation. If the petition shall be filed
by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The court clerk, if so ordered
by the court, shall give notice of the time and place fixed for the
hearing on the petition by registered or certified mail to the surviving
or resulting corporation and to the shareholders shown on the list at
the addresses therein stated. Notice shall also be given by one or more
publications at least one (1) week before the day of the hearing, in a
newspaper of general circulation published in the City of Oklahoma City,
Oklahoma, or other publication as the court deems advisable. The forms
of the notices by mail and by publication shall be approved by the
court, and the costs thereof shall be borne by the surviving or
resulting corporation.
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G. At the hearing on the petition, the court shall determine the
shareholders who have complied with the provisions of this section and
who have become entitled to appraisal rights. The court may require the
shareholders who have demanded an appraisal for their shares and who
hold stock represented by certificates to submit their certificates of
stock to the court clerk for notation thereon of the pendency of the
appraisal proceedings; and if any shareholder fails to comply with this
direction, the court may dismiss the proceedings as to that shareholder.
H. After determining the shareholders entitled to an appraisal, the court
shall appraise the shares, determining their fair value exclusive of any
element of value arising from the accomplishment or expectation of the
merger or consolidation, together with a fair rate of interest, if any,
to be paid upon the amount determined to be the fair value. In
determining the fair value, the court shall take into account all
relevant factors. In determining the fair rate of interest, the court
may consider all relevant factors, including the rate of interest which
the surviving or resulting corporation would have to pay to borrow money
during the pendency of the proceeding. Upon application by the surviving
or resulting corporation or by any shareholder entitled to participate
in the appraisal proceeding, the court may, in its discretion, permit
discovery or other pretrial proceedings and may proceed to trial upon
the appraisal prior to the final determination of the shareholder
entitled to an appraisal. Any shareholder whose name appears on the list
filed by the surviving or resulting corporation pursuant to the
provisions of subsection F of this section and who has submitted the
certificates of stock of the shareholder to the court clerk, if
required, may participate fully in all proceedings until it is finally
determined that the shareholder is not entitled to appraisal rights
pursuant to the provisions of this section.
I. The court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting
corporation to the shareholders entitled thereto. Interest may be simple
or compound, as the court may direct. Payment shall be made to each
shareholder, in the case of holders of uncertificated stock immediately,
and in the case of holders of shares represented by certificates upon
the surrender to the corporation of the certificates representing the
stock. The court's decree may be enforced as other decrees in the
district court may be enforced, whether the surviving or resulting
corporation be a corporation of this state or of any other state.
J. The costs of the proceeding may be determined by the court and taxed
upon the parties as the court deems equitable in the circumstances. Upon
application of a shareholder, the court may order all or a portion of
the expenses incurred by any shareholder in connection with the
appraisal proceeding, including, without limitation, reasonable
attorney's fees and the fees and expenses of experts, to be charged pro
rata against the value of all of the shares entitled to an appraisal.
K. From and after the effective date of the merger or consolidation, no
shareholder who has demanded appraisal rights as provided for in
subsection D of this section shall be entitled to vote such stock for
any purpose or to receive payment of dividends or other distributions on
the stock, except dividends or other distributions payable to
shareholders of record at a date which is prior to the effective date of
the merger or consolidation; provided, however, that if no petition for
an appraisal shall be filed within the time provided for in subsection E
of this section, or if the shareholder shall deliver to the surviving or
resulting corporation a written withdrawal of the shareholder's demand
for an appraisal and an acceptance of the merger or consolidation,
either within sixty (60) days after the effective date of the merger or
consolidation as provided for in subsection E of this section or
thereafter with the written approval of the corporation, then the right
of the shareholder to an appraisal shall cease; provided further, no
appraisal proceeding in the district court shall be dismissed as to any
shareholder without the approval of the court, and such approval may be
conditioned upon such terms as the court deems just.
L. The shares of the surviving or resulting corporation into which the
shares of any objecting shareholders would have been converted had they
assented to the merger or consolidation shall have the status of
authorized and unissued shares of the surviving or resulting
corporation.
C-4
<PAGE> 290
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Section 1031 of the Oklahoma General Corporation Act, under which the
Registrant is incorporated, authorizes the indemnification of directors and
officers under certain circumstances. Article VIII of the Certificate of
Incorporation of the Registrant and Article VI of the Bylaws of the Registrant
also provide for indemnification of directors and officers under certain
circumstances. These provisions, together with the Registrant's indemnification
obligations under individual indemnity agreements with its directors and
officers, may be sufficiently broad to indemnify such persons for liabilities
under the Securities Act of 1933 (the "Securities Act"), as amended. In
addition, the Registrant maintains insurance, which insures its directors and
officers against certain liabilities.
The Oklahoma General Corporation Act provides for indemnification of each
of Chesapeake's officers and directors against (a) expenses, including
attorneys' fees, judgments, fines and amounts paid in settlement actually and
reasonably incurred by them in connection with any action, suit or proceeding
brought by reason of such person being or having been a director, officer,
employee or agent of Chesapeake, or of any other corporation, partnership, joint
venture, trust or other enterprise at the request of Chesapeake, other than an
action by or in the right of Chesapeake. To be entitled to indemnification, the
individual must have acted in good faith and in a manner he reasonably believed
to be in or not opposed to the best interest of Chesapeake, and with respect to
any criminal action, the person seeking indemnification had no reasonable cause
to believe that the conduct was unlawful and (b) expenses, including attorneys'
fees, actually and reasonably incurred in connection with the defense or
settlement of any action or suit by or in the right of Chesapeake brought by
reason of the person seeking indemnification being or having been a director,
officer, employee or agent of Chesapeake, or any other corporation, partnership,
joint venture, trust or other enterprise at the request of Chesapeake, provided
the actions were in good faith and were reasonably believed to be in or not
opposed to the best interest of Chesapeake, except that no indemnification shall
be made in respect of any claim, issue or matter as to which the individual
shall have been adjudged liable to Chesapeake, unless and only to the extent
that the court in which such action was decided has determined that the person
is fairly and reasonably entitled to indemnity for such expenses which the court
deems proper. Article VIII of Chesapeake's Certificate of Incorporation provides
for indemnification of Chesapeake's director and officers. The Oklahoma General
Corporation Act also permits Chesapeake to purchase and maintain insurance on
behalf of Chesapeake's directors and officers against any liability arising out
of their status as such, whether or not Chesapeake would have the power to
indemnify them against such liability. These provisions may be sufficiently
broad to indemnify such persons for liabilities arising under the Securities
Act.
Chesapeake has entered into indemnity agreements with each of its directors
and executive officers. Under each indemnity agreement, Chesapeake will pay on
behalf of the indemnitee any amount which he is or becomes legally obligated to
pay because of (a) any claim or claims from time to time threatened or made
against him by any person because of any act or omission or neglect or breach of
duty, including any actual or alleged error or misstatement or misleading
statement, which he commits or suffers while acting in his capacity as a
director and/or officer of Chesapeake or an affiliate or (b) being a party, or
being threatened to be made a party, to any threatened, pending or contemplated
action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that he is or was an officer, director,
employee or agent of Chesapeake or an affiliate or is or was serving at the
request of Chesapeake as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise. The payments
which Chesapeake would be obligated to make under an indemnification agreement
could include damages, charges, judgments, fines, penalties, settlements and
costs, cost of investigation and cost of defense of legal, equitable or criminal
actions, claims or proceedings and appeals therefrom, and costs of attachment,
supersedeas, bail, surety or other bonds. Chesapeake also provides liability
insurance for each of its directors and executive officers.
II-1
<PAGE> 291
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits. The following exhibits are filed herewith pursuant to the
requirements of Item 601 of Regulation S-K:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
2.1 -- Senior Secured Discount Notes Purchase Agreement dated
June 23, 2000 between Chesapeake Energy Marketing, Inc.
and Appaloosa Investment Limited Partnership I, Palomino
Fund Ltd. and Tersk L.L.C. Incorporated herein by
reference to Exhibit 2.1 to Registrant's Form S-1
Registration Statement (No. 333-41014).
2.2 -- Senior Secured Discount Notes Purchase Agreement dated
June 23, 2000 between Chesapeake Energy Marketing, Inc.
and Oppenheimer Strategic Income Fund, Oppenheimer
Champion Income Fund, Oppenheimer High Yield Fund,
Oppenheimer Strategic Bond Fund/VA and Atlas Strategic
Income Fund. Incorporated herein by reference to Exhibit
2.2 to Registrant's Form S-1 Registration Statement (No.
333-41014).
2.3 -- Senior Secured Discount Notes Purchase Agreement dated
June 26, 2000 between Chesapeake Energy Marketing, Inc.
and John Hancock High Yield Bond Fund and John Hancock
Variable Annuity High Yield Bond Fund. Incorporated
herein by reference to Exhibit 2.3 to Registrant's Form
S-1 Registration Statement (No. 333-41014).
2.4 -- Senior Secured Discount Notes Purchase Agreement dated
June 26, 2000 between Chesapeake Energy Marketing, Inc.
and Ingalls & Snyder Value Partners, L.P., Heritage Mark
Foundation and Arthur R. Ablin. Incorporated herein by
reference to Exhibit 2.4 to Registrant's Form S-1
Registration Statement (No. 333-41014).
2.5 -- Senior Secured Discount Notes Purchase Agreement dated
August 29, 2000 between Chesapeake Energy Marketing, Inc.
and BNP Paribas. Incorporated herein by reference to
Exhibit 2.5 to Registrant's registration statement on
Form S-1 (No. 333-45872).
2.6 -- Senior Secured Notes Purchase Agreement dated September
1, 2000 between Chesapeake Energy Corporation and Lehman
Brothers Inc. Incorporated herein by reference to Exhibit
2.6 to Registrant's registration statement on Form S-1
(No. 333-45872).
2.7 -- Agreement and Plan of Merger dated September 8, 2000
among Chesapeake Energy Corporation, Chesapeake Merger
2000 Corp. and Gothic Energy Corporation. Incorporated
herein by reference to Exhibit 2.7 to Registrant's
registration statement on Form S-1 (No. 333-45872).
2.7.1** -- Amendment No. 1 to Agreement and Plan of Merger dated
October 31, 2000 among Chesapeake Energy Corporation,
Chesapeake Merger 2000 Corp. and Gothic Energy
Corporation.
3.1 -- Registrant's Certificate of Incorporation, as amended.
Incorporated herein by reference to Exhibit 3.1 to
Registrant's registration statement on Form S-1 (No.
333-45872).
3.2 -- Registrant's Bylaws. Incorporated herein by reference to
Exhibit 3.2 to Registrant's registration statement on
Form 8-B (No. 001-13726).
</TABLE>
II-2
<PAGE> 292
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
4.1 -- Indenture dated as of March 15, 1997 among the
Registrant, as issuer, Chesapeake Operating, Inc.,
Chesapeake Gas Development Corporation and Chesapeake
Exploration Limited Partnership, as Subsidiary
Guarantors, and United States Trust Company of New York,
as Trustee, with respect to 7.875% Senior Notes due 2004.
Incorporated herein by reference to Exhibit 4.1 to
Registrant's registration statement on Form S-4 (No.
333-24995). First Supplemental Indenture dated December
17, 1997 and Second Supplemental Indenture dated February
16, 1998. Incorporated herein by reference to Exhibit
4.1.1 to Registrant's transition report on Form 10-K for
the six months ended December 31, 1997. Second [Third]
Supplemental Indenture dated April 22, 1998. Incorporated
herein by reference to Exhibit 4.1.1 to Registrant's
Amendment No. 1 to Form S-3 registration statement (No.
333-57235). Fourth Supplemental Indenture dated July 1,
1998. Incorporated herein by reference to Exhibit 4.1.1
to Registrant's quarterly report on Form 10-Q for the
quarter ended September 30, 1998.
4.2 -- Indenture dated as of March 15, 1997 among the
Registrant, as issuer, Chesapeake Operating, Inc.,
Chesapeake Gas Development Corporation and Chesapeake
Exploration Limited Partnership, as Subsidiary
Guarantors, and United States Trust Company of New York,
As Trustee, with respect to 8.5% Senior Notes due 2012.
Incorporated herein by reference to Exhibit 4.1.3 to
Registrant registration statement on Form S-4 (No.
333-24995). First Supplemental Indenture dated December
17, 1997 and Second Supplemental Indenture dated February
16, 1998. Incorporated herein by reference to Exhibit
4.2.1 to Registrant's transition report on Form 10-K for
the six months ended December 31, 1997. Second [Third]
Supplemental Indenture dated April 22, 1998. Incorporated
herein by reference to Exhibit 4.2.1 to Registrant's
Amendment No. 1 to Form S-3 registration statement (No.
333-57235). Fourth Supplemental Indenture dated July 1,
1998. Incorporated herein by reference to Exhibit 4.2.1
to Registrant's quarterly report on Form 10-Q for the
quarter ended September 30, 1998.
4.3 -- Indenture dated as of April 1, 1998 among the Registrant,
as issuer, its subsidiaries signatory thereto, as
Subsidiary Guarantors, and United States Trust Company of
New York, as Trustee, with respect to 9.625% Senior Notes
due 2005. Incorporated herein by reference to Exhibit 4.3
to Registrant's registration statement on Form S-3 (No.
333-57235). First Supplemental Indenture dated July 1,
1998. Incorporated herein by reference to Exhibit 4.4.1
to Registrant's quarterly report on Form 10-Q for the
quarter ended September 30, 1998.
4.4 -- Indenture dated as of April 1, 1996 among the Registrant,
its subsidiaries signatory thereto, as Subsidiary
Guarantors, and United States Trust Company of New York,
as Trustee, with respect to 9.125% Senior Notes, due
2006. Incorporated herein by reference to Exhibit 4.6 to
Registrant's registration statement on Form S-3 (No.
333-1588). First Supplemental Indenture dated December
30, 1996 and Second Supplemental Indenture dated December
17, 1997. Incorporated herein by reference to Exhibit
4.4.1 to Registrant's transition report on Form 10-K for
the six months ended December 31, 1997. Third
Supplemental Indenture dated April 22, 1998. Incorporated
herein by reference to Exhibit 4.4.1 to Registrant's
Amendment No. 1 to Form S-3 registration statement (No.
333-57235). Fourth Supplemental Indenture dated July 1,
1998. Incorporated herein by reference to Exhibit 4.3.1
to Registrant's quarterly report on Form 10-Q for the
quarter ended September 30, 1998.
</TABLE>
II-3
<PAGE> 293
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
4.5 -- Agreement to furnish copies of unfiled long-term debt
instruments. Incorporated herein by reference to
Registrant's transition report on Form 10-K for the six
months ended December 31, 1997.
4.6 -- Amended and Restated Credit Agreement dated May 30, 2000
among Chesapeake Exploration Limited Partnership, as
borrower, Chesapeake Energy Corporation and certain of
its subsidiaries, as guarantors, Union Bank of
California, N.A., as agent, and certain financial
institutions, as lenders, as amended by First Amendment
thereto dated August 1, 2000. Incorporated herein by
reference to Exhibit 4.7 to Registrant's quarterly report
on Form 10-Q for the quarter ended June 30, 2000 and
Exhibit 4.7.1 to Registrant's quarterly report on From
10-Q for the quarter ended June 30, 2000.
4.7 -- Common Stock Registration Rights Agreement dated as of
June 27, 2000 among the Registrant and Appaloosa
Investment Limited Partnership I, Palomino Fund Ltd.,
Tersk L.L.C., Oppenheimer Strategic Income Fund,
Oppenheimer Champion Income Fund, Oppenheimer High Yield
Fund, Oppenheimer Strategic Bond Fund/VA and Atlas
Strategic Income Fund. Incorporated herein by reference
to Exhibit 4.6 to Registrant's Form S-1 Registration
Statement (No. 333-41014).
4.8 -- Common Stock Registration Rights Agreement dated as of
August 29, 2000 between Chesapeake Energy Corporation and
Paribas North America, Inc. Incorporated herein by
reference to Exhibit 4.8 to Registrant's registration
statement on Form S-1 (No. 333-45872).
4.9 -- Common Stock Registration Rights Agreement dated as of
September 1, 2000 between Chesapeake Energy Corporation
and Lehman Brothers Inc. Incorporated herein by reference
to Exhibit 4.9 to Registrant's registration statement on
Form S-1 (No. 333-45872).
5.1* -- Opinion of Winstead Sechrest & Minick P.C. regarding the
validity of the securities being registered.
8.1* -- Opinion of Pray, Walker, Jackman, Williamson & Marlar
regarding certain tax matters.
10.1.1+ -- Registrant's 1992 Incentive Stock Option Plan.
Incorporated herein by reference to Exhibit 10.1.1 to
Registrant's registration statement on Form S-4 (No.
33-93718).
10.1.2+ -- Registrant's 1992 Nonstatutory Stock Option Plan, as
Amended. Incorporated herein by reference to Exhibit
10.1.2 to Registrant's quarterly report on Form 10-Q for
the quarter ended December 31, 1996.
10.1.3+ -- Registrant's 1994 Stock Option Plan, as amended.
Incorporated herein by reference to Exhibit 10.1.3 to
Registrant's quarterly report on Form 10-Q for the
quarter ended December 31, 1996.
10.1.4+ -- Registrant's 1996 Stock Option Plan. Incorporated herein
by reference to Registrant's Proxy Statement for its 1996
Annual Meeting of Shareholders and to Registrant's
quarterly report on Form 10-Q for the quarter ended
December 31, 1996.
10.1.5+ -- Registrant's 1999 Stock Option Plan. Incorporated herein
by reference to Exhibit 10.1.5 to Registrant's quarterly
report on Form 10-Q for the quarter ended June 30, 1999.
</TABLE>
II-4
<PAGE> 294
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.1.6+ -- Registrant's 2000 Employee Stock Option Plan.
Incorporated herein by reference to Exhibit 10.1.6 to
Registrant's quarterly report on Form 10-Q for the
quarter ended March 31, 2000.
10.1.7+ -- Registrant's 2000 Executive Officer Stock Option Plan.
Incorporated herein by reference to Exhibit 10.1.7 to
Registrant's quarterly report on Form 10-Q for the
quarter ended March 31, 2000.
10.2.1+ -- Amended and Restated Employment Agreement dated as of
July 1, 1998, as amended by First Amendment thereto dated
December 31, 1998, between Aubrey K. McClendon and
Chesapeake Energy Corporation. Incorporated herein by
reference to Exhibit 10.2.1 to Registrant's quarterly
reports on Form 10-Q for the quarters ended September 30,
1998 and June 30, 1999.
10.2.2+ -- Amended and Restated Employment Agreement dated as of
July 1, 1998, as amended by First Amendment thereto dated
December 31, 1998, between Tom L. Ward and Chesapeake
Energy Corporation. Incorporated herein by reference to
Exhibit 10.2.2 to Registrant's quarterly reports on Form
10-Q for the quarters ended September 30, 1998 and June
30, 1999.
10.2.3+ -- Amended and Restated Employment Agreement dated as of
August 1, 2000 between Marcus C. Rowland and Chesapeake
Energy Corporation. Incorporated herein by reference to
Exhibit 10.2.3 to Registrant's registration statement on
Form S-1 (No. 333-45872).
10.2.5+ -- Employment Agreement between Steven C. Dixon and
Chesapeake Energy Corporation effective July 1, 2000.
Incorporated herein by reference to Exhibit 10.2.5 to
Registrant's quarterly report on Form 10-Q for the
quarter ended June 30, 2000.
10.2.6+ -- Employment Agreement between J. Mark Lester and
Chesapeake Energy Corporation effective July 1, 2000.
Incorporated herein by reference to Exhibit 10.2.6 to
Registrant's quarterly report on Form 10-Q for the
quarter ended June 30, 2000.
10.2.7+ -- Employment Agreement between Henry J. Hood and Chesapeake
Energy Corporation effective July 1, 2000. Incorporated
herein by reference to Exhibit 10.2.7 to Registrant's
quarterly report on Form 10-Q for the quarter ended June
30, 2000.
10.2.8+ -- Employment Agreement between Michael A. Johnson and
Chesapeake Energy Corporation effective July 1, 2000.
Incorporated herein by reference to Exhibit 10.2.8 to
Registrant's quarterly report on Form 10-Q for the
quarter ended June 30, 2000.
10.2.9+ -- Employment Agreement between Martha A. Burger and
Chesapeake Energy Corporation effective July 1, 2000.
Incorporated herein by reference to Exhibit 10.2.9 to
Registrant's quarterly report on Form 10-Q for the
quarter ended June 30, 2000.
10.3+ -- Form of Indemnity Agreement for officers and directors of
Registrant and its subsidiaries. Incorporated herein by
reference to Exhibit 10.30 to Registrant's registration
statement on Form S-1 (No. 33-55600).
</TABLE>
II-5
<PAGE> 295
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.5 -- Rights Agreement dated July 15, 1998 between the
Registrant and UMB Bank, N.A., as Rights Agent.
Incorporated herein by reference to Exhibit 1 to
Registrant's registration statement on Form 8-A filed
July 16, 1998. Amendment No. 1 dated September 11, 1998.
Incorporated herein by reference to Exhibit 10.3 to
Registrant's quarterly report on Form 10-Q for the
quarter ended September 30, 1998.
10.10 -- Partnership Agreement of Chesapeake Exploration Limited
Partnership dated December 27, 1994 between Chesapeake
Energy Corporation and Chesapeake Operating, Inc.
Incorporated herein by reference to Exhibit 10.10 to
Registrant's registration statement on Form S-4 (No.
33-93718).
10.11 -- Amended and Restated Limited Partnership Agreement of
Chesapeake Louisiana, L.P. dated June 30, 1997 between
Chesapeake Operating, Inc. and Chesapeake Energy
Louisiana Corporation. Incorporated herein by reference
to Exhibit 10.11 to Registrant's annual report on Form
10-K for the year ended June 30, 1997.
21 -- Subsidiaries of Registrant. Incorporated herein by
reference to Exhibit 21 to Registrant's annual report on
Form 10-K for the year ended December 31, 1999.
23.1.1** -- Consent of PricewaterhouseCoopers LLP as to Chesapeake
23.1.2** -- Consent of PricewaterhouseCoopers LLP as to Gothic
23.2** -- Consent of Williamson Petroleum Consultants, Inc.
23.3** -- Consent of Ryder Scott Company Petroleum Engineers
23.4** -- Consent of Lee Keeling and Associates, Inc.
23.5* -- Consent of CIBC World Markets Corp.
23.6* -- Consent of Pray, Walker, Jackman, Williamson & Marlar
(included in Exhibit 8.1).
23.7* -- Consent of Winstead Sechrest & Minick P.C. (included in
Exhibit 5.1).
24.1* -- Power of Attorney
99.1* -- Form of Gothic Proxy
</TABLE>
---------------
* Previously filed.
** Filed herewith.
+ Management contract or compensatory plan or arrangement.
(b) Financial Statement Schedules. Schedule II, Valuation and Qualifying
Accounts is included with the Company's audited consolidated financial
statements included in the prospectus which is Part I of this Registration
Statement. No other financial statement schedules are applicable or required.
ITEM 22. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
Chesapeake, we have been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by Chesapeake of expenses incurred or
paid by a director, officer or controlling person of Chesapeake in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, Chesapeake will, unless in the opinion of our counsel the matter has
been settled by controlling precedent, submit to a court of
II-6
<PAGE> 296
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
The undersigned Registrant hereby undertakes:
(1) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 4, 10(b), 11 or 13 of Form
S-4, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of the Registration Statement through the date of responding
to the request;
(2) That, prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this Registration
Statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other Items
of the applicable form;
(3) That every prospectus (i) that is filed pursuant to paragraph (2)
immediately preceding, or (ii) that purports to meet the requirements of
section 10(a)(3) of the Securities Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof; and
(4) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the Registration Statement when
it became effective.
II-7
<PAGE> 297
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Oklahoma City, State of Oklahoma on October 31, 2000.
CHESAPEAKE ENERGY CORPORATION
By: /s/ AUBREY K. MCCLENDON
----------------------------------
Aubrey K. McClendon
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities indicated on October 31, 2000.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ AUBREY K. MCCLENDON Chairman of the Board, Chief Executive Officer
----------------------------------------------------- and Director (Principal Executive Officer)
Aubrey K. McClendon
/s/ TOM L. WARD President, Chief Operating Officer and
----------------------------------------------------- Director (Principal Executive Officer)
Tom L. Ward
/s/ MARCUS C. ROWLAND Executive Vice President and Chief Financial
----------------------------------------------------- Officer (Principal Financial Officer)
Marcus C. Rowland
/s/ MICHAEL A. JOHNSON Senior Vice President -- Accounting (Principal
----------------------------------------------------- Accounting Officer)
Michael A. Johnson
EDGAR F. HEIZER, JR.* Director
-----------------------------------------------------
Edgar F. Heizer, Jr.
BREENE M. KERR* Director
-----------------------------------------------------
Breene M. Kerr
SHANNON T. SELF* Director
-----------------------------------------------------
Shannon T. Self
FREDERICK B. WHITTEMORE* Director
-----------------------------------------------------
Frederick B. Whittemore
* By: /s/ AUBREY K. MCCLENDON
-----------------------------------------------
Aubrey K. McClendon
as attorney-in-fact
</TABLE>
II-8
<PAGE> 298
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
2.1 -- Senior Secured Discount Notes Purchase Agreement dated
June 23, 2000 between Chesapeake Energy Marketing, Inc.
and Appaloosa Investment Limited Partnership I, Palomino
Fund Ltd. and Tersk L.L.C. Incorporated herein by
reference to Exhibit 2.1 to Registrant's Form S-1
Registration Statement (No. 333-41014).
2.2 -- Senior Secured Discount Notes Purchase Agreement dated
June 23, 2000 between Chesapeake Energy Marketing, Inc.
and Oppenheimer Strategic Income Fund, Oppenheimer
Champion Income Fund, Oppenheimer High Yield Fund,
Oppenheimer Strategic Bond Fund/VA and Atlas Strategic
Income Fund. Incorporated herein by reference to Exhibit
2.2 to Registrant's Form S-1 Registration Statement (No.
333-41014).
2.3 -- Senior Secured Discount Notes Purchase Agreement dated
June 26, 2000 between Chesapeake Energy Marketing, Inc.
and John Hancock High Yield Bond Fund and John Hancock
Variable Annuity High Yield Bond Fund. Incorporated
herein by reference to Exhibit 2.3 to Registrant's Form
S-1 Registration Statement (No. 333-41014).
2.4 -- Senior Secured Discount Notes Purchase Agreement dated
June 26, 2000 between Chesapeake Energy Marketing, Inc.
and Ingalls & Snyder Value Partners, L.P., Heritage Mark
Foundation and Arthur R. Ablin. Incorporated herein by
reference to Exhibit 2.4 to Registrant's Form S-1
Registration Statement (No. 333-41014).
2.5 -- Senior Secured Discount Notes Purchase Agreement dated
August 29, 2000 between Chesapeake Energy Marketing, Inc.
and BNP Paribas. Incorporated herein by reference to
Exhibit 2.5 to Registrant's registration statement on
Form S-1 (No. 333-45872).
2.6 -- Senior Secured Notes Purchase Agreement dated September
1, 2000 between Chesapeake Energy Corporation and Lehman
Brothers Inc. Incorporated herein by reference to Exhibit
2.6 to Registrant's registration statement on Form S-1
(No. 333-45872).
2.7 -- Agreement and Plan of Merger dated September 8, 2000
among Chesapeake Energy Corporation, Chesapeake Merger
2000 Corp. and Gothic Energy Corporation. Incorporated
herein by reference to Exhibit 2.7 to Registrant's
registration statement on Form S-1 (No. 333-45872).
2.7.1** -- Amendment No. 1 to Agreement and Plan of Merger dated
October 31, 2000 among Chesapeake Energy Corporation,
Chesapeake Merger 2000 Corp. and Gothic Energy
Corporation.
3.1 -- Registrant's Certificate of Incorporation, as amended.
Incorporated herein by reference to Exhibit 3.1 to
Registrant's registration statement on Form S-1 (No.
333-45872).
3.2 -- Registrant's Bylaws. Incorporated herein by reference to
Exhibit 3.2 to Registrant's registration statement on
Form 8-B (No. 001-13726).
</TABLE>
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EXHIBIT
NO. DESCRIPTION
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4.1 -- Indenture dated as of March 15, 1997 among the
Registrant, as issuer, Chesapeake Operating, Inc.,
Chesapeake Gas Development Corporation and Chesapeake
Exploration Limited Partnership, as Subsidiary
Guarantors, and United States Trust Company of New York,
as Trustee, with respect to 7.875% Senior Notes due 2004.
Incorporated herein by reference to Exhibit 4.1 to
Registrant's registration statement on Form S-4 (No.
333-24995). First Supplemental Indenture dated December
17, 1997 and Second Supplemental Indenture dated February
16, 1998. Incorporated herein by reference to Exhibit
4.1.1 to Registrant's transition report on Form 10-K for
the six months ended December 31, 1997. Second [Third]
Supplemental Indenture dated April 22, 1998. Incorporated
herein by reference to Exhibit 4.1.1 to Registrant's
Amendment No. 1 to Form S-3 registration statement (No.
333-57235). Fourth Supplemental Indenture dated July 1,
1998. Incorporated herein by reference to Exhibit 4.1.1
to Registrant's quarterly report on Form 10-Q for the
quarter ended September 30, 1998.
4.2 -- Indenture dated as of March 15, 1997 among the
Registrant, as issuer, Chesapeake Operating, Inc.,
Chesapeake Gas Development Corporation and Chesapeake
Exploration Limited Partnership, as Subsidiary
Guarantors, and United States Trust Company of New York,
As Trustee, with respect to 8.5% Senior Notes due 2012.
Incorporated herein by reference to Exhibit 4.1.3 to
Registrant registration statement on Form S-4 (No.
333-24995). First Supplemental Indenture dated December
17, 1997 and Second Supplemental Indenture dated February
16, 1998. Incorporated herein by reference to Exhibit
4.2.1 to Registrant's transition report on Form 10-K for
the six months ended December 31, 1997. Second [Third]
Supplemental Indenture dated April 22, 1998. Incorporated
herein by reference to Exhibit 4.2.1 to Registrant's
Amendment No. 1 to Form S-3 registration statement (No.
333-57235). Fourth Supplemental Indenture dated July 1,
1998. Incorporated herein by reference to Exhibit 4.2.1
to Registrant's quarterly report on Form 10-Q for the
quarter ended September 30, 1998.
4.3 -- Indenture dated as of April 1, 1998 among the Registrant,
as issuer, its subsidiaries signatory thereto, as
Subsidiary Guarantors, and United States Trust Company of
New York, as Trustee, with respect to 9.625% Senior Notes
due 2005. Incorporated herein by reference to Exhibit 4.3
to Registrant's registration statement on Form S-3 (No.
333-57235). First Supplemental Indenture dated July 1,
1998. Incorporated herein by reference to Exhibit 4.4.1
to Registrant's quarterly report on Form 10-Q for the
quarter ended September 30, 1998.
4.4 -- Indenture dated as of April 1, 1996 among the Registrant,
its subsidiaries signatory thereto, as Subsidiary
Guarantors, and United States Trust Company of New York,
as Trustee, with respect to 9.125% Senior Notes, due
2006. Incorporated herein by reference to Exhibit 4.6 to
Registrant's registration statement on Form S-3 (No.
333-1588). First Supplemental Indenture dated December
30, 1996 and Second Supplemental Indenture dated December
17, 1997. Incorporated herein by reference to Exhibit
4.4.1 to Registrant's transition report on Form 10-K for
the six months ended December 31, 1997. Third
Supplemental Indenture dated April 22, 1998. Incorporated
herein by reference to Exhibit 4.4.1 to Registrant's
Amendment No. 1 to Form S-3 registration statement (No.
333-57235). Fourth Supplemental Indenture dated July 1,
1998. Incorporated herein by reference to Exhibit 4.3.1
to Registrant's quarterly report on Form 10-Q for the
quarter ended September 30, 1998.
</TABLE>
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NO. DESCRIPTION
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4.5 -- Agreement to furnish copies of unfiled long-term debt
instruments. Incorporated herein by reference to
Registrant's transition report on Form 10-K for the six
months ended December 31, 1997.
4.6 -- Amended and Restated Credit Agreement dated May 30, 2000
among Chesapeake Exploration Limited Partnership, as
borrower, Chesapeake Energy Corporation and certain of
its subsidiaries, as guarantors, Union Bank of
California, N.A., as agent, and certain financial
institutions, as lenders, as amended by First Amendment
thereto dated August 1, 2000. Incorporated herein by
reference to Exhibit 4.7 to Registrant's quarterly report
on Form 10-Q for the quarter ended June 30, 2000 and
Exhibit 4.7.1 to Registrant's quarterly report on From
10-Q for the quarter ended June 30, 2000.
4.7 -- Common Stock Registration Rights Agreement dated as of
June 27, 2000 among the Registrant and Appaloosa
Investment Limited Partnership I, Palomino Fund Ltd.,
Tersk L.L.C., Oppenheimer Strategic Income Fund,
Oppenheimer Champion Income Fund, Oppenheimer High Yield
Fund, Oppenheimer Strategic Bond Fund/VA and Atlas
Strategic Income Fund. Incorporated herein by reference
to Exhibit 4.6 to Registrant's Form S-1 Registration
Statement (No. 333-41014).
4.8 -- Common Stock Registration Rights Agreement dated as of
August 29, 2000 between Chesapeake Energy Corporation and
Paribas North America, Inc. Incorporated herein by
reference to Exhibit 4.8 to Registrant's registration
statement on Form S-1 (No. 333-45872).
4.9 -- Common Stock Registration Rights Agreement dated as of
September 1, 2000 between Chesapeake Energy Corporation
and Lehman Brothers Inc. Incorporated herein by reference
to Exhibit 4.9 to Registrant's registration statement on
Form S-1 (No. 333-45872).
5.1* -- Opinion of Winstead Sechrest & Minick P.C. regarding the
validity of the securities being registered.
8.1* -- Opinion of Pray, Walker, Jackman, Williamson & Marlar
regarding certain tax matters.
10.1.1+ -- Registrant's 1992 Incentive Stock Option Plan.
Incorporated herein by reference to Exhibit 10.1.1 to
Registrant's registration statement on Form S-4 (No.
33-93718).
10.1.2+ -- Registrant's 1992 Nonstatutory Stock Option Plan, as
Amended. Incorporated herein by reference to Exhibit
10.1.2 to Registrant's quarterly report on Form 10-Q for
the quarter ended December 31, 1996.
10.1.3+ -- Registrant's 1994 Stock Option Plan, as amended.
Incorporated herein by reference to Exhibit 10.1.3 to
Registrant's quarterly report on Form 10-Q for the
quarter ended December 31, 1996.
10.1.4+ -- Registrant's 1996 Stock Option Plan. Incorporated herein
by reference to Registrant's Proxy Statement for its 1996
Annual Meeting of Shareholders and to Registrant's
quarterly report on Form 10-Q for the quarter ended
December 31, 1996.
10.1.5+ -- Registrant's 1999 Stock Option Plan. Incorporated herein
by reference to Exhibit 10.1.5 to Registrant's quarterly
report on Form 10-Q for the quarter ended June 30, 1999.
10.1.6+ -- Registrant's 2000 Employee Stock Option Plan.
Incorporated herein by reference to Exhibit 10.1.6 to
Registrant's quarterly report on Form 10-Q for the
quarter ended March 31, 2000.
</TABLE>
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NO. DESCRIPTION
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10.1.7+ -- Registrant's 2000 Executive Officer Stock Option Plan.
Incorporated herein by reference to Exhibit 10.1.7 to
Registrant's quarterly report on Form 10-Q for the
quarter ended March 31, 2000.
10.2.1+ -- Amended and Restated Employment Agreement dated as of
July 1, 1998, as amended by First Amendment thereto dated
December 31, 1998, between Aubrey K. McClendon and
Chesapeake Energy Corporation. Incorporated herein by
reference to Exhibit 10.2.1 to Registrant's quarterly
reports on Form 10-Q for the quarters ended September 30,
1998 and June 30, 1999.
10.2.2+ -- Amended and Restated Employment Agreement dated as of
July 1, 1998, as amended by First Amendment thereto dated
December 31, 1998, between Tom L. Ward and Chesapeake
Energy Corporation. Incorporated herein by reference to
Exhibit 10.2.2 to Registrant's quarterly reports on Form
10-Q for the quarters ended September 30, 1998 and June
30, 1999.
10.2.3+ -- Amended and Restated Employment Agreement dated as of
August 1, 2000 between Marcus C. Rowland and Chesapeake
Energy Corporation. Incorporated herein by reference to
Exhibit 10.2.3 to Registrant's registration statement on
Form S-1 (No. 333-45872).
10.2.5+ -- Employment Agreement between Steven C. Dixon and
Chesapeake Energy Corporation effective July 1, 2000.
Incorporated herein by reference to Exhibit 10.2.5 to
Registrant's quarterly report on Form 10-Q for the
quarter ended June 30, 2000.
10.2.6+ -- Employment Agreement between J. Mark Lester and
Chesapeake Energy Corporation effective July 1, 2000.
Incorporated herein by reference to Exhibit 10.2.6 to
Registrant's quarterly report on Form 10-Q for the
quarter ended June 30, 2000.
10.2.7+ -- Employment Agreement between Henry J. Hood and Chesapeake
Energy Corporation effective July 1, 2000. Incorporated
herein by reference to Exhibit 10.2.7 to Registrant's
quarterly report on Form 10-Q for the quarter ended June
30, 2000.
10.2.8+ -- Employment Agreement between Michael A. Johnson and
Chesapeake Energy Corporation effective July 1, 2000.
Incorporated herein by reference to Exhibit 10.2.8 to
Registrant's quarterly report on Form 10-Q for the
quarter ended June 30, 2000.
10.2.9+ -- Employment Agreement between Martha A. Burger and
Chesapeake Energy Corporation effective July 1, 2000.
Incorporated herein by reference to Exhibit 10.2.9 to
Registrant's quarterly report on Form 10-Q for the
quarter ended June 30, 2000.
10.3+ -- Form of Indemnity Agreement for officers and directors of
Registrant and its subsidiaries. Incorporated herein by
reference to Exhibit 10.30 to Registrant's registration
statement on Form S-1 (No. 33-55600).
10.5 -- Rights Agreement dated July 15, 1998 between the
Registrant and UMB Bank, N.A., as Rights Agent.
Incorporated herein by reference to Exhibit 1 to
Registrant's registration statement on Form 8-A filed
July 16, 1998. Amendment No. 1 dated September 11, 1998.
Incorporated herein by reference to Exhibit 10.3 to
Registrant's quarterly report on Form 10-Q for the
quarter ended September 30, 1998.
10.10 -- Partnership Agreement of Chesapeake Exploration Limited
Partnership dated December 27, 1994 between Chesapeake
Energy Corporation and Chesapeake Operating, Inc.
Incorporated herein by reference to Exhibit 10.10 to
Registrant's registration statement on Form S-4 (No.
33-93718).
</TABLE>
<PAGE> 302
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EXHIBIT
NO. DESCRIPTION
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10.11 -- Amended and Restated Limited Partnership Agreement of
Chesapeake Louisiana, L.P. dated June 30, 1997 between
Chesapeake Operating, Inc. and Chesapeake Energy
Louisiana Corporation. Incorporated herein by reference
to Exhibit 10.11 to Registrant's annual report on Form
10-K for the year ended June 30, 1997.
21 -- Subsidiaries of Registrant. Incorporated herein by
reference to Exhibit 21 to Registrant's annual report on
Form 10-K for the year ended December 31, 1999.
23.1.1** -- Consent of PricewaterhouseCoopers LLP as to Chesapeake
23.1.2** -- Consent of PricewaterhouseCoopers as to Gothic
23.2** -- Consent of Williamson Petroleum Consultants, Inc.
23.3** -- Consent of Ryder Scott Company Petroleum Engineers
23.4** -- Consent of Lee Keeling and Associates, Inc.
23.5* -- Consent of CIBC World Markets Corp.
23.6* -- Consent of Pray, Walker, Jackman, Williamson & Marlar
(included in Exhibit 8.1).
23.7* -- Consent of Winstead Sechrest & Minick P.C. (included in
Exhibit 5.1).
24.1* -- Power of Attorney
99.1* -- Form of Gothic Proxy
</TABLE>
---------------
* Previously filed.
** Filed herewith.
+ Management contract or compensatory plan or arrangement.
