Chesapeake Energy 1998 Annual Report Download - page 78

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with Bayard's growth strategy, (iii) undisclosed pending related-party transactions between Bayard and third parties
other than the Company, (iv) Bayard's planned use of offering proceeds and (v) Bayard's capital expenditures and
liquidity. The alleged defective disclosures are claimed to have resulted in a decline in Bayard's share price
following the public offering. The plaintiffs seek a determination that the suit is a proper class action and damages
in an unspecified amount or rescission, together with interest and costs of litigation, including attorneys' fees. The
Company believes that these actions are without merit and has filed a motion to dismiss. No estimate of loss or
range of estimate of loss, if any, can be made at this time.
In October 1996, Union Pacific Resources Company ("UPRC") sued the Company alleging infringement of a
patent for a drilling method, tortious interference with confidentiality contracts between UPRC and certain of its
former employees and misappropriation of proprietary information of UPRC. UPRC's claims against the Company
are based on services provided to the Company by a third party vendor contr011ed by former UPRC employees.
UPRC is seeking injunctive relief, damages of an unspecified amount, including actual, enhanced, consequential
and punitive damages, interest, costs and attorneys' fees. In May 1998, the court ruled as a matter of law that
UPRC's tort claims for misappropriation of trade secrets and tortious interference with business relations are barred
by the statute of limitatiions. Further, the court found that UPRC's claim for inducement to infringe its patent for a
drilibit steering method is barred as to any wells drilled by the Company prior to August 14, 1995. The only issues
remaining in the case involve the validity, potential infringement and value, if any, of UPRC's patent. The
Company believes that it has meritorious defenses to UPRC's allegations and has petitioned the court to declare the
UPRC patent invalid. Various motions for summary judgment are pending. No estimate of a probable loss or range
of estimate of a probable loss, if any, can be made at this time; however, in reports filed in the proceeding, experts
for UPRC claim that damages could be as much as $18 million while Company experts state that the amount should
not exceed $25,000, in each case based on a reasonable royalty. This case has been set for trial in June 1999 on the
issue of liability.
The Company is currently involved in various other routine disputes incidental to its business operations. While
it is not possible to determine the ultimate disposition of these matters, management, after consultation with legal
counsel, is of the opinion that the final resolution of all such currently pending or threatened litigation is not likely
to have a material adverse effect on the consolidated fmancial position or results of operations ofthe Company.
The Company has employment contracts with its two principal shareholders and its chief fmancial officer and
various other senior management personnel which provide for annual base salaries, bonus compensation and various
benefits. The contracts provide for the continuation of salary and benefits for the respective terms of the agreements
in the event of termination of employment without cause. These agreements expire at various times from June30,
2000 through June 30, 2003.
Due to the nature of the oil and gas business, the Company and its subsidiaries are exposed to possible
environmental risks. The Company has implemented various policies and procedures to avoid environmental
contamination and risks from environmental contamination. The Company is not aware of any potential material
environmental issues or claims.
5. Income Taxes
The components of the income tax provision (benefit) for each of the periods are as follows:
Year Ended Six Months Ended
December 31, December 31, Year Ended June 30,
1998 1997 1997 1996
The effective income tax expense (benefit) differed from the computed "expected" federal income tax expense
(benefit) on earnings before income taxes for the following reasons:
58
Current
Deferred
Total
($ in thousands)
$$(3,573) $12,854
$$$ (3,573) $ 12,854