Chesapeake Energy 2000 Annual Report Download - page 43

of Gothic common stock. In addition, outstanding warrants and options to purchase Gothic common stock
were converted to the right to purchase Chesapeake common stock based on the merger exchange ratio. As of
March 15, 2001, 1.1 million shares of Chesapeake common stock may be purchased upon the exercise of such
warrants and options at an average price of $12.28 per share.
Gothic Production Corporation's senior secured notes, of which $202.3 million principal amount remains
presently outstanding, have been guaranteed by its parent Gothic Energy Corporation. Chesapeake has not
assumed any payment obligations with respect to the notes. The notes are collateralized by Gothic
Production's oil and gas properties and mature on May 1, 2005. The notes may be redeemed beginning May 1,
2002 at an initial redemption price of 105.563%. 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. The indenture for the notes contains
covenants imposing restrictions on the incurrence of additional indebtedness, the payment of dividends,
distributions and other restricted payments (including such payments to Chesapeake), the sale of assets, the
creation of liens and transactions with affiliates, among other covenants. Gothic Production will continue to
operate in accordance with the terms of the senior secured note indenture. Gothic will produce its existing oil
and gas properties but will not add to its reserves through drilling or acquisitions. As a result of the acquisition,
Chesapeake will develop all future wells. Chesapeake has assumed operations of all properties formerly
operated by Gothic Production.
We believe we have adequate resources, including budgeted cash flow from operations, to fund our capital
expenditure budget for exploration and development activities during 2001, which are currently estimated to
be approximately $310 million. However, lower oil and gas prices, unfavorable drilling results or other factors
could cause us to reduceour drilling program, which is largely discretionary. Based on our current cash flow
assumptions, we expect to have an additional $250 to $325 million available for acquisitions, debt repayment
and general corporate purposes in 2001. Additionally, we have approximately $70 million available under our
bank credit facility as of March 30, 2001.
We will have additional cash needs to fund our future operations. If we do not have cash available, or
borrowing capacity under our credit facilities when a cash need arises, we would be forced to seek additional
debt or equity financing or to forego the opportunity. In the event that we determine to seek additional debt or
equity financing, there can be no assurance that any such financing will be available, on commercially
reasonable terms or at all, or permitted by the terms of our existing indebtedness.
On March 29, 2001, we announced a proposed private offering to sell $800 million of senior notes due
2011 in order to lower the interest rate and extend the maturity of approximately 74% of our senior notes. If
the offering is successfully completed, the proceeds from the proposed offering, together with available cash
and bank borrowings, would be used to redeem Chesapeake's existing $120 million principal amount of
9.125% senior notes due 2006, $500 million principal amount of 9.625% senior notes due 2005 and
$202.5 million principal amount of 11.125% senior secured notes due 2005 of Gothic Production Corporation,
a Chesapeake subsidiary. Redemption of these notes will include payment of aggregate make-whole and
redemption premiums estimated at approximately $74 million. The notes to be offered by Chesapeake would
not be initially registered under the Securities Act of 1933, as amended, and will not be offered or sold in the
United States absent registration or an applicable exemption from registration requirements.
Recently Issued Accounting Standards
On June 15, 1998, the Financial Accounting Standards Board issued SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS 133 establishes a new model for accounting for
derivatives and hedging activities and supersedes and amends a number of existing standards. SFAS 133 (as
amended by SFAS 137 and SFAS 138) is effective for all fiscal quarters of fiscal years beginning after
June 15, 2000.
SFAS 133 standardizes the accounting for derivative instruments by requiring that all derivatives be
recognized as assets and liabilities and measured at fair value. The accounting for changes in the fair value of
derivatives (gains and losses) depends on (i) whether the derivative is designated and qualifies as a hedge, and
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