-----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, HEoWsoZn0+cvqDzzbxFjkflRBHnV0sJHmUbBHClxu33YrWa3EXQvswnx8kbEuVC8 cCgTG4UjfT7NYNN1tMo1EA== 0000950134-01-002840.txt : 20010330 0000950134-01-002840.hdr.sgml : 20010330 ACCESSION NUMBER: 0000950134-01-002840 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GOTHIC ENERGY CORP CENTRAL INDEX KEY: 0000878482 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 222663839 STATE OF INCORPORATION: OK FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 033-42335 FILM NUMBER: 1584608 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-K405 1 d85381e10-k405.txt FORM 10-K FOR FISCAL YEAR END DECEMBER 31, 2000 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K Mark One: [X] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the fiscal year ended DECEMBER 31, 2000; or [ ] Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from __________ to __________. COMMISSION FILE NO. 0-19753 GOTHIC ENERGY CORPORATION - -------------------------------------------------------------------------------- (Exact Name of Registrant as Specified in its Charter) OKLAHOMA 22-2663839 - -------------------------------------------------------------------------------- (State or Other Jurisdiction of (IRS Employer Incorporation or Organization) Identification No.) 6100 NORTH WESTERN - OKLAHOMA CITY, OKLAHOMA 73118 - -------------------------------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) (405) 848-8000 - -------------------------------------------------------------------------------- (Registrant's Telephone Number, Including Area Code) Securities registered under Section 12(b) of the Exchange Act: None. Securities Registered Pursuant to Section 12(g) of the Exchange Act: None. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The registrant meets the conditions set forth in general instruction I(1)(a) and (b) of Form 10-K and is therefore filing this form in the reduced disclosure format. As of March 23, 2001, 1,000 shares of the Registrant's common stock were outstanding, all of which were owned by Chesapeake Energy Corporation. DOCUMENTS INCORPORATED BY REFERENCE None. 1 2 TABLE OF CONTENTS
PAGE ---- PART I Item 1. Description of Business 3 Item 2. Description of Property 12 Item 3. Legal Proceedings 13 Item 4. Submission of Matters to a Vote of Security Holders 13 PART II Item 5. Market for Common Equity and Related Security Holder Matters 14 Item 6. Selected Financial Data 14 Item 7. Management's Discussion and Analysis or Plan of Operation 14 Item 8. Financial Statements 15 Item 9. Changes in and Disagreements on Accounting and Financial Disclosure 15 PART III Item 10. Directors, Executive Officers, Promoters and Control Persons; 16 Compliance With Section 16(a) of the Exchange Act Item 11. Executive Compensation 16 Item 12. Security Ownership of Certain Beneficial Owners and Management 16 Item 13. Certain Relationships and Related Transactions 16 PART IV Item 14. Exhibits and Reports on Form 8-K 16
2 3 PART I ITEM 1 - DESCRIPTION OF BUSINESS GENERAL Gothic Energy Corporation (the "Company" or "Gothic Energy") is a holding company which owns all of the outstanding capital stock of Gothic Production Corporation ("Gothic Production"). Gothic Energy and Gothic Production are referred to collectively as "Gothic." Through January 15, 2001, Gothic Production was an independent energy company engaged in the exploration, development, acquisition and production of natural gas and oil. On January 16, 2001, Gothic Energy merged with Chesapeake Merger 2000 Corp., a wholly owned subsidiary of Chesapeake Energy Corporation ("Chesapeake"). Gothic was the surviving corporation in the merger and as a result of the merger Gothic became a wholly owned subsidiary of Chesapeake. Chesapeake had previously acquired all of Gothic's Series B Preferred Stock, substantially all of Gothic's 14 1/8% Senior Secured Discount Notes, and $31.6 million of Gothic's Senior Secured Notes. Chesapeake has not assumed any payment obligations with respect to the remaining notes after the merger. This report is being filed to fulfill Gothic's obligations under provisions of the indentures for the notes. As of December 31, 2000, Gothic had proved reserves of 290.9 bcf of natural gas and 1.8 mmbbls of oil (301.5 bcfe), with a PV-10 of approximately $1.3 billion as estimated by Gothic's independent petroleum engineers. These reserves, of which 85% were classified as proved developed, had an estimated average reserve life of approximately 10.5 years and 96% were natural gas. 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. At December 31, 2000, Gothic held an interest in approximately 480,000 gross acres (approximately 229,000 net acres) and had an interest in 903 gross wells (481 net wells). Gothic serves as operator of 564 of the wells in which it has an interest. After January 16, 2001, Chesapeake assumed operations of all wells previously operated by Gothic. Operated wells accounted for approximately 62% of the PV-10 value of Gothic's proved reserves as of December 31, 2000. For the year ended December 31, 2000, Gothic had revenues of $85.7 million, EBITDA of $68.5 million and a net income of $6.1 million. A glossary is included at the end of this Item 1. It defines units of measurement and industry terms used throughout this report. VOLUMES, REVENUE, PRICES AND PRODUCTION COSTS The following table sets forth certain information regarding the production volumes, revenues, average prices received and average production costs associated with Gothic's sale of natural gas and oil for the periods indicated: 3 4
YEARS ENDED DECEMBER 31, -------------------------------------------- 1998 1999 2000 ---------- ---------- ---------- NET PRODUCTION: Oil (Mbls) .................................... 257 158 135 Natural gas (Mmcf) ............................ 24,455 25,477 26,309 Natural gas equivalent (Mmcfe) ................ 25,997 26,425 27,119 OIL AND NATURAL GAS SALES(000S): Oil ........................................... $ 3,469 $ 2,671 $ 3,062 Natural gas ................................... 47,245 50,296 80,003 ---------- ---------- ---------- Total ......................................... $ 50,714 $ 52,967 $ 83,065 ========== ========== ========== AVERAGE SALES PRICE: (1) Oil (Bbl) ..................................... $ 13.50 $ 16.91 $ 22.68 Natural gas (Mcf) ............................. 1.93 1.97 3.04 Natural gas equivalent (Mcfe) ................. 1.95 2.00 3.06 EXPENSES (PER MCFE): Lease operating (2) ........................... $ 0.33 $ 0.22 $ 0.19 General and administrative .................... 0.14 0.18 0.17 Depreciation, depletion and amortization (3) ........................... 0.91 0.77 0.81
(1) Includes the effect of hedging activity (see Item 7A and Note 1 of Notes to Consolidated Financial Statements) (2) These amounts exclude production taxes. (3) These amounts represent depreciation, depletion and amortization of oil and natural gas properties only. 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, 2000 for Gothic based on the report of Lee Keeling and Associates, Inc. The calculations, which Lee Keeling and Associates, Inc. used in preparing its report, were prepared using geological and engineering methods generally accepted by the petroleum industry and in accordance with Securities and Exchange Commission guidelines.
AS OF DECEMBER 31, 2000 --------------------------------------------------------------------------------- NATURAL GAS NATURAL GAS OIL EQUIVALENT PV-10% --------------- --------------- --------------- --------------- (Mmcf) (Mbbls) (Mmcfe) ($ in thousands) Proved developed reserves......... 245,472 1,567 254,874 $ 1,043,978 Proved undeveloped reserves....... 45,435 201 46,641 222,525 --------------- --------------- --------------- --------------- Total proved reserved.... 290,907 1,768 301,515 $ 1,266,503 =============== =============== =============== ===============
Prices used in calculating future net revenue of proved reserves as of December 31, 2000 and related PV-10 were $10.19 per Mcf of natural gas and $26.54 per barrel of oil based on weighted average prices at December 31, 2000. These prices were based on the adjusted cash spot price for natural gas and oil at December 31, 2000. These prices are significantly higher than the average natural gas and oil price ($5.88 per Mcf and $25.00 per barrel) received by Gothic during December 2000, and the prices Gothic expects to receive during 2001. Gothic has not filed any estimates of proved natural gas and oil reserves with any federal authority or agency other than the Securities and Exchange Commission. 4 5 PRINCIPAL AREAS OF OPERATIONS The following table sets forth the principal areas of operation and estimated proved natural gas and oil reserves, PV-10 of the estimated future net revenues and percent of total PV-10 of Gothic at December 31, 2000.
OIL AND NATURAL NATURAL GAS % OF TOTAL FIELD CONDENSATE GAS EQUIVALENT PV-10% PV-10% - ------------------------------------- ------------- ------------- ------------- ---------------- ------------- (MBBLS) (MMCF) (MMCFE) ($ IN THOUSANDS) ANADARKO BASIN: Watonga-Chickasha..................... 453 81,170 83,888 $ 358,312 28.3% Cement Field.......................... 182 65,904 66,996 285,290 22.6 Northwest Okeene/Cedardale Field...... 308 38,112 39,960 153,751 12.1 Springer Field........................ 103 19,336 19,954 78,350 6.2 Mocane Laverne & Hugoton Fields....... 59 12,030 12,384 46,905 3.7 ARKOMA BASIN: Arkoma Field.......................... -- 32,422 32,422 144,346 11.4 Potato Hills.......................... -- 8,606 8,606 64,738 5.1 PERMIAN/DELAWARE BASIN: Pecos Slope.......................... 663 29,465 33,443 115,772 9.1 Johnson Ranch........................ -- 3,862 3,862 19,039 1.5 ------------- ------------- ------------- ------------- ------------- Total 1,768 290,907 301,515 $ 1,266,503 100.0% ============= ============= ============= ============= =============
DRILLING ACTIVITY The following table sets forth development drilling results for Gothic for the years ended December 31, 1998, 1999 and 2000. There were no exploratory wells drilled during those years.
1998 1999 2000 --------------- --------------- --------------- GROSS NET GROSS NET GROSS NET ----- ----- ----- ----- ----- ----- Productive............... 44.0 20.4 41.0 14.5 35.0 12.0 Drilling and completing.. -- -- 15.0 5.6 2.0 1.0 Non-productive........... 2.0 1.8 5.0 2.9 -- -- ----- ----- ----- ----- ----- ----- Total........... 46.0 22.2 61.0 23.0 37.0 13.0 ===== ===== ===== ===== ===== =====
DEVELOPMENT, EXPLORATION AND ACQUISITION EXPENDITURES The following table sets forth certain information regarding the costs Gothic incurred in its development, exploration and acquisition activities during the periods indicated:
YEARS ENDED DECEMBER 31, --------------------------------------- 1998 1999 2000 --------- --------- --------- ($ IN THOUSANDS) Development and leasehold costs.. $ 18,379 $ 21,056 $ 19,043 Acquisition costs................ 218,738 1,499 655 Sales of oil and gas properties.. (44,678) (2,228) (1,877) Capitalized internal costs....... -- -- 210 --------- --------- --------- Total................. $ 192,439 $ 20,327 $ 18,031 ========= ========= =========
OPERATING CONTROL OVER PRODUCTION ACTIVITIES Gothic operated 564 of the 903 wells in which it owned an interest, representing approximately 62% of its PV-10 as of December 31, 2000. After January 16, 2001, Chesapeake Operating, Inc. assumed operations of all wells previously operated by Gothic. Unrelated third parties operate the remaining properties pursuant to operating agreements, which are, for the most part, standard to the industry. If Gothic declines to participate in additional activities proposed by a third party 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. It is anticipated that Gothic will not participate in any new wells after January 16, 2001. 5 6 Gothic holds a license to use advanced well automation technology developed by Amoco Production Company ("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. The technology also helps to regulate a well's productivity and makes periodic adjustments to allow a well to flow more efficiently. Gothic believes 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 of Gothic's significant non-operated properties. 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 (i.e., bonus) and a fixed annual charge (i.e., delay rental) prior to production (unless the lease is paid up) and, once production has been established, a royalty based generally upon the proceeds from the sale of natural gas and oil. Once wells are drilled, a lease generally continues so long as production of natural gas and oil continues. In some cases, leases may be acquired in exchange for a commitment to drill or finance the drilling of a specified number of wells to predetermined depths. Some of 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. Title may also be subject 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 have not always been received prior to the acquisition of a producing natural gas and oil property, Gothic has historically obtained title opinions on significant producing properties in connection with pledging Gothic's producing properties under bank loan agreements. Gothic did not usually obtain title opinions on undeveloped leases 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. PRODUCTION, SALES PRICES AND HEDGING ACTIVITIES 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. See Item 7A - Quantitative and Qualitative Disclosures About Market Risks. 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 the contracts are essentially the same in that Gothic makes gas production available to the pipeline companies at given points of delivery on their 6 7 pipelines and the pipeline companies accept such gas and deliver it to the end user. Each pipeline company 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. In January 1998 Gothic entered into a ten-year marketing agreement with Continental Natural Gas Company ("Continental"), now CMS Continental Natural Gas, whereby the majority of the natural gas associated with properties acquired from Amoco is sold to Continental at current market prices adjusted for marketing and transportation fees. During the year ended December 31, 2000, Gothic sold approximately 60% of its gas production (57% of total oil and gas sales) to Continental and 64% of its oil production (2% of total oil and gas sales) to Duke Energy, Inc. Management does not believe the loss of either customer would have a material adverse effect on Gothic's results of operations or financial position. No other customer accounted for more than 10% of total oil and gas sales in 2000. Revenues, earnings and cash flows are highly dependent upon current prices for natural gas and oil received by Gothic. In December 2000, natural gas and oil prices received by Gothic for its production were $5.88 per Mcf and $25.00 per Bbl, respectively, compared to $1.89 per Mcf and $24.33 per Bbl, respectively, received in December 1999. 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, 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. COMPETITION The energy industry is highly competitive. Gothic competes with other energy companies in all areas of its operations, including the marketing of natural gas and oil. Because gathering systems are the only practical method for the intermediate transportation of natural gas, Gothic competes with pipelines and gas gathering systems. Competition may also stem from 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. RISK FACTORS You should carefully consider the following risk factors, in addition to the other information included in this report. Each of these risk factors could adversely affect Gothic's business, operating results and financial condition. Oil and natural gas prices are volatile. A decline in prices could adversely affect Gothic's financial results, cash flows, access to capital and ability to grow. Gothic's revenues, operating results, profitability, cash flow and the carrying value of Gothic's oil and natural gas properties depend substantially upon the prices Gothic receives for its oil and natural gas. In addition, Gothic may have ceiling test writedowns if prices decline significantly from present levels. Lower prices may also reduce the amount of oil and natural gas that Gothic can produce economically. Historically, the markets for oil and natural gas have been volatile, and they are likely to continue to be volatile. The prices Gothic is currently receiving for its production are near or at historic highs. Wide fluctuations in oil and natural gas prices may result from relatively minor changes in the supply of and demand for oil and natural gas, market uncertainty and other factors that are beyond Gothic's control, including: 7 8 o worldwide and domestic supplies of oil and natural gas, o weather conditions, o the level of consumer demand, o the price and availability of alternative fuels, o the availability of pipeline capacity, o the price and level of foreign imports, o domestic and foreign governmental regulations and taxes, o the ability of the members of the Organization of Petroleum Exporting Countries to agree to and maintain oil price and production controls, o political instability or armed conflict in oil-producing regions, and o the overall economic environment. Gothic's level of indebtedness may adversely affect operations, and we may have difficulty repaying long-term indebtedness as it matures. Gothic's ability to meet its debt obligations and to reduce its level of debt depends on its future performance. General economic conditions and financial, business and other factors affect Gothic's operations and its future performance. Many of these factors are beyond Gothic's control. Gothic cannot assure you that it will be able to generate sufficient cash flow to pay the interest on its debt or that future working capital or borrowings will be available to pay or refinance such debt. Factors that will affect Gothic's ability to raise cash through a refinancing of its debt include financial market conditions and its value and performance at the time it needs capital. Gothic's recent commodity price risk management activities have reduced the realized prices received for its oil and natural gas sales. Gothic's commodity price risk management transactions may limit its realized oil and natural gas sales prices in the future. In order to manage Gothic's exposure to price volatility in marketing its oil and natural gas, Gothic enters into oil and natural gas price risk management arrangements for a portion of its expected production. These transactions are limited in life. While intended to reduce the effects of volatile oil and natural gas prices, commodity price risk management transactions may limit the prices Gothic actually realizes. In 2000, we recorded reductions to oil and natural gas revenues of $17.9 million related to commodity price risk management activities. Gothic cannot assure you that it will not experience additional reductions to oil and natural gas revenues from its commodity price risk management. In addition, Gothic's commodity price risk management transactions may expose it to the risk of financial loss in certain circumstances, including instances in which: o Gothic's production is less than expected, o there is a widening of price differentials between delivery points for Gothic's production and the delivery point assumed in the hedge arrangement, or o the counterparties to Gothic's contracts fail to perform the contracts. As of December 31, 2000, Gothic had no open natural gas or oil price risk management arrangements. Estimates of oil and natural gas reserves are uncertain and inherently imprecise. This report contains estimates of Gothic's proved reserves and the estimated future net revenues from its proved reserves. These estimates are based upon various assumptions, including assumptions required by the SEC relating to oil and natural gas prices, drilling and operating expenses, capital expenditures, taxes and availability of funds. The process of estimating oil and natural gas reserves is complex. The process involves significant decisions and assumptions in the evaluation of available geological, geophysical, engineering and economic data for each reservoir. Therefore, these estimates are inherently imprecise. Actual future production, oil and natural gas prices, revenues, taxes, development expenditures, operating expenses and quantities of recoverable oil and natural gas reserves most likely will vary from these estimates. Such variations may be significant and could materially affect the estimated quantities and present value of Gothic's proved reserves. In addition, Gothic may adjust estimates of proved reserves to reflect production history, results of 8 9 exploration and development drilling, prevailing oil and natural gas prices and other factors, many of which are beyond Gothic's control. Gothic's properties may also be susceptible to hydrocarbon drainage from production by operators on adjacent properties. At December 31, 2000, approximately 15% of Gothic's estimated proved reserves were undeveloped. Recovery of undeveloped reserves requires significant capital expenditures and successful drilling operations. The estimates of these reserves include the assumption that significant capital expenditures will be required to develop the reserves. Although Gothic has prepared estimates of its oil and natural gas reserves and the costs associated with these reserves in accordance with industry standards, Gothic cannot assure you that the estimated costs are accurate, that development will occur as scheduled or that the results will be as estimated. You should not assume that the present value referred to in this report is the current market value of Gothic's estimated oil and natural gas reserves. In accordance with SEC requirements, the estimate of Gothic's present value is based on prices and costs as of the date of the estimate. Gothic's year-end 2000 present value is based on oil and natural gas prices of $26.54 per barrel of oil and $10.19 per Mcf of natural gas, compared to prices of $24.33 per barrel of oil and $1.89 per Mcf of natural gas used in computing Gothic's year-end 1999 present value. Actual future prices and costs may be materially higher or lower than the prices and costs as of the date of an estimate. Any changes in consumption by oil and natural gas purchasers or in governmental regulations or taxation will also affect actual future net cash flows. The timing of both the production and the expenses from the development and production of oil and natural gas properties will affect both the timing of actual future net cash flows from proved reserves and their present value. In addition, the 10% discount factor, which is required by the SEC to be used in calculating discounted future net cash flows for reporting purposes, is not necessarily the most accurate discount factor. The effective interest rate at various times and the risks associated with Gothic's business or the oil and natural gas industry in general will affect the accuracy of the 10% discount factor. REGULATION General. The energy industry is regulated by federal, state and local authorities, and there are extensive laws and regulations that affect oil and gas drilling and production operations. The regulatory burden on the industry increases our costs of doing business and, consequently, affects our profitability. Inasmuch as such laws and regulations are frequently expanded, amended or reinterpreted, we are unable to predict the future cost or impact of regulatory compliance. Regulation of Natural Gas and Oil Exploration and Production. Our operations are subject to various types of regulation at 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, the plugging and abandoning of wells and the disposal of fluids used in connection with operations. Our operations are also subject to various conservation laws and regulations. These include the regulation of the size of drilling and spacing units or proration 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 project 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 may limit the amount of oil and gas we can produce from our wells and may limit the number of wells or the locations at which we can drill. We do not anticipate that compliance with existing federal, state and local laws, rules and regulations will have a material adverse effect on operations or earnings. Environmental Regulation. Various federal, state and local laws and regulations concerning the discharge of contaminants into the environment, the generation, storage, transportation and disposal of contaminants and the protection of public health, natural resources, wildlife and the environment affect our exploration, development and production operations. Such regulation has increased the cost of planning, designing, drilling, operating and in some 9 10 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. The risks of substantial costs and liabilities associated with such compliance are inherent in oil and gas operations, and there can be no assurance that significant costs and liabilities, including civil and criminal penalties, will not be incurred. Moreover, it is possible that other developments, such as stricter and more comprehensive environmental laws and regulations as well as claims for damages to property or persons resulting from company operations could result in substantial costs and liabilities to Gothic. We believe we are in substantial compliance with existing environmental regulations, and that any noncompliance will not have a material adverse effect on our operations or earnings. OPERATIONAL HAZARDS AND INSURANCE Gothic maintained 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, through January 16, 2001. After January 16, 2001, Gothic became an insured under Chesapeake's insurance policies, which generally provide for significantly higher liability and excess-liability coverage limits. 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 insurance, could have a material adverse effect on Gothic's financial condition and results of operations. Moreover, no assurance can be given that we will be able to maintain adequate insurance in the future at reasonable rates. EMPLOYEES As of January 1, 2001, Gothic had 16 employees consisting of 6 production and land personnel, and 10 financial, accounting and administrative personnel, two of whom were executive officers. Following the merger, all continuing Gothic employees (4) became employees of Chesapeake. GLOSSARY Wherever used in this report, the following terms shall have the meanings specified. Bbl--One stock tank barrel, or 42 US gallons liquid volume, used in reference to crude oil or other liquid hydrocarbons. Bcf--One billion cubic feet. Bcfe--One billion cubic feet of natural gas equivalent. 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. Developed Acreage--Acres which are allocated or assignable to producing wells or wells capable of production. Development Well--A well drilled within the proved area of a natural gas and oil reservoir to the depth of a stratigraphic horizon known to be productive. Dry Well--A well found to be incapable of producing either oil or natural gas in sufficient quantities to justify completion as an oil or natural gas well. EBITDA--Net income (loss) before interest expense, income taxes, depreciation, depletion and amortization, impairments of oil and gas properties and other assets, extraordinary items, and certain other non-cash charges. EBITDA is not a measure of cash flow as determined by generally accepted accounting principles. EBITDA information has been included in this report because EBITDA is a measure used by some investors in determining historical ability to service indebtedness. EBITDA should not be considered as an 10 11 alternative to, or more meaningful than, net income or cash flows as determined in accordance with generally accepted accounting principles as an indicator of operating performance or liquidity. Exploratory Well--A well drilled to find and produce oil or natural gas in an unproved area, to find a new reservoir in a field previously found to be productive of oil or natural gas in another reservoir, or to extend a known reservoir. Gross Acres or Gross Wells--The total acres or wells, as the case may be, in which a working interest is owned. Mbbl--One thousand Bbl. Mcf--One thousand cubic feet. Mcfe--One thousand cubic feet of natural gas equivalent, using the ratio of one Bbl of crude oil to six Mcf of natural gas. Mmbbl--One million Bbl. MmBtu--One million Btus. Mmcf--One million cubic feet. Mmcfe--One million cubic feet of natural gas equivalent. Natural Gas and Oil Lease--An instrument by which a mineral fee owner grants to a lessee the right for a specific period of time to explore for natural gas and oil underlying the lands covered by the lease and the right to produce any natural gas and oil so discovered generally for so long as there is production in economic quantities from such lands. Net Acres or Net Wells--The sum of the fractional working interests owned in gross acres or gross wells. NYMEX--New York Mercantile Exchange. Overriding Royalty Interest--A fractional undivided interest in a natural gas and oil property entitling the owner to a share of natural gas and oil production, in addition to the usual royalty paid to the owner, free of costs of production. Productive Well--A well that is producing oil or natural gas or that is capable of production. Proved Developed Reserves--Reserves that can be expected to be recovered through existing wells with existing equipment and operating methods. Proved Reserves--The estimated quantities of crude oil, natural gas and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved Undeveloped Reserves --Reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for completion. PV-10--The discounted future net cash flows for proved natural gas and oil reserves computed on the same basis as the standardized measure, but without deducting income taxes, which is not in accordance with generally accepted accounting principles. PV-10 is an important financial measure for evaluating the relative significance of natural gas and oil properties and acquisitions, but should not be construed as an alternative to the standardized measure (as determined in accordance with generally accepted accounting principles). 11 12 Reserve Life--The estimated productive life of a proved reservoir based upon the economic limit of such reservoir producing hydrocarbons in paying quantities assuming certain price and cost parameters. For purposes of this report, reserve life is calculated by dividing the proved reserves (on an mcfe basis), as of December 31, 2000 by projected production volumes for the 12 months ending December 31, 2001. Royalty Interest--An interest in a natural gas and oil property entitling the owner to a share of natural gas and oil production free of costs of production. SEC--Securities and Exchange Commission. Standardized Measure--The estimated future net cash flows from proved natural gas and oil reserves computed using prices and costs at the dates indicated, after income taxes and discounted at 10%. Undeveloped Acreage--Lease acreage on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of natural gas and oil regardless of whether such acreage contains proved reserves. Working Interest--The operating interest which gives the owner the right to drill, produce and conduct operating activities on the property and a share of production, subject to all royalties, overriding royalties and other burdens and to all costs of exploration, development and operations and all risks in connection therewith. ITEM 2 - DESCRIPTION OF PROPERTY ACREAGE The following table shows the approximate gross and net acres of Gothic's leasehold interests on December 31, 2000:
DEVELOPED ACREAGE UNDEVELOPED ACREAGE ------------------- ------------------- GROSS NET GROSS NET ------- ------- ------- ------- ANADARKO BASIN Springer Field .............................. 7,200 4,680 150 75 Northwest Okeene/Cedardale Field ............ 66,560 51,906 1,920 274 Cement Field ................................ 49,697 13,319 15,617 2,901 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 ................................ 1,051 402 10,362 2,371 PERMIAN/DELAWARE BASIN Johnson Ranch ............................... 1,920 1,388 -- -- Pecos Slope ................................. 12,000 9,000 -- -- SOUTH TEXAS ...................................... -- -- 1,898 597 ------- ------- ------- ------- Total ..................................... 441,866 217,936 38,524 10,765 ======= ======= ======= =======
PRODUCTIVE WELL SUMMARY The following table sets forth by field the respective interests in productive wells owned by Gothic as of December 31, 2000. 12 13
FIELD GROSS WELLS NET WELLS - ------------------------------------------------------- ----------- --------- ANADARKO BASIN Springer Field ..................................... 36 14 Northwest Okeene/Cedardale Field ................... 168 87 Cement Field ....................................... 68 19 Mocane Laverne & Hugoton Fields .................... 82 54 Watonga-Chickasha .................................. 338 170 ARKOMA BASIN Arkoma Field ....................................... 92 28 Potato Hills ....................................... 7 1 PERMIAN/DELAWARE BASIN Johnson Ranch ...................................... 5 3 Pecos Slope ........................................ 107 105 ----- ----- Total .............................................. 903 481 ===== =====
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, 1998, 1999 and 2000.
YEARS ENDED DECEMBER 31, ---------------------------------- 1998 1999 2000 -------- -------- -------- Natural gas (Mmcf) .................................... 24,455 25,477 26,309 Oil (Mbbls) ........................................... 257 158 135 Natural gas equivalent (Mmcfe) ........................ 25,997 26,425 27,119
ITEM 3 - LEGAL PROCEEDINGS Gothic Energy was a plaintiff in an action instituted on December 22, 1999 in the United States District Court for the Northern District of Oklahoma against Jefferies & Company, Inc. ("Jefferies") seeking actual and punitive damages against Jefferies for intentional interference with contractual relations and business opportunity. Gothic Energy claimed Jefferies improperly and wrongfully interfered in the closing of the acquisition of assets from Amoco in January 1998. Jefferies filed a counterclaim against Gothic Energy seeking indemnification under an alleged letter agreement between Gothic Energy and Jefferies for attorney's fees and expenses of litigation, among other things. The action was dismissed in February 2001 pursuant to a settlement agreement. The settlement resulted in a cash payment to Gothic Energy. Neither Gothic Energy nor Gothic Production is a party to any other proceedings other than ordinary litigation incidental to their business, the outcome of which management believes will not have a material adverse effect on their financial position or results of operations. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The information called for by this item is omitted pursuant to General Instruction (I) of Form 10-K. 13 14 PART II ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED SECURITY HOLDER MATTERS All common stock of Gothic Energy is owned by Chesapeake. ITEM 6 - SELECTED FINANCIAL DATA The information called for by this item is omitted pursuant to General Instruction (I) of Form 10-K. ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this item is presented in a reduced disclosure format pursuant to General Instruction (I) of Form 10-K. A COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999 Our revenues were $85.7 million for the year ended December 31, 2000, compared with $55.6 million for the year ended December 31, 1999. Natural gas and oil sales in 2000 were $83.1 million compared to $53.0 million in 1999. Of the 2000 natural gas and oil sales, $3.1 million was from oil sales and $80.0 million was from natural gas sales. This compares to oil sales of $2.7 million in 1999 and gas sales of $50.3 million in 1999. The increase in our natural gas and oil sales was primarily the result of higher commodity prices for both natural gas and oil in 2000 compared to 1999. Our oil sales in 2000 were based on the sale of 135,000 barrels at an average price of $22.68 per barrel compared to the sale of 158,000 barrels at an average price of $16.91 per barrel in 1999. Natural gas sales in 2000 were based on the sale of 26.3 Bcf at an average price of $3.04 per mcf, which includes the effect of unfavorable hedging transactions during most of the year, compared to the sale of 25.5 Bcf at an average price of $1.97 per mcf in 1999. Hedging activities resulted in a decrease in natural gas and oil sales of $17.9 million in 2000 ($0.65 per mcf and $5.79 per barrel). Hedging gains and losses in 1999 were not significant. We incurred lease operating expenses during 2000 of $11.8 million compared with lease operating expenses of $9.6 million for 1999. Our lease operating expenses included approximately $6.6 million and $3.9 million in production taxes, which we incurred from our share of production in 2000 and 1999, respectively. The increase in lease operating expenses was due to the increase in production taxes resulting from increased natural gas and oil sales in 2000, partly offset by reduced lease operating expenses due to operating efficiencies. Our lease operating expenses and production taxes as a percentage of natural gas and oil sales decreased to 14% in 2000 compared to 18% in 1999. Lease operating expenses per mcfe decreased to $0.19 for 2000 compared to $0.22 in 1999. Our depreciation, depletion and amortization expense was $22.6 million for 2000 compared to $21.0 million for 1999. The 2000 increase was the result of increased production and an increased depletable base as a result of capital spent on drilling activities during 1999 and 2000. Our general and administrative costs were $4.6 million for 2000 compared to $4.7 million for 1999. The costs per mcfe decreased from $0.18 in 1999 to $0.17 in 2000. We also incurred investment banking and related fees of $1.2 million in 2000 and $638,000 in 1999 in connection with our efforts to restructure our balance sheet and to complete the Chesapeake merger. We account for our oil and gas exploration and development activities using the full-cost method of accounting prescribed by the Securities and Exchange Commission. Accordingly, all our productive and non-productive costs incurred in connection with the acquisition, exploration and development of natural gas and oil reserves are capitalized and depleted using the units-of-production method based on proved oil and gas reserves. We capitalize our costs including salaries and related fringe benefits of employees directly engaged in the acquisition, exploration and development of natural gas and oil properties, as well as other directly identifiable general and administrative costs associated with these activities. These costs do not include any costs related to production, general corporate overhead, or similar activities. Our natural gas and oil reserves are estimated annually by independent petroleum engineers. Our calculation of depreciation, depletion and amortization ("DD&A") includes estimated future expenditures that we believe we will incur in developing our proved reserves and the estimated dismantlement and 14 15 abandonment costs, net of salvage values. In the event the unamortized cost of the natural gas and oil properties we are amortizing exceeds the full cost ceiling as defined by the Securities and Exchange Commission, we charge the amount of the excess to expense in the period during which the excess occurs. The full-cost ceiling is based principally on the estimated future discounted net cash flows from our natural gas and oil properties. Changes in our estimates or declines in prevailing natural gas and oil prices could cause us to reduce the carrying value of our natural gas and oil properties. A write-down arising out of these conditions is referred to throughout our industry as a full-cost ceiling write-down. We had no full-cost ceiling write-down during 2000 or 1999. Our interest and debt issuance costs were $39.8 million for 2000 compared to $38.0 million for 1999. This increase was primarily because of higher debt levels associated with our 14 1/8% Senior Secured Discount Notes which Gothic Energy issued in April 1998, and amortization of the costs incurred to complete the sale of these notes and amendments to our bank credit facility. For the year ended December 31, 2000, we incurred interest costs of $26.2 million related to our 11 1/8% Senior Secured Notes, $10.8 million related to our 14 1/8% Senior Secured Discount Notes, $968,000 related to our bank credit facility, and $1.8 million as amortization of loan costs. We use the sales method for recording natural gas sales. Our oil and condensate production is sold, title passes, and revenue is recognized under short-term purchase contracts at prevailing prices in accordance with arrangements which are customary in our industry. Our gas sales are recorded as revenues when the gas is metered and title is transferred pursuant to the gas sales contracts. When our sales of gas exceed our pro rata ownership in a well, such sales are recorded as revenues unless total sales from the well have exceeded our share of estimated total gas reserves underlying the property. In that case, the excess is recorded as a gas balancing liability. Such imbalances are incurred from time to time in the ordinary course of our business in the operation of our gas wells as a consequence of operational factors. Certain of such gas balancing liabilities were assumed as part of an acquisition of natural gas and oil properties. ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK COMMODITY PRICE RISK Gothic's results of operations are highly dependent upon the prices received for oil and natural gas production. HEDGING ACTIVITIES Periodically Gothic has utilized hedging strategies to hedge the price of a portion of its future oil and gas production. The strategies included: (i) swap arrangements that establish an index-related price above which Gothic pays the counterparty and below which Gothic is paid by the counterparty, (ii) the purchase of index-related puts that provide for a "floor" price below which the counterparty pays Gothic the amount by which the price of the commodity is below the contracted floor, and (iii) the sale of index-related calls that provide for a "ceiling" price above which Gothic pays the counterparty the amount by which the price of the commodity is above the contracted ceiling. Results from commodity hedging transactions are reflected in oil and gas sales to the extent related to the oil and gas production. Gothic entered into commodity hedging transactions related to monthly oil and natural gas production volumes. Gains or losses on crude oil and natural gas hedging transactions were recognized as price adjustments in the months of related production. As of December 31, 2000, Gothic had no open natural gas or oil swap or other hedging arrangements. Gothic's new management (Chesapeake) may utilize hedging strategies in the future. ITEM 8 - FINANCIAL STATEMENTS The response to this Item is included in a separate section of this report. See page 18. ITEM 9 - CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 15 16 PART III ITEM 10 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF EXCHANGE ACT The information called for by this Item is omitted pursuant to General Instruction (I) of Form 10-K. ITEM 11 - EXECUTIVE COMPENSATION The information called for by this Item is omitted pursuant to General Instruction (I) of Form 10-K. ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information called for by this Item is omitted pursuant to General Instruction (I) of Form 10-K. ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information called for by this Item is omitted pursuant to General Instruction (I) of Form 10-K. PART IV ITEM 14 - EXHIBITS AND REPORTS ON FORM 8-K (a)(1-2)The financial statements and schedules filed as part of this Form 10-K are set forth in the index on page F-1. (a)(3)
EXHIBIT DESCRIPTION ------- ----------- 3.1* Restated Certificate of Incorporation of Gothic Energy Corporation 3.2* By-Laws of Gothic Energy Corporation 4.1 Indenture dated as of April 21, 1998 between Gothic Production Corporation and The Bank of New York, as Trustee, with respect to the 11-1/8% Senior Secured Notes due 2005. Incorporated herein by reference to Exhibit 10.4 to current report on Form 8-K for April 27, 1998. 23* Consent of Lee Keeling and Associates, Inc.
- ---------- * Filed herewith. (b) Reports on Form 8-K. During the quarter ended December 31, 2000, Gothic Energy Corporation filed a current report on Form 8-K on December 13, 2000, disclosing the results of Gothic's shareholder meeting held on December 12, 2000. 16 17 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, Gothic Energy Corporation has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. GOTHIC ENERGY CORPORATION By: /s/ AUBREY K. McCLENDON ---------------------------------------- Aubrey K. McClendon President and Chief Executive Officer Date: March 26, 2001 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Gothic Energy Corporation and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - --------- ----- ---- /s/ AUBREY K. McCLENDON President, Chief Executive March 26, 2001 - ------------------------- Officer and Director Aubrey K. McClendon (Principal Executive Officer) /s/ TOM L. WARD Vice President and Director March 26, 2001 - ------------------------- Tom L. Ward /s/ MARCUS C. ROWLAND Vice President (Principal Accounting March 26, 2001 - ------------------------- and Financial Officer Marcus C. Rowland
17 18 INDEX TO FINANCIAL STATEMENTS Report of Independent Accountants........................................................................... 19 Consolidated Balance Sheets, December 31, 1999 and 2000..................................................... 20 Consolidated Statement of Operations, Years ended December 31, 1998, 1999 and 2000.......................... 21 Consolidated Statement of Stockholders' Equity (Deficit), Years ended December 31, 1998, 1999 and 2000...... 22 Consolidated Statement of Cash Flows, Years ended December 31, 1998, 1999 and 2000.......................... 23 Notes to Consolidated Financial Statements.................................................................. 24
18 19 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholder of Gothic Energy Corporation In our opinion, the accompanying consolidated balance sheets 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 ("Gothic") and Subsidiary at December 31, 1999 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. 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 of America 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 our opinion. Chesapeake Energy Corporation ("Chesapeake") acquired all of the outstanding common stock and related outstanding warrants and options to acquire common stock of Gothic and Gothic was merged into a wholly owned subsidiary of Chesapeake. PricewaterhouseCoopers LLP Tulsa, Oklahoma February 26, 2001 19 20 GOTHIC ENERGY CORPORATION AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ------------------------ 1999 2000 --------- --------- ($ IN THOUSANDS, EXCEPT SHARE DATA) ASSETS CURRENT ASSETS: Cash and cash equivalents ............................................... $ 2,583 $ 2,000 Natural gas and oil receivables ......................................... 8,163 18,273 Receivable from officers and employees .................................. 77 1,764 Other ................................................................... 624 192 --------- --------- Total Current Assets .............................................. 11,447 22,229 PROPERTY AND EQUIPMENT: Natural gas and oil properties on full cost method: Properties being amortized ............................................ 258,818 275,827 Unproved properties not subject to amortization ....................... 5,473 6,191 Equipment, furniture and fixtures ....................................... 6,123 6,385 Accumulated depreciation, depletion and amortization .................... (54,170) (76,651) --------- --------- PROPERTY AND EQUIPMENT, NET ............................................. 216,244 211,752 OTHER ASSETS, NET ......................................................... 10,706 8,675 --------- --------- TOTAL ASSETS .............................................................. $ 238,397 $ 242,656 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Accounts payable trade .................................................. $ 4,630 $ 203 Revenues payable ........................................................ 6,047 6,349 Accrued interest ........................................................ 4,357 4,366 Other accrued liabilities ............................................... 893 291 --------- --------- Total Current Liabilities ......................................... 15,927 11,209 LONG-TERM DEBT ............................................................ 319,857 321,676 GAS IMBALANCE LIABILITY ................................................... 3,648 2,835 COMMITMENTS AND CONTINGENCIES (NOTES 1 AND 6) STOCKHOLDERS' EQUITY (DEFICIT): Series B Preferred stock, par value $.05, authorized 165,000 shares; 59,216 and 66,674 shares issued and outstanding, respectively ............................................. 45,612 55,139 Common stock, par value $.01, authorized 100,000,000 shares; 18,685,765 and 23,305,094 shares issued and outstanding, respectively ............................................. 187 233 Additional paid in capital .............................................. 42,987 44,830 Accumulated deficit ..................................................... (189,821) (193,266) --------- --------- Total Stockholders' Equity (Deficit) .............................. (101,035) (93,064) --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) ............................................................... $ 238,397 $ 242,656 ========= =========
See accompanying notes to consolidated financial statements. 20 21 GOTHIC ENERGY CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENT OF OPERATIONS
YEARS ENDED DECEMBER 31, --------------------------------------- 1998 1999 2000 --------- --------- --------- ($ IN THOUSANDS, EXCEPT PER SHARE DATA) REVENUES: Natural gas and oil sales ...................................... $ 50,714 $ 52,967 $ 83,065 Well operations ................................................ 2,319 2,657 2,680 --------- --------- --------- Total revenues ................................................. 53,033 55,624 85,745 COSTS AND EXPENSES: Lease operating expense ........................................ 12,129 9,605 11,800 Depletion, depreciation and amortization ....................... 24,001 20,969 22,621 General and administrative expense ............................. 3,823 4,675 4,551 Investment banking and related fees ............................ -- 638 1,212 Provision for impairment of natural gas and oil properties ..... 76,000 -- -- --------- --------- --------- Operating income (loss) .......................................... (62,920) 19,737 45,561 Interest expense and amortization of debt issuance costs ......... (35,438) (37,988) (39,759) Interest and other income ........................................ 433 942 280 Loss on sale of investments ...................................... (305) -- -- --------- --------- --------- INCOME (LOSS) BEFORE EXTRAORDINARY ITEM .......................... (98,230) (17,309) 6,082 LOSS ON EARLY EXTINGUISHMENT OF DEBT ............................. 31,459 -- -- --------- --------- --------- NET INCOME (LOSS) ................................................ (129,689) (17,309) 6,082 PREFERRED DIVIDEND ............................................... 5,599 6,820 7,678 PREFERRED DIVIDEND -- AMORTIZATION OF PREFERRED DISCOUNT ......... 5,095 1,847 1,849 --------- --------- --------- NET LOSS AVAILABLE FOR COMMON SHARES ............................. $(140,383) $ (25,976) $ (3,445) ========= ========= ========= LOSS PER COMMON SHARE BEFORE EXTRAORDINARY ITEM, BASIC ........... $ (6.70) $ (1.51) $ (0.17) AND DILUTED LOSS ON EARLY EXTINGUISHMENT OF DEBT ............................. (1.93) -- -- --------- --------- --------- NET LOSS PER COMMON SHARE, BASIC AND DILUTED ..................... $ (8.63) $ (1.51) $ (0.17) ========= ========= ========= WEIGHTED AVERAGE COMMON SHARES OUTSTANDING ....................... 16,262 17,219 20,637 ========= ========= =========
See accompanying notes to consolidated financial statements. 21 22 GOTHIC ENERGY CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, --------------------------------------- 1998 1999 2000 --------- --------- --------- ($ IN THOUSANDS) PREFERRED STOCK: Balance beginning of period ................................... $ -- $ 36,945 $ 45,612 Preferred stock dividend-- Series B ........................... 4,187 6,820 7,678 Preferred dividend-- amortization of discount-- Series B ...... 1,231 1,847 1,849 Issuance of Series A preferred stock .......................... 33,909 -- -- Redemption of Series A preferred stock ........................ (33,909) -- -- Issuance of Series B preferred stock .......................... 31,527 -- -- --------- --------- --------- Balance, end of period ........................................ $ 36,945 $ 45,612 $ 55,139 ========= ========= ========= COMMON STOCK: Balance, beginning of period .................................. $ 162 $ 162 $ 187 Issuance of common stock on exercise of options ............... -- -- 44 Issuance of common stock on exercise of warrants .............. -- -- 2 Issuance of common stock on warrant conversion ................ -- 25 -- --------- --------- --------- Balance, end of period ........................................ $ 162 $ 187 $ 233 ========= ========= ========= ADDITIONAL PAID-IN CAPITAL: Balance, beginning of period .................................. $ 36,043 $ 42,996 $ 42,987 Issuance of common stock on exercise of options ............... -- -- 1,695 Issuance of common stock as employee severance ................ -- 16 -- Issuance of common stock on exercise of warrants .............. -- -- 148 Issuance of common stock on warrant conversion ................ -- (25) -- Issuance of Series A preferred stock .......................... (20) -- -- Warrants issued in connection with Series A preferred ......... 941 -- -- Warrants issued in connection with Amoco acquisition .......... 1,153 -- -- Warrants issued in connection with Series B preferred ......... 4,879 -- -- --------- --------- --------- Balance, end of period ........................................ $ 42,996 $ 42,987 $ 44,830 ========= ========= ========= ACCUMULATED DEFICIT: Balance, beginning of period .................................. $ (23,462) $(163,845) $(189,821) Net income (loss) ............................................. (129,689) (17,309) 6,082 Preferred stock dividend-- Series B ........................... (4,187) (6,820) (7,678) Preferred stock dividend-- amortization of discount-- Series B. (1,231) (1,847) (1,849) Preferred stock dividend-- Series A ........................... (1,412) -- -- Preferred stock dividend-- amortization of discount-- Series A. (3,864) -- -- --------- --------- --------- Balance, end of period ........................................ $(163,845) $(189,821) $(193,266) ========= ========= ========= ACCUMULATED OTHER COMPREHENSIVE INCOME: Balance, beginning of period .................................. $ (121) $ -- $ -- Realized loss on available for sale investments ............... 121 -- -- --------- --------- --------- Balance, end of period ........................................ $ -- $ -- $ -- ========= ========= ========= NOTE RECEIVABLE: Balance, beginning of period .................................. $ (169) $ (179) $ -- Advance to officer ............................................ (10) -- -- Forgiveness of officer note receivable ........................ -- 179 -- --------- --------- --------- Balance, end of period ........................................ $ (179) $ -- $ -- ========= ========= ========= TOTAL STOCKHOLDERS' EQUITY (DEFICIT) ............................ $ (83,921) $(101,035) $ (93,064) ========= ========= =========
See accompanying notes to consolidated financial statements. 22 23 GOTHIC ENERGY CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, --------------------------------------- 1998 1999 2000 --------- --------- --------- ($ IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) .............................................. $(129,689) $ (17,309) $ 6,082 ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Depreciation, depletion and amortization ....................... 24,001 20,969 22,621 Amortization of discount and loan costs ........................ 1,994 1,769 1,828 Provision for impairment of natural gas and oil properties ..... 76,000 -- -- Accretion of interest on discount notes ........................ 6,023 9,678 10,819 Loss on early extinguishment of debt ........................... 31,459 -- -- Other .......................................................... -- 179 -- CHANGES IN ASSETS AND LIABILITIES: Increase in accounts receivable ................................ (4,009) (949) (11,797) (Increase) decrease in other current assets .................... (143) (403) 432 Increase (decrease) in accounts and revenues payable ........... 5,605 1,438 (4,125) Increase (decrease) in gas imbalance and other liabilities ..... 65 (2,532) (813) Increase (decrease) in accrued liabilities ..................... 411 639 (593) (Increase) decrease in other assets ............................ (150) 228 202 --------- --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES ........................ 11,567 13,707 24,656 NET CASH USED BY INVESTING ACTIVITIES: Collection of note receivable from officer and director ........ 167 -- -- Purchase of available-for-sale investments ..................... (462) -- -- Proceeds from sale of investments .............................. 1,359 -- -- Proceeds from sale of property and equipment ................... 44,678 2,228 1,877 Purchase of property and equipment ............................. (218,738) (3,413) (939) Property development costs ..................................... (18,379) (21,056) (19,066) --------- --------- --------- NET CASH USED BY INVESTING ACTIVITIES ............................ (191,375) (22,241) (18,128) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from short-term borrowings ............................ 60,000 -- -- Payments of short-term borrowings .............................. (60,000) -- -- Proceeds from long-term borrowings ............................. 431,290 31,000 13,473 Payments of long-term borrowings ............................... (259,884) (22,000) (22,473) Redemption of preferred stock, net ............................. (40,809) -- -- Proceeds from sale of preferred stock, net ..................... 73,475 -- -- Proceeds from exercise of stock options ........................ -- -- 1,739 Proceeds from exercise of stock warrants ....................... -- -- 150 Payment of loan and offering fees .............................. (38,535) (172) -- Other .......................................................... (162) -- -- --------- --------- --------- NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES ................. 165,375 8,828 (7,111) NET CHANGE IN CASH AND CASH EQUIVALENTS .......................... (14,433) 294 (583) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ................... 16,722 2,289 2,583 --------- --------- --------- CASH AND CASH EQUIVALENTS, END OF PERIOD ......................... $ 2,289 $ 2,583 $ 2,000 ========= ========= ========= SUPPLEMENTAL DISCLOSURE OF INTEREST PAID ......................... $ 23,063 $ 26,541 $ 27,104 ========= ========= =========
See accompanying notes to consolidated financial statements. 23 24 GOTHIC ENERGY CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 wholly owned subsidiary, Gothic Production Corporation ("Gothic Production") since its formation in April of 1998 (collectively referred to as "Gothic" or the "Company"). All significant intercompany balances and transactions have been eliminated. Through January 15, 2001, Gothic Production was an independent energy company engaged in the business of acquiring, developing and exploiting natural gas and oil reserves in Oklahoma, Texas, New Mexico and Kansas. On January 16, 2001, Gothic Energy Corporation merged with Chesapeake Merger 2000 Corp., a wholly owned subsidiary of Chesapeake Energy Corporation ("Chesapeake") (the "Merger"). Gothic was the surviving corporation in the Merger and since January 16, 2001 has been a wholly owned subsidiary of Chesapeake. Chesapeake had previously acquired all of Gothic's Series B Preferred Stock, substantially all of Gothic Energy's 14 1/8% Senior Secured Discount Notes, and $31.6 million of Gothic Production's 11 1/8% Senior Secured Notes. Under terms of the Merger, Chesapeake issued 4.0 million shares of common stock to the Gothic stockholders, with an exchange ratio of 0.1908 of a Chesapeake share for each share of Gothic common stock. 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 11) and the tax valuation allowance (see Note 5) 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 8 -- 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. Gothic had an account receivable from one customer (CMS Continental Natural Gas) of approximately $2.3 million at December 31, 1999 and $8.8 million at December 31, 2000. The cash and cash equivalents are with major banks or institutions with high credit ratings. At December 31, 1999 and 2000, Gothic had a concentration of cash of $5.8 million and $6.5 million, respectively, 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 24 25 requirements of Statement of Financial Accounting Standards No. 107, "Disclosures About Fair Value of Financial Instruments." Gothic, using available market information, has determined the estimated fair value amounts. 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 Gothic Production's 11 1/8% Senior Secured Notes and Gothic Energy's 14 1/8% Senior Secured Discount Notes using estimated market prices. Gothic's carrying amount for such debt at December 31, 1999 was $235.0 million and $75.9 million, respectively, compared to approximate fair value of $197.4 million and $35.9 million, respectively. At December 31, 2000, the notes were carried at $235.0 million and $86.7 million, respectively, compared to an approximate fair value of $249.1 million and $80.1 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. 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 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. 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, and Oklahoma Mainline Index. In August 1999, Gothic entered into a hedge agreement covering 10,000 barrels of oil per month at a price of $20.10 per barrel. This hedge was in effect from September 1999 through August 2000. 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 was 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 price for both contracts was the Panhandle Eastern Pipeline Company, Texas, Oklahoma Mainline Index. In September 2000, Gothic entered into hedge contracts for the months of November and December 2000, for 60,000 mmbtu per day at a price of $4.88 and $5.00, respectively. The commodity price for both contracts was the Panhandle Eastern Pipeline Company, Texas, Oklahoma Mainline Index. Gains and losses on such natural gas and oil hedging contracts are reflected in revenues when the natural gas or crude oil is sold. Hedging activities reduced 2000 realized prices by $0.65 per mcf and $5.79 per barrel, and reduced natural gas and oil sales by $17.9 million. Gothic had no open commodity hedges at December 31, 2000. If the open commodity hedges outstanding at December 31, 1999 had been settled at that date, Gothic would have realized a gain of approximately $500,000. 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 25 26 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. 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 $0.91, $0.77 and $0.81 per mcfe in 1998, 1999 and 2000, respectively. DD&A of natural gas and oil properties amounted to $23.6 million, $20.4 million and $21.9 million in 1998, 1999 and 2000, 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 $76.0 million provision for impairment of natural gas and oil properties during the year ended December 31, 1998. No such provision was recorded in 1999 or 2000. As discussed in Note 11, 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 Gothic Energy's 14 1/8% Senior Secured Discount Notes Due 2006, are amortized and included in interest expense using the effective interest method over the term of the notes. The unamortized portion of debt issuance costs associated with Gothic's credit facility is also included in other assets and amortized and included in interest expense using the straight-line method over the term of the facility. Amortization of debt issuance costs for the years ended December 31, 1998, 1999 and 2000 amounted to $2.0 million, $1.8 million and $1.8 million, respectively. Unamortized debt issue costs at December 31, 1999 and 2000 were $9.9 million and $7.4 million, 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, the title passes, and revenue is 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 $2.8 million (1,449 mmcf), based on historical settlement prices. At December 31, 2000, total sales exceeded Gothic's share of estimated total gas reserves on 27 wells by $2.2 million (1,233 mmcf). 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. Cumulative total gas sales volumes for underproduced wells were less than 26 27 Gothic's pro-rata share of total gas production from these wells by 4,435 mmcf and 4,122 mmcf for 1999 and 2000, respectively, resulting in prepaid lease operating expenses of $1.5 million and $1.2 million for 1999 and 2000, respectively, 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. Cumulative total gas sales volumes for overproduced wells exceeded Gothic's pro-rata share of total gas production from these wells by 2,717 mmcf and 2,271 mmcf for 1999 and 2000, respectively, resulting in accrued lease operating expenses of $897,000 and $681,000 in 1999 and 2000, respectively, 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 20,775,000, 19,940,000 and 14,731,000 shares were outstanding as of December 31, 1998, 1999 and 2000, 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 1998 and 1999 no compensation expense has been recognized. Recently Issued Financial Accounting Pronouncements In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities". FAS 133, as amended, is effective for all fiscal quarters of fiscal years beginning after June 15, 2000 (January 1, 2001 for 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 had no derivative instruments outstanding at December 31, 2000, and has not subsequently entered into any hedging instruments. 2. FINANCING ACTIVITIES Credit Facility On April 27, 1998, Gothic Production, with Gothic Energy as guarantor, entered into a credit facility, with Bank One (the "Credit Facility"). The Credit Facility consists of a revolving line of credit, with an initial borrowing base of $25.0 million. Borrowings are limited to being available for the acquisition and development of natural gas and 27 28 oil properties, letters of credit and general corporate purposes. The borrowing base will be redetermined at least semi-annually. Upon an amendment to the Credit Facility dated November 15, 2000, the borrowing base was reduced to $10.75 million and the principal is due at maturity, January 31, 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, 2000 there were no borrowings outstanding under the Credit Facility. The Credit Facility was terminated on January 31, 2001. 11 1/8% Senior Secured Notes Due 2005 The 11 1/8% Senior Secured Notes Due 2005 ("Senior Secured Notes") issued by Gothic Production are fully and unconditionally guaranteed by Gothic Energy. The aggregate original principal amount of Senior Secured Notes outstanding was $235.0 million 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 Production 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 must 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. Gothic made a Change of Control offer following the Chesapeake Merger. The offer terminated on February 22, 2001. Prior to the expiration of the offer, $1.0 million of the Senior Secured Notes were tendered and purchased by Gothic. 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, including the payment of dividends and distributions to Gothic Energy and Chesapeake, 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 $10.0 million or more, the failure of Gothic Production to be a wholly owned subsidiary of Gothic Energy, and certain other bankruptcy and other court proceedings, among other matters. 28 29 14 1/8% Senior Secured Discount Notes Due 2006 The 14 1/8% Senior Secured Discount Notes Due 2006 (the "Discount Notes") were issued by Gothic Energy under an indenture (the "Discount Note Indenture") dated April 21, 1998 in such aggregate principal amount and at such rate of interest as generated gross proceeds of $60.2 million. Gothic also issued seven-year warrants to purchase, at an exercise price of $2.40 per share, 825,000 shares of Gothic Energy's common stock with the Discount Notes. The estimated fair value of such warrants was approximately $554,000 on the date of issuance. The Discount Notes were issued at a substantial discount from their principal amount and accrete at a rate per annum of 14 1/8%, compounded semi-annually, to an aggregate principal amount of $104.0 million at May 1, 2002. Thereafter, the Discount Notes accrue interest at the rate of 14 1/8% per annum, payable in cash semi-annually in arrears on May 1 and November 1 of each year, 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 Gothic Production. The carrying amount of the Discount Notes as of December 31, 2000 was $86.7 million. 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. 3. STOCKHOLDERS' EQUITY In January 1999, Gothic Energy issued 30,000 shares of its common stock as part of a severance package to a former employee. On August 17, 1999, Chesapeake fully exercised the common stock purchase warrant issued to it in April 1998 and purchased 2,394,125 shares of Gothic Energy's common stock. The warrant had been issued to Chesapeake as part of the transaction involving the sale to Chesapeake of shares of Gothic Energy'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 Energy's common stock having a market value equivalent to the total exercise price. The total exercise price was $23,941.25 or $0.01 per share. An aggregate of 45,121 warrants were surrendered in payment of the total exercise price. The shares of common stock were issued pursuant to the exemption from the registration requirements of the Securities Act of 1933, as amended, afforded by section 4(2) thereof. In July 2000, Gothic Energy issued 225,000 shares of its common stock to one director and certain employees upon their exercise of stock options. In July 2000, Gothic Energy issued 233,000 shares of its common stock to two warrant holders upon the exercise of outstanding common stock purchase warrants. In August 2000, Gothic Energy issued 4,161,000 shares of its common stock to certain employees, two officers and two directors, upon their exercise of stock options. The directors, officers and employees issued full recourse interest bearing promissory notes, due one year from the date of issuance, upon exercise of the stock options. All of these notes were paid in full prior to January 31, 2001. Preferred Stock Offering Series B Preferred Stock and Warrant. On April 27, 1998, as part of a recapitalization, Gothic Energy issued 50,000 shares of Series B Preferred Stock with an aggregate liquidation preference of $50.0 million and a warrant to purchase 2,439,246 shares of Gothic Energy's common stock, discussed above. The estimated fair value of such warrant was $4.9 million on the date of issuance. The Series B Preferred Stock, with respect to dividend rights and rights on liquidation, winding-up and dissolution, ranks senior to all classes of common stock of Gothic Energy and senior to all other classes or series of any class of preferred stock. Holders of the Series B Preferred Stock are entitled to receive dividends payable at a rate per annum of 12% of the aggregate liquidation preference of the Series B Preferred Stock payable in additional shares of Series B Preferred Stock; provided that after April 1, 2000, at 29 30 Gothic Energy's option, it may pay the dividends in cash. Dividends are cumulative and will accrue from the date of issuance and are payable quarterly in arrears. At any time prior to April 30, 2000, the Series B Preferred Stock may have been redeemed at the option of Gothic Energy in whole or in part, at 105% of the liquidation preference payable in cash out of the net proceeds from a public or private offering of any equity security, plus accrued and unpaid dividends (whether or not declared), which shall also be paid in cash. At any time on or after April 30, 2000, the Series B Preferred Stock may have been redeemed at the option of Gothic Energy in whole or in part, in cash at a redemption price equal to the liquidation preference. Gothic Energy is required to redeem the Series B Preferred Stock on June 30, 2008 at a redemption price equal to the liquidation preference payable in cash or, at the option of Gothic Energy, in shares of common stock valued at the fair market value at the date of such redemption. Except as required by Oklahoma law, the holders of Series B Preferred Stock are not entitled to vote on any matters submitted to a vote of the stockholders of Gothic Energy. The Series B Preferred Stock is convertible at the option of the holders on or after April 30, 2000 into the number of fully paid and non-assessable shares of common stock determined by dividing the liquidation preference by the higher of (i) $2.04167 or (ii) the fair market value on the date the Series B Preferred Stock is converted. Notwithstanding the foregoing, no holder or group shall be able to convert any shares of Series B Preferred Stock to the extent that the conversion of such shares would cause such holder or group to own more than 19.9% of the outstanding common stock of Gothic Energy. The Series B Preferred Stock, all of which was owned by Chesapeake prior to the merger, remains outstanding. As part of the merger, the terms of the Series B Preferred Stock were amended to provide for cash dividends of 8% per annum if, as and when declared by the Board of Directors, optional redemption rights permitting Gothic Energy to redeem the shares at any time or from time to time, and mandatory redemption for cash on June 30, 2008. The amendment also eliminated conversion rights. Other Warrants In connection with past financing arrangements and as compensation for consulting and professional services, Gothic Energy has issued other warrants to purchase its common stock. A summary of the status of Gothic Energy's warrants as of December 31, 1997, 1998, 1999 and 2000, and changes during the years ended December 31, 1998, 1999 and 2000 is presented below:
NUMBER WEIGHTED NUMBER WEIGHTED AVERAGE OUTSTANDING AVERAGE PRICE EXERCISABLE EXERCISE PRICE ------------ ------------- ------------ ---------------- 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) 0.20 ------------ Balance at December 31, 1999 ................ 14,705,309 $ 2.33 14,705,309 $ 2.33 Warrants exercised/expired ................ (1,233,121) 2.20 Warrants adjusted for antidilution ........ 524,109 -- ------------ Balance at December 31, 2000 ................ 13,996,297 $ 2.40 13,996,297 $ 2.40 ============
The following table summarizes information about Gothic Energy's warrants, which were outstanding, and those which were exercisable, as of December 31, 2000:
WARRANTS OUTSTANDING WARRANTS EXERCISABLE ------------------------------------------ --------------------------- PRICE NUMBER WEIGHTED WEIGHTED NUMBER WEIGHTED RANGE OUTSTANDING AVERAGE LIFE AVERAGE PRICE EXERCISABLE AVERAGE PRICE ------------- ----------- ------------ ------------- ----------- ------------- $1.78-- $3.00 13,996,297 1.1 years $ 2.40 13,996,297 $ 2.40
30 31 4. STOCK OPTIONS Incentive Stock Option Plan Gothic Energy has an incentive stock option and non-statutory option 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. No non-qualified options have been issued under the Plan. As of December 31, 1998 and 1999, options to purchase 2,095,000 and 2,500,000 shares of common stock, respectively, had been issued under the Plan. As of December 31, 2000, all options granted under the Plan had been exercised. Omnibus Incentive Plan On August 13, 1996 at the annual shareholders' meeting, the shareholders approved the 1996 Omnibus Incentive Plan and the 1996 Non-Employee Stock Option Plan. The 1996 Omnibus Incentive Plan provides for compensatory awards of up to an aggregate of 1,000,000 shares of common stock of Gothic Energy to officers, directors and certain other key employees. Awards may be granted for no consideration and consist of stock options, stock awards, stock appreciation rights, dividend equivalents, other stock-based awards (such as phantom stock) and performance awards consisting of any combination of the foregoing. Generally, options will be granted at an exercise price equal to the lower of (i) 100% of the fair market value of the shares of common stock on the date of grant or (ii) 85% of the fair market value of the shares of common stock on the date of exercise. Each option will be exercisable for the period or periods specified in the option agreement, which will generally not exceed 10 years from the date of grant. As of December 31, 1999, options to purchase 1,000,000 shares of common stock had been issued under the Omnibus Incentive Plan. As of December 31, 2000, all options granted under the Omnibus Incentive Plan had been exercised. 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 Energy. The plan provides that a total of 1,000,000 shares of Gothic Energy'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, 1998 and 1999, options to purchase 600,000 and 1,000,000 shares of common stock, respectively, had been issued under the Non-Employee Plan. As of December 31, 2000, all options granted under the Non-Employee Plan had been exercised. A summary of the status of Gothic Energy's stock options as of December 31, 1997, 1998, 1999 and 2000, and changes during December 31, 1998, 1999 and 2000, is presented below:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ---------------------------- --------------------------- NUMBER WEIGHTED NUMBER WEIGHTED OUTSTANDING AVERAGE PRICE EXERCISABLE AVERAGE PRICE ------------ ------------- ----------- ------------- 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 $ .79 2,807,500 $ 1.13 Options exercised.......................... (4,390,000) .15-.53 Options forfeited.......................... (110,000) .40 ---------- Balance at December 31, 2000................. 735,000 $ 3.21 735,000 $ 3.21 ==========
31 32 The following table summarizes information about Gothic Energy's stock options which were outstanding, and those which were exercisable, as of December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------ --------------------------- PRICE NUMBER WEIGHTED WEIGHTED NUMBER WEIGHTED RANGE OUTSTANDING AVERAGE LIFE AVERAGE PRICE EXERCISABLE AVERAGE PRICE ------------- ----------- ------------ ------------- ----------- ------------- $1.50-- $3.30 735,000 0.3 years $ 3.21 735,000 $ 3.21
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 1998, 1999 or 2000. 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:
1998 1999 2000 ------------ ------------ ------------ ($ IN THOUSANDS, EXCEPT PER SHARE DATA) Net loss available for common shares: As reported ............................... $ (140,383) $ (25,976) $ (3,445) ============ ============ ============ Pro forma ................................. $ (141,232) $ (26,439) $ (3,751) ============ ============ ============ Basic and diluted loss per share: As reported ............................... $ (8.63) $ (1.51) $ (0.17) ============ ============ ============ Pro forma ................................. $ (8.68) $ (1.54) $ (0.18) ============ ============ ============
The fair value of each option granted is estimated using the Black Scholes model. Gothic's stock volatility was 0.81 and 0.95 in 1998 and 1999, respectively, based on previous stock performance. Dividend yield was estimated to remain at zero with an average risk-free interest rate of 4.81 percent and 5.59 percent in 1998 and 1999, respectively. Expected life was three years for options issued in both 1998 and 1999 based on the vesting periods involved and the make up of participating employees within each grant. Fair value of options granted during 1998 and 1999 under the Stock Option Plan were $643,000 and $646,000, respectively. No options were granted during 2000. As part of the merger, all plans terminated on January 16, 2001. 5. INCOME TAXES A reconciliation of the income tax expense or benefit, computed by applying the federal statutory rate to pre-tax income or loss, to Gothic's effective income tax expense or benefit is as follows:
1998 1999 2000 -------- -------- -------- ($ IN THOUSANDS) Income tax (expense) benefit computed at the statutory rate (34%) ................................. $ 44,094 $ 5,885 $ (2,068) State income taxes, net of federal .................... 5,135 685 (260) Change in valuation allowance ......................... (49,229) (6,570) 2,555 Other ................................................. -- -- (227) -------- -------- -------- Income tax (expense) benefit .......................... -- -- -- ======== ======== ========
Deferred tax assets and liabilities are comprised of the following at December 31, 1999 and 2000:
1999 2000 -------- -------- ($ IN THOUSANDS) Deferred tax assets: Gas balancing liability ................... $ 1,386 $ 1,077 Net operating loss carryforwards .......... 68,448 68,436 Depletion carryforwards ................... 257 257 Tax over book basis of property and equipment ................................ 2,627 426 Accrued wages ............................. 119 -- -------- -------- Gross deferred tax assets ................. 72,837 70,196 Deferred tax liabilities: Deferred lease operating expenses ......... (556) (470) -------- -------- Gross deferred tax liabilities ............ (556) (470) Net deferred tax assets ..................... 72,281 69,726 Valuation allowance ....................... (72,281) (69,726) -------- -------- -- -- ======== ========
32 33 Net operating losses of approximately $180.3 million are available for future use against taxable income. These net operating loss carryforwards ("NOL") expire in the years 2010 through 2019. 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 Energy were to occur in the future (whether through the sale of stock by a significant shareholder or shareholders, new issuances of stock by Gothic Energy, 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 Energy's capital stock changed during any three-year period, Gothic Energy's ability to utilize its NOLs could be substantially limited. Realization of the net deferred tax asset is dependent on generating sufficient taxable income in future periods. As a result of significant losses in prior years, Gothic has recorded a 100% valuation allowance, as management presently deems it is more likely than not that realization will not occur in the future. 6. COMMITMENTS AND CONTINGENCIES Gothic entered into an employment agreement with its President effective January 1, 1999. The President received a base salary of $225,000 per year. In addition, he was to receive a cash bonus as was determined by Gothic's Board of Directors. The President was also entitled to participate in such incentive compensation and benefit programs as Gothic made available. The term of the agreement was for a period of three years and at the end of the first year and at the end of each succeeding year the agreement was automatically extended for one year such that at the end of each year there would automatically be three years remaining on the term of the agreement. The President could 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 was terminated by Gothic (other than for cause, as defined), the President was entitled to receive a payment representing all salary due under the remaining full term of his agreement and Gothic was 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 had 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. The President resigned from Gothic effective January 16, 2001, upon completion of the Chesapeake Merger. Gothic also entered into an employment agreement with its Chief Financial Officer effective January 1, 1999. The Chief Financial Officer received a base salary of $187,500 per year. In addition, he was to receive a cash bonus as was determined by Gothic's Board of Directors. The CFO was also entitled to participate in such incentive compensation and benefit programs as Gothic made available. The term of the agreement was for a period of three years and at the end of the first year and at the end of each succeeding year the agreement was automatically extended for one year such that at the end of each year there would automatically be three years remaining on the term of the agreement. The CFO could 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 was terminated by Gothic (other than for cause, as defined), the CFO was entitled to receive a payment representing all salary due under the remaining full term of his agreement, and Gothic was 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 had 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. The Chief Financial Officer resigned from Gothic effective January 16, 2001, upon completion of the Chesapeake Merger. The above employment agreements were amended in connection with the Merger whereby the executives each received a severance payment equal to their year 2000 base salary, and entered into consulting and non-compete agreements with Chesapeake. Gothic leases its corporate offices and certain office equipment and automobiles under non-cancelable operating leases. Rental expense under non-cancelable operating leases was $190,000, $240,000 and $345,000 for the years ended December 31, 1998, 1999 and 2000, respectively. 33 34 Remaining minimum annual rentals under non-cancelable lease agreements subsequent to December 31, 2000 are as follows: 2001 ......................... $ 295,000 2002 ......................... $ 282,000 2003 ......................... $ 267,000 2004 ......................... $ 247,000
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. 7. BENEFIT PLAN Gothic maintained a 401(k) plan for the benefit of its employees. The plan was implemented in October 1997. The plan permitted employees to make contributions on a pre-tax salary reduction basis. Gothic made limited matching contributions to the plan, and also made other discretionary contributions. Gothic's contributions for 1998, 1999 and 2000 were $62,000, $85,000 and $81,000, respectively. The plan was terminated in December 2000. 8. MAJOR CUSTOMERS During the year ended December 31, 2000, Gothic was a party to contracts whereby it sold approximately 60% of its natural gas production to CMS Continental Natural Gas Corporation ("Continental"), and approximately 64% of its oil production to Duke Energy, Inc. Gothic has a ten-year marketing agreement, whereby the majority of the natural gas associated with properties acquired from Amoco in January 1998 will be sold to Continental, at market prices, under this agreement. 9. 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. This amount was forgiven by Gothic during 1999. During 2000, Gothic made advances to directors, officers and employees totaling $1.7 million for the exercise of options to purchase Gothic common stock. These amounts were settled in connection with the Merger on January 16, 2001. 10. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Summarized quarterly financial information for 1999 and 2000 is as follows:
THREE MONTHS ENDED ---------------------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 -------- -------- ------------ ----------- ($ IN THOUSANDS, EXCEPT PER SHARE DATA) Year Ended December 31, 1999: Revenues .................................. $ 11,470 $ 13,206 $ 14,150 $ 16,798 -------- -------- -------- -------- Gross profit(1) ........................... $ 3,846 $ 5,577 $ 6,217 $ 9,410 -------- -------- -------- -------- Net loss .................................. $ (5,621) $ (4,850) $ (4,296) $ (2,542) -------- -------- -------- -------- Loss per common share:(2) Basic ................................... $ (0.47) $ (0.43) $ (0.37) $ (0.26) -------- -------- -------- -------- Diluted ................................. $ (0.47) $ (0.43) $ (0.37) $ (0.26) -------- -------- -------- -------- Year Ended December 31, 2000: Revenues .................................. $ 15,559 $ 17,660 $ 21,904 $ 30,622 -------- -------- -------- -------- Gross profit(1) ........................... $ 8,334 $ 10,467 $ 12,920 $ 19,603 -------- -------- -------- -------- Net income (loss) ......................... $ (2,883) $ (517) $ 1,325 $ 8,157 -------- -------- -------- -------- Earnings (loss) per common share:(2) -------- -------- -------- -------- Basic ................................... $ (0.28) $ (0.15) $ (0.05) $ 0.24 -------- -------- -------- -------- Diluted ................................. $ (0.28) $ (0.15) $ (0.05) $ 0.24 -------- -------- -------- --------
34 35 - ---------- (1) Gross profit includes total revenues, less lease operating expenses and depletion, depreciation and amortization expense. (2) As a result of shares issued during the year, earnings per share for the year's four quarters, which is based on average shares outstanding during each quarter, does not equal the annual earnings per share, which is based on the average shares outstanding during the year. 11. SUPPLEMENTARY NATURAL GAS AND OIL INFORMATION 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". FINANCIAL DATA 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 and 2000 were as follows:
1999 2000 ---------- ---------- ($ IN THOUSANDS) Proved properties ............................................... $ 258,818 $ 275,827 Unproved, not subject to depreciation, depletion and amortization .................................................. 5,473 6,191 Less accumulated depreciation, depletion, and amortization ...... (53,137) (75,003) ---------- ---------- Net natural gas and oil properties .......................... $ 211,154 $ 207,015 ========== ==========
Costs Incurred Costs incurred in natural gas and oil property acquisition, exploration and development activities for the years ended December 31, 1998, 1999 and 2000 were as follows:
1998 1999 2000 -------- -------- -------- ($ IN THOUSANDS) Proved property acquisition ............ $225,103 $ 1,499 $ 655 Unproved property acquisition .......... 2,109 2,611 718 Development costs ...................... 16,270 18,445 18,535 -------- -------- -------- Total costs incurred ............... $243,482 $ 22,555 $ 19,908 ======== ======== ========
RESULTS OF OPERATIONS FROM OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) Gothic's results of operations from natural gas and oil producing activities are presented below for 1998, 1999 and 2000. The following table includes revenues and expenses associated directly with Gothic's natural gas and oil producing activities.
1998 1999 2000 -------- -------- -------- ($ IN THOUSANDS) Oil and gas sales ........................... $ 50,714 $ 52,967 $ 83,065 Production expenses ......................... (8,608) (5,725) (5,234) Production taxes ............................ (3,521) (3,880) (6,566) Impairment of oil and gas properties ........ (76,000) -- -- Depletion and depreciation .................. (24,001) (20,969) (22,621) -------- -------- -------- Results of operations from oil and gas producing activities ...................... $(61,416) $ 22,393 $ 48,644 ======== ======== ========
35 36 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. The following unaudited table, which is based on reports of Lee Keeling and Associates, Inc., sets forth proved natural gas and oil reserves:
1998 1999 2000 ---------------------- ---------------------- ---------------------- MBBLS MMCF MBBLS MMCF MBBLS MMCF -------- -------- -------- -------- -------- -------- Proved Reserves: Beginning of year ................... 3,585 127,460 1,761 306,668 1,922 289,191 Revisions of previous estimates ..... (872) 39,577 319 6,598 50 32,051 Purchases of reserves in place ...... 1,362 233,007 -- 1,402 -- 172 Production .......................... (257) (24,455) (158) (25,477) (135) (26,309) Sales of reserves in place .......... (2,057) (68,921) -- -- (69) (4,198) -------- -------- -------- -------- -------- -------- End of year ......................... 1,761 306,668 1,922 289,191 1,768 290,907 ======== ======== ======== ======== ======== ======== Proved Developed: Beginning of year ................... 2,503 91,690 1,523 254,762 1,683 251,631 End of year ......................... 1,523 254,762 1,683 251,631 1,567 245,472
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, 2000, were $10.19 per mcf, and $26.54 per barrel, respectively. These prices were based on the adjusted cash spot price for natural gas and oil at December 31, 2000. These prices are significantly higher than the average natural gas and oil price ($5.88 per mcf and $25.00 per barrel) received by Gothic during December 2000, and the prices Gothic expects to receive during 2001. 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. 36 37 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 2001 to be approximately $30.0 million. If such capital is not employed, the estimated future cash flows will be negatively impacted. The following table sets forth Gothic's unaudited estimated standardized measure of discounted future net cash flows.
FOR THE YEARS ENDED DECEMBER 31, --------------------------------------------- 1998 1999 2000 ----------- ----------- ----------- ($ IN THOUSANDS) Cash Flows Relating to Proved Reserves: Future cash inflows ................................. $ 573,604 $ 596,216 $ 3,005,450 Future production costs ............................. (141,253) (139,458) (350,371) Future development costs ............................ (37,028) (26,969) (42,260) Future income tax expense ........................... (47,264) (30,113) (843,629) ----------- ----------- ----------- 348,059 399,676 1,769,190 Ten percent annual discount factor .................. (169,297) (201,291) (911,617) ----------- ----------- ----------- Standardized measure of discounted future net cash flows ....................................... $ 178,762 $ 198,385 $ 857,573 =========== =========== ===========
The following table sets forth changes in the standardized measure of discounted future net cash flows:
FOR THE YEARS ENDED DECEMBER 31, --------------------------------------- 1998 1999 2000 --------- --------- --------- ($ IN THOUSANDS) Standardized measure of discounted future cash flows-beginning of period ..................................... $ 94,102 $ 178,762 $ 198,385 Sales of natural gas and oil produced, net of operating expenses ............................................ (38,585) (43,362) (71,265) Purchases of reserves-in-place .................................. 231,184 1,000 114 Sales of reserves-in-place ...................................... (62,933) -- (3,815) Revisions of previous quantity estimates and changes in sales prices and production costs ............................. (54,416) 44,109 714,315 Accretion of discount ........................................... 9,410 17,876 19,839 --------- --------- --------- Standardized measure of discounted future cash flows-end of period ..................................................... $ 178,762 $ 198,385 $ 857,573 ========= ========= =========
37 38 EXHIBIT INDEX
EXHIBIT DESCRIPTION ------- ----------- 3.1* Restated Certificate of Incorporation of Gothic Energy Corporation 3.2* By-Laws of Gothic Energy Corporation 4.1 Indenture dated as of April 21, 1998 between Gothic Production Corporation and The Bank of New York, as Trustee, with respect to the 11-1/8% Senior Secured Notes due 2005. Incorporated herein by reference to Exhibit 10.4 to current report on Form 8-K for April 27, 1998. 23* Consent of Lee Keeling and Associates, Inc.
- ---------- * Filed herewith. EX-3.1 2 d85381ex3-1.txt RESTATED CERTIFICATE OF INCORPORATION 1 EXHIBIT 3.1 RESTATED CERTIFICATE OF INCORPORATION OF GOTHIC ENERGY CORPORATION PURSUANT TO SECTION 1080 OF THE OKLAHOMA GENERAL CORPORATION ACT TO THE SECRETARY OF STATE OF THE STATE OF OKLAHOMA: Gothic Energy Corporation (the "Corporation"), a corporation organized and existing under and by virtue of the Oklahoma General Corporation Act (the "Act"), for the purpose of adopting a restated certificate of incorporation, does hereby submit the following: A. The name of the Corporation is Gothic Energy Corporation. The name under which it was originally incorporated was Gothic Energy Newco, Inc. B. The original Certificate of Incorporation of the Corporation was filed with the Secretary of State of Oklahoma on October 11, 1996. C. This Restated Certificate of Incorporation of the Corporation was duly adopted in accordance with the provisions of Section 1080 of the Act after being adopted by the directors and only restates and integrates, but does not further amend, the provisions of the Certificate of Incorporation of the Corporation as amended and supplemented as of this date, there being no discrepancy between those provisions and the provisions hereof; D. The Amended and Restated Certificate of Designation of Preferences and Rights of Senior Redeemable Preferred Stock, Series B, $.05 par value, of the Corporation, included in the Certificate of Merger filed with the Oklahoma Secretary of State on January 16, 2001 and attached hereto as Exhibit A, shall remain in full force and effect. E. The Certificate of Incorporation is hereby restated to read in its entirety as follows: 1. Name. The name of the corporation is Gothic Energy Corporation (the "Corporation"). 2. Registered Address and Registered Agent. The address of the Corporation's registered office in the State of Oklahoma is 2725 Oklahoma Tower, 210 Park Avenue, Oklahoma City, Oklahoma 73102, and the Corporation's registered agent at such address is Shannon Self. 3. Purpose. The purpose for which the Corporation is formed is to engage in any part of the world in any capacity in any lawful act or activity for which corporations may be organized under the Oklahoma General Corporation Act (the "Act"). The Corporation is authorized to exercise and enjoy all powers, rights and privileges which corporations organized under the Act may have under the laws of the State of Oklahoma as in force from time to time including, without limitation, all powers, rights and privileges necessary or convenient to carry out all those acts and activities in which it may lawfully engage. -1- 2 4. Capital Stock. The total number of shares of capital stock which the Corporation will have the authority to issue is two million five hundred seventy thousand (2,570,000) shares, consisting of seventy thousand (70,000) shares of preferred stock, par value $.05 per share, and two million five hundred thousand (2,500,000) shares of common stock, par value $.01 per share. The preferences, qualifications, limitations, restrictions and the special or relative rights in respect of the shares of each class are as follows: 4.1 Preferred Stock. The preferred stock may be issued from time to time in one or more series. All shares of preferred stock will be of equal rank and will be identical, except in respect of the matters that may be fixed and determined by the board of directors as hereinafter provided, and each share of each series will be identical with all other shares of such series, except as to the date from which dividends are cumulative. The board of directors hereby is authorized to cause such shares to be issued in one or more series and with respect to each such series prior to the issuance thereof to fix and determine the designation, powers, preferences and rights of the shares of each such series and the qualifications, limitations or restrictions thereof. The authority of the board of directors with respect to each series will include, but not be limited to, determination of the following: 4.1.1 The number of shares constituting a series, the distinctive designation of a series and the stated value of the series, if different from the par value; 4.1.2 Whether the shares of a series are entitled to any fixed or determinable dividends, the dividend rate (if any) on the shares whether the dividends are cumulative and the relative rights of priority of dividends on shares of that series; 4.1.3 Whether a series has voting rights in addition to the voting rights provided by law and the terms and conditions of such voting rights; 4.1.4 Whether a series will have or receive conversion or exchange privileges and the terms and conditions of such conversion or exchange privileges; 4.1.5 Whether or not the shares of a series are redeemable and the terms and conditions of such redemption including, without limitation, the manner of selecting shares for redemption if less than all shares are to be redeemed, the date or dates on or after which the shares in the series will be redeemable and the amount payable in case of redemption; 4.1.6 Whether a series will have a sinking fund for the redemption or purchase of the shares in the series and the terms and the amount of such sinking fund; -2- 3 4.1.7 The right of a series to the benefit of conditions and restrictions on the creation of indebtedness of the Corporation or any subsidiary, on the issuance of any additional capital stock (including additional shares of such series or any other series), on the payment of dividends or the making of other distributions on any outstanding stock of the Corporation and the purchase, redemption or other acquisition by the Corporation, or any subsidiary, of any outstanding stock of the Corporation; 4.1.8 The rights of a series in the event of voluntary or involuntary liquidation, dissolution or winding up of the Corporation and the relative rights of priority of payment of a series; and 4.1.9 Any other relative, participating, optional or other special rights, qualifications, limitations or restrictions of such series. Dividends on outstanding shares of preferred stock will be paid or set apart for payment before any dividends will be paid or declared or set apart for payment on the common shares with respect to the same dividend period. If upon any voluntary or involuntary liquidation, dissolution or winding up of the Corporation the assets available for distribution to holders of shares of preferred stock of all series will be insufficient to pay such holders the full preferential amount to which they are entitled, then such assets will be distributed ratably among the shares of all series in accordance with the respective preferential amounts (including unpaid cumulative dividends, if any) payable with respect thereto. 4.2 Common Stock. The common stock will be subject to the express terms of the preferred stock and any series thereof. Each share of common stock will be equal to every other share of common stock. The holders of shares of common stock will be entitled to one vote for each share of such stock upon all matters presented to the shareholders. Shares of common stock authorized hereby will not be subject to preemptive rights. The holders of shares of common stock now or hereafter outstanding will have no preemptive right to purchase or have offered to them for purchase any of such authorized but unissued shares. The holders of shares of common stock now or hereafter outstanding will have no preemptive right to purchase or have offered to them for purchase any shares of preferred stock, common stock or other equity securities issued or to be issued by the Corporation. Subject to the preferential and other dividend rights applicable to the preferred stock, the holders of shares of common stock will be entitled to receive such dividends (payable in cash, stock or otherwise) as may be declared on the common stock by the board of directors at any time or from time to time out of any funds legally available therefor. In the event of any voluntary or involuntary liquidation, distribution or winding up of the Corporation, after distribution in full of the preferential and/or other amounts to be distributed to the holders of shares of preferred stock, the holders of shares of common stock will be entitled to receive all of the remaining assets of the Corporation available for -3- 4 distribution to its shareholders, ratably in proportion to the number of shares of common stock held by them. 5. Internal Affairs. The following provisions for the regulation of the internal affairs of the Corporation are hereby adopted: 5.1 The bylaws for the governing of the Corporation may be adopted, amended, altered, repealed or readopted by the directors either at any regular or special meeting of the directors or by the written consent of all directors. The powers of the directors will at all times be subject to the right of the shareholders to adopt, amend or repeal the bylaws either at any annual or special meeting of shareholders or by the written consent of a majority of the shareholders, and the power of the directors will not extend to any amendment of the bylaws respecting the number, qualifications or term of office of the directors. 5.2 The number of authorized shares of any class or classes of stock may, by amendment to the Corporation's Certificate of Incorporation, be increased or decreased, but not below the number of shares of such class or classes then outstanding, by the affirmative vote of the holders of a majority of the stock of the Corporation entitled to vote, irrespective of the provisions of 18 Okla. Stat. Section 1077(B)(2). 5.3 The Corporation will indemnify and advance litigation expenses to its officers, directors, employees and agents to the fullest extent permitted by the Act and all other laws of the State of Oklahoma. No amendment to or repeal of this paragraph 5.3 will apply to or have any effect on the liability or alleged liability of any officer, director, employee or agent of the Corporation for or with respect to any acts or omissions of such person occurring prior to the time of such amendment or repeal. On the request of any person who believes such person is entitled to indemnification pursuant to the provisions of 18 Okla. Stat. Section 1031(A) or (B), the directors will by vote at a special meeting, immediately called for such purpose, to determine whether such person has met the standards of conduct set forth in 18 Okla. Stat. Section 1031(A) or (B), as amended, whichever is applicable, subject to the provisions of 18 Okla. Stat. Section 1031(D)(1) and (2), as amended, and, if so, provide for such indemnification. 5.4 Meetings of shareholders may be held within or without the State of Oklahoma, as the bylaws may provide. The books of the Corporation may be kept (subject to applicable law) inside or outside the State of Oklahoma at such place or places as may be designated from time to time by the directors or in the bylaws of the Corporation. Elections of directors need not be by written ballot unless the bylaws of the Corporation so provide. 5.5 To the extent permitted by law, no contract or transaction between the Corporation and one or more of the Corporation's directors or officers, or between the Corporation and any other corporation, partnership, association or other -4- 5 organization in which one or more of the Corporation's directors or officers are directors or officers or have a financial interest, will be void or voidable solely for this reason, or solely because the Corporation's directors or officers are present at or participate in the meeting of the board of directors or committee thereof which authorizes the contract or transaction, or solely because the Corporation's directors or officers or their votes are counted for such purposes. 5.6 To the fullest extent that the Act permits the limitation or elimination of the liability of directors, no director will be personally liable to the Corporation or its shareholders for monetary damages for breach of fiduciary duty as a director, provided that such provision will not eliminate or limit the liability of a director (a) for any breach of the director's duty of loyalty to the Corporation or its shareholders, or (b) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of the law, or (c) under 18 Okla. Stat. Section 1053, or (d) for any transaction from which the director derived an improper personal benefit. No amendment to or repeal of this paragraph 5.6 will apply to or have any effect on the liability or alleged liability of any director of the Corporation for or with respect to any acts or omissions of such director occurring prior to such amendment or repeal. 6. Creditors. Whenever a compromise or arrangement is proposed between the Corporation and its creditors or any class of them and/or between the Corporation and its shareholders or any class of them, any court of equitable jurisdiction within the State of Oklahoma, on the application in a summary way of the Corporation or of any creditor or shareholder thereof or on the application of receiver or receivers appointed for the Corporation under the provisions of 18 Okla. Stat Section 1106 or on the application of trustees in dissolution or of any receiver or receivers appointed for the Corporation under the provisions of 18 Okla. Stat. Section 1100 may order a meeting of the creditors or class of creditors, and/or of the shareholders or class of shareholders of the Corporation, as the case may be, to be summoned in such manner as the court directs. If a majority in number representing three-fourths (3/4ths) in value of the creditors, class of creditors, and/or of the shareholders or class of shareholders of the Corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of the Corporation as a consequence of such compromise or arrangement, the compromise or arrangement and the reorganization, if sanctioned by the court to which the application has been made, will be binding on all the creditors or class of creditors, and/or on all the shareholders or class of shareholders, of the Corporation, as the case may be, and also on the Corporation. -5- 6 IN WITNESS WHEREOF, the Corporation has caused this Certificate to be signed by its President and attested to by its Secretary this 13th day of March, 2001. ATTEST: GOTHIC ENERGY CORPORATION, an Oklahoma corporation By /s/ Jennifer Grigsby By /s/ Aubrey K. McClendon --------------------------- ----------------------------------- Jennifer Grigsby, Secretary Aubrey K. McClendon, President -6- 7 EXHIBIT A AMENDED AND RESTATED CERTIFICATE OF DESIGNATION OF PREFERENCES AND RIGHTS OF SENIOR REDEEMABLE PREFERRED STOCK, SERIES B $.05 PAR VALUE GOTHIC ENERGY CORPORATION Pursuant to Section 1032 of the General Corporation Act of the State of Oklahoma The undersigned, Marcus C. Rowland, as Vice President, and Jennifer Grigsby, as Secretary, of Gothic Energy Corporation, a corporation organized and existing under the laws of the State of Oklahoma (the "Corporation"), hereby certify as follows: A. The name of the Corporation is Gothic Energy Corporation, formerly Gothic Energy Newco, Inc. B. The original Certificate of Incorporation of the Corporation was filed with the Secretary of State of Oklahoma on October 11, 1996, and amended by that certain Certificate of Merger filed with the Oklahoma Secretary of State on October 22, 1996 (the "Certificate of Incorporation"). C. The original Certificate of Designation Preferences and Rights of Senior Redeemable Preferred Stock, Series B, $0.05 par value (the "Series B Preferred "), was filed with the Oklahoma Secretary of State on April 24, 1998 (the "Certificate of Designation"). As of the date hereof, 64,722.83 shares of Series B Preferred have been issued under the Certificate of Designation. D. This Amended and Restated Certificate of Designation was duly adopted in accordance with the Certificate of Incorporation and the provisions of Sections 1032 and 1077 of the General Corporation Act of Oklahoma (the "Act") by the vote of the holders of the Common Stock and the Series B Preferred voting as a class and by a written consent of the holders of the Series B Preferred. E. The Certificate of Designation is hereby amended and restated to read in its entirety as follows: -7- 8 1. DESIGNATION AND AMOUNT. The shares of such series will be designated as the Corporation's Series B Preferred Stock, par value $0.05 per share. The number of shares constituting the Series B Preferred is seventy thousand (70,000). 2. RANKING. So long as any shares of the Series B Preferred are outstanding, the Series B Preferred will rank senior to the Corporation's Common Stock, par value $0.01 per share (the "Common Stock") and to all other classes of the Corporation's capital stock with respect to the right to receive assets on liquidation, dissolution or winding up of the Corporation or the payment of dividends, redemptions and distributions (collectively, the "Junior Stock"). 3. DIVIDEND. Dividends will be paid on the Series B Preferred as follows: 3.1 SERIES B PREFERRED. The holder of each share of Series B Preferred will be entitled to receive, if, when and as declared by the Board out of funds legally available for that purpose, cash dividends at an annual rate of Eighty Dollars ($80.00) per share. Dividends on the Series B Preferred, if declared, will be payable in accordance with the declaration thereof by the Board. Neither interest nor dividends will accrue or accumulate on the Series B Preferred or any dividends which are not paid as provided herein. The Board will fix a record date for the determination of holders of the Series B Preferred entitled to receive payment of a dividend declared thereon, which record date shall be not more than 45 days prior to the date fixed for the payment thereof. When dividends are not paid in full on the Series B Preferred, all dividends declared upon shares of Series B Preferred will be declared pro rata. 3.2 OTHER STOCK. No dividends or other distributions will be declared, paid or set apart for payment on any Junior Stock for any period unless full cumulative dividends have been or contemporaneously are declared and paid on the Series B Preferred for all dividend payment periods terminating on or prior to the date of payment of such dividend or distribution to the Junior Stock. 4. LIQUIDATION RIGHTS. On the liquidation, dissolution or winding up of the affairs of the Corporation, no distribution or payment will be made to the holders of the Junior Stock before the holders of the Series B Preferred have received $1,000.00 per share redemption or liquidation price. In the event of a liquidation, dissolution or winding up of the Corporation after payment to the holders of the Series B Preferred of the full amount with respect to the Series B Preferred, the holders of any class or classes of stock ranking on liquidation junior to the Series B Preferred will be entitled, to the exclusion of the Series B Preferred, to share according to their respective rights and preferences in all remaining assets of the Corporation available for distribution to its stockholders. If the assets distributable in any such event to the holders of the Series B Preferred are insufficient to permit the payment to such holders of the full preferential amounts to which they are entitled, such assets will be distributed ratably among the holders of the Series B Preferred in proportion to the full preferential amount each such holder would otherwise be entitled to receive. 5. VOTING AND APPROVAL RIGHTS. Series B Preferred will not be entitled to vote on the election of directors or on any other matter, except as otherwise provided by law and except that -8- 9 the Corporation will not, without the affirmative vote or written consent of the holders of at least a majority of the outstanding Series B Preferred voting as a class, amend the Corporation's Certificate of Incorporation in a manner which adversely affects the voting rights, preferences or redemption price of the Series B Preferred. 6. REDEMPTION. The shares of Series B Preferred will be redeemable as follows: 6.1 OPTIONAL REDEMPTION. The Corporation may, at its election, redeem, in whole or in part at any time or from time to time, such shares of Series B Preferred as are then outstanding at a price per share equal to the Redemption Price. The term "Redemption Price" means an amount equal to One Thousand Dollars ($1,000.00) per share of Series B Preferred, plus any accrued and unpaid dividends thereon. 6.2 MANDATORY REDEMPTION. The Corporation will redeem for cash out of funds legally available for that purpose all of the shares of Series B Preferred on June 30, 2008, at a price per share equal to the Redemption Price. 6.3 REDEMPTION PROCEDURES. On not less than 10 days prior to the date set for the redemption of any Series B Preferred (the "Redemption Date"), written notice (the "Redemption Notice") will be mailed by the Corporation, postage prepaid, to each holder of record of the Series B Preferred at the post office address last shown on the records of the Corporation. The Redemption Notice will state: (i) the total number of shares of the Series B Preferred being redeemed; (ii) the number of shares of the Series B Preferred held by the holder that the Corporation intends to redeem; (iii) the Redemption Date; and (iv) that the holder is to surrender to the Corporation in the manner and at the place designated, its certificate or certificates representing the Series B Preferred to be redeemed. On or before the Redemption Date, each holder of the Series B Preferred will surrender the certificate or certificates representing the shares of Series B Preferred to be surrendered in the manner and at the place designated in the Redemption Notice, and thereupon the Redemption Price for such shares will be paid to the order of the person whose name appears on such certificate or certificates as the owner thereof, and each surrendered certificate will be canceled and retired. In the event less than all of the shares represented by such certificate are redeemed, a new certificate will be issued representing the unredeemed shares and delivered promptly to the holder thereof. If the Redemption Notice will have been duly given, and if on the Redemption Date the Redemption Price is either paid or made reasonably available for payment to the holders of the Series B Preferred being redeemed, then notwithstanding that the certificates evidencing any of the Series B Preferred so called for redemption are not surrendered, the dividends with -9- 10 respect to such shares will immediately cease to accrue after the Redemption Date and all rights, privileges and preferences with respect to such shares will forthwith after the Redemption Date terminate, except only the right of the holders to receive the Redemption Price without interest on surrender of their certificate or certificates. In the case of redemption of less than all of the Series B Preferred, the number of shares of the Series B Preferred which will be redeemed from each holder will be determined pro rata, based on the number of shares of the Series B Preferred held by each holder on the date of the Redemption Notice. The Corporation need not establish any sinking fund for the redemption of the Series B Preferred. 7. EXCLUSION OF OTHER RIGHTS. Except as may otherwise be required by the Oklahoma General Corporation Act, shares of the Series B Preferred will not have any preferences or relative, participating, optional or other special rights, other than those set forth in this Certificate of Designation (as such Certificate of Designation may be amended from time to time) and in the Certificate of Incorporation, as amended from time to time. Except as otherwise provided in writing the holders of the Series B Preferred will not have any preemptive rights or subscription rights whatsoever as to any securities of the Corporation. 8. AMENDMENT. Any provision of this Certificate of Designation may be amended by the Corporation, or waived by the holders of the Series B Preferred, in each case with the consent of the holders representing a majority of the outstanding shares of Series B Preferred. IN WITNESS WHEREOF, this Amended and Restated Certificate of Designation was duly adopted by the board of directors of the Corporation in accordance with the Certificate of Incorporation and the Act and executed this 16th day of January 2001. GOTHIC ENERGY CORPORATION, an Oklahoma corporation By /s/ Marcus C. Rowland --------------------------------- Marcus C. Rowland, Vice President ATTEST: By /s/ Jennifer Grigsby ------------------------- Jennifer Grigsby, Secretary -10- EX-3.2 3 d85381ex3-2.txt BYLAWS OF GOTHIC ENERGY CORP 1 EXHIBIT 3.2 BYLAWS OF GOTHIC ENERGY CORPORATION (FORMERLY CHESAPEAKE MERGER 2000 CORP.) (AN OKLAHOMA CORPORATION) 2 TABLE OF CONTENTS
Page ---- ARTICLE 1 - NAME............................................................................................ 5 ARTICLE 2 - OFFICE.......................................................................................... 5 2.1 Principal Office.................................................................................. 5 2.2 Other Offices..................................................................................... 5 ARTICLE 3 - SEAL............................................................................................ 5 ARTICLE 4 - SHAREHOLDER MEETINGS............................................................................ 5 4.1 Meeting Place................................................................................. 5 4.2 Annual Meetings............................................................................... 5 4.3 Special Meetings.............................................................................. 6 4.4 Notice of Meeting............................................................................. 6 4.5 Quorum........................................................................................ 6 4.6 Voting........................................................................................ 6 4.7 Vote Required................................................................................. 6 4.8 Proxies....................................................................................... 7 4.9 Officers of Shareholder Meetings.............................................................. 7 4.10 Shareholder List.............................................................................. 7 4.11 Order of Business............................................................................. 8 4.12 Approval of Action Taken...................................................................... 8 4.13 Consent to Action............................................................................. 8 ARTICLE 5 - DIRECTORS....................................................................................... 8 5.1 Authority..................................................................................... 8 5.2 Number; Term of Office........................................................................ 8 5.3 Qualification................................................................................. 9 5.4 Vacancies or Newly Created Directorships...................................................... 9 5.5 Removal....................................................................................... 9 5.6 Resignation................................................................................... 9 5.7 Declared Vacancies............................................................................ 9 5.8 Compensation of Directors..................................................................... 9 5.9 Place of Meetings............................................................................. 9 5.10 Regular Meetings.............................................................................. 9 5.11 Special Meetings.............................................................................. 9 5.12 Notice of Meetings............................................................................ 10 5.13 Memorandum of Action.......................................................................... 10 5.14 Quorum........................................................................................ 10 5.15 Telephonic Conferences........................................................................ 10 5.16 Election of Officers.......................................................................... 10 5.17 Order of Business............................................................................. 10 ARTICLE 6 - EXECUTIVE COMMITTEE............................................................................. 10 6.1 Election...................................................................................... 10 6.2 Duties........................................................................................ 11 6.3 Meetings...................................................................................... 11 6.4 Quorum; Voting................................................................................ 11 6.5 Waiver of Notice.............................................................................. 11
2 3 6.6 Removal....................................................................................... 11 6.7 Vacancies..................................................................................... 11 6.8 Action Without Meeting........................................................................ 11 6.9 Telephonic Conferences........................................................................ 11 ARTICLE 7 - COMMITTEES OF DIRECTORS......................................................................... 12 7.1 Designation................................................................................... 12 7.2 Procedural Rules.............................................................................. 12 ARTICLE 8 - OFFICERS........................................................................................ 12 8.1 Enumeration; Election; Qualification.......................................................... 12 8.2 Term of Office; Removal....................................................................... 12 8.3 Vacancies..................................................................................... 12 8.4 President..................................................................................... 12 8.5 Vice President................................................................................ 12 8.6 Secretary; Assistant Secretary................................................................ 13 8.7 Treasurer; Assistant Treasurer................................................................ 13 8.8 Delegation of Duties.......................................................................... 13 ARTICLE 9 - SHARE CERTIFICATES.............................................................................. 13 9.1 Certificates.................................................................................. 13 9.2 Transfer...................................................................................... 13 9.3 Fixing Record Date............................................................................ 14 9.4 Registered Shareholders....................................................................... 14 9.5 Lost Certificates............................................................................. 14 9.6 Inspection of Books........................................................................... 14 9.7 Treasury Shares............................................................................... 14 ARTICLE 10 - FISCAL YEAR.................................................................................... 14 ARTICLE 11 - EXECUTION OF INSTRUMENTS....................................................................... 15 11.1 Contracts..................................................................................... 15 11.2 Checks; Drafts................................................................................ 15 11.3 Deposits; Bank Accounts....................................................................... 15 11.4 Loans......................................................................................... 15 11.5 Securities.................................................................................... 15 ARTICLE 12 - DIVIDENDS...................................................................................... 15 12.1 Declaration................................................................................... 15 12.2 Reserve Fund.................................................................................. 15 ARTICLE 13 - NOTICES........................................................................................ 16 13.1 Form of Notices............................................................................... 16 13.2 Waiver of Notice.............................................................................. 16 ARTICLE 14 - AMENDMENTS..................................................................................... 16 ARTICLE 15 - INDEMNIFICATION................................................................................ 16 15.1 Third Party Actions........................................................................... 16 15.2 Actions by Corporation........................................................................ 16 15.3 Indemnification for Expenses.................................................................. 17 15.4 Authorization of Indemnification.............................................................. 17 15.5 Advance Indemnification....................................................................... 17 15.6 Indemnification not Exclusive Right........................................................... 17 15.7 Nonexclusive Indemnification.................................................................. 18
3 4 15.8 Insurance..................................................................................... 18 15.9 Constituent Corporation....................................................................... 18 15.10 Continuation.................................................................................. 18
4 5 BYLAWS GOTHIC ENERGY CORPORATION (AN OKLAHOMA CORPORATION) Adopted Pursuant to the Certificate of Merger of Chesapeake Merger 2000 Corp. into Gothic Energy Corporation, filed with the Oklahoma Secretary of State on January 16, 2001 (AN OKLAHOMA CORPORATION) ARTICLE 1 - NAME The name of the corporation is Chesapeake Merger 2000 Corp. (the "Corporation"). ARTICLE 2 - OFFICE 2.1 Principal Office. The principal office of the Corporation will be at 6100 North Western, Oklahoma City, Oklahoma 73118, until otherwise established by the Corporation's Board of Directors (the "Board"). 2.2 Other Offices. The Corporation may also have offices in such other places as the Board in its discretion may from time to time determine. ARTICLE 3 - SEAL The corporate seal will have inscribed thereon the name of the Corporation and the words "Corporate Seal, Oklahoma." ARTICLE 4 - SHAREHOLDER MEETINGS 4.1 Meeting Place . Meetings of the shareholders will be held at the principal office of the Corporation or at such other place, either within or without the State of Oklahoma as is determined from time to time by the Board. 4.2 Annual Meetings. An annual meeting of shareholders will be held on the first Tuesday of the fourth month after the fiscal year end, provided that any such meeting may be held at any other time designated by the Board or by the majority of the shareholders entitled to vote at such meeting. At such annual meeting, directors will be elected, reports of affairs of the Corporation will be considered and any other business may be transacted which is within the powers of the shareholders to transact and which may be properly brought before the meeting. A failure to hold the annual meeting at the designated time or to elect a sufficient number of directors to conduct the business of the Corporation will not effect otherwise valid corporate acts, cause a forfeiture of the Corporation or cause a dissolution of the Corporation, except as may be otherwise specifically provided by law. If the annual meeting for election of directors is not held 5 6 on the date designated therefore, the directors will cause the meeting to be held as soon thereafter as convenient. 4.3 Special Meetings. Unless otherwise prescribed by law or by the Certificate of Incorporation, a special meeting of the shareholders, for any purpose or purposes, may be called by (a) the president, (b) in the president's absence or disability, by a vice president, (c) the secretary, or (d) at the request in writing of (i) a majority of the Board or (ii) the shareholders holding a majority of the issued and outstanding voting stock of the Corporation. Any such request must state the purpose or purposes of the proposed meeting. If notice of such meeting is not given to the shareholders within seven (7) days after the receipt of a valid request for a special meeting of shareholders, such person or persons making such request may fix the time of such special meeting and give notice thereof in the same manner as hereinafter provided. 4.4 Notice of Meeting. Subject to the provisions of Section hereof, a written notice of each meeting of the shareholders stating the date, hour and place and in case of special meetings the purpose thereof, will be mailed postage prepaid to each shareholder entitled to vote at such meeting at the address in the books of the Corporation. Such notice will be provided at least ten (10) days but not more than sixty (60) days before the date of each meeting. 4.5 Quorum and Adjournment. A majority of the issued and outstanding shares entitled to vote on any matter (exclusive of treasury shares, if any) will constitute a quorum at a meeting of shareholders for the purpose of considering such matters. In the absence of a quorum, those shareholders entitled to vote, present in person or represented by proxy, may adjourn the meeting from time to time until a quorum is obtained, but until a quorum is obtained, no other business may be transacted. When a meeting is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At any adjourned meeting at which a quorum is present or represented, the Corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting will be given to each shareholder of record entitled to vote at the meeting. 4.6 Voting. At each meeting of shareholders, every shareholder will be entitled to vote in person or by proxy and, unless modified by a cumulative voting provision contained in the Corporation's Certificate of Incorporation, will have one (1) vote for each share standing registered in the shareholder's name at the closing of the transfer books for such meeting, or the record date fixed for such meeting by the Board, as the case may be, or standing registered in the shareholder's name at the time of such meeting if neither a date for the closing of the transfer books nor a record date for such meeting has been fixed by the Board. The voting at all meetings of shareholders may be oral, but any qualified voter may demand a vote by written ballot, whereupon such vote will be taken by written ballot stating the name of the shareholder, the number of shares voted and, if such ballot be cast by proxy, the name of such proxy. 4.7 Vote Required. Except as provided by law, the Certificate of Incorporation or these Bylaws, in all matters other than the election of directors, the affirmative vote of the holders of a majority of the shares present in person or represented by proxy at the meeting and entitled to 6 7 vote on the subject matter will decide any question brought before such meeting. Directors of the Corporation will be elected by a plurality of the votes of the shares present in person or represented by proxy at the meeting and entitled to vote on the election of directors. 4.8 Proxies. Each shareholder entitled to vote at a meeting of shareholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person or persons to act for him by proxy, but no such proxy will be voted or acted upon after three (3) years from which date unless the proxy provides for a longer period. In no event, will a proxy by appointed for a period of over seven (7) years. The appointment of a proxy will be in writing signed by the shareholder but will require no other attestation. Each proxy statement will be filed with the secretary of the Corporation at or before the meeting. If any shareholder appoints two (2) or more persons to act as proxies and if the instrument does not otherwise provide, a majority of such persons present at the meeting (or if only one is present, then that one) may exercise all of the powers conferred by such instrument on all of the persons so appointed, and if such proxies are equally divided as to the right and manner of voting in any particular case, the vote will be divided among the proxies. Any person holding shares in a representative or fiduciary capacity which that person may represent in person may represent the same by proxy and confer general or discretionary power on such proxy. The duly executed proxy will be irrevocable if it states that it is irrevocable and if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power. The authority of a proxy not coupled with an interest may be terminated at will. The termination of a proxy's authority by act of the shareholder will, subject to the time limitations herein set forth, be ineffective until written notice of the termination has been given to the secretary of the Corporation. Unless otherwise provided therein, an appointment filed with the secretary will have the effect of revoking all proxy appointments of prior date. A proxy's authority will not be revoked by the death or incapacity of the shareholder, unless before the vote is cast or the authority is exercised written notice of such death or incapacity is given to the secretary of the Corporation. 4.9 Officers of Shareholder Meetings. The president, if present, will preside at all meetings of shareholders. In the president's absence, the next officer, in due order, who may be present, will preside. In the absence of any such officer, a chairman chosen by a majority vote of the shareholders present in person or represented by proxy and entitled to vote at the meeting will preside and act as chairman of the meeting. The secretary or, in his absence an assistant secretary or, in the absence of the secretary and all assistant secretaries, a person appointed by the chairman of such meeting will act as secretary of such meeting and will keep a true and correct record of the proceedings of such meeting. 4.10 Shareholder List. The secretary of the Corporation will prepare and make, at least ten (10) days before every shareholders meeting, a complete list of the shareholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each shareholder and the number of shares registered to the name of each shareholder. Such list will be open to the examination of any shareholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place will be specified in the notice of the meeting or, if not so specified, at the place where the meeting is to be held. The list will also be produced and kept open at the time and place of the meeting during the whole time thereof, and 7 8 maybe inspected by any shareholder who is present. In lieu of making and producing such list, the Corporation may make the information therein available by any other means permitted by law. The stock ledger will be the only evidence as to who are the shareholders entitled to examine the stock ledger, the list required by this Section 4.10, the books of the Corporation, or to vote in person or by proxy at any meeting of the shareholders. 4.11 Order of Business. The order of business at the annual meeting, and so far as practicable at all other meetings of the shareholders, will be as follows: (1) calling meeting to order; (2) calling of roll and checking proxies; (3) proof of notice of meetings; (4) reading of any unapproved minutes; (5) reports of officers; (6) reports of committees; (7) election of directors and establishment of fees, if any, therefor; (8) unfinished business; (9) new business; and (10) adjournment. 4.12 Approval of Action Taken. Any transactions of the shareholders at any meeting, regardless of how call was made or notice given, will be valid as though transacted at a meeting duly held by regular call and notice if a quorum is present and if before or after the meeting each of the shareholders entitled to vote and not present in person or by proxy signs a written waiver of notice. All such waivers of notice will be filed with the secretary and made a part of the records of the meeting. 4.13 Consent to Action. Any action, which under any provision of the laws of the State of Oklahoma, the provisions of the Certificate of Incorporation or these Bylaws might be taken at either an annual or special meeting of the shareholders, 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 shareholders of outstanding stock having not less than the minimum number of votes that would be necessary to take such action at a meeting at which all shares entitled to vote were present and voted, and such consent will be filed with the secretary and made a part of the corporate records. Every written consent will bear the date of signature of each shareholder who signs the consent and no written consent will be effective to take the corporate action referred to therein unless, within sixty (60) days of the earliest dated consent delivered to the secretary, written consent signed by a sufficient number of holders to take action or delivered to the secretary of the Corporation. Prompt notice of the taking of corporate action without a meeting by less than unanimous written consent will be given to those shareholders who have not consented in writing. ARTICLE 5 - DIRECTORS 5.1 Authority. The Board will have charge of the property, interests, business, transactions and affairs of the Corporation with full power and authority to manage, control and conduct the same. In addition to the powers and authorities expressly conferred on the Board by these Bylaws, the Board may exercise all powers and take such actions as are not by statute, the Certificate of Incorporation or these Bylaws required to be exercised by the shareholders. 5.2 Number; Term of Office. The Board will consist of not less than one (1) director. The shareholders at any annual meeting and at any special meeting called for such purpose may determine the number of directors which will constitute the Board, and the number so 8 9 determined will remain fixed until changed at a subsequent meeting. The directors, except for any initial director who was named in the Certificate of Incorporation of the Corporation, will be selected at the annual shareholders meeting and will serve for one (1) year or until a successor is elected and qualified (even though necessitating a term in excess of one (1) year); or until the earliest of his death, resignation or removal. 5.3 Qualification. A director need not be a shareholder of the Corporation. 5.4 Vacancies or Newly Created Directorships. Any vacancy or newly created directorship resulting from any increase in the authorized number of directorships occurring in the Board may be filled by a majority of the remaining directors or by a sole remaining director, and each person so elected will serve as a director until removed or until a successor is elected by the shareholders. 5.5 Removal. The entire Board or any director may be removed from office with or without cause by a vote of shareholders holding a majority of the outstanding shares entitled to vote at any annual or special meeting of shareholders. 5.6 Resignation. Any director of the Corporation may resign at any time by giving written notice of his resignation to the president or secretary of the Corporation. Such resignation will take effect at the date of receipt with such notice by the president or secretary, or at any later times specified therein. Unless otherwise specified therein, the acceptance of such resignation will not be necessary to make it effective. 5.7 Declared Vacancies. The Board will declare vacant the office of a director if the director is declared of unsound mind by an order of court, convicted of a felony, fails to accept such office in writing within thirty (30) days after the director's election or habitually fails to attend meetings of the Board. 5.8 Compensation of Directors. Directors will receive such fees for their services as are determined from time to time by the Board. No director will be precluded from serving the Corporation in any other capacity and receiving compensation therefor. 5.9 Place of Meetings. Board meetings may be held at such places, within or without the State of Oklahoma, as the Board may from time to time determine or as may be specified in the notice of any meeting. 5.10 Regular Meetings. An annual meeting of the Board for the purpose of electing officers of the Corporation and the transaction of any other business coming before such meeting will be held each year immediately following the annual election of directors and no notice of such meeting will be necessary. Other regular meetings of the Board may be held without notice at such time as is from time to time determined by the Board. 5.11 Special Meetings. Special meetings of the Board may be held at any time on the written call of the majority of the Board, the president or, if the president is absent or unable to act, by 9 10 any other officer in order of seniority. Such meetings may also be held at any time without call or notice on the unanimous consent of the directors. 5.12 Notice of Meetings. The secretary of the Corporation will serve written notice to each director of all regular or special meetings, except the annual meeting immediately following the annual shareholders' meeting. Such notice will be served by mail, telegram, telefacsimile or personally not less than seven (7) days before any meeting, giving the time, place, and in case of special meetings, the purpose thereof, and no business will be considered at any special meeting other than the purpose stated in such notice. Any director may, in writing, either before or after the meeting waive notice thereof, and without notice, any director by attendance at any meeting will be deemed to have waived such notice. 5.13 Memorandum of Action. Any action required or permitted to be taken at any meeting of the Board or any committee thereof may be taken without a meeting if all members of the Board or committee thereof consent to such action in writing, and such written consent is filed with the minutes of the Board or the committee. 5.14 Quorum. At all meetings of the Board, a quorum will consist of a majority of the number of directors in office. The acts of a majority of the directors present at a meeting at which a quorum is present will be the acts of the Board. A minority of the Board present at any regular or special meeting may, in the absence of a quorum, adjourn to a later date, but may not transact any other business until a quorum has been secured. At any adjourned meeting at which a quorum is present, any business may be transacted which might have been transacted at the meeting adjourned. 5.15 Telephonic Conferences. Directors may participate in a meeting of the Board by means of telephone conference or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this Section 5.15 will constitute presence in person at such meeting. 5.16 Election of Officers. At the annual meeting of the Board, the Board will elect a president, a secretary, a treasurer and such vice presidents and additional officers of the Corporation as the Board, from time to time, determines, to serve for the ensuing year or until the election of their respective successors. The Board will fix the compensation of all officers of the Corporation. 5.17 Order of Business. The order of business at the annual meetings and so far as practical at all other meetings of the Board will be as follows: (l) calling meeting to order; (2) proof of notice of meeting; (3) reading of any unapproved minutes; (4) reports of officers and directors; (5) reports of committees; (6) election of officers; (7) unfinished business; (8) new business; and (9) adjournment. ARTICLE 6 - EXECUTIVE COMMITTEE 6.1 Election. The Board may designate, by resolution adopted by a majority of the whole Board, an Executive Committee composed of one or more directors and such alternate members 10 11 as the Board desires. In the absence or disqualification of any Executive Committee member, the other member or members present and not disqualified from voting, whether or not constituting a quorum, may unanimously appoint another director to act at the meeting of the Executive Committee in the place of the absent or disqualified member. 6.2 Duties. To the extent provided in the resolution establishing the Executive Committee, the Executive Committee will have all of the powers of the Board in the interim between meetings of the Board except as may be prohibited by the Oklahoma General Corporation Act, more specifically 18 Okla. Stat. Section 1027 (1991). The Executive Committee will keep minutes of its proceedings which will be reported to the directors as and when required. 6.3 Meetings. The Executive Committee will meet at such times as may be fixed by its chairman or on the call of the president. Notice of each meeting will be given to each member of the Executive Committee in the manner provided for notice of special meetings of the Board. 6.4 Quorum; Voting. A majority of the members of the Executive Committee will constitute a quorum. The act of the majority of the members of the Executive Committee present at a meeting at which a quorum is present will be the act of the Executive Committee. At all meetings of the Executive Committee, each member present will have one (l) vote which will be cast in person. 6.5 Waiver of Notice. Any actions taken at any meeting of the Executive Committee will be as valid as though taken at a meeting duly held after regular call and notice, with a quorum present, if either before or after the meeting, each of the members of the Executive Committee not present signs a written waiver of notice. 6.6 Removal. The entire Executive Committee or any member thereof may be removed with or without cause by a vote of the Board. 6.7 Vacancies. Except as provided in Section 6.1, the Board will fill all vacancies in the Executive Committee. 6.8 Action Without Meeting. Any action which might be taken at a meeting of the Executive Committee may be taken without a meeting if a written consent thereof is signed by all members of the Executive Committee and filed with the minutes of the Executive Committee. 6.9 Telephonic Conferences. Members of the Executive Committee may participate in a meeting of the Executive Committee by means of telephone conference or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this Section 6.9 will constitute presence in person at such meeting. 11 12 ARTICLE 7 - COMMITTEES OF DIRECTORS 7.1 Designation. The Board may designate one or more committees (in addition to the Executive Committee provided for in Article hereof), to exercise the powers of the Board and to perform such actions as the Board might determine from time to time. 7.2 Procedural Rules. Each committee will be subject to the limitations set forth in Article hereof and limitations imposed by the Board in the designation creating such committee, and such committee will comply with the procedural rules applicable to the Executive Committee. ARTICLE 8 - OFFICERS 8.1 Enumeration; Election. The officers of the Corporation will be elected by the Board and will be a president, one or more vice presidents, secretary, treasurer, and such assistant secretaries and assistant treasurers as the Board, in its discretion, determines. Any number of offices may be held by the same person. The Board may delegate to the president, any vice president, the secretary and the treasurer the power to appoint or remove any subordinate officers, agents or employees. 8.2 Term of Office; Removal. The officers of the Corporation will hold office until their successors are elected and qualify or until the earliest of his death, resignation, or removal. Any officer elected by the Board may be removed at any time with or without cause by the Board, or except in the case of any officer elected by the Board, by any officer upon whom the powers of removal may be conferred by the Board. 8.3 Vacancies. If any office becomes vacant for any reason, the vacancy may be filled by the Board. 8.4 President. The president will: (a) exercise the duties of supervision and management of the business of the Corporation; (b) preside at all meetings of the shareholders and directors; (c) sign such contracts and other instruments as may be required in the ordinary course of the Corporation's business; (d) sign the minutes of all shareholders' and directors' meetings over which the president presided; (e) execute notes, mortgages and other contracts requiring the seal of the Corporation; (f) at the annual meeting of shareholders, submit a report of the operations of the Corporation's affairs; (g) report to the Board from time to time all matters coming to the president's attention which should be brought to the attention of the Board; (h) be an ex officio member of all standing committees; and (i) have such usual powers of supervision and management as may pertain to the office of the president. In addition, the president will perform, under the direction and subject to the control of the Board, all other duties as are incidental to the office of president and as may be prescribed by the Board from time to time. 8.5 Vice President. In the absence, failure or refusal of the president to act, the vice president will perform all usual and customary duties which would otherwise be performed by the president (but not any unusual or extraordinary duties or powers conferred by the Board on the president) and will perform such other duties and have such other powers as the Board may from time to time prescribe. 12 13 8.6 Secretary; Assistant Secretary. The secretary will: (a) attend all meetings of the Board and shareholders and record all votes and minutes of such proceedings; (b) issue calls for meetings of shareholders and directors; (c) notify all officers and directors of their election; (d) keep the seal of the Corporation and affix the same to such instruments as might be required; (e) keep the stock transfer books and other Corporation books and records; transfer stock certificates as required by the transactions of the Corporation and its shareholders; (f) attest the Corporation's execution of instruments when requested; (g) make such reports to the Board as are requested; (h) prepare such reports as are required by the laws of the jurisdictions in which the Corporation conducts business; (i) perform such other duties as may be prescribed by the president and the Board; (j) allow any director to inspect the books and records of the Corporation; (k) attend to any correspondence requested; and (l) do such other duties as may be incidental to the office or as may be properly assigned by the Board. The assistant secretary or secretaries will perform the duties of the secretary in the case of the secretary's absence or disability and such other duties as the secretary, president, or the Board may determine. 8.7 Treasurer; Assistant Treasurer. The treasurer will: (a) have custody of all money and securities of the Corporation; (b) keep regular books of account; (c) disburse the funds of the Corporation in payment of the Corporation's debts as requested by the president and the Board; (d) see that proper vouchers are taken for such disbursements; (e) render to the president and the Board, from time to time, as requested an account of all such transactions and of the financial condition of the Corporation; (f) perform all duties incident to the office or which are properly requested by the president and the Board. The assistant treasurer or treasurers will perform the duties of the treasurer in the event of the treasurer's absence or disability and such other duties as the treasurer, president or the Board may determine. 8.8 Delegation of Duties. In case of the absence or disability of any officer or for any other reason that the Board deems sufficient, the Board may delegate the powers or duties of an officer to any other officer or to any director. ARTICLE 9 - SHARE CERTIFICATES 9.1 Certificates. Each shareholder whose shares have been paid for in full will be entitled to a certificate or certificates evidencing the number of shares standing on the books in the shareholder's name. Each certificate will be numbered, bear the signatures of the president or vice president, and the treasurer or an assistant treasurer or the secretary or an assistant secretary, certify the number of shares represented by the certificate, bear the seal of the Corporation and be issued in numerical order. A record of each certificate issued will be maintained by the Corporation. Any or all the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate will have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if the person who signed the certificate was such officer, transfer agent or registrar at the date of issue. 9.2 Transfer. The secretary will transfer shares on the books of the Corporation on the surrender of the certificate or certificates representing the transferred shares duly endorsed or 13 14 accompanied by proper evidence of succession, assignment or authority to transfer and evidence of compliance with any agreement restricting transfer by which the shareholder is bound. Surrendered certificates will be canceled and new certificates issued to the shareholder entitled thereto. 9.3 Fixing Record Date. In order to determine the shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or to receive payment of any dividend or other distribution or allotment of shareholder's rights, or to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board may fix a date, which date will not be more than sixty (60) nor less than ten (10) days before the date of such meeting, nor more than sixty (60) days prior to any other action. In such case, only such shareholders of record on the date so fixed will be entitled to such rights notwithstanding any transfer of shares of the Corporation after such record date, and the Corporation will not be bound to recognize any equitable or other claim or other interest in such shares on the part of any other person, whether or not the Corporation will have express or other notice thereof. 9.4 Registered Shareholders. The Corporation will be entitled to treat the shareholder of record as the absolute owner thereof and will not be bound to recognize any other claim or interest in such shares on the part of any other person whether or not the Corporation has express or other notice thereof, except as required by law. 9.5 Lost Certificates. Any shareholder claiming a share certificate to be lost, stolen or destroyed will make an affidavit of such fact and advertise the same in such manner as the Board may require, and the Board may in its discretion require such shareholder to give the Corporation an indemnity bond in such sum as the Board determines against any claim that might be made on account of the loss of such certificate. A replacement certificate may be issued without advertising and without requiring indemnification when, in the judgment of the Board, it is proper to do so. 9.6 Inspection of Books. Except as required by law, the Board will determine, from time to time, the extent and conditions under which the accounts, books and records of the Corporation will be open to inspection by the shareholders, and the shareholders' right to inspect will be limited accordingly. 9.7 Treasury Shares. Treasury and other shares not at the time issued and outstanding will not be voted at any meeting of the shareholders or counted in calculating any voting majority. ARTICLE 10 - FISCAL YEAR The fiscal year of the Corporation will be determined by the Board. 14 15 ARTICLE 11 - EXECUTION OF INSTRUMENTS 11.1 Contracts. The Board may authorize any officer, or agent to execute and deliver on behalf of the Corporation any contract or other instrument, and such authority may be general or may be confined to specific instances. 11.2 Checks; Drafts. All checks, drafts, notes, acceptances, other orders for payment or evidence of indebtedness issued by the Corporation will be signed by such officers or agents and in such manner as is determined from time to time by the Board. 11.3 Deposits; Bank Accounts. All funds of the Corporation will be deposited from time to time to the credit of the Corporation in such banks, trust companies or other depositories as the Board may from time to time designate or as may be designated by an officer of the Corporation to whom such power of designation may from time to time be delegated by the Board. The Board may make such special rules and regulations with respect to such bank accounts, not inconsistent with the provisions of these Bylaws, as the Board deems expedient. Unless otherwise provided by the Board, endorsements for deposit to the credit of the Corporation may be made by hand-stamped legend in the name of the Corporation or by written endorsement of any officer without countersignature. 11.4 Loans. No loans will be contracted on behalf of the Corporation unless authorized by the Board but, when so authorized, unless a particular officer or agent is directed to negotiate the same, may be negotiated up to the amount so authorized by the president, a vice president or the treasurer, and such officers are hereby severally authorized to execute and deliver on behalf of the Corporation notes or other evidences of indebtedness for the amount of such loans and to give security for the payment of any and all indebtedness by hypothecating any part or all of the real or personal property at any time owned by the Corporation as approved by the Board. 11.5 Securities. Stock certificates, bonds or other securities at any time owned by the Corporation may be held on behalf of the Corporation or sold, transferred or otherwise disposed of pursuant to authorization by the Board. When so authorized the stock certificates, bonds or other securities may be transferred by the signature of the president. ARTICLE 12 - DIVIDENDS 12.1 Declaration. Dividends on the stock of the Corporation may be declared by the Board at any regular or special meeting and paid out of the Corporation's surplus, as defined in and computed in accordance with the provisions of 18 Okla. Stat. Sections 1035 and 1079 or if there is no such surplus out of the Corporation's net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year except as limited by 18 Okla. Stat. Section 1049(A). Dividends may be paid in cash, in property or in shares of the capital stock. 12.2 Reserve Fund. Before payment of any dividend, there may be set aside out of any funds of the Corporation available for dividends such sums as the Board may from time to time, in its discretion, deem proper as a reserve fund to meet contingencies of the Corporation or for such 15 16 other purposes as the Board deems conducive to the interests of the Corporation, and the Board may modify or abolish any such reserve in the manner in which it was created. ARTICLE 13 - NOTICES 13.1 Form of Notices. Whenever notice is required, the same will be given in writing, by mail, by depositing the same in the United States mail addressed to the person entitled to notice at the address on file with the Corporation, and such notice will be deemed to be given at the time when it is mailed. 13.2 Waiver of Notice. Any person may waive any notice required to be given under these Bylaws by a written waiver signed by the person entitled to such notice, whether before or after the time stated therein, and such waiver will be deemed equivalent to the actual giving of such notice. ARTICLE 14 - AMENDMENTS These Bylaws may be amended, altered, changed or repealed by the vote of the Board at any regular or special meeting if notice of the proposed amendment is contained in the notice of the meeting. ARTICLE 15 - INDEMNIFICATION 15.1 Third Party Actions. The Corporation will have the power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that such person is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses, including attorneys' fees, judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe the conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent, will not, of itself, create a presumption that such person did not act in good faith and in a manner which such person reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that the conduct was unlawful. 15.2 Actions by Corporation. The Corporation will have the power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in the Corporation's favor by reason of the fact that such person is or was a director, officer, 16 17 employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses, including attorney's fees actually and reasonably incurred by such person in connection with the defense or settlement of such action or suit if such person acted in good faith and in a manner reasonably believed to be in or not opposed to the best interests of the Corporation; except that no indemnification will be made in respect of any claim, issue or matter as to which such person is adjudged to be liable for negligence or misconduct in the performance of a duty to the Corporation, unless and only to the extent that the court in which such action or suit was brought determines upon application that, despite adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which such court deems proper. 15.3 Indemnification for Expenses. To the extent that any present or former director, officer, employee or person who is or was serving at the request of the Corporation as a director, officer or employee of another corporation, partnership, joint venture, trust or other enterprise, or any agent of the Corporation or any person who is or was serving at the request of the Corporation as an agent of another corporation, partnership, joint venture, trust or other enterprise, has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Sections 15.1 or 15.2, or in defense of any claim, issue or matter therein, such person will be indemnified against expenses (including attorneys' fees) actually and reasonably incurred in connection therewith. 15.4 Authorization of Indemnification. Any indemnification under Sections 15.1 or 15.2, unless ordered by a court, will be made by the Corporation only as authorized in the specific case on a determination that indemnification of the director, officer, employee or agent is proper in the circumstances because such person has met the applicable standard of conduct set forth in Sections 15.1 or 15.2. Such determination will be made by the Board by (a) a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or (b) if such quorum is not obtainable or even if it is obtainable and a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (c) by the shareholders. 15.5 Advance Indemnification. Expenses (including attorney's fees) incurred by an officer or director in defending a civil or criminal action, suit or proceeding may be paid by the Corporation in advance of the final disposition of such action, suit or proceeding on receipt of an undertaking by or on behalf of such director or officer to repay such amount if it is ultimately determined that such person is not entitled to be indemnified by the Corporation as authorized by the provisions of this Article 15. Such expenses (including attorney's fees) incurred by other employees and agents may be so paid on such terms and conditions, if any, as the Board deems appropriate. 15.6 Indemnification not Exclusive Right. The indemnification and advancement of expenses provided, or granted pursuant to, this Article 15 will not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any Bylaw, agreement, vote of shareholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office. 17 18 15.7 Nonexclusive Indemnification. The indemnification and advancement of expenses provided by this Article will not be deemed exclusive of any other rights to which those seeking indemnification might be entitled under any bylaw, agreement, vote of shareholders or disinterested directors or otherwise, both as to action in an official capacity and as to action in another capacity while holding such office, and will continue as to a person who has ceased to be a director, officer, employee or agent and inure to the benefit of the heirs, executors and administrators of such person. 15.8 Insurance. The Corporation will have the power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against and incurred by such person in any such capacity, or arising out of such person's status as such, whether or not the Corporation would have the power to indemnify such person against such liability under the provisions of this Article. 15.9 Constituent Corporation. For the purposes of this Article 15, references to "the Corporation" include all constituent corporations absorbed in a consolidation or merger as well as the resulting or surviving corporation so that any person who is or was a director, officer, employee or agent of such a constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise will stand in the same position under the provisions of this Article with respect to the resulting or surviving corporation as such person would have with respect to such constituent corporation if its separate existence had continued. 15.10 Continuation. The indemnification and advancement of expenses provided by, or granted pursuant to, this Article 15 will, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and will nearer to the benefit of the heirs, executors and administrators of such person. Dated the 16th day of October, 2000. By /s/ Jennifer Grigsby --------------------------- Jennifer Grigsby, Secretary 18 EX-23 4 d85381ex23.txt CONSENT OF LEE KEELING AND ASSOCIATES, INC. 1 EXHIBIT 23 CONSENT OF LEE KEELING AND ASSOCIATES, INC. As independent oil and gas consultants, Lee Keeling and Associates, Inc. hereby consents to the use of our reserve report dated as of January 1, 2001 and all references to our firm included in or made a part of the Gothic Energy Corporation Form 10-K to be filed with the Securities and Exchange Commission on or about March 28, 2001. We also consent to the references to us under the heading "Experts" in such Form 10-K. LEE KEELING AND ASSOCIATES, INC. By: /s/ Kenneth Renberg ----------------------------------- Kenneth Renberg, Vice President Tulsa, Oklahoma March 23, 2001 -----END PRIVACY-ENHANCED MESSAGE-----