Chesapeake Energy 1999 Annual Report Download - page 60

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denying the Company's request for attorneys' fees. Management is unable to predict the outcome of these appeals
but believes the invalidity of the patent will be upheld on appeal.
West Panhandle Field Cessation Cases
A subsidiary of the Company, Chesapeake Panhandle Limited Partnership ("CP") (17k/a MC Panhandle, Inc.), and
two subsidiaries of Kinder Morgan, Inc. are defendants in 13 lawsuits filed between June 1997 and January 1999 by
royalty owners seeking the cancellation of oil and gas leases in the West Panhandle Field in Texas. The Company
acquired MC Panhandle, Inc. on April 28, 1998. MC Panhandle, Inc. has owned the leases since January 1, 1997,
and the co-defendants are prior lessees. Plaintiffs claim the leases terminated upon the cessation of production for
various periods primarily during the 1 960s. In addition, plaintiffs seek to recover conversion damages, exemplary
damages, attorneys' fees and interest. Defendants assert that any cessation of production was excused and have pled
affirmative defenses of limitations, waiver, temporary estoppel, laches and title by adverse possession.
Of the ten cases filed in the District Court of Moore County, Texas, 69th Judicial District, three have been tried
to a jury. Judgment has been entered against CP and its co-defendants in all three cases, although there was a jury
verdict in two of the cases in favor of defendants. The Company's aggregate liability for these judgments is $1.3
million of actual damages and $1.2 million of exemplary damages and, jointly and severally with the other two
defendants, $1.5 million of actual damages and $337,000 of attorneys' fees in the event of an appeal, sanctions,
interest and court costs. The court also quieted title to the leases in dispute in plaintiffs. CP and the other defendants
have each appealed the judgments and posted supersedeas bonds in two of these cases and post-trial motions are
pending in the other one. One of the other Moore County, Texas cases has been set for trial in May 2000. There are
three related cases pending in other courts. One is set for trial in June 2000, and another, in the U.S. District Court,
Northern District of Texas, Amarillo Division, resulted in a jury verdict for CP and its co-defendants. Judgment has
not yet been entered in this case.
The Company has previously established an accrued liability that management believes will be sufficient to cover
the estimated costs of litigation for each of these cases. Because of the inconsistent verdicts reached by the juries in
the four cases tried to date and because the amount of damages sought is not specified in all of the other cases, the
outcome of the remaining trials and the amount of damages that might ultimately be awarded could differ from
management's estimates. Management believes, however, that the leases are valid, there is no basis for exemplary
damages and that any findings of fraud or bad faith will be overturned on appeal. CP and the other defendants intend
to vigorously defend against the plaintiffs' claims.
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 financial positionor results of operations of the Company.
The Company has employment contracts with its two principal shareholders and its chief financial 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 varying terms in the event of
termination of employment without cause. These agreements expire at various times from June 30, 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:
-50-