Chesapeake Energy 1998 Annual Report Download - page 82

Under the Company's 1992 Nonstatutory Stock Option Plan (the"NSO Plan"), non-qualified options to purchase
common stock may be granted only to directors and consultants of the Company. Subject to any adjustment as
provided by the NSO Plan, the aggregate number of shares which may be issued and sold may not exceed 3,132,000
shares. The maximum period for exercise of an option may not be more than 10 years from the date of grant, and
the exercise price may not be less than the fair market value of the shares underlying the options on the date of
grant. Options granted become exercisable at dates determined by the Stock Option Committee of the Board of
Directors. No options can be granted under the NSO Plan after December 10, 2002.
Under the Company's 1994 Stock Option Plan (the "1994 Plan"), and its 1996 Stock Option Plan (the "1996
Plan"), incentive and nonqualified stock options to purchase Common Stock may be granted to employees and
consultants of the Company and its subsidiaries. Subject to any adjustment as provided by the respective plans; the
aggregate number of shares which may be issued and sold may not exceed 4,886,910 shares under the 1994 Plan
and 6,000,000 shares under the 1996 Plan. The maximum period for exercise of an option may not be more than 10
years from the date of grant and the exercise price may not be less than 75% of the fair market value of the shares
underlying the options on the date of grant. OptiOns granted become exercisable at dates determined by the Stock
Option Conmtittee of the Board of Directors. No options can be granted under the 1994 Plan after December 16,
2004 or under the 1996 Plan after October 14, 2006.
The Company has elected to follow APB No. 25, Accounting for Stock Issued to Employees and related
interpretations in accounting for its employee stock options. Under APB No. 25, compensation expense is
recognized for the difference between the option price and market value on the measurement date. No
compensation expense has been recognized because the exercise price of the stock options equaled the market price
of the underlying stock on the date of grant.
Pro forma information regarding net income and earnings per share is required by SFAS No. 123 and has been
determined as if the Company had accounted for its employee stock options under the fair value method of the
statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted-average assumptions for 1998, the six months ended December 31, 1997 and
fiscal 1997 and 1996, respectively: interest rates (zero-coupon U.S. government issues with a remaining life equal to
the expected term of the options) of 5.20%, 6.45%, 6.74% and 6.2 1%; dividend yields of 0.0%, 0.9%, 0.9% and
0.9%; volatility factors of the expected market price of the Company's common stock of .96, .67, .60 and .60; and
weighted-average expected life of the options of four years.
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options
which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input
of highly subjective assumptions including the expected stock price volatility. Because the Company's employee
stock options have characteristics significantly different from those of traded options; and because changes in the
subjective input assumptions can materially affect the fair value estimate, in management's opinion the existing
models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
The Company's pro forma information follows:
Year Ended Six Months Ended
December 31, December 31, Year Ended June 30,
For purposes of the pro forma disclosures, the estimated fair value of the options is amortized to expense over
the options' vesting period, which is four years. Because the Company's stock options vest over four years and
additional awards are typically made each year, the above pro forma disclosures are not likely to be representative
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1998 1997 1997 1996
(In thousands, except per share amounts)
Net Income (Loss)
As reported $ (933,854) $(31,574) $ (183,377) $ 23,355
Pro forma (948,014) (35,084) (190,160) 22,081
Earnings (Loss) per Share
As reported $(9.97) $(0.45) $(2.79) $0.40
Pro forma (10.12) (0.50) (2.89) 0.38