Chesapeake Energy 2000 Annual Report Download - page 102

respectively, resulting in prepaid lease operating expenses of $1.5 million and $1.2 million for 1999 and 2000,
respectively, which are included in other assets in the accompanying balance sheet. The rate used to calculate the
deferred charge is the average annual production costs per mcf.
Gothic has recorded accrued charges for estimated lease operating expenses incurred in connection with its
overproduced gas imbalance position. Cumulative total gas sales volumes for overproduced wells exceeded Gothic's
pro-rata share of total gas production from these wells by 2,717 mmcf and 2,271 mmcf for 1999 and 2000,
respectively, resulting in accrued lease operating expenses of $897,000 and $681,000 in 1999 and 2000, respectively,
which are included in the gas imbalance liability in the accompanying balance sheet. The rate used to calculate the
accrued liability is the average annual production costs per mcf.
Income Taxes
Gothic applies the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes" ("SFAS No. 109"). Under SFAS No. 109, deferred tax liabilities or assets arise from the
temporary differences between the tax basis of assets and liabilities, and their basis for financial reporting, and are
subject to tests of realizability in the case of deferred tax assets. A valuation allowance is provided for deferred tax
assets to the extent realization is not judged to be more likely than not.
Loss per Common Share
Loss per common share before extraordinary item and net loss per common share are computed in accordance
with Statement of Financial Accounting Standards No. 128 ("FAS 128"). Presented on the Consolithted
Statement of Operations is a reconciliation of loss available to common shareholders. There is no difference between
actual weighted average shares outstanding, which are used in computing basic loss per share, and diluted weighted
average shares, which are used in computing diluted loss per share, because the effect of outstanding options and
warrants would be antidilutive. Warrants and options to purchase approximately 20,775,000, 19,940,000 and
14,731,000 shares were outstanding as of December 31, 1998, 1999 and 2000, and were excluded from the
computation of diluted loss per share due to their anti-dilutive impact.
Stock Based Compensation
Gothic applies Accounting Principles Board Opinion No. 25 in accounting for its stock option plans. Under this
standard, no compensation expense is recognized for grants of options which include an exercise price equal to or
greater than the market price of the stock on the date of grant. Accordingly, based on Gothic's grants in 1998 and
1999 no compensation expense has been recognized.
Recently Issued Financial Accounting Pronouncements
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities". FAS 133, as amended, is effective for all fiscal quarters of fiscal years beginning after June 15, 2000
(January 1, 2001 for Gothic). FAS 133 standardizes the accounting for derivative instruments by requiring that all
derivatives be recognized as assets and liabilities and measured at fair value. Upon the Statement's initial
application, all derivatives are required to be recognized in the statement of financial position as either assets or
liabilities and measured at fair value. In addition, all existing hedging relationships must be designated, reassessed,
documented and the accounting conformed to the provisions of FAS 133. Gothic had no derivative instruments
outstanding at December 31, 2000, and has not subsequently entered into any hedging instruments.
2. Financing Activities
Credit Facility
On April 27, 1998, Gothic Production, with Gothic Energy as guarantor, entered into a credit facility, with
Bank One (the "Credit Facility"). The Credit Facility consists of a revolving line of credit, with an initial borrowing
base of $25.0 million. Borrowings are limited to being available for the acquisition and development of natural gas
and oil properties, letters of credit and general corporate purposes. The borrowing base will be redetermined at least
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