Chesapeake Energy 2000 Annual Report Download - page 104

14'/8% Senior Secured Discount Notes Due 2006
The 14'/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'/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'/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
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 Gothic Energy's option, it may pay the
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