-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TDx8r1CCrBL54Y+eL+gosngMPPtwJIFWbe4Zciql5XlrZAITsv1RCmDh4MkAIIRo Q8JArhd589FKyEtUu1GWIA== /in/edgar/work/20000804/0000950134-00-006345/0000950134-00-006345.txt : 20000921 0000950134-00-006345.hdr.sgml : 20000921 ACCESSION NUMBER: 0000950134-00-006345 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000804 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GOTHIC ENERGY CORP CENTRAL INDEX KEY: 0000878482 STANDARD INDUSTRIAL CLASSIFICATION: [1311 ] IRS NUMBER: 222663839 STATE OF INCORPORATION: OK FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-19753 FILM NUMBER: 686432 BUSINESS ADDRESS: STREET 1: 5727 S LEWIS AVE STE 700 STREET 2: P O BOX 186 CITY: TULSA STATE: OK ZIP: 74105 BUSINESS PHONE: 9187495666 FORMER COMPANY: FORMER CONFORMED NAME: TNC MEDIA INC DATE OF NAME CHANGE: 19930328 10-Q 1 e10-q.txt FORM 10-Q FOR QUARTER ENDED JUNE 30, 2000 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the period from to . ----------- ----------- ---------- Commission file number 0-19753 GOTHIC ENERGY CORPORATION (Exact name of registrant as specified in its charter) OKLAHOMA 22-2663839 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 6120 SOUTH YALE AVENUE, SUITE 1200, TULSA, OKLAHOMA 74136 (Address of principal executive offices) 918-749-5666 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- APPLICABLE ONLY TO CORPORATE ISSUERS: As of August 4, 2000, 23,298,209 shares of the Registrant's Common Stock, $.01 par value, were outstanding. 2 GOTHIC ENERGY CORPORATION GOTHIC PRODUCTION CORPORATION TABLE OF CONTENTS
PAGE PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS Consolidated Unaudited Balance Sheet December 31, 1999 and June 30, 2000.............................................................. 3 Consolidated Unaudited Statement of Operations Six months ended June 30, 1999 and 2000.......................................................... 4 Consolidated Unaudited Statement of Operations Three months ended June 30, 1999 and 2000........................................................ 5 Consolidated Unaudited Statement of Cash Flows Six months ended June 30, 1999 and 2000.......................................................... 6 Notes to Unaudited Consolidated Financial Statements............................................. 7 Report of Review by Independent Accountants...................................................... 11 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS....................................................................................... 12 ITEM 3 - Quantitative and Qualitative Disclosures About Market Risks............................. 17 ITEM 5 - Other Events............................................................................ 17 PART II - OTHER INFORMATION Item 6 - Exhibits and Reports on Form 8-K........................................................ 18 Signatures....................................................................................... 19
3 PART I - FINANCIAL INFORMATION GOTHIC ENERGY CORPORATION AND SUBSIDIARY CONSOLIDATED BALANCE SHEET (IN THOUSANDS, EXCEPT PAR VALUE)
DECEMBER 31, JUNE 30, ASSETS 1999 2000 ------------ ----------- (unaudited) CURRENT ASSETS: Cash and cash equivalents $ 2,583 $ 5,317 Natural gas and oil receivables 8,163 12,486 Receivable from officers and employees 77 110 Other 624 878 ----------- ----------- TOTAL CURRENT ASSETS 11,447 18,791 PROPERTY AND EQUIPMENT: Natural gas and oil properties on full cost method: Properties being amortized 258,818 269,380 Unproved properties not subject to amortization 5,473 5,911 Equipment, furniture and fixtures 6,123 6,311 Accumulated depreciation, depletion and amortization (54,170) (64,005) ----------- ----------- PROPERTY AND EQUIPMENT, NET 216,244 217,597 OTHER ASSETS, NET 10,706 9,738 ----------- ----------- TOTAL ASSETS $ 238,397 $ 246,126 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Accounts payable trade $ 4,630 $ 3,828 Revenues payable 6,047 7,931 Accrued interest expense 4,357 4,477 Other accrued liabilities 893 368 Current portion long-term debt -- 14,723 ----------- ----------- TOTAL CURRENT LIABILITIES 15,927 31,327 LONG-TERM DEBT, NET 319,857 315,958 GAS IMBALANCE LIABILITY 3,648 3,274 STOCKHOLDERS' EQUITY (DEFICIT): Series B Preferred Stock, Par Value $.05, authorized 165,000 shares; 59,216 and 62,827 shares issued and outstanding 45,612 50,252 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 (189,821) (197,859) ----------- ----------- TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (101,035) (104,433) ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 238,397 $ 246,126 =========== ===========
See accompanying notes 3 4 GOTHIC ENERGY CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENT OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, ---------------------------- 1999 2000 ------------ ------------ REVENUES: Natural gas and oil sales $ 23,417 $ 31,863 Well operations 1,259 1,356 ------------ ------------ TOTAL REVENUES 24,676 33,219 COSTS AND EXPENSES: Lease operating expenses 4,601 4,443 Depletion, depreciation and amortization 10,652 9,975 General and administrative expense 1,984 1,976 Investment banking and related fees -- 785 ------------ ------------ Operating income 7,439 16,040 Interest expense and amortization of debt issuance costs (18,727) (19,490) Interest and other income 817 50 ------------ ------------ NET LOSS (10,471) (3,400) PREFERRED DIVIDEND ($59.84 AND $60.00 PER PREFERRED SHARE) 3,291 3,715 PREFERRED DIVIDEND - AMORTIZATION OF PREFERRED DISCOUNT 923 923 ------------ ------------ NET LOSS AVAILABLE FOR COMMON SHARES $ (14,685) $ (8,038) ============ ============ NET LOSS PER COMMON SHARE, BASIC AND DILUTED $ (.90) $ (.43) ============ ============ WEIGHTED AVERAGE COMMON SHARES OUTSTANDING, BASIC AND DILUTED 16,286 18,686 ============ ============
See accompanying notes 4 5 GOTHIC ENERGY CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENT OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
FOR THE THREE MONTHS ENDED JUNE 30, ---------------------------- 1999 2000 ------------ ------------ REVENUES: Natural gas and oil sales $ 12,564 $ 17,048 Well operations 642 612 ------------ ------------ TOTAL REVENUES 13,206 17,660 COSTS AND EXPENSES: Lease operating expenses 2,262 2,455 Depletion, depreciation and amortization 5,367 4,738 General and administrative expense 1,013 979 Investment banking and related fees -- 291 ------------ ------------ Operating income 4,564 9,197 Interest expense and amortization of debt issuance costs (9,450) (9,740) Interest and other income 36 26 ------------ ------------ NET LOSS (4,850) (517) PREFERRED DIVIDEND ($30.26 AND $30.16 PER PREFERRED SHARE) 1,688 1,895 PREFERRED DIVIDEND - AMORTIZATION OF PREFERRED DISCOUNT 461 461 ------------ ------------ NET LOSS AVAILABLE FOR COMMON SHARES $ (6,999) $ (2,873) ============ ============ NET LOSS PER COMMON SHARE, BASIC AND DILUTED $ (.43) $ (.15) ============ ============ WEIGHTED AVERAGE COMMON SHARES OUTSTANDING, BASIC AND DILUTED 16,292 18,686 ============ ============
See accompanying notes 5 6 GOTHIC ENERGY CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, ---------------------------- 1999 2000 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (10,471) $ (3,400) ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Depreciation, depletion and amortization 10,652 9,975 Amortization of discount and loan costs 832 907 Accretion of interest on discount notes 4,674 5,101 CHANGES IN ASSETS AND LIABILITIES: Increase in accounts receivable (2,482) (4,332) Increase in other current assets (80) (254) Increase (decrease) in accounts and revenues payable (275) 1,082 Increase (decrease) in accrued liabilities 243 (405) Decrease in gas imbalance liability (76) (374) Decrease in other assets -- 39 ------------ ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES 3,017 8,339 NET CASH USED BY INVESTING ACTIVITIES: Proceeds from sale of property and equipment 2,104 1,638 Purchase of property and equipment (3,659) (779) Property development costs (9,306) (12,187) ------------ ------------ NET CASH USED BY INVESTING ACTIVITIES (10,861) (11,328) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from long-term borrowings 17,500 13,473 Payments of long-term borrowings (10,000) (7,750) Payment of loan fees (76) -- ------------ ------------ NET CASH PROVIDED BY FINANCING ACTIVITIES 7,424 5,723 NET CHANGE IN CASH AND CASH EQUIVALENTS (420) 2,734 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,289 2,583 ------------ ------------ CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,869 $ 5,317 ============ ============ SUPPLEMENTAL DISCLOSURE OF INTEREST PAID $ 13,221 $ 13,361 ============ ============
See accompanying notes 6 7 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, 1999 and 2000. 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 21,575,000 and 18,830,309 shares were outstanding as of June 30, 1999 and 2000, and were excluded from the computation of diluted loss per share due to their antidilutive impact. HEDGING ACTIVITIES - 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. 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 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. 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. 7 8 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 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. (in thousands):
As of December 31, 1999 ---------------------------------------------------------------- Gothic Energy Gothic Energy Gothic Production Corporation Corporation Corporation Consolidated --------------- --------------- --------------- 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
As of June 30, 2000 ---------------------------------------------------------------- Gothic Energy Gothic Energy Gothic Production Corporation Corporation Corporation Consolidated --------------- --------------- --------------- 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
8 9
For the six months ended June 30, 1999 ---------------------------------------------------------------- Gothic Energy Gothic Energy Gothic Production Corporation Corporation Corporation Consolidated --------------- --------------- --------------- 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)
For the six months ended June 30, 2000 ---------------------------------------------------------------- Gothic Energy Gothic Energy Gothic Production Corporation Corporation Corporation Consolidated --------------- --------------- --------------- 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)
For the six months ended June 30, 2000 ---------------------------------------------------------------- Gothic Energy Gothic Energy Gothic Production Corporation Corporation Corporation Consolidated --------------- --------------- --------------- 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)
For the three months ended June 30, 2000 ------------------------------------------------------------- Gothic Energy Gothic Energy Gothic Production Corporation Corporation Corporation Consolidated --------------- --------------- --------------- 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)
(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 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. 9 10 Gothic loaned $1,739,000 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 under the Gothic stock option plans at August 4, 2000. 10 11 INDEPENDENT ACCOUNTANT'S REPORT To the Board of Directors and Stockholders: We have reviewed the accompanying consolidated balance sheet of Gothic Energy Corporation and Subsidiary as of June 30, 2000 and the related consolidated statements of operations for the three and six-month periods ended June 30, 1999 and 2000 and cash flows for the six-months periods ended June 30, 1999 and 2000. These financial statements are the responsibility of Gothic's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet as of December 31, 1999, and the related consolidated statements of operations, stockholders' equity and cash flows for the year then ended (not presented herein); and in our report dated February 21, 2000, we expressed an unqualified opinion on those consolidated financial statements. Our report included an explanatory paragraph that described the substantial doubt about Gothic's ability to continue as a going concern, as discussed in Note 2 to those statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 1999 is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived. PricewaterhouseCoopers LLP Tulsa, Oklahoma August 4, 2000 11 12 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS A DISCUSSION OF OUR 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 (the "Discount Notes"). Additionally, it recognized $4.6 million in preferred dividends and amortization of preferred discount on its Series B Convertible Preferred Stock during 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 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 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. The following table reflects certain summary operating data for the periods presented: RESULTS OF OPERATIONS
Three Months Ended June 30, Six Months Ended June 30, --------------------------- --------------------------- 1999 2000 1999 2000 ------------ ------------ ------------ ------------ (in thousands, unless otherwise indicated) Net Production: Oil (Mbbls) 35 35 75 79 Natural gas (Mmcf) 6,469 6,446 12,891 12,641 Natural gas equivalent (Mmcfe) 6,679 6,656 13,341 13,115 Oil and Natural Gas Sales: Oil $ 564 $ 741 $ 1,045 $ 1,722 Natural gas 12,000 16,307 22,372 30,141 ------------ ------------ ------------ ------------ Total $ 12,564 $ 17,048 $ 23,417 $ 31,863 ============ ============ ============ ============ Average Sales Price: (1) Oil (Bbl) $ 16.11 $ 21.17 $ 13.93 $ 21.80 Natural gas (Mcf) 1.86 2.53 1.74 2.38 Natural gas equivalent (Mcfe) 1.88 2.56 1.76 2.43 Expenses ($ per Mcfe): Lease operating (2) $ 0.21 $ 0.18 $ 0.22 $ 0.18 General and administrative 0.15 0.15 0.15 0.15 Depreciation, depletion and amortization(3) 0.80 0.68 0.80 0.73
- ---------- (1) Includes the effect of hedging activity (See Item 3 and Note 1 of Notes to Unaudited Consolidated Financial Statements). (2) These amounts exclude production taxes. (3) These amounts represent depletion of oil and natural gas properties only. 12 13 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 14 1/8% Senior Secured 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 14 1/8% Senior Secured 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. 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. 13 14 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 month 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 14 1/8% Senior Secured Discount Notes issued as part of Gothic's recapitalization in April 1998. Gothic incurred interest costs of $6.5 million related to the 11 1/8% Senior Secured Notes, $2.5 million related to the 14 1/8% Senior Secured 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. 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. The profitability and revenues of Gothic are dependent, to a certain extent, upon prevailing spot market prices for natural gas and oil received by Gothic. In the past, 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 the control of Gothic. Such factors include political conditions, weather conditions, government regulations, the price and availability of alternative fuels and overall economic conditions. 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, 1999 and 2000:
SIX MONTHS ENDED JUNE 30, 1999 2000 ------------- ------------ (IN THOUSANDS) Net cash provided by operating activities $ 3,017 $ 8,339 Net cash used by investing activities 10,861 11,328 Net cash provided by financing activities 7,424 5,723
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. 14 15 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. 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, 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 ("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 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, (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 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 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 Energy Corporation to merge with a wholly owned subsidiary of Chesapeake, in exchange for 4,000,000 shares of Chesapeake's common stock. 15 16 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. Gothic loaned $1,739,000 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 under the Gothic stock option plans at August 4, 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 Report 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 Notes to Consolidated Financial Statements herein, "Item 2. Management's Discussion and Analysis or Plan of Operations - General", "Six Months Ended June 30, 2000 Compared with Six Months Ended June 30, 1999", "Quarter Ended June 30, 2000 Compared with Quarter Ended June 30, 1999, "- Liquidity and Capital Resources." 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 Energy Corporation 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 described above and in Gothic's Annual Report on Form 10-KSB for the year ended December 31, 1999 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. 16 17 ITEM 3 - 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. 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 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 the Panhandle Eastern Pipeline Company, 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 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. ITEM 5 - OTHER 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. 17 18 Gothic loaned $1,739,000 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 under the Gothic stock option plans at August 4, 2000. PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 15 - Letter Regarding Unaudited Interim Financial Information 27 - Financial Data Schedule 99 - Letter of Intent dated June 30, 2000 between Gothic Energy Corporation and Chesapeake Energy Corporation (b) Reports on Form 8-K During the quarter ended June 30, 2000, Gothic filed a Current Report on Form 8-K dated June 7, 2000, in response to Item 7. 18 19 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused the report to be signed on its behalf by the undersigned thereunto duly authorized. GOTHIC ENERGY CORPORATION Date: August 4, 2000 By: /s/ Michael Paulk --------------------------------------- MICHAEL PAULK, President, Chief Executive Officer Date: August 4, 2000 By: /s/ Steven P. Ensz --------------------------------------- STEVEN P. ENSZ, Vice President of Finance, Chief Financial Officer Date: August 4, 2000 By: /s/ Andrew McGuire --------------------------------------- ANDREW MCGUIRE, Controller 19 20 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 15 - Letter Regarding Unaudited Interim Financial Information 27 - Financial Data Schedule 99 - Letter of Intent dated June 30, 2000 between Gothic Energy Corporation and Chesapeake Energy Corporation
EX-15 2 ex15.txt LETTER REGARDING UNAUDITED INTERIM FINANCIAL INFO 1 EXHIBIT 15 GOTHIC ENERGY CORPORATION LETTER REGARDING UNAUDITED INTERIM FINANCIAL INFORMATION Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Re: GOTHIC ENERGY CORPORATION AND SUBSIDIARY REGISTRATION ON FORMS S-3 AND S-8 Gentlemen: We are aware that our report dated August 4, 2000 on our review of the interim financial information of Gothic Energy Corporation for the period ended June 30 2000, and included in the Company's quarterly report on Form 10-Q for the quarter ended June 30, 2000, is incorporated by reference in the Company's Registration Statements on Form S-3 (File Nos. 333-23239, 333-38679 and 333-68085) and on Form S-8 (File Nos. 333-82287, 333-82289, and 333-82291). PricewaterhouseCoopers LLP Tulsa, Oklahoma August 4, 2000 20 EX-27 3 ex27.txt FINANCIAL DATA SCHEDULE
5 1,000 6-MOS 3-MOS DEC-31-2000 DEC-31-2000 JAN-01-2000 APR-01-2000 JUN-30-2000 JUN-30-2000 5,317 0 0 0 12,596 0 0 0 0 0 18,791 0 281,602 0 (64,005) 0 246,126 0 31,327 0 315,958 0 0 0 50,252 0 187 0 (154,872) 0 246,126 0 31,863 17,048 33,219 17,660 17,179 8,463 17,179 8,463 0 0 0 0 19,490 9,740 (3,400) (517) 0 0 (3,400) (517) 0 0 0 0 0 0 (3,400) (517) (0.43) (0.15) (0.43) (0.15)
EX-99 4 ex99.txt LETTER OF INTENT DATED JUNE 30, 2000 1 EXHIBIT 99 [CHESAPEAKE ENERGY CORPORATION LETTERHEAD] June 30, 2000 VIA TELEFACSIMILE Mr. Michael K. Paulk President Gothic Energy Corporation Gothic Production Company 6120 South Yale Avenue Tulsa, Oklahoma 74136 Dear Mr. Paulk: This letter of intent summarizes the principal terms of the proposed acquisition by Chesapeake Energy Corporation, an Oklahoma corporation ("Chesapeake"), of Gothic Energy Corporation, an Oklahoma corporation ("Gothic"), and Gothic Production Company, an Oklahoma corporation and wholly owned subsidiary of Gothic ("Production" and together with Gothic, the "Gothic Parties"). The proposed acquisition and the terms and conditions of the transaction are as follows: 1. Merger. The proposed transaction will be consummated as a merger (the "Merger") of a wholly owned subsidiary of Chesapeake with Gothic. It is the intent of the parties that the Merger will be tax free to the shareholders of Gothic and the Merger will be structured accordingly. In connection with the Merger, the holders of shares of Gothic common stock, par value $.01 ("GEC Stock"), other than Chesapeake or any wholly owned subsidiary of Chesapeake, will receive in the aggregate 4.0 million shares of Chesapeake common stock, par value $.01 (the "CHK Stock") to be allocated among Gothic's shareholders on the basis of the number of shares of GEC Stock owned by such shareholders. As part of the Merger all stock options for GEC Stock issued to any officer, employee, director or independent contractor under Gothic's stock option plans will be converted prior to the Merger or will be terminated, canceled and released as of the closing of the Merger. It is the intent of the parties that on consummation of the Merger Chesapeake or Chesapeake's designated subsidiaries will own all of the outstanding capital stock of Gothic. The CHK Stock to be received by Gothic's shareholders in the Merger will be registered under the Securities Act of 1933, and consequently the proxy statement for Gothic's shareholders meeting will comply with the requirements for a Form S-4 Registration Statement under the Securities Act of 1933. 2. Merger Agreements. On the execution and delivery of this letter by each of the parties: (a) Chesapeake will commence preparation of a definitive merger agreement (the 2 Mr. Michael K. Paulk June 30, 2000 Page 2 "Agreement"); (b) the parties will make reasonable efforts to prepare and file all required filings under the Hart-Scott-Rodino Antitrust Improvements Act (the "HSR Act"); and (c) the parties will use reasonable efforts to prepare, file and make effective a proxy statement covering the Merger and attempt to secure the requisite shareholder approval by Gothic's shareholders. The Agreement will contain comprehensive representations, warranties, covenants and terms as usual and customary in transactions of this nature. The consummation of the Merger and the parties' obligations under the Agreement will be subject to the usual and customary conditions to a transaction of this nature, including, but not limited to: (x) consents to the Merger by any governmental regulatory agencies whose consent is necessary including, without implied limitation, compliance with the HSR Act; (y) approval of the Merger by Gothic's shareholders; and (z) any consents to the assignment of any material contracts or agreements which are reasonably determined by Chesapeake to be necessary. 3. Access. Subsequent to the execution of this letter through the closing of the Merger, the Gothic Parties will cause the officers, directors, employees, accountants, engineers, investment bankers, legal counsel and all other representatives and agents of the Gothic Parties (the "Gothic Representatives") to provide full and free access to the books, contracts, assets, records, businesses and representatives of the Gothic Parties as Chesapeake may request in connection with Chesapeake's review and investigation of the Gothic Parties. The Gothic Parties and the Gothic Representatives will cooperate fully with Chesapeake and Chesapeake's representatives in completing Chesapeake's due diligence of the Gothic Parties. 4. Conduct of Business. Until the execution and delivery of the Agreement, the Gothic Parties will continue to conduct the operations and businesses of such parties in the ordinary course and will not engage in or permit any extraordinary transactions without the prior written consent of Chesapeake. The Gothic Parties hereby agree that transactions outside the ordinary course include, without limitation, the sale of assets other than in the ordinary course of business, the modification of any material employment relationship, any increase in compensation for any executive officer (other than the exercise of stock options previously issued pursuant to existing employment arrangements), any distributions with respect to any capital stock of Gothic (excluding any exercise of any existing option, warrant or other derivative security in accordance with its terms) and the termination of or default under any material agreements or contracts. The parties agree that the pursuit of existing litigation by the Gothic Parties will be considered in the ordinary course of business but settlement of any litigation where the Gothic Parties are required to admit liability, transfer any assets or incur similar obligations will require the prior written approval of Chesapeake. 5. Exclusive Dealing. On or before the earlier of August 15, 2000, or termination of this letter of intent with the written consent of both parties under paragraph 10 herein, the Gothic Parties will not, directly or indirectly, through any representative or otherwise, solicit or entertain offers from, initiate or participate in negotiations with or encourage, discuss or consider any proposal from any person regarding the Acquisition (as hereafter defined) of: (a) any shares of the capital stock of the Gothic Parties; (b) any of the Gothic Parties or the Gothic Parties' businesses or operations; or (c) any assets of the Gothic Parties other than to unaffiliated third parties for value in the ordinary course of business. For purposes of this letter of intent the term "Acquisition" means 3 Mr. Michael K. Paulk June 30, 2000 Page 3 any person acquiring, directly or indirectly, an interest in the Gothic Parties or any business, operation or asset of the Gothic Parties including, without implied limitation, any such action by purchase, merger, reorganization, consolidation, lease, contract or operation of law. Gothic further agrees not to provide any information concerning the Gothic Parties with respect to any of the foregoing. In the event any person should solicit, initiate negotiations or make inquiries relative to any Acquisition the Gothic Parties will immediately notify Chesapeake in writing. 6. Break-up Fee. In the event that any of the Gothic Parties breach paragraph 5 of this letter of intent or terminate this letter of intent after August 15, 2000, and within one (1) year after the date of this letter of intent any of the Gothic Parties enters into a letter of intent or other agreement relating to the Acquisition of a material portion of the capital stock of any of the Gothic Parties or any assets, operations or business, in whole or in part, whether directly or indirectly, through purchase, merger, consolidation, or otherwise (other than sales of inventory or immaterial assets in the ordinary course), then the Gothic Parties will pay to Chesapeake the sum of $17 million (the "Break-up Fee") in immediately available funds. The Break-up Fee is not Chesapeake's exclusive remedy in the event of a breach by the Gothic Parties of any Binding Provision (as hereafter defined) and in such event Chesapeake will be entitled to exercise any and all rights and remedies provided by law or in equity. The Break-up Fee will not be payable by the Gothic Parties in the event that this letter of intent is terminated solely as a result of the failure to obtain the required governmental consents. 7. Restructure Agreement. On or about June 5, 2000, Gothic entered into that certain Agreement in Respect of Restructuring of Gothic Energy Corporation 14c% Series B Senior Secured Discount Notes (the "Restructure Agreement") with certain holders of the Gothic Energy Corporation 14c% Series B Senior Secured Discount Notes (the "Notes") which provided for the restructure of Gothic by filing for protection under the United States Bankruptcy Code (the "Bankruptcy Code") using a prepackaged bankruptcy plan. Subsequent thereto Chesapeake Energy Marketing, Inc., an Oklahoma corporation and a wholly owned subsidiary of Chesapeake ("CEMI"), acquired and continues to hold the Notes that were held by the persons that executed and delivered the Restructure Agreement. Based on current circumstances Gothic does not plan to file for protection under the Bankruptcy Code on or before July 20, 2000, as required by the Restructure Agreement and requests that Chesapeake and CEMI terminate the Restructure Agreement. Accordingly, Chesapeake (for its own account and on behalf of CEMI) and Gothic by the execution and delivery of this letter of intent: (a) jointly and irrevocably terminate the Restructure Agreement; (b) release all parties to the Restructure Agreement from any and all obligations thereunder and any related agreements; and (c) hereby agree to execute or cause to be executed any documents necessary or appropriate to evidence the termination of the Restructure Agreement and the release the obligations arising thereunder. 8. Option. Effective March 27, 2000, Chesapeake Exploration Limited Partnership, an Oklahoma limited partnership ("CELP"), granted to the Gothic Parties an option (the "Option") to acquire all of the Gothic capital stock owned by CELP subject to various conditions which included the Gothic Parties filing for protection under the Bankruptcy Code, affirming various 4 Mr. Michael K. Paulk June 30, 2000 Page 4 agreements with Chesapeake and confirming a plan of reorganization. Because neither of the Gothic Parties intend to file a bankruptcy petition and may desire to propose wells in contravention of the terms of the Option, the Gothic Parties hereby irrevocably terminate and release the Option and any and all obligations of CELP under the Option including, without implied limitation, any obligation of CELP to convey any capital stock or security issued by the Gothic Parties and owned by CELP or any affiliated entity. In addition, CELP hereby releases the Gothic Parties from any and all obligations under the Option, whether express or implied, including any obligation of any of the Gothic Parties to file a bankruptcy petition or seek confirmation of a bankruptcy plan. Chesapeake (for its own account and on behalf of CELP) and the Gothic Parties by the execution and delivery of this letter of intent hereby agree to execute or cause to be executed any documents necessary or appropriate to evidence the termination of the Option and the release of the obligations arising thereunder. The termination of the Option will not affect or terminate any provision of that certain Option Purchase Agreement dated February 28, 2000, among the Gothic Parties and CELP. 9. Costs. Chesapeake and the Gothic Parties will be responsible for the costs and expenses incurred by such parties (including any broker, finder's or investment banking fees) incurred in connection with this letter of intent or the transaction contemplated by this letter of intent. Notwithstanding the foregoing: (a) any fees under the HSR Act will be paid fifty percent by Chesapeake and fifty percent by the Gothic Parties; and (b) if a party institutes an action or proceeding against any other party under this letter of intent the unsuccessful party to such action or proceeding will reimburse the prevailing party for the reasonable attorneys' fees and disbursements incurred by the prevailing party. Gothic's remedy in the event that Chesapeake terminates this letter of intent after August 15, 2000 (other than as a result of a breach of this letter of intent by the Gothic Parties or the failure to satisfy the conditions under paragraph 2 of this letter of intent), and within one (1) year after the date of this letter of intent the Gothic Parties have not entered into an Acquisition of the Gothic Parties at a higher price than the value of the CHK Stock on the date of this letter of intent, Chesapeake will pay to the Gothic Parties $1.0 million as a reimbursement of the Gothic Parties' expenses and damages in connection with this proposed transaction. 10. Liability. Except for paragraphs 3 through 10 inclusive (the "Binding Provisions") which are intended to create binding obligations, it is understood that no legal obligation or liability is created by this letter of intent and that the legal obligations and liabilities of the parties are to arise only on the duly authorized execution and delivery of the Agreement. The terms of this letter of intent can only be amended or modified in a writing signed by all parties hereto. Except as expressly set forth in the Binding Provisions or the Agreement, no past or future action, course of conduct, failure to act with respect to the Merger, the failure to negotiate or the failure to consummate the Merger will give rise to or serve as the basis for any liability of the parties. This letter of intent will terminate on the written consent by all of the parties hereto or by written notice of any party after August 15, 2000. The termination of this letter of intent will not affect the liability of a party for the breach of any of the Binding Provisions prior to such termination or the breach of any provision set forth in paragraphs 6, 7, 8, 9 or 10 of this letter of intent, which will survive termination of this letter of intent. 5 Mr. Michael K. Paulk June 30, 2000 Page 5 If the foregoing meets with your approval, please sign and return one copy of this letter of intent to our offices no later than 5:00 p.m., June 30, 2000. Each of the parties agrees that this letter of intent may be signed in counterparts or by facsimile without affecting the validity or enforceability of this letter of intent. On receipt of a signed letter of intent, we will commence preparation of the Agreement for your review and release the joint press release in accordance with the rules of the New York Stock Exchange. Best Regards, /s/ MARCUS C. ROWLAND Marcus C. Rowland Chief Financial Officer AGREED TO AND ACCEPTED this 30 th day of June, 2000. GOTHIC ENERGY CORPORATION, an Oklahoma corporation By /s/ MICHAEL K. PAULK --------------------------- Michael K. Paulk, President GOTHIC PRODUCTION COMPANY, an Oklahoma corporation By /s/ MICHAEL K. PAULK --------------------------- Michael K. Paulk, President -----END PRIVACY-ENHANCED MESSAGE-----