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REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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CHESAPEAKE ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
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<S> <C>
DELAWARE 73-1395733
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6100 NORTH WESTERN AVENUE AUBREY K. MCCLENDON
OKLAHOMA CITY, OKLAHOMA 73118 CHIEF EXECUTIVE OFFICER
(405) 848-8000 6100 NORTH WESTERN AVENUE
- --------------------------------------------- OKLAHOMA CITY, OKLAHOMA 73118
(Address, including zip code, and telephone (405) 848-8000
number, including area code, of registrant's -------------------------------------------
principal executive offices) (Name, address, including zip code, and
telephone number, including area code, of
agent for service)
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Copy to:
THEODORE M. ELAM, ESQ. G. MICHAEL O'LEARY, ESQ.
MCAFEE & TAFT ANDREWS & KURTH
A PROFESSIONAL CORPORATION 600 TRAVIS, SUITE 4200
211 NORTH ROBINSON, SUITE 1000 HOUSTON, TEXAS 77002
OKLAHOMA CITY, OKLAHOMA 73102 (713) 220-4200
(405) 235-9621
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, please check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED
PROPOSED MAXIMUM
AMOUNT MAXIMUM OFFERING AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO BE PRICE PER OFFERING REGISTRATION
TO BE REGISTERED REGISTERED UNIT(1) PRICE(1) FEE(2)
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<S> <C> <C> <C> <C>
Common Stock, Par Value
$0.10 per share................. 3,737,500 Shares $54.56 $203,918,000 $61,794
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457 of the Securities Act of 1933.
(2) Calculated in accordance with Rule 457(c) of the Securities Act of 1933,
based on the average of the high and low prices reported in the consolidated
reporting system on October 24, 1996.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED OCTOBER 28, 1996
PROSPECTUS
, 1996
3,250,000 SHARES
CHESAPEAKE ENERGY CORPORATION
COMMON STOCK
All of the 3,250,000 shares of Common Stock offered hereby (the
"Offering"), are being sold by Chesapeake Energy Corporation ("Chesapeake" or
the "Company"). The Common Stock is traded on the New York Stock Exchange
("NYSE") under the symbol "CHK." On , 1996, the closing sales price
of the Common Stock as reported by the NYSE was $ per share.
SEE "RISK FACTORS" BEGINNING ON PAGE 12 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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PRICE UNDERWRITING PROCEEDS
TO THE DISCOUNTS AND TO THE
PUBLIC COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
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Per Share..............................
Total(3)............................... $ $ $
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(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.
(2) Before deducting the expenses of the Offering payable by the Company,
estimated at $ .
(3) The Company has granted to the Underwriters an option, exercisable within 30
days hereof, to purchase up to an aggregate of 487,500 additional shares at
the price to the public less underwriting discounts and commissions for the
purpose of covering over-allotments, if any. If the Underwriters exercise
such option in full, the total price to the public, the underwriting
discounts and commissions and proceeds to the Company will be $ ,
$ and $ , respectively. See "Underwriting."
The shares are offered, subject to prior sale, when, as and if accepted by
the Underwriters named herein and subject to certain prior conditions including
the right of the Underwriters to reject orders in whole or in part. It is
expected that delivery of the shares will be made on or about ,
1996 in New York, New York.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
BEAR, STEARNS & CO. INC.
J.P. MORGAN & CO.
PRUDENTIAL SECURITIES INCORPORATED
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AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-3 (the "Registration
Statement," which term shall include all amendments, exhibits, annexes and
schedules thereto) pursuant to the Securities Act of 1933, as amended (the
"Securities Act"), and the rules and regulations promulgated thereunder,
covering the Common Stock being offered hereby. This Prospectus does not contain
all the information set forth in the Registration Statement, certain parts of
which are omitted in accordance with the rules and regulations of the Commission
and to which reference is hereby made. Statements made in this Prospectus as to
the contents of any contract, agreement or other document referred to are not
necessarily complete. With respect to each such contract, agreement or other
document filed as an exhibit to the Registration Statement, reference is made to
the exhibit for a more complete description of the matter involved, and each
such statement shall be deemed qualified in its entirety by such reference.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information filed by the
Company may be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Judiciary Plaza,
Washington, D.C. 20549; and at the following regional offices of the Commission:
7 World Trade Center, Suite 1300, New York, New York 10048; and 500 West Madison
Street, Chicago, Illinois 60661. Copies of such material can also be obtained
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Judiciary Plaza, Washington, D.C. 20549, at prescribed rates. The Company's
Common Stock is listed for trading on the New York Stock Exchange. The Company's
reports, proxy statements and other information concerning the Company can be
inspected and copied at the offices of the New York Stock Exchange, 20 Broad
Street, New York, New York 10005. Such material may also be accessed
electronically by means of the Commission's home page on the Internet at
http://www.sec.gov.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's Annual Report on Form 10-K for the fiscal year ended June 30,
1996, the Company's Current Reports on Form 8-K dated July 1, July 26, August 29
and September 4, 1996, the description of the Company's Common Stock contained
in the Company's registration statement on Form 8-A, dated April 13, 1995 in
each case, if applicable, as amended, and all documents subsequently filed by
the Company pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act
subsequent to the date of this Prospectus and prior to the termination of the
offering described herein shall be deemed to be incorporated in this Prospectus
and to be a part hereof from the date of the filing of such document. Any
statement contained herein or in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for all purposes to the extent that a statement contained in this Prospectus or
in any other subsequently filed document which is also incorporated or deemed to
be incorporated by reference modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of the Registration Statement or this
Prospectus. The Company will provide without charge to each person to whom this
Prospectus is delivered, upon written or oral request of such person, a copy
(without exhibits unless such exhibits are specifically incorporated by
reference into such document) of any or all documents incorporated by reference
in this Prospectus. Requests for such copies should be directed to Marcus C.
Rowland, Vice President-Finance and Chief Financial Officer, Chesapeake Energy
Corporation, 6100 North Western Avenue, Oklahoma City, Oklahoma 73118, by mail,
and if by telephone (405) 848-8000.
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IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SECURITIES
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by and should be read in
conjunction with the more detailed information and Consolidated Financial
Statements and notes thereto included elsewhere or incorporated by reference in
this Prospectus. Investors should carefully consider the information set forth
in "Risk Factors" in evaluating the Offering. Unless the context otherwise
requires, all references in this Prospectus to "Chesapeake" or the "Company" are
to Chesapeake Energy Corporation and its subsidiaries. All references in this
Prospectus to fiscal years are to the Company's fiscal year ended June 30.
Certain terms used herein are defined in the Glossary included elsewhere in this
Prospectus. All share information included herein has been adjusted to reflect
the two-for-one stock split effected in December 1994 and the three-for-two
stock splits effected in December 1995 and in June 1996.
THE COMPANY
Chesapeake Energy Corporation is an independent energy company which
utilizes advanced drilling and completion technologies to explore for and
produce oil and natural gas. The Company ranks among the five most active
drillers of new wells in the United States.
From its inception in 1989 through June 30, 1996, Chesapeake drilled a
total of 562 gross (186 net) wells, of which 529 gross (175 net) wells were
commercially productive. As a result of its successful drilling efforts, the
Company has experienced significant growth in its proved reserves, production,
revenue, and assets. From its first full fiscal year of operation ended June 30,
1990 to the fiscal year ended June 30, 1996, the Company's estimated proved
reserves increased to 425 Bcfe from 11 Bcfe, annual production increased to 60.2
Bcfe from 0.2 Bcfe, total revenue increased to $149.4 million from $0.6 million,
and total assets increased to $572 million from $8 million.
At June 30, 1996, the Company's estimated proved reserves consisted of 12.3
MMBbl of oil and 351.2 Bcf of gas, a total of 425 Bcfe. During fiscal 1996, the
Company's proved reserves increased from 242 Bcfe to 425 Bcfe, an increase of
183 Bcfe, or a four-fold replacement of its 60.2 Bcfe of production. At June 30,
1996 the present value of estimated future net revenue attributable to
Chesapeake's estimated proved reserves before income taxes (utilizing a 10%
discount rate) was $547 million, based on average prices at fiscal year end 1996
of $20.90 per Bbl and $2.41 per Mcf. At June 30, 1996 the Company had an
inventory of approximately 900 undrilled locations (including 182 proved
undeveloped locations), providing the Company with an estimated five-year
inventory of drilling opportunities.
The Company operates approximately 80% of the wells in which it owns an
interest. Of the 562 wells drilled by the Company through June 30, 1996, 275
were horizontal wells, reflecting the Company's emphasis on utilizing horizontal
drilling technology.
BUSINESS STRATEGY
Since its inception, Chesapeake's business strategy has been growth through
the drillbit. Using this strategy, the Company has expanded its reserves and
production through the acquisition and subsequent development of large blocks of
acreage. The Company has focused its activities in areas where reservoirs such
as fractured carbonates offer low geological risk, large reserve potential, and
the opportunity to earn attractive economic returns through the application of
advanced drilling and completion technologies.
The Company concentrates its undeveloped leasehold acquisition and
associated drilling in three primary operating areas: (i) the Giddings Field of
southern Texas, (ii) the Knox, Sholem Alechem, and Golden Trend fields of
southern Oklahoma, and (iii) the Louisiana Austin Chalk Trend (the "Louisiana
Trend") in eastern Texas and central Louisiana. In addition, the Company
continues to search for other areas in the United States and Canada where its
geological and engineering expertise provides the Company with competitive
advantages. The additional project areas identified to date include the
Williston Basin in eastern Montana and western North Dakota, the Arkoma Basin in
southeastern Oklahoma, and the Lovington area in eastern New
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Mexico. The Company seeks to achieve a balance between oil and gas production
and to retain a higher level of ownership in its project areas than it has
historically retained.
The Company's operating areas are typically characterized by fractured
carbonate reservoirs that are known to contain oil and gas and generally cover a
large geographic area. In the past, development of these reservoirs has been
limited by both economic and technological factors. Recent advances in drilling
and completion technologies, and the resulting higher reserve recoveries and
lowered exploration costs, provide the Company with the opportunity to develop
large new reserves of oil and natural gas and to generate attractive economic
returns.
The proceeds of the Offering will allow the Company to expand its
exploration and development activities and to reduce its debt. Management
believes that the Company's growth through the drillbit strategy, distinct
competitive advantages and success to date provide the basis for continued
growth in reserves and production. Management further believes that this
Offering will provide a significantly improved capital structure that should
enable the Company to develop the large number of opportunities available to it.
To that end, management seeks over time, to achieve an investment grade senior
debt rating.
COMPETITIVE ADVANTAGES
Management believes five competitive advantages are responsible for
Chesapeake's rapid growth and distinguish the Company from other independent
energy companies.
Growth Through the Drillbit. Employing its strategy of growth through the
drillbit, the Company has substantially increased its reserves and production.
By focusing drilling efforts on reservoirs that respond favorably to the
application of advanced drilling and completion technologies, management
believes the Company can continue to increase its reserves and production and
generate attractive returns by integrating the Company's technical expertise
with its large inventory of undeveloped leasehold.
Dominant Leasehold Positions. Through aggressive acreage acquisition in its
existing and new project areas, the Company seeks to establish a dominant
leasehold position in each of its project areas. Such a dominant position allows
the Company to maximize its economic returns while limiting drilling
opportunities available to its competitors. Consistent with this strategy, the
Company has assembled a significant leasehold acreage inventory which included
approximately 900 proved and unproved drilling locations at June 30, 1996.
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UNDEVELOPED
NUMBER OF GROSS LOCATIONS(A)
WELLS UNDEVELOPED ----------------------
OPERATING AREA DRILLED(A) GROSS ACREAGE(B) PROVED UNEVALUATED
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Giddings........................ 178 150 69 60
Southern Oklahoma............... 196 100 85 150
Louisiana Trend................. 6 1,000 17 425
Williston Basin................. -- 550 -- 75
Other........................... 182 250 11 25
--- ----- --- ---
Total................. 562 2,050 182 735
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(a) Includes wells drilling at June 30, 1996
(b) Acreage in thousands
Technological Leadership. The Company has developed significant expertise
in the rapidly evolving technologies of horizontal drilling, 3-D seismic
evaluation, and deep fracture stimulation. The Company believes its expertise in
employing these technologies is the most important factor in its growth during
the past several years. In particular, the Company has developed considerable
horizontal drilling and completion expertise, especially in wells which target
deep fractured carbonates. Over the last several years, deeper, more complex
horizontal wells have become technically and economically feasible and the cost
of drilling these
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wells has decreased. As a result, the Company believes there has been a
substantial increase in the number of areas which are economically attractive
for horizontal drilling.
Superior Operating Margin. Management believes the Company's operating cost
structure is among the lowest of all publicly traded independent energy
producers. For fiscal 1996, the Company's per unit operating costs (consisting
of general and administrative expense, lease operating expense, production
taxes, and depreciation, depletion and amortization of oil and gas properties)
were $1.07 per Mcfe produced, resulting in an operating margin of $0.77 per
Mcfe. Management believes the key to creating value in the independent energy
industry is the ability to generate high levels of cash flow per Mcfe that can
be successfully reinvested in a technologically-driven exploration program.
Management's Substantial Equity Ownership. At October 25, 1996, the
Company's management and directors beneficially owned (including outstanding
vested options) an aggregate of approximately 42% of the Company's outstanding
shares of Common Stock. Assuming completion of the Offering, management and
directors will continue to own approximately 37% of the Company's outstanding
Common Stock. Management believes this substantial equity ownership provides a
strong alignment of management's and investors' interests and creates an
entrepreneurial culture within the Company.
PRIMARY OPERATING AREAS
The Company's activities are concentrated in three primary operating areas:
(i) the Navasota River and Independence areas of the downdip Giddings Field in
southern Texas, (ii) the Knox, Sholem Alechem, and Golden Trend fields of
southern Oklahoma, and (iii) the South Brookeland, Leesville, Masters Creek, St.
Landry, Baton Rouge and Livingston areas of the Louisiana Trend.
The following table sets forth the Company's proved reserves in its primary
operating areas (net of interests of other working and royalty interest owners
and others entitled to share in production), estimated capital expenditures and
the number of potential drilling locations required to develop the Company's
proved undeveloped reserves at June 30, 1996:
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PROVED RESERVES ESTIMATED
-------------------------------- PERCENT CAPITAL NUMBER OF
GAS OF EXPENDITURES PROVED
OIL GAS EQUIVALENT PROVED REQUIRED TO UNDEVELOPED
OPERATING AREA (MMBBL) (MMCF) (MMCFE) RESERVES DEVELOP LOCATIONS
- ---------------------------- ------- ------- ---------- -------- ---------------- -----------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Giddings.................... 2,147 156,557 169,439 39.9% $ 38,163 69
Southern Oklahoma........... 3,657 157,460 179,402 42.2 60,746 85
Louisiana Trend............. 5,969 23,182 58,996 13.9 33,749 17
Williston Basin............. -- -- -- -- -- --
Other Areas................. 485 14,025 16,938 4.0 4,410 11
------ ------- ------- ----- -------- ---
Total............. 12,258 351,224 424,775 100.0% $137,068 182
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GIDDINGS FIELD
Chesapeake's second largest concentration of proved reserves and its
highest concentration of present value are located in the Giddings Field, which
is one of the most active oil and natural gas fields in the U.S. The primary
producing formation in Giddings is the Austin Chalk formation, a fractured
carbonate reservoir found at depths ranging from 7,000 feet to 17,000 feet along
a 15,000 square mile trend in southeastern Texas and central Louisiana.
Chesapeake has concentrated its drilling efforts in the gas-prone downdip
portion of the Giddings Field, where the Austin Chalk is located at depths below
11,000 feet. The Company believes the downdip Giddings area is one of the
largest discoveries of onshore gas in the U.S. in recent years.
The Company believes that its success in the downdip Giddings Field is
attributable to four principal factors: (i) limited reservoir drainage from
previously drilled vertical wells; (ii) the Company's aggressive leasehold
acquisition program, which has permitted the creation of larger spacing units,
thus reducing competition for reserves from offsetting wells; (iii) continued
technological advances in horizontal drilling,
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which have significantly lowered development costs, expanded the field's
boundaries into deeper areas, and increased per well productivity through the
ability to drill within a more precisely defined target zone; and (iv) the
geological setting of the downdip Austin Chalk, which is characterized by
greater reservoir pressure and more intensive fracturing than in the updip area
of the Giddings Field. As a result of these factors, the Company's downdip wells
have, on average, produced greater reserves per well while also exhibiting lower
decline rates than average wells in other areas of Austin Chalk production in
Texas.
Navasota River. In February 1994, the Company drilled its first well in the
Navasota River leasehold block, located in Brazos and Grimes Counties, Texas. As
of June 30, 1996, the Company had successfully completed 77 of 77 Navasota River
wells and was drilling seven additional wells. The Company has budgeted $30
million in fiscal 1997 to drill 28 gross (16 net) wells in the Navasota River
area.
Independence. The Company's Independence block is located in Grimes and
Washington Counties to the south and southwest (and further downdip) from the
Navasota River area. As of June 30, 1996, the Company had successfully completed
24 of 26 Independence wells and was drilling two additional wells. The Company
has budgeted $7 million to drill six gross (three net) wells in fiscal 1997 in
the Independence area.
SOUTHERN OKLAHOMA
Chesapeake's largest concentration of proved reserves is located in
southern Oklahoma and is comprised of the Knox, Golden Trend and Sholem Alechem
fields. Based on the Company's drilling success in late 1993 with its deeper
wells (12,000 to 14,000 feet) in the Bradley area of the Golden Trend Field, the
Company initiated a deeper drilling project in 1994 in the Knox area. The
Company's first two wells in Knox were the first wells in Oklahoma to establish
commingled commercial production from the Sycamore, Woodford, Hunton and Viola
formations at depths below 15,000 feet. This success led to an aggressive and
successful acreage acquisition and drilling program during fiscal 1995 and
fiscal 1996.
Knox. As of June 30, 1996, Chesapeake had successfully completed 41 of 42
wells drilled in the Knox Field and was drilling six additional wells. The
Company's acreage inventory in the Knox area is large enough to support the
drilling of approximately 50 proved undeveloped locations. The Company believes
this inventory could increase by up to 150 increased density or step-out wells,
subject to continued drilling success and applicable spacing requirements.
During fiscal 1996, Chesapeake doubled its assets in Knox and the Golden Trend
through its acquisition of Amerada Hess Corporation's interests in Chesapeake
wells. The Company has budgeted $36 million in fiscal 1997 to drill 19 gross (15
net) wells in the Knox area.
Sholem Alechem. The Company's horizontal drilling project in the Sholem
Alechem portion of southern Oklahoma's Sho-Vel-Tum Field was initiated on the
Company's belief that the application of horizontal drilling technology could
result in a significant increase in the recovery of remaining reserves in this
field. Since its discovery more than 80 years ago, the Sho-Vel-Tum Field has
produced more than one billion barrels of oil and one trillion cubic feet of
natural gas. To date, the Company has successfully completed 25 of 25 horizontal
wells in the Sycamore formation. The Company believes other fractured carbonates
that underlie the Sycamore, such as the Hunton and McLish formations, may also
be commercially productive as the result of the application of horizontal
drilling. Texaco Exploration and Production, Inc. is the Company's 50% working
interest partner in this area. The Company has budgeted $8 million to drill 10
gross (five net) Sholem Alechem wells during fiscal 1997.
LOUISIANA AUSTIN CHALK TREND
The Louisiana Trend is the newest of the Company's three primary operating
areas and will be central to the Company's exploration and development
activities over the next several years. In late 1994, Occidental Petroleum
Corporation ("Occidental") announced the completion of a single lateral
horizontal Austin Chalk discovery well in the Masters Creek area of central
Louisiana. Occidental's well was drilled 200 miles east of the Company's
activity in the downdip Giddings Field and 60 miles east of the nearest previous
commercial multi-well horizontal Austin Chalk production in the Brookeland Field
of southeast Texas.
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Based on management's judgment that the Occidental well confirmed the
Company's geological premise that the Austin Chalk would be productive across a
large portion of central and southeastern Louisiana, Chesapeake invested
approximately $125 million through September 30, 1996 to acquire approximately
1,050,000 acres of leasehold in the Louisiana Trend.
Through October 28, 1996, Chesapeake had commenced drilling operations on
13 operated wells in the Louisiana Trend. Of these 13 wells, two are producing,
one is waiting on a pipeline connection, one has been temporarily abandoned and
nine are drilling. Production commenced from Chesapeake's first operated well,
the Laddie James #7-1, on June 30, 1996, and the Cloud #9-1 on September 10,
1996. Cumulative production from the Laddie James #7-1 was 2.1 Bcfe and from the
Cloud #9-1 was 0.6 Bcfe through October 28, 1996. The Company has also
participated in three successful wells operated by others. Chesapeake has
budgeted $125 million to drill 25 gross and net wells in the Louisiana Trend
during fiscal 1997, including several wells that will test the deeper Tuscaloosa
formation.
OTHER OPERATING AREAS
Williston Basin. During fiscal 1996, Chesapeake began acquiring leasehold
in the Williston Basin, located in eastern Montana and western North Dakota, and
as of June 30, 1996 owned approximately 550,000 gross (450,000 net) acres. The
primary focus of Chesapeake's exploration efforts in the southern portion of
this basin (325,000 net acres) is a horizontal drilling target, the oil-prone
Red River "B" formation in Bowman and Slope Counties, North Dakota and in Fallon
County, Montana. Approximately 75 Red River "B" horizontal wells have been
drilled to date by other companies in this area. The Company's first Red River
"B" well, the State #1-16, is currently drilling.
In the northern portion of the Williston Basin (125,000 net acres), the
Company is focusing its exploratory efforts on drilling vertical wells to the
Red River "C" and "D" formations using 3-D seismic. The Company's first well,
the Vitt #1-5, was completed from the Red River "C" formation in late October
1996 for initial daily production of 300 Bbls and 200 Mcf. Based on this initial
test and other production history in the area, the Company estimates the Vitt
#1-5 will ultimately recover approximately 300 MBoe. The Company has budgeted
approximately $6 million to drill six gross (six net) Williston wells in fiscal
1997, but expects to increase these activities if drilling results continue to
be favorable.
Lovington. In late 1994, the Company initiated activity in the Lovington
portion of the Permian Basin of Lea County, New Mexico. In this project, the
Company is utilizing 3-D seismic technology to search for algal mound buildups
that management believes have been overlooked in this portion of the Permian
Basin because of inconclusive results provided by traditional 2-D seismic
technology. The first well operated by the Company on one of its 3-D seismic
surveys in the Lovington area is the Ruth #1-20. This well was completed in late
October 1996 for initial daily production of 600 Bbls and 250 Mcf from the
Strawn formation. Based on this initial test and other production history in the
area, the Company estimates the Ruth #1-20 will ultimately recover approximately
750 MBoe.
The Company has identified approximately 50 prospects in the Lovington
area, where the Company is targeting oil reserves at depths from 11,000 to
13,000 feet. The Company has budgeted $4 million to drill six gross (five net)
wells during fiscal 1997, but expects to increase these activities if drilling
results continue to be favorable.
RECENT DEVELOPMENTS
In September 1996, the Company entered into two agreements to enhance the
natural gas gathering and processing infrastructure in the Masters Creek and St.
Landry areas of the Louisiana Trend. The first agreement, with Mitchell Energy &
Development Corp. ("Mitchell"), involves the construction of a pipeline and an
associated gathering system capable of transporting up to 350 MMcf of natural
gas per day from the Company's wells in the central portion of the Louisiana
Trend to Enron Louisiana Energy Company's ("Enron") Eunice natural gas
processing and fractionating facility. This system will be constructed by a
50/50 joint venture between the Company and Mitchell, with Mitchell as the
operating partner. Construction of the
7
<PAGE> 9
system is expected to be completed in the third quarter of fiscal 1997. The
Company's share of costs for this venture will be approximately $15 million.
In a related agreement, Enron will upgrade its Eunice facility so that it
can treat, process and fractionate the Company's raw natural gas that will be
delivered to Eunice via the Louisiana Chalk Gathering System. Based on
production to date from wells in the Louisiana Trend, the natural gas produced
from the Masters Creek area is expected to be rich in natural gas liquids and,
once processed, should enable the Company to receive a premium to Henry Hub
pricing for its natural gas.
In September 1996, the Company agreed to sell to Koch Oil Company at
market-sensitive prices the Company's crude oil and condensate production in the
Masters Creek, Leesville and South Brookeland portions of the Louisiana Trend.
Koch will construct a 10-inch crude oil pipeline system into this area of
Louisiana from the Nederland and Beaumont areas of Texas. The construction of
this pipeline should enable the Company to access Gulf Coast oil markets,
currently the most favorably priced oil markets in the United States.
A summary of the Company's Louisiana Trend operated drilling activity at
October 28, 1996 is provided below.
<TABLE>
<CAPTION>
COMPANY COMPANY NET
WELL NAME AREA NAME WORKING INTEREST %* REVENUE INTEREST %* STATUS
- ------------------------ -------------------- ------------------- ------------------- -----------------------------
<S> <C> <C> <C> <C>
James #7-1 Masters Creek 96 76 Producing
Cloud #9-1 Masters Creek 96 80 Producing
Lyles #31-1 Masters Creek 98 81 Temporarily abandoned
Rice Land Lumber #33-1 South Brookeland 98 74 Drilling horizontally
Lawton #25-1 Masters Creek 98 78 Waiting on pipeline
Lord #19-1 Masters Creek 98 79 Drilling horizontally
Martin #11-1 Masters Creek 79 59 Drilling horizontally
Thomas #40-1 Baton Rouge 63 51 Drilling vertically
USA/LROC #34-1 Masters Creek 98 79 Drilling vertically
Singletary #29-1 South Brookeland 98 77 Drilling horizontally
Grezaffi #19-1 St. Landry 98 77 Drilling horizontally
Lawton #31-1 South Brookeland 61 50 Drilling vertically
Southern Pine #1-H Masters Creek 98 75 Drilling vertically
</TABLE>
- ---------------
* Subject to change based upon final title examinations
Contingent upon completion of this Offering, the Company will purchase or
otherwise satisfy its obligations in respect of the Company's outstanding 12%
Senior Notes due 2001 (the "12% Senior Notes"). Completion of the purchase of
the 12% Senior Notes is expected to occur promptly after the closing of this
Offering and, together with repayment of the amount outstanding under the
Revolving Credit Facility, will result in an extraordinary charge to the Company
of approximately $7 million, net of tax.
In October 1996, a patent infringement suit was filed against the Company
by Union Pacific Resources Corporation. Management believes that the Company has
meritorious defenses to this action, although the Company is unable to predict
the ultimate outcome of this lawsuit because litigation is inherently uncertain.
See "Risk Factors -- Patent Litigation" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Legal Proceedings."
8
<PAGE> 10
THE OFFERING
Common Stock offered.................... 3,250,000 shares(1)
Common Stock to be outstanding after the
Offering................................ 33,378,321 shares(1)(2)
Use of proceeds......................... The Company intends to use the net
proceeds from the Offering to
reduce debt, to fund expanded
exploration and production capital
expenditures, and for general
corporate purposes. See "Use of
Proceeds."
NYSE trading symbol..................... CHK
- ---------------
(1) Excludes 487,500 shares of Common Stock subject to purchase upon the
exercise of the Underwriters' over-allotment option.
(2) Excludes options outstanding on the date hereof to purchase approximately
3,802,834 million shares of Common Stock at a weighted average exercise
price of $10.00. Also excludes shares of Common Stock reserved for issuance
under the Company's stock option plans.
RISK FACTORS
An investment in the Common Stock involves certain risks that a potential
investor should carefully evaluate prior to making an investment in the Common
Stock. See "Risk Factors."
9
<PAGE> 11
SUMMARY OIL AND GAS RESERVE DATA
The reserve information presented below is based upon reports prepared by
the independent petroleum engineering firm of Williamson Petroleum Consultants,
Inc. ("Williamson") and the Company's petroleum engineers as of June 30, 1996.
The reserves evaluated by the Company's petroleum engineers constituted 0.6% of
the Company's total proved reserves at such date. These estimates were based on
average prices realized by the Company at June 30, 1996 which resulted in
average prices over the life of the production of approximately $2.41 per Mcf
and $20.90 per Bbl.
<TABLE>
<CAPTION>
PROVED PROVED
DEVELOPED UNDEVELOPED TOTAL
--------- ----------- ------
($ IN MILLIONS)
<S> <C> <C> <C>
Estimated proved reserves:
Oil (MMBbl)................................................ 3.7 8.6 12.3
Gas (Bcf).................................................. 144.7 206.5 351.2
Gas equivalent (Bcfe)...................................... 166.6 258.2 424.8
Estimated future net revenue before income taxes............. $ 340.8 $ 454.8 $795.6
Present value of estimated future net revenue before income
taxes (discounted at 10% per annum)........................ $ 242.0 $ 305.0 $547.0
</TABLE>
There are numerous uncertainties inherent in estimating quantities of
proved reserves and in projecting future rates of production and timing of
development expenditures, including many factors beyond the control of the
producer. See "Risk Factors -- Uncertainty of Estimates of Oil and Gas Reserves"
and "-- Price Fluctuations."
SUMMARY PRODUCTION AND SALES DATA
The following table sets forth summary data with respect to the production
and sales of oil and gas by the Company for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Net production:
Oil (MBbl)................................. 374 276 537 1,139 1,413
Gas (MMcf)................................. 1,252 2,677 6,927 25,114 51,710
Gas equivalent (MMcfe)..................... 3,496 4,333 10,152 31,947 60,190
Oil and gas sales ($ in thousands):
Oil........................................ $ 8,170 $ 5,576 $ 8,111 $19,784 $ 25,224
Gas........................................ 2,350 6,026 14,293 37,199 85,625
------- ------- ------- ------- --------
Total oil and gas sales.................... $10,520 $11,602 $22,404 $56,983 $110,849
======= ======= ======= ======= ========
Average sales price:
Oil ($ per Bbl)............................ $ 21.85 $ 20.20 $ 15.09 $ 17.36 $ 17.85
Gas ($ per Mcf)............................ 1.88 2.25 2.06 1.48 1.66
Gas equivalent ($ per Mcfe)................ 3.01 2.68 2.21 1.78 1.84
Oil and gas costs ($ per Mcfe):
Production expenses and taxes.............. .60 .67 .36 .13 .14
General and administrative................. .95 .84 .31 .11 .08
Depreciation, depletion and amortization of
oil and gas properties.................. .83 .97 .80 .80 .85
Gross productive wells at end of period...... 110 148 229 363 474
Net productive wells at end of period........ 31 39 58 91 182
</TABLE>
10
<PAGE> 12
SUMMARY CONSOLIDATED FINANCIAL DATA
The following table sets forth summary consolidated financial data of the
Company for each of the five fiscal years ended June 30, 1996. The data should
be read in conjunction with the Consolidated Financial Statements and the
related notes thereto appearing elsewhere in this Prospectus. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Oil and gas sales.............................................. $10,520 $11,602 $22,404 $ 56,983 $110,849
Gas marketing sales............................................ -- -- -- -- 28,428
Oil and gas service operations................................. 7,656 5,526 6,439 8,836 6,314
Interest and other............................................. 542 880 981 1,524 3,831
------- ------- ------- ------- --------
Total revenues............................................. 18,718 18,008 29,824 67,343 149,422
------- ------- ------- ------- --------
Costs and expenses:
Production expenses and taxes.................................. 2,103 2,890 3,647 4,256 8,303
Gas marketing expenses......................................... -- -- -- -- 27,452
Oil and gas service operations................................. 4,113 3,653 5,199 7,747 4,895
Depreciation, depletion and amortization of oil and gas
properties................................................... 2,910 4,184 8,141 25,410 50,899
Depreciation and amortization of other assets.................. 974 557 1,871 1,765 3,157
General and administrative..................................... 3,314 4,906 3,135 3,578 4,828
Interest expense............................................... 2,577 2,282 2,676 6,627 13,679
------- ------- ------- ------- --------
Total costs and expenses................................... 15,991 18,472 24,669 49,383 113,213
------- ------- ------- ------- --------
Income (loss) before income taxes................................ 2,727 (464) 5,155 17,960 36,209
Income tax expense (benefit)..................................... 1,337 (99) 1,250 6,299 12,854
------- ------- ------- ------- --------
Net income (loss)................................................ $ 1,390 $ (365) $ 3,905 $ 11,661 $ 23,355
======= ======= ======= ======= ========
Dividends on preferred stock..................................... $ -- $ 385 $ -- $ -- $ --
Net income (loss) per common share............................... .10 (.04) .16 .41 .79
Weighted average common and common equivalent shares
outstanding.................................................... 13,955 16,776 24,183 28,303 29,461
OTHER COMPANY DATA:
Operating cash flow(a)........................................... $ 6,611 $ 4,277 $15,167 $ 45,135 $ 90,265
Capital expenditures............................................. 32,487 19,085 37,574 128,914 356,503
EBITDA(b)........................................................ 9,188 7,845 17,843 51,762 103,944
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
------------------------------------------------------ JUNE 30, 1996
1992 1993 1994 1995 1996 AS ADJUSTED(C)
------- ------- -------- -------- -------- --------------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents....................... $ 690 $ 4,851 $ 16,225 $ 55,535 $ 51,638 $166,129
Oil and gas assets, net......................... 41,638 50,316 70,482 150,955 435,934 435,934
Total assets.................................... 61,095 78,707 125,690 276,693 572,335 683,885
Long-term debt, including current maturities.... 30,141 21,863 55,454 155,747 275,186 229,458
Stockholders' equity............................ 132 31,432 31,260 44,975 177,767 338,933
</TABLE>
- ---------------
(a) Represents net income plus income tax expense and depreciation, depletion
and amortization.
(b) EBITDA represents net income of the Company and its subsidiaries from
continuing operations before interest, taxes, depreciation, depletion,
amortization, certain other non-cash charges and, with respect to fiscal
1993, the provision for legal and other settlements. EBITDA should not be
considered in isolation or as a substitute for net income, cash flows from
continuing operations or other consolidated income or cash flow data
prepared in accordance with generally accepted accounting principles or as
a measure of the Company's profitability or liquidity.
(c) Gives effect to the Offering and the application of the estimated net
proceeds of $168.2 million therefrom, assuming the Underwriters'
over-allotment option is not exercised. See "Use of Proceeds."
11
<PAGE> 13
RISK FACTORS
In addition to the other information set forth elsewhere or incorporated by
reference in this Prospectus, the following factors relating to the Company and
the Offering should be considered when evaluating an investment in the Common
Stock offered hereby.
CONCENTRATION IN LOUISIANA TREND
In addition to the development of its existing proved reserves, the Company
expects that its inventory of unproved drilling locations will be the primary
source of new reserves, production and cash flow over the next few years. The
Louisiana Trend, in particular, is a key element of the existing inventory. The
Company had invested approximately $125 million through September 30, 1996 to
acquire approximately 1,050,000 acres of leasehold in the Louisiana Trend which
is largely undeveloped and unproven. Moreover, approximately 55% of the
Company's fiscal year 1997 drilling budget is associated with drilling and
acreage acquisition activity in the Louisiana Trend. There can be no assurance
that the Louisiana Trend will yield substantial economic returns. Failure of the
Louisiana Trend to yield significant quantities of economically attractive
reserves and production could have a material adverse impact on the Company's
future financial condition and results of operations and could result in a
write-off of a significant portion of its investment in the Louisiana Trend. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
NEED TO REPLACE RESERVES
As is customary in the oil and gas exploration and production industry, the
Company's future success depends upon its ability to find, develop or acquire
additional oil and gas reserves that are economically recoverable. Unless the
Company successfully replaces the reserves that it produces through successful
development, exploration or acquisition, the Company's proved reserves will
decline. Further, 40% of the Company's proved reserves at June 30, 1996 were
located in the Austin Chalk trend, where wells are characterized by relatively
rapid decline rates. Additionally, approximately 60% of the Company's total
proved reserves at June 30, 1996 were undeveloped. Recovery of such reserves
will require significant capital expenditures and successful drilling
operations. There can be no assurance that the Company will continue to be
successful in its effort to develop or replace its proved reserves.
SUBSTANTIAL CAPITAL REQUIREMENTS
The Company has made and intends to make substantial capital expenditures
in connection with the exploration and production of its oil and gas properties.
Historically, the Company has funded its capital expenditures through a
combination of internally generated funds, equity and long-term debt financing,
and short-term financing arrangements. The Company anticipates that the net
proceeds from the Offering, together with its cash flow from operations and the
availability of credit under the Company's revolving credit facility with Union
Bank (the "Revolving Credit Facility") will be sufficient to meet estimated
capital expenditures for fiscal 1997 and for fiscal 1998, including increases in
capital expenditures being presently evaluated. Future cash flows and the
availability of credit are subject to a number of variables, such as the level
of production from existing wells, prices of oil and gas and the Company's
success in locating and producing new reserves. If revenue were to decrease as a
result of lower oil and gas prices, decreased production or otherwise, and the
Company had no availability under the Revolving Credit Facility, the Company
could have a reduced ability to replace its reserves or to maintain production
at current levels, potentially resulting in a decrease in production and revenue
over time. If the Company's cash flow from operations and availability under its
Revolving Credit Facility are not sufficient to satisfy its capital expenditure
budget, there can be no assurance that additional debt or equity financing will
be available to meet these requirements.
STOCK PRICE VOLATILITY
The sales price for the Company's Common Stock on the NYSE has been subject
to significant changes over short periods of time. See "Price Range of Common
Stock and Dividend Policy." This volatility has resulted from, among other
things, (i) the concentration of capital expenditures and potential returns tied
to
12
<PAGE> 14
the Louisiana Trend, (ii) the price multiples at which the Company's Common
Stock has historically traded, (iii) the relatively large number of short sales
positions with respect to the Company Common Stock and (iv) rumors and
speculation concerning the Company's drilling activity.
PATENT LITIGATION
On October 15, 1996, Union Pacific Resources Company ("UPRC") filed suit
against the Company in the United States District Court for the Northern
District of Texas alleging (a) infringement of UPRC's claimed patent (the "UPRC
Patent") for an invention involving a method of maintaining a bore hole in a
stratigraphic zone during drilling, and (b) tortious interference with contracts
between UPRC and a third party vendor regarding the confidentiality of
proprietary information of UPRC. UPRC is seeking injunctive relief, damages of
an unspecified amount, including actual, enhanced, consequential and punitive
damages, interest, costs and attorney's fees. The Company believes that it has
meritorious defenses to UPRC's allegations, including, without limitation, the
Company's belief that the UPRC Patent is invalid. Although the Company will
vigorously defend the lawsuit, no assurance can be given as to the outcome of
the matter or the ultimate impact on the Company of any damages (which could be
substantial) that may be awarded to UPRC because litigation is inherently
uncertain. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Legal Proceedings."
EFFECTS OF LEVERAGE
At June 30, 1996, on a pro forma basis, after giving effect to the Offering
and the application of the net proceeds therefrom, the Company would have had
approximately $230 million of indebtedness, including current maturities of
long-term indebtedness, and stockholders' equity of $339 million. See
"Capitalization." The Company may incur additional indebtedness under the
Revolving Credit Facility.
The instruments governing the indebtedness of the Company and its
subsidiaries impose significant operating and financial restrictions on the
Company. The terms of the indentures (the "Senior Notes Indentures") governing
the Company's outstanding 12% Senior Notes, 10.5% Senior Notes and 9.125% Senior
Notes (collectively, the "Senior Notes") and the Company's bank credit
facilities affect, and in many respects significantly limit or prohibit, among
other things, the ability of the Company to incur additional indebtedness, pay
dividends, repay indebtedness prior to its stated maturity, sell assets or
engage in mergers or acquisitions. These restrictions could also limit the
ability of the Company to effect future financing, make needed capital
expenditures, withstand a future downturn in the Company's business or the
economy in general, or otherwise conduct necessary corporate activities. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
COMMODITY PRICE FLUCTUATIONS
The Company's revenue, profitability and future rate of growth are
substantially dependent upon prevailing prices for oil, gas and natural gas
liquids, which are dependent upon numerous factors such as weather, economic,
political and regulatory developments and competition from other sources of
energy. The volatile nature of the energy markets makes it particularly
difficult to estimate future prices of oil, gas and natural gas liquids. Prices
of oil, gas and natural gas liquids are subject to wide fluctuations in response
to relatively minor changes in circumstances, and there can be no assurance that
future prolonged decreases in such prices will not occur. All of these factors
are beyond the control of the Company. Any significant decline in oil and gas
prices could have a material adverse effect on the Company's operations,
financial condition and level of expenditures for the development of its oil and
gas reserves, and may result in violations of certain covenants contained in the
Company's credit agreements. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
WRITEDOWNS OF CARRYING VALUES
The Company periodically reviews the carrying value of its oil and gas
properties under the full cost accounting rules of the Securities and Exchange
Commission (the "Commission"). Under these rules,
13
<PAGE> 15
capitalized costs of oil and natural gas properties may not exceed the present
value of estimated future net revenues from proved reserves, discounted at 10%,
plus the lower of cost or fair market value of unproved properties. Application
of this "ceiling" test generally requires pricing future revenue at the
unescalated prices in effect as of the end of each fiscal quarter and requires a
writedown for accounting purposes if the ceiling is exceeded, even if prices
declined for only a short period of time, and even if prices increase in
subsequent periods. The risk that the Company will be required to write down the
carrying value of its oil and natural gas properties increases when oil and
natural gas prices are depressed or decline substantially, or if a large amount
of unevaluated leasehold were proven to be uneconomical to develop or were
abandoned. If a writedown is required, it would result in a one-time charge to
earnings, but would not impact cash flow from operating activities.
UNCERTAINTY OF ESTIMATES OF OIL AND GAS RESERVES
There are numerous uncertainties inherent in estimating quantities of
proved oil and gas reserves, including many factors beyond the control of the
Company. The Company obtained an estimate of its proved oil and gas reserves and
the estimated future net revenue therefrom based upon a report prepared as of
June 30, 1996 by Williamson and the Company's petroleum engineers. The portion
of the reserves evaluated solely by the Company's petroleum engineers as of June
30, 1996 constituted 0.6% of the Company's total proved reserves at that date.
These estimates rely upon various assumptions, including assumptions required by
the Commission as to constant oil and gas prices, drilling and operating
expenses, capital expenditures, taxes and availability of funds. The process of
estimating oil and gas reserves is complex, requiring significant decisions and
assumptions in the evaluation of available geological, geophysical, engineering
and economic data for each reservoir. As a result such estimates are inherently
imprecise. Actual future production, revenue, taxes, development expenditures,
operating expenses and quantities of recoverable oil and gas reserves may vary
substantially from those estimated by the Company. Any significant variance in
these assumptions could materially affect the estimated quantity and value of
reserves set forth in this Prospectus. In addition, the Company's reserves may
be subject to downward or upward revision, based upon production history,
results of future exploration and development, prevailing oil and gas prices and
other factors, many of which are beyond the Company's control.
DRILLING AND OPERATING RISKS
Oil and gas drilling activities are subject to numerous risks, many of
which are beyond the Company's control. The Company's operations may be
curtailed, delayed or canceled as a result of title problems, weather
conditions, compliance with governmental requirements, mechanical difficulties
and shortages or delays in the delivery of equipment. In addition, the Company's
properties may be susceptible to hydrocarbon drainage from production by other
operators on adjacent properties. Industry operating risks include the risk of
fire, explosions, blow-outs, pipe failure, abnormally pressured formations and
environmental hazards such as oil spills, gas leaks, ruptures or discharges of
toxic gases, the occurrence of any of which could result in substantial losses
to the Company due to injury or loss of life, severe damage to or destruction of
property, natural resources and equipment, pollution or other environmental
damage, clean-up responsibilities, regulatory investigation and penalties and
suspension of operations.
The Company has been among the most active drillers of horizontal wells and
expects to drill a significant number of deep horizontal wells in the future.
The Company's horizontal drilling activities involve greater risk of mechanical
problems than conventional vertical drilling operations. In some cases, the
locations will require wells to be drilled to greater depths, which may involve
more complex drilling than wells drilled to date. These wells may be
significantly more expensive to drill than those drilled to date.
In accordance with customary industry practice, the Company maintains
insurance against some, but not all, of the risks described above. There can be
no assurance that any insurance will be adequate to cover losses or liabilities.
The Company cannot predict the continued availability of insurance, or its
availability at premium levels that justify its purchase.
14
<PAGE> 16
GOVERNMENTAL REGULATION
Oil and gas operations are subject to various federal, state and local
governmental regulations which may be changed from time to time in response to
economic or political conditions. From time to time, regulatory agencies have
imposed price controls and limitations on production in order to conserve
supplies of oil and gas. In addition, the production, handling, storage,
transportation and disposal of oil and gas, by-products thereof and other
substances and materials produced or used in connection with oil and gas
operations are subject to regulation under federal, state and local laws and
regulations primarily relating to protection of human health and the
environment. To date, expenditures related to complying with these laws and for
remediation of existing environmental contamination have not been significant in
relation to the results of operations of the Company. There can be no assurance
that the trend of more expansive and stricter environmental legislation and
regulations will not continue.
COMPETITION
The Company operates in a highly competitive environment. The Company
competes with major and independent oil and gas companies for the acquisition of
desirable oil and gas properties, as well as for the equipment and labor
required to develop and operate such properties. Many of these competitors have
financial and other resources substantially greater than those of the Company.
RELIANCE ON KEY PERSONNEL; CONFLICTS OF INTEREST
The Company is dependent upon its Chief Executive Officer, Aubrey K.
McClendon, and its Chief Operating Officer, Tom L. Ward. The unexpected loss of
the services of either of these executive officers could have a detrimental
effect on the Company. The Company maintains $20 million key man life insurance
policies on the life of each of Messrs. McClendon and Ward.
Messrs. McClendon and Ward, together with another executive officer of the
Company, have rights to, and do, participate in wells drilled by the Company.
Such participation may create interests which conflict with those of the
Company.
CONTROL BY CERTAIN STOCKHOLDERS
At October 25, 1996, Aubrey K. McClendon, Tom L. Ward, the Aubrey K.
McClendon Children's Trust and the Tom L. Ward Children's Trust beneficially
owned an aggregate of 11,479,159 shares (including outstanding vested options)
representing approximately 38% (34% after giving effect to this Offering) of the
outstanding Common Stock, and members of the Company's Board of Directors and
senior management beneficially owned an aggregate of 13,278,449 shares
(including outstanding vested options), which, together with the shares
beneficially owned by Messrs. McClendon and Ward and their respective children's
trusts, represented approximately 42% (37% after giving effect to this Offering)
of the Company's outstanding Common Stock. As a result, Messrs. McClendon and
Ward, together with other officers and directors of the Company, are in a
position to effectively control the Company through their ability to
significantly influence matters requiring the vote or consent of the Company's
stockholders.
DIVIDEND RIGHTS AND RESTRICTIONS ON PAYMENT OF DIVIDENDS
Holders of Common Stock will be entitled to receive dividends when, as and
if declared by the Board of Directors of the Company out of funds legally
available therefor. The Senior Notes Indentures and certain of the Company's
other credit agreements restrict the payment of dividends to the holders of the
Company's capital stock, including the Common Stock. As described under "Price
Range of Common Stock and Dividend Policy," the Company's current policy is to
retain its earnings to support its business. The determination of the amount of
future cash dividends, if any, to be declared and paid is in the sole discretion
of the Company's Board of Directors and will depend on the Company's financial
condition, earnings and funds from operations, the level of its capital and
exploration expenditures, dividend restrictions in its financing agreements, its
future business prospects and other matters as the Company's Board of Directors
deems relevant. The amount permitted under the Company's credit agreements and
the Senior Notes Indentures to
15
<PAGE> 17
be used to pay dividends will vary over time depending on, among other things,
the Company's earnings and any future issuances of capital stock.
FORWARD LOOKING STATEMENTS
All statements other than statements of historical fact contained in this
Prospectus, including statements in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" are forward-looking statements.
When used herein, the words "budget," "budgeted," "anticipate," "expects,"
"believes," "seeks," "goals," "intends" or "projects" and similar expressions
are intended to identify forward-looking statements. It is important to note
that Chesapeake's actual results could differ materially from those projected by
such forward-looking statements. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, no
assurance can be given that such expectations will prove correct. Factors that
could cause the Company's results to differ materially from the results
discussed in such forward-looking statements include the aforementioned risks
described under "Risk Factors," including, but not limited to, the following:
production variances from expectations, volatility of oil and gas prices, the
need to develop and replace its reserves, the substantial capital expenditures
required to fund its operations, environmental risks, drilling and operating
risks, risks related to exploration and development drilling, uncertainties
about estimates of reserves, competition, government regulation, and the ability
of the Company to implement its business strategy. All forward-looking
statements in this Prospectus are expressly qualified in their entirety by the
cautionary statements in this paragraph.
16
<PAGE> 18
THE COMPANY
Chesapeake Energy Corporation is an independent energy company which
utilizes advanced drilling and completion technologies to explore for and
produce oil and natural gas. The Company's executive offices are located at 6100
North Western Avenue, Oklahoma City, Oklahoma 73118 and its telephone number is
(405) 848-8000.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Common Stock offered
hereby are estimated to be $168.2 million ($193.5 million if the over-allotment
option is exercised). The Company intends to use the net proceeds from the
Offering to reduce debt, to fund increased exploratory and development capital
expenditures and for general corporate purposes. The Company intends to use
approximately $53 million of the net proceeds to offer to purchase or otherwise
satisfy the Company's obligations in respect of $47.5 million principal amount
of the Company's outstanding 12% Senior Notes, and such additional amounts as
may be required to fully repay the outstanding balance of its Revolving Credit
Facility ($10 million principal amount at September 30, 1996). This Offering is
not contingent upon the Company's purchase of any amount of 12% Senior Notes.
The balance of the net proceeds will be used to fund an increase in the
Company's exploration and development capital expenditures and for general
corporate purposes. Pending such application of the net proceeds of the
Offering, such net proceeds will be invested in short-term, interest-bearing
instruments.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Since April 28, 1995 the Company's Common Stock has traded on the NYSE
under the symbol "CHK." The table below sets forth the high and low sales prices
for the Company's Common Stock on the NYSE (as reported on the composite tape)
since April 28, 1995 and, during the prior periods indicated, on the Nasdaq
National Market (as reported by Nasdaq). The prices reflected below have been
adjusted to reflect the stock splits effected in December 1994, December 1995
and June 1996. The last reported sale price of the Common Stock on the NYSE on
October 25, 1996 was $54.375 per share.
<TABLE>
<CAPTION>
PRICE RANGE
OF COMMON STOCK
-----------------
HIGH LOW
------ ------
<S> <C> <C>
Fiscal Year Ended June 30, 1995:
1st Quarter.............................................................. $ 4.89 $ 1.72
2nd Quarter.............................................................. 7.67 4.28
3rd Quarter.............................................................. 9.67 4.44
4th Quarter.............................................................. 13.39 9.33
Fiscal Year Ended June 30, 1996:
1st Quarter.............................................................. $14.56 $ 9.06
2nd Quarter.............................................................. 22.17 12.39
3rd Quarter.............................................................. 33.00 21.33
4th Quarter.............................................................. 60.75 31.00
Fiscal Year Ending June 30, 1997:
1st Quarter.............................................................. $70.25 $41.50
2nd Quarter (through October 25, 1996)................................... 65.50 53.25
</TABLE>
The Company has not paid cash dividends on its Common Stock. The Company's
policy is to retain its earnings to support the growth of the Company's
business. In addition, the Senior Notes Indentures and other agreements with the
Company's lenders contain certain restrictions on the Company's ability to
declare and pay dividends. The payment of future cash dividends, if any, will be
reviewed periodically by the Board of Directors and will depend upon, among
other things, the Company's financial condition, funds from operations, the
level of its capital and development expenditures, its future business prospects
and any restrictions imposed by the Company's present or future credit
facilities.
17
<PAGE> 19
CAPITALIZATION
The following table sets forth the total consolidated capitalization of the
Company and its subsidiaries at June 30, 1996 and as adjusted to give effect to
the Offering and the application of net proceeds therefrom, assuming the
purchase of all outstanding 12% Senior Notes. This table should be read in
conjunction with the Company's Consolidated Financial Statements, the related
notes thereto and the other financial information included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1996
---------------------------
ACTUAL AS ADJUSTED(A)
-------- --------------
($ IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents.......................................... $ 51,638 $166,129
======== ========
Current maturities of long-term debt(b)............................ $ 6,755 $ 6,755
======== ========
Long-term debt, less current maturities:
9.125% Senior Notes.............................................. $120,000 $120,000
Discount on 9.125% Senior Notes(c)............................... (81) (81)
10.5% Senior Notes............................................... 90,000 90,000
12% Senior Notes................................................. 47,500 --
Discount on 12% Senior Notes(c).................................. (1,772) --
Revolving Credit Facility(d)..................................... -- --
Term Credit Facility(e).......................................... 10,020 10,020
Other............................................................ 2,764 2,764
-------- --------
Total long-term debt..................................... 268,431 222,703
-------- --------
Stockholders' equity:
Common stock..................................................... 3,008 3,333
Paid-in capital.................................................. 136,782 304,623
Accumulated earnings............................................. 37,977 30,977
-------- --------
Total stockholders' equity............................... 177,767 338,933
-------- --------
Total capitalization............................................... $452,953 $568,391
======== ========
</TABLE>
- ---------------
(a) Gives effect to (i) the Offering and the application of the estimated net
proceeds of $168.2 million therefrom, assuming the Underwriters'
over-allotment option is not exercised, and (ii) the extraordinary charge
to the Company of approximately $7 million, net of tax, upon retirement of
the 12% Senior Notes and payment of the outstanding balance of the
Revolving Credit Facility. See "Use of Proceeds."
(b) Includes $2.9 million in current maturities under the Term Credit Facility.
(c) Represents the unamortized portion of original issue discount related to
the issuance of the related Senior Notes.
(d) The Revolving Credit Facility provides for total borrowings of up to $125
million, subject to borrowing base limitations and Senior Notes Indentures
limitations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
(e) The Term Credit Facility is the obligation of a subsidiary of the Company
and is non-recourse to the Company and its other subsidiaries. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
18
<PAGE> 20
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data of the
Company for each of the five fiscal years ended June 30, 1996. The selected
consolidated financial data for the five fiscal years in the period ended June
30, 1996 are derived from the Company's audited consolidated financial
statements. The data set forth in this table should be read in conjunction with
the Consolidated Financial Statements and the related notes thereto included
elsewhere in this Prospectus. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------------------------------
1992 1993 1994 1995 1996
------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA:
Revenues:
Oil and gas sales.................. $10,520 $11,602 $ 22,404 $ 56,983 $110,849
Gas marketing sales................ -- -- -- -- 28,428
Oil and gas service operations..... 7,656 5,526 6,439 8,836 6,314
Interest and other................. 542 880 981 1,524 3,831
------- ------- ------- ------- --------
Total revenues................ 18,718 18,008 29,824 67,343 149,422
------- ------- ------- ------- --------
Costs and expenses:
Production expenses and taxes...... 2,103 2,890 3,647 4,256 8,303
Gas marketing expenses............. -- -- -- -- 27,452
Oil and gas service operations..... 4,113 3,653 5,199 7,747 4,895
Depreciation, depletion and
amortization of oil and gas
properties....................... 2,910 4,184 8,141 25,410 50,899
Depreciation and amortization of
other assets..................... 974 557 1,871 1,765 3,157
General and administrative......... 3,314 4,906 3,135 3,578 4,828
Interest expense................... 2,577 2,282 2,676 6,627 13,679
------- ------- ------- ------- --------
Total costs and expenses...... 15,991 18,472 24,669 49,383 113,213
------- ------- ------- ------- --------
Income (loss) before income taxes..... 2,727 (464) 5,155 17,960 36,209
Income tax expense (benefit).......... 1,337 (99) 1,250 6,299 12,854
------- ------- ------- ------- --------
Net income (loss)..................... $ 1,390 $ (365) $ 3,905 $ 11,661 $ 23,355
======= ======= ======= ======= ========
Dividends on preferred stock.......... $ -- $ 385 $ -- $ -- $ --
Net income (loss) per common share.... .10 (.04) .16 .41 .79
Weighted average common and common
equivalent shares outstanding...... 13,955 16,776 24,183 28,303 29,461
OTHER DATA:
Operating cash flow(a)................ $ 6,611 $ 4,277 $ 15,167 $ 45,135 $ 90,265
Capital expenditures.................. 32,487 19,085 37,574 128,914 356,503
EBITDA(b)............................. 9,188 7,845 17,843 51,762 103,944
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
-------------------------------------------------- JUNE 30, 1996
1992 1993 1994 1995 1996 AS ADJUSTED(C)
------- ------- -------- -------- -------- --------------
<S> <C> <C> <C> <C> <C> <C>
($ IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents........ $ 690 $ 4,851 $ 16,225 $ 55,535 $ 51,638 $166,129
Oil and gas assets, net.......... 41,638 50,316 70,482 150,955 435,934 435,934
Total assets..................... 61,095 78,707 125,690 276,693 572,335 683,885
Long-term debt, including current
maturities.................... 30,141 21,863 55,454 155,747 275,186 229,458
Stockholders' equity............. 132 31,432 31,260 44,975 177,767 338,933
</TABLE>
- ---------------
(a) Represents net income plus income tax expense and depreciation, depletion
and amortization.
(b) EBITDA represents net income of the Company and its subsidiaries from
continuing operations before interest, taxes, depreciation, depletion,
amortization, certain other non-cash charges and, with respect to fiscal
1993, the provision for legal and other settlements. EBITDA should not be
considered in isolation or as a substitute for net income, cash flows from
continuing operations or other consolidated income or cash flow data
prepared in accordance with generally accepted accounting principles or as a
measure of the Company's profitability or liquidity.
(c) Gives effect to the Offering and the application of the estimated net
proceeds of $168.2 million therefrom, assuming the Underwriters'
over-allotment option is not exercised, and the extraordinary charge to the
Company of approximately $7 million, net of tax, upon retirement of the 12%
Senior Notes and payment of the outstanding balance of the Revolving Credit
Facility. See "Use of Proceeds."
19
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Chesapeake's revenue, net income, operating cash flow, and production
reached record levels in 1996. Increased cash flow from operations, in
combination with the issuance of $120 million of 9.125% Senior Notes and the
sale of approximately three million shares of Common Stock in April 1996,
allowed the Company to fund its net capital expenditures of $344 million.
During fiscal 1996, the Company participated in 148 gross wells (69.0 net),
of which 111 were operated by the Company. The Company's proved reserves
increased by 183 Bcfe to 425 Bcfe as a result of this drilling and the purchase
of proved reserves from Amerada Hess Corporation compared to 60.2 Bcfe of
production, resulting in reserve replacement in excess of 300% compared to
production.
The Company's business strategy has continued to emphasize the acquisition
of large prospective leasehold positions to provide a multi-year inventory of
drilling locations. By June 1996, the Company had increased its acreage position
to approximately 200,000 gross acres of developed leasehold and approximately
two million gross acres of undeveloped leasehold. During 1996, the Company
continued the expansion of its exploration focus in the Louisiana Trend and
began a significant acreage acquisition program in the Williston Basin. The
Company also conducted or participated in 3-D seismic programs in the Lovington
area, the Giddings Field, the Knox Field and in the Williston and Arkoma Basin
areas to evaluate the Company's acreage inventory.
The following table sets forth certain operating data of the Company for
the periods presented:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------
1994 1995 1996
------- ------- --------
<S> <C> <C> <C>
Net production data:
Oil (MBbl)................................................... 537 1,139 1,413
Gas (MMcf)................................................... 6,927 25,114 51,710
Gas equivalent (MMcfe)....................................... 10,152 31,947 60,190
Oil and gas sales ($ in 000's):
Oil.......................................................... $ 8,111 $19,784 $ 25,224
Gas.......................................................... 14,293 37,199 85,625
-------- ------- -------
Total oil and gas sales................................... $22,404 $56,983 $110,849
======== ======= =======
Average sales price:
Oil ($ per Bbl).............................................. $ 15.09 $ 17.36 $ 17.85
Gas ($ per Mcf).............................................. $ 2.06 $ 1.48 $ 1.66
Gas equivalent ($ per Mcfe).................................. $ 2.21 $ 1.78 $ 1.84
Oil and gas costs ($ per Mcfe):
Production expenses and taxes................................ $ .36 $ .13 $ .14
General and administrative................................... $ .31 $ .11 $ .08
Depreciation, depletion and amortization..................... $ .80 $ .80 $ .85
Net wells drilled:
Horizontal wells............................................. 11.1 28.5 42.0
Vertical wells............................................... 7.9 23.0 27.0
Net wells at end of period..................................... 57.9 91.2 186.2
</TABLE>
RESULTS OF OPERATIONS
YEAR ENDED JUNE 30, 1996 VS. JUNE 30, 1995 AND JUNE 30, 1994
General. For the fiscal year ended June 30, 1996, the Company realized net
income of $23.4 million, or $0.80 per common share, on total revenues of $149.4
million. This compares to net income of $11.7 million, or
20
<PAGE> 22
$0.42 per common share, on total revenues of $67.3 million in fiscal 1995, and
net income of $3.9 million, or $0.16 per common share, on total revenues of
$29.8 million in fiscal 1994. The significantly higher earnings in 1996 as
compared to 1995 and 1994 were largely the result of higher production and
prices per Mcfe, partially offset by higher oil and gas depreciation, depletion
and amortization and higher interest costs.
Oil and Gas Sales. During fiscal 1996, oil and gas sales increased 94% to
$110.8 million versus $57.0 million for fiscal 1995 and 395% from the fiscal
1994 amount of $22.4 million. The increase in oil and gas sales resulted
primarily from strong growth in production volumes. For fiscal 1996, the Company
produced 60.2 Bcfe at a weighted average price of $1.84 per Mcfe, compared to
31.9 Bcfe produced in fiscal 1995 at a weighted average price of $1.78 per Mcfe,
and 10.2 Bcfe produced in fiscal 1994 at a weighted average price of $2.21 per
Mcfe. This represents production growth of 89% for fiscal 1996 compared to 1995
and 490% compared to 1994.
These increases in production volumes reflect the Company's successful
exploration and development program. The following table shows the Company's
production by major field area for fiscal 1995 and fiscal 1996:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------------------
1995 1996
---------------------- ----------------------
PRODUCTION PRODUCTION
OPERATING AREA (MMCFE) PERCENT (MMCFE) PERCENT
--------------------------------------------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C>
Giddings
Navasota River............................. 16,881 53% 28,360 47%
Independence............................... 3,784 12 11,601 19
Other Giddings............................. 5,976 19 7,205 12
Southern Oklahoma
Knox....................................... 1,255 4 3,901 6
Golden Trend............................... 1,880 6 2,758 5
Sholem Alechem............................. 749 2 2,010 3
All other fields............................. 1,422 4 4,355 8
------ --- ------ ---
Total production................... 31,947 100% 60,190 100%
====== === ====== ===
</TABLE>
The Company's gas production represented approximately 86% of the Company's
total production volume on an equivalent basis in fiscal 1996. This is compared
to 79% in fiscal 1995 and 68% in 1994. This is a result of the Company's
drilling in deeper, more gas-prone areas of the Giddings and Knox Fields.
For fiscal 1996, the Company realized an average price per barrel of oil of
$17.85, compared to $17.36 in fiscal 1995 and $15.09 in fiscal 1994. The Company
markets its oil on monthly average equivalent spot price contracts and typically
receives a premium to the price posted for West Texas intermediate crude oil. In
fiscal 1996, the Company realized $0.9 million less in oil revenues than it
would have received from unhedged market prices.
Gas price realizations increased from fiscal 1995 to 1996 by approximately
12%, despite lower gas revenue realized by the Company during the fourth fiscal
quarter of 1996 as a result of the hedging activity. As a result of hedging, the
Company had gas revenues during that period that were approximately $5.1 million
less than unhedged market prices. Although gas prices generally increased during
1996, the weighted average realization per Mcf in 1996 was still 19% less than
1994. The lower prices realized in 1995 were the result of lower natural gas
prices, and the fact that an increased portion of the Company's gas production
was from areas that contain leaner gas that is either not processed for liquids
or contains less energy value (Btu's) per Mcf. The Company anticipates gas
production in Louisiana will receive premium prices at least equivalent to Henry
Hub indexes due to the high Btu content and favorable market location of the
production.
Gas Marketing Sales. In December 1995, the Company entered into the gas
marketing business by acquiring all of the outstanding stock of an Oklahoma
City-based natural gas marketing company for total consideration of $725,000.
This subsidiary provides natural gas marketing services including commodity
price
21
<PAGE> 23
structuring, contract administration and nomination services for the Company,
its partners and other natural gas producers in the geographical areas in which
the Company is active.
As a result of this purchase, the Company realized $28.4 million in gas
marketing sales for third parties in fiscal 1996, with corresponding costs of
gas marketing sales of $27.5 million, resulting in a gross margin of $0.9
million. There were no gas marketing activities in 1995 or 1994.
Oil and Gas Service Operations. Revenues from oil and gas service
operations were $6.3 million in fiscal 1996, down 28% from $8.8 million in
fiscal 1995, and down 2% from $6.4 million in fiscal 1994. The related costs and
expenses of these operations were $4.9 million, $7.7 million and $5.2 million
for the three years ended June 30, 1996, 1995 and 1994, respectively. The gross
profit margin of 22% in fiscal 1996 was up from the 12% margin in fiscal 1995,
and up slightly from the 19% gross margin in fiscal 1994. The gross profit
margin derived from these operations is a function of drilling activities in the
period, costs of materials and supplies and the mix of operations between lower
margin trucking operations versus higher margin labor oriented service
operations.
In June 1996, Peak USA Energy Services, Ltd., a limited partnership
("Peak"), was formed by Peak Oilfield Services Company (a joint venture between
Cook Inlet Region, Inc. and Nabors Indus tries, Inc.) and Chesapeake for the
purpose of purchasing the Company's oilfield service assets and providing rig
moving, transportation and related site construction services to the Company and
the industry. The Company sold its service company assets to Peak for $6.4
million, and simultaneously invested $2.5 million in exchange for a 33.3%
partnership interest in Peak. This transaction resulted in recognition of a $1.8
million pre-tax gain during the fourth fiscal quarter of 1996 reported in
Interest and Other Revenues. A deferred gain from the sale of service company
assets of $0.9 million was recorded as a reduction in the Company's investment
in Peak and will be amortized to income over the estimated useful lives of the
Peak assets. The Company's investment in Peak will be accounted for using the
equity method.
Interest and Other. Interest and Other Revenues for fiscal 1996 was $3.8
million which compares to $1.5 million in 1995 and $1 million in 1994. During
fiscal 1996, the Company realized $3.7 million of interest and other income, and
a $1.8 million gain related to the sale of certain service company assets,
offset by a $1.7 million loss due to natural gas basis changes in April 1996 as
a result of the Company's hedging activities. During 1995 and 1994, the Company
did not incur any such gains on sale of assets or basis losses.
Production Expenses and Taxes. Production expenses and taxes, which include
lifting costs and production and excise taxes, increased to $8.3 million in
fiscal 1996, as compared to $4.3 million in fiscal 1995, and $3.6 million in
fiscal 1994. These increases on a year-to-year basis were primarily the result
of increased production. On a Mcfe production unit basis, production expenses
and taxes increased to $0.14 per Mcfe as compared to $0.13 per Mcfe in fiscal
1995 and $0.36 per Mcfe in 1994. Severance tax exemptions for production were
available in fiscal 1996 and 1995, and certain of the exemptions in the Giddings
Field are applicable for production through 2001 for wells spud prior to
September 1, 1996 and, on a more limited basis, for qualifying wells spud
thereafter. The Company expects that operating costs in fiscal 1997 will
increase because of the Company's expansion of drilling efforts into the
Louisiana Trend and the Williston Basin, both of which are oil prone areas with
significant associated water production which results in higher operating costs
than gas prone areas, and because limited severance tax exemptions will be
applicable in these areas as compared to existing exemptions in the Giddings
Field.
Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization ("DD&A") of oil and gas properties for fiscal 1996 was $50.9
million, $25.5 million higher than fiscal 1995's expense of $25.4 million, and
$42.8 million higher than fiscal 1994's expense of $8.1 million. The average
DD&A rate per Mcfe, which is a function of capitalized costs, future development
costs, and the related underlying reserves in the periods presented, increased
to $0.85 in fiscal 1996 compared to $0.80 in fiscal 1995 and 1994. The Company's
DD&A rate in the future will be a function of the results of future acquisition,
exploration, development and production results. The Company's DD&A rate will
increase in 1997 based on projected higher finding costs for the Louisiana
Trend.
Depreciation and Amortization of Other Assets. Depreciation and
amortization ("D&A") of other assets increased to $3.2 million in fiscal 1996,
compared to $1.8 million in fiscal 1995, and $1.9 million in 1994. This
22
<PAGE> 24
increase in fiscal 1996 was caused by an increase in D&A as a result of
increased investments in depreciable buildings and equipment, and increased
amortization of debt issuance costs as a result of the issuance of Senior Notes
in May 1995 and in April 1996. The Company anticipates an increase in D&A in
fiscal 1997 as a result of a full year of debt issuance cost amortization on the
9.125% Senior Notes issued in April 1996 and higher building depreciation
expense on the Company's corporate offices, offset by a reduction in
depreciation expense associated with the sale of the service company assets.
General and Administrative. General and administrative ("G&A") expenses,
which are net of capitalized internal payroll and non-payroll expenses (see Note
11 of Notes to Consolidated Financial Statements), were $4.8 million in fiscal
1996, up 33% from $3.6 million in fiscal 1995, and up from $3.1 million in
fiscal 1994. The increases in fiscal 1996 compared to 1995 and 1994 result
primarily from increased personnel expenses required by the Company's growth.
The Company capitalized $1.7 million of internal costs in fiscal 1996 directly
related to the Company's oil and gas exploration and development efforts, as
compared to $0.6 million in 1995 and $1.0 million in 1994. The Company
anticipates that G&A costs for fiscal 1997 will increase by approximately 25% as
a result of the Company's continued growth and increased budgets for exploration
and development activities, increasing operations activities, and attendant
personnel and overhead requirements.
Interest and Other. Interest and other expense increased to $13.7 million
in fiscal 1996 as compared to $6.6 million in 1995 and $2.7 million in fiscal
1994. Interest expense in the fourth quarter of fiscal 1996 was approximately $4
million, reflecting the issuance of $120 million of 9.125% Senior Notes in April
1996. In addition to the interest expense reported, the Company capitalized $6.4
million of interest during fiscal 1996, as compared to $1.6 million capitalized
in 1995 and $0.4 million in 1994. Interest expense will increase significantly
in fiscal 1997 as compared to 1996 as a result of the 9.125% Senior Notes issued
in April 1996.
Income Tax Expense. The Company recorded income tax expense of $12.9
million in fiscal 1996, as compared to $6.3 million in fiscal 1995, and $1.3
million in 1994. All of the income tax expense in 1996 was deferred due to a
current year tax net operating loss resulting from the Company's active drilling
program. A substantial portion of the Company's drilling costs are currently
deductible for income tax purposes. The effective tax rate was approximately
35.5% in fiscal 1996 compared to a tax rate of 35% in 1995 and 24% in 1994. The
Company anticipates an effective tax rate of approximately 36.5% for fiscal 1997
as a result of Louisiana state taxes and higher activity levels in Louisiana.
Based upon the anticipated level of drilling activities in fiscal 1997, the
Company anticipates that substantially all of its fiscal 1997 income tax expense
will be deferred.
Hedging. Periodically the Company utilizes hedging strategies to hedge the
price of a portion of its future oil and gas production. These strategies
include swap arrangements that establish an index-related price above which the
Company pays the hedging partner and below which the Company is paid by the
hedging partner, the purchase of index-related puts that provide for a "floor"
price to the Company to be paid by the counter-party to the extent the price of
the commodity is below the contracted floor, and basis protection swaps. Results
from hedging transactions are reflected in oil and gas sales to the extent
related to the Company's oil and gas production.
As of June 30, 1996, the Company had NYMEX-based crude oil swap agreements
for 1,000 Bbl per day for July 1, 1996 through August 31, 1996 at an average
price of $17.85 per Bbl. The counter-party has the option exercisable monthly
for an additional 1,000 Bbl per day for the period July 1, 1996 through December
31, 1996 to cause a swap if the price exceeds an average $17.74 per Bbl. The
actual settlements for July, August and September resulted in a net $0.7 million
payment to the counter-parties. The Company estimates, based on NYMEX prices as
of October 24, 1996, that the effect of the October through December hedges
would be a net $0.7 million payment to the counter-parties.
23
<PAGE> 25
The Company has purchased Houston Ship Channel put options which guarantee
the Company an average floor price of $2.21/MMBtu for 20,000 MMBtu per day for
the period of November 1, 1996 through February 28, 1997. The average cost of
these puts was $0.14 per MMBtu.
As of June 30, 1996, the Company had NYMEX-based natural gas swaps and
NYMEX/Houston Ship Channel basis swaps for the months of July through October
1996. These transactions resulted in payments to the Company's counter-parties
of approximately $3.7 million for the months of July, August and September, 1996
and $0.2 million for the month of October 1996.
The Company has only limited involvement with derivative financial
instruments, as defined in SFAS No. 119 "Disclosure About Derivative Financial
Instruments and Fair Value of Financial Instruments" and does not use them for
trading purposes. The Company's objective is to hedge a portion of its exposure
to price volatility from producing crude oil and natural gas. These arrangements
may expose the Company to credit risk to its counter-parties and to basis risk.
LIQUIDITY AND CAPITAL RESOURCES
FINANCING ACTIVITIES
In April 1996 the Company completed a public offering of 2,994,750 shares
of Common Stock at a price of $35.33 per share resulting in net proceeds to the
Company of approximately $99.4 million. In April 1996 the Company also concluded
the sale of $120 million of 9.125% Senior Notes at 99.931% of par, which
offering resulted in net proceeds to the Company of approximately $116 million,
and applied approximately $44 million of the proceeds to pay the balance
outstanding under the Revolving Credit Facility. Prior to April 15, 1999 the
Company may retire up to $42 million of the 9.125% Senior Notes at 109.125% of
par from the proceeds of an equity offering. The 9.125% Senior Notes are
redeemable at the option of the Company at any time at the redemption or
make-whole prices set forth in the Indenture.
In fiscal 1995, cash flows from financing activities were $97.3 million,
including $90 million from the sale of 10.5% Senior Notes. The 10.5% Senior
Notes are redeemable after June 1, 1999 and prior to June 1, 1998, the Company
may retire up to $30 million of the 10.5% Senior Notes with the proceeds of an
equity offering at 110% of par.
In fiscal 1994, the Company received $48.8 million from the issuance of
$47.5 million of 12% Senior Notes and warrants to purchase an aggregate of
2,190,937 shares of Common Stock. The Company must redeem $11.9 million of 12%
Senior Notes on each March 1, 1998, 1999 and 2000, and may redeem all 12% Senior
Notes after March 1, 1998. Immediately following this Offering, the Company
intends to purchase or otherwise satisfy its obligations in respect of all
outstanding 12% Senior Notes. See "Use of Proceeds."
All of the Company's subsidiaries except Chesapeake Gas Development
Corporation ("GCDC") and Chesapeake Energy Marketing Inc. ("CEMI") have fully
and unconditionally guaranteed on a joint and several basis all Senior Notes,
and the securities of the guaranteeing subsidiaries have been pledged to secure
the 12% Senior Notes. See Note 2 of Notes to the Company's Consolidated
Financial Statements. The Senior Notes Indentures limit the Company and the
guaranteeing subsidiaries with respect to asset sales, restricted payments, the
incurrence of additional debt, the issuance of preferred stock, liens, sale and
leaseback transactions, lines of business, dividend and certain other payments,
mergers or consolidations, and transactions with affiliates. The Company must
repurchase the Senior Notes upon a change of control, the sale of certain assets
or failure to maintain a specified ratio of assets to debt.
FINANCIAL FLEXIBILITY AND LIQUIDITY
The Company had working capital of $0.3 million at June 30, 1996. The
Company had unused Revolving Credit Facility commitments of $75 million, of
which $10 million was outstanding as of September 30, 1996. The total facility
size has been set at $125 million subject to certain borrowing base and Senior
Notes Indentures limitations. This facility provides for interest at the Union
Bank reference rate (8.25% at
24
<PAGE> 26
September 30, 1996), or at the option of the Company the Eurodollar rate plus
1.375% to 1.875%, depending on the ratio of the amount outstanding to the
borrowing base. Although the Senior Notes Indentures contain various
restrictions on additional indebtedness, based on asset values as of June 30,
1996 the Company estimates it could borrow up to $106 million within these
restrictions.
The Company also maintains a limited resource bank facility with an amount
outstanding of $12.9 million as of June 30, 1996 secured by producing oil and
gas properties owned by the Company's wholly-owned subsidiary CGDC. This
facility provides for interest at the Union Bank reference rate (8.25% at
September 30, 1996) or, at the option of the Company, the Eurodollar rate plus
1.875%. The facility has not been guaranteed by the Company or any of its other
subsidiaries and is recourse only to the assets of CGDC. CGDC used proceeds
borrowed under this facility to acquire producing oil and gas properties from
Chesapeake Exploration Limited Partnership ("CEX"), another subsidiary of the
Company. The terms of the facility prohibit the payment of dividends by CGDC.
Debt ratings for the Senior Notes are Ba3 by Moody's Investors Service and
B+ by Standard & Poors Corporation. Both Moody's and S&P upgraded their ratings
during the year. The Company's long-term debt represented 60% of total capital
at June 30, 1996. At June 30, 1996, on a pro forma basis after giving effect to
the completion of this Offering and the application of the net proceeds
therefrom, the Company's debt to total capital ratio would have been
approximately 40%. Over time, the Company seeks to achieve an investment grade
senior debt rating.
OPERATING CASH FLOWS
Cash provided by operating activities was $121 million in fiscal 1996, as
compared to $54.7 million in 1995, and $19.4 million in 1994. Operating cash
flows for 1996 included enhanced earnings primarily as a result of increased oil
and gas production. Other major factors affecting cash flows for 1996, 1995 and
1994 were increases in non-cash charges and cash flows provided by changes in
the components of assets and liabilities. A portion of the proceeds of the
Offering and cash provided by operating activities are expected to be the
primary sources for meeting forecasted cash requirements in 1997.
INVESTING CASH FLOWS
Significantly higher cash was used in fiscal 1996 for development,
exploration and acquisition of oil and gas properties as compared to fiscal 1995
and 1994. Approximately $336 million was expended by the Company in 1996 (net of
proceeds from sale of leasehold and equipment, and from providing certain
oilfield services), as compared to $106 million in 1995, an increase of $230
million, or approximately 216%. In fiscal 1994 the Company expended $27 million
(net of proceeds from sales of leasehold, equipment and other) for development
and exploration activities. Net cash proceeds received by the Company for sales
of oil and gas equipment, leasehold and other services decreased to
approximately $11 million in fiscal 1996 as compared to $15 million in 1995. In
fiscal 1996, other property and equipment additions were $8.8 million, primarily
as a result of the purchase of additional office buildings in its headquarters
complex in Oklahoma City.
The Company's capital spending is largely discretionary. The Company has
established a fiscal 1997 capital expenditure budget of approximately $300
million, of which $80 million is budgeted to fund drilling and completion
requirements for the development of a portion of its proved undeveloped reserves
during fiscal 1997. The Company expects to spend approximately $155 million for
the development of its unproved reserves, $10 million for seismic programs and
$55 million for acreage acquisition and other corporate purposes. Based on
recent drilling results, the Company is evaluating an expansion of its capital
budget for fiscal 1997 and fiscal 1998. Management believes that the Company's
internally generated cash flow, the proceeds from the Offering and its Revolving
Credit Facility should be sufficient to fund its operating activities, budgeted
capital expenditures and its debt service obligations in fiscal 1997 and 1998.
The discretionary nature of nearly all of the Company's capital spending permits
the Company to make adjustments to its budget based upon factors such as oil and
gas pricing, exploration and development drilling results, and the continued
availability of internally generated or external capital resources.
25
<PAGE> 27
LEGAL PROCEEDINGS
On October 15, 1996, Union Pacific Resources Company ("UPRC") filed suit
against the Company in the United States District Court for the Northern
District of Texas alleging (a) infringement of UPRC's claimed patent (the "UPRC
Patent") for an invention involving a method of maintaining a bore hole in a
stratigraphic zone during drilling, and (b) tortious interference with contracts
between UPRC and a third party vendor (the "Vendor") regarding the
confidentiality of proprietary information of UPRC. UPRC is seeking injunctive
relief, damages of an unspecified amount, including actual, enhanced,
consequential and punitive damages, interest, costs and attorney's fees. The
Company believes that it has meritorious defenses to UPRC's allegations,
including, without limitation, the Company's belief that the UPRC Patent is
invalid. The Company will vigorously defend the lawsuit. No assurance can be
given as to the outcome of the matter or the ultimate impact on the Company of
any damages (which could be substantial) that may be awarded to UPRC because
litigation is inherently uncertain.
Since February 1994, the Vendor has assisted the Company in the analysis of
horizontal drilling data. In May 1994, the UPRC Patent was issued to UPRC by the
U.S. Patent Office and, in August 1995, UPRC advised the Company that the
Vendor's services infringed the UPRC Patent. Promptly following receipt of such
notification, the Company retained patent counsel who, in December 1995,
provided the Company with a legal opinion that the UPRC Patent was invalid.
In September 1995, litigation to which the Company was not a party
commenced between UPRC and the Vendor. On October 11, 1996, the litigation was
settled with an agreed judgment reciting the validity of the UPRC Patent and
finding that the services provided by the Vendor violated the UPRC Patent. The
agreed judgment enjoined the Vendor from further infringement of the UPRC Patent
and use of UPRC's trade secrets.
By letter dated October 16, 1996, the Vendor advised the Company that the
Vendor expected to offer alternative services in the near future which,
according to the Vendor, will not violate the Vendor's settlement agreement with
UPRC and will not infringe the UPRC Patent. The Vendor also advised the Company
that UPRC had agreed to permit the Vendor to complete work in progress which,
under the agreed judgment, had been found to infringe the UPRC Patent. The
Company believes that alternative services offered by the Vendor and other third
party vendors will allow the Company to continue its horizontal drilling program
without material interruption.
26
<PAGE> 28
MANAGEMENT
DIRECTORS AND SENIOR OFFICERS
The following table sets forth names, ages and titles of the directors and
senior officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Aubrey K. McClendon(a)(b)............. 37 Chairman of the Board, Chief Executive
Officer and Director
Tom L. Ward(a)(b)..................... 37 President, Chief Operating Officer and
Director
Marcus C. Rowland..................... 44 Vice President - Finance and Chief
Financial Officer
Steven C. Dixon....................... 38 Senior Vice President - Operations
J. Mark Lester........................ 43 Senior Vice President - Exploration
Henry J. Hood......................... 36 Vice President - Land and Legal
Ronald A. Lefaive..................... 48 Controller and Chief Accounting
Officer
Martha A. Burger...................... 43 Treasurer and Human Resources Manager
Thomas S. Price, Jr.(d)............... 44 Vice President - Corporate Development
Tony S. Say(d)........................ 40 Vice President - Marketing
E. F. Heizer, Jr.(b).................. 67 Director
Breene M. Kerr(a)(c).................. 67 Director
Shannon T. Self(a)(c)................. 40 Director
Frederick B. Whittemore(b)............ 65 Director
Walter C. Wilson(c)................... 61 Director
</TABLE>
- ---------------
(a) Member of the Executive Committee.
(b) Member of the Compensation Committee.
(c) Member of the Audit Committee.
(d) Not an executive officer.
Aubrey K. McClendon has served as Chairman of the Board, Chief Executive
Officer and director of the Company since its inception. From 1982 to 1989, Mr.
McClendon was an independent producer of oil and gas in affiliation with Tom L.
Ward, the Company's President and Chief Operating Officer. Mr. McClendon is a
member of the Board of Visitors of the Fuqua School of Business at Duke
University, an Executive Committee member of the Texas Independent Producers and
Royalty Owners Association, a Director of the Oklahoma Independent Petroleum
Association, and a Director of the Louisiana Independent Oil and Gas
Association. Mr. McClendon graduated from Duke University in 1981.
Tom L. Ward has served as President, Chief Operating Officer, and a
director of the Company since its inception. From 1982 to 1989, Mr. Ward was an
independent producer of oil and gas in affiliation with Mr. McClendon. Mr. Ward
graduated from the University of Oklahoma in 1981.
Marcus C. Rowland has served as Vice President - Finance and Chief
Financial Officer of the Company since 1993. From 1990 until his association
with the Company, Mr. Rowland was Chief Operating Officer of Anglo-Suisse, L.P.
assigned to the White Nights Russian Enterprise, a joint venture of
Anglo-Suisse, L.P. and Phibro Energy Corporation, a major foreign operation
which was granted the right to engage in oil and gas operations in Russia. Prior
to his association with White Nights Russian Enterprise, Mr. Rowland owned and
managed his own oil and gas company and prior to that was Chief Financial
Officer of a private exploration company in Oklahoma City from 1981 to 1985. Mr.
Rowland is a Certified Public Accountant. Mr. Rowland graduated from Wichita
State University in 1975.
27
<PAGE> 29
Steven C. Dixon served as Vice President - Exploration from 1991 to 1995
and was appointed Senior Vice President - Operations in 1995. Mr. Dixon was a
self-employed geological consultant in Wichita, Kansas, from 1983 through 1990.
He was employed by Beren Corporation in Wichita, Kansas, from 1980 to 1983 as a
geologist. Mr. Dixon graduated from the University of Kansas in 1980.
J. Mark Lester served as Vice President - Exploration from 1989 to 1995 and
was appointed Senior Vice President - Exploration in 1995. From 1986 to 1989,
Mr. Lester was employed by Messrs. McClendon and Ward. He was employed by
various independent oil companies in Oklahoma City from 1980 to 1986, and was
employed by Union Oil Company of California from 1977 to 1980 as a geophysicist.
Mr. Lester graduated from Purdue University in 1975.
Henry J. Hood has served as Vice President - Land and Legal since 1994. Mr.
Hood was retained as a consultant to the Company during the prior two years. He
was associated with the Oklahoma City law firm of Watson & McKenzie from 1987 to
1992 and, from 1991 to 1992, Mr. Hood was of counsel with the Oklahoma City law
firm of White, Coffey, Galt & Fite. Mr. Hood is a member of the Oklahoma and
Texas Bars. Mr. Hood graduated from Duke University in 1982 and from the
University of Oklahoma College of Law in 1985.
Ronald A. Lefaive has served as Controller and Chief Accounting Officer
since 1993. From 1991 until his association with the Company, Mr. Lefaive was
Controller for Phibro Energy Production, Inc., an international exploration and
production subsidiary of Phibro Energy Corporation, whose principal operations
were located in Russia. From 1982 to 1991, Mr. Lefaive served as Assistant
Controller, General Auditor, and Manager of Management Information Systems at
Conquest Exploration Company in Houston, Texas. Prior to joining Conquest, Mr.
Lefaive held various financial staff and management positions with The Superior
Oil Company from 1980 to 1982 and Shell Oil Company from 1975 to 1982. Mr.
Lefaive is a Certified Public Accountant and graduated from the University of
Houston in 1975.
Martha A. Burger has served as Treasurer since 1995 and as Human Resources
Manager since 1996. From 1994 to 1995, she served in various accounting
positions with the Company including Assistant Controller - Operations. From
1989 to 1993, Ms. Burger was employed by Hadson Corporation as Assistant
Treasurer and from 1994 to 1995, served as Vice President and Controller of
Hadson. Prior to joining Hadson Corporation, Ms. Burger was employed by Phoenix
Resource Companies, Inc. as Assistant Treasurer and by Arthur Andersen & Co. Ms.
Burger is a Certified Public Accountant and graduated from the University of
Central Oklahoma in 1982 and from Oklahoma City University in 1992.
Thomas S. Price, Jr. has served as Vice President - Corporate Development
since 1992 and was a consultant to the Company during the prior two years. He
was employed by Kerr-McGee Corporation, Oklahoma City, from 1988 to 1990 and by
Flag-Redfern Oil Company in Oklahoma City from 1984 to 1988. Mr. Price graduated
from the University of Central Oklahoma in 1983, from the University of Oklahoma
in 1989, and from the American Graduate School of International Management in
1992.
Tony S. Say serves as President of Chesapeake Energy Marketing, Inc. From
1979 to 1986, Mr. Say was employed by Delhi Gas Pipeline Corporation. From 1986
to 1993, Mr. Say was President and Chief Executive Officer of Clinton Gas
Transmission, Inc., a company he co-founded and later sold to a major utility in
1993. In 1993, Mr. Say co-founded Princeton Natural Gas Company which was
purchased by Chesapeake Energy Corporation in 1995. Mr. Say is a member of the
Natural Gas Society of Oklahoma and the Natural Gas Society of North Texas and
graduated from the University of Oklahoma in 1979.
E. F. Heizer, Jr. was an advisory director of the Company from June 1992 to
February 1993 when he became a director. From 1985 to the present, Mr. Heizer
has been a private venture capitalist. He founded Heizer Corp., an American
Stock Exchange-listed business development company, in 1969 and served as
Chairman and Chief Executive Officer from 1969 until 1986, when Heizer
Corporation was reorganized into a number of public and private companies. Mr.
Heizer was assistant treasurer of the Allstate Insurance Company from 1962 to
1969. He was employed by Booz, Allen and Hamilton from 1958 to 1962, Kidder,
Peabody & Co. from 1956 to 1958, and Arthur Andersen & Co. from 1954 to 1956. He
serves on the advisory board of the Kellogg School of Management at Northwestern
University and the Executive Committee of
28
<PAGE> 30
Yale Law School. Mr. Heizer is a director of two other public companies, Amdahl
Corporation, a manufacturer of computers based in Santa Clara, California, and
Material Science Corporation, Elk Grove, Illinois, which is engaged in coating
technology, as well as numerous private companies. Mr. Heizer graduated from
Northwestern University in 1951 and from Yale University Law School in 1954.
Breene M. Kerr was an advisory director of the Company from June 1992 to
February 1993 when he became a director. In 1969, Mr. Kerr founded Kerr
Consolidated, Inc. and remains Chairman and President of this private company
with investments in the oil and gas and trucking industries. Additionally, in
1969, Mr. Kerr co-founded the Resource Analysis and Management Group and
remained its senior partner until 1982. From 1967 to 1969, he was Vice President
of Kerr-McGee Chemical Corporation. From 1951 through 1967, Mr. Kerr worked for
Kerr-McGee Corporation as a geologist and land manager. Mr. Kerr has served as
chairman of the Investment Committee for the Massachusetts Institute of
Technology and is a life member of the Corporation (Board of Trustees) of that
university. He served as a director of Kerr-McGee Corporation from 1957 to 1981.
Mr. Kerr currently is a trustee and serves on the Investment Committee of the
Brookings Institute in Washington, D.C., and has been an associate director
since 1987 of Aven Gas & Oil, Inc., an oil and gas property management company
located in Oklahoma City. Mr. Kerr graduated from the Massachusetts Institute of
Technology in 1951.
Shannon T. Self was an advisory director of the Company from June 1992 to
February 1993 when he became a director. Mr. Self is a shareholder of Self,
Giddens & Lees, Inc., Attorneys at Law, in Oklahoma City, which he co-founded in
1991. Mr. Self was an associate and shareholder in the law firm of Hastie and
Kirschner, Oklahoma City, from 1984 to 1991 and was employed by Arthur Young &
Co. from 1979 to 1980. Mr. Self is a certified public accountant. He graduated
from the University of Oklahoma in 1979 and from Northwestern University Law
School in 1984.
Frederick B. Whittemore was an advisory director of the Company from June
1992 to February 1993 when he became a director. Mr. Whittemore has been an
advisory director of Morgan Stanley & Co. since 1989 and was a managing director
of Morgan Stanley & Co. from 1970 to 1989. He was Vice-Chairman of the American
Stock Exchange from 1982 to 1984. Mr. Whittemore was a partner with Morgan
Stanley & Co. from 1967 to 1970 and an associate from 1958 to 1967. He is a
director of Integon Corporation, an insurance company listed on the New York
Stock Exchange, and Southern Pacific Petroleum Corporation, an Australian oil
and gas company. Mr. Whittemore graduated from Dartmouth College in 1953 and
from the Amos Tuck School of Business Administration in 1954.
Walter C. Wilson was an advisory director of the Company from June 1992 to
February 1993 when he became a director. From 1963 to 1974 and from 1978 to the
present, Mr. Wilson has been a general agent with Massachusetts Mutual Life
Insurance Company. From 1974 to 1978, he was Senior Vice President of
Massachusetts Mutual Life Insurance Company, and from 1958 to 1963, he was an
agent with that company. Mr. Wilson is a member of the Board of Trustees of
Springfield College, Springfield, Massachusetts, and is a director of Earth
Satellite Corporation, a satellite remote sensing company in Rockville,
Maryland, and National Compensation Plans, Inc., a company located in Houston,
Texas which designs deferred compensation and retirement plans. Mr. Wilson
graduated from Dartmouth College in 1958.
The directors are divided into three classes, with each class having as
equal a number of directors as practicable. The directors are elected on a
staggered basis for three-year terms. One class stands for re-election at each
annual meeting of stockholders. The Company's executive officers serve at the
discretion of the Board of Directors.
29
<PAGE> 31
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 45,000,000 shares
of Common Stock, par value $.10 per share, and 2,000,000 shares of Preferred
Stock, par value of $.01 per share ("Preferred Stock"). As of October 25, 1996
the issued and outstanding capital stock of the Company consisted of 30,128,321
shares of Common Stock. No shares of Preferred Stock are currently outstanding.
Also, an additional 4,110,834 shares of Common Stock were reserved for issuance
upon the exercise of options granted and which may be granted under the
Company's stock option plans.
The Company's Board of Directors has approved and, at the Company's 1996
annual meeting, will submit to its shareholders for approval a proposal that the
Company reincorporate in the State of Oklahoma. The primary reason for the
reincorporation is to save approximately $200,000 in annual franchise taxes
while retaining corporate governance laws similar to those of Delaware. The
reincorporation will be accomplished by merging the Company into its
newly-formed Oklahoma subsidiary, Chesapeake Oklahoma Corporation ("Chesapeake
Oklahoma"). Upon consummation of the merger, the name of Chesapeake Oklahoma
will become Chesapeake Energy Corporation. The authorized capital stock of
Chesapeake Oklahoma is (and the authorized capital stock of the Company upon the
consummation of the merger will be) 100,000,000 shares of common stock, par
value $.01 per share, and 10,000,000 shares of preferred stock, par value $.01
per share. The issued and outstanding shares and the shares reserved for
issuance upon the exercise of options which have been and may be granted under
the Company's stock option plans will remain unchanged. If approved by
shareholders, the reincorporation will be effective on December 31, 1996.
Purchasers of Common Stock in the Offering will not be shareholders of record
entitled to vote at the 1996 annual meeting.
The following description of certain matters relating to the capital stock
of the Company is a summary and is qualified in its entirety by the provisions
of the Company's Certificate of Incorporation and Bylaws, which are incorporated
by reference as exhibits to the Registration Statement of which this Prospectus
is a part. The Certificate of Incorporation and the Bylaws of Chesapeake
Oklahoma are substantially the same as the Certificate of Incorporation
("Certificate") and Bylaws of the Company. Also the Oklahoma General Corporation
Act (the "Oklahoma Act") was adopted from the Delaware General Corporation Law
(the "Delaware Law") and the rights and obligations of stockholders of the
Company will be virtually unchanged. References to the Certificate and Bylaws of
the Company include references to the Certificate and Bylaws of Chesapeake
Oklahoma after the reincorporation.
COMMON STOCK
The holders of Common Stock are entitled to one vote per share on all
matters submitted to a vote of stockholders of the Company. In addition, such
holders are entitled to receive ratably such dividends, if any, as may be
declared from time to time by the Board of Directors out of funds legally
available therefor, subject to the payment of preferential dividends with
respect to any Preferred Stock that from time to time may be outstanding. In the
event of the dissolution, liquidation or winding-up of the Company, the holders
of Common Stock are entitled to share ratably in all assets remaining after
payment of all liabilities of the Company and subject to the prior distribution
rights of the holders of any Preferred Stock that may be outstanding at that
time. The holders of Common Stock do not have cumulative voting rights or
preemptive or other rights to acquire or subscribe for additional, unissued or
treasury shares. All outstanding shares of Common Stock are fully paid and
nonassessable.
PREFERRED STOCK
The Company has an authorized class of Preferred Stock consisting of
2,000,000 shares, none of which is issued and outstanding. The Board of
Directors is authorized, subject to any limitations prescribed by law, without
further stockholder approval, to issue shares of Preferred Stock from time to
time in one or more new series as from time to time designated. Each such series
of Preferred Stock would have such number of shares, designations, preferences,
voting powers, qualifications and special or relative rights or privileges as
shall be determined by the Board of Directors, which may include, among others,
dividend rights, voting rights, redemption and sinking fund provisions,
liquidation preferences and conversion rights.
30
<PAGE> 32
While providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, and eliminating delays associated
with a stockholder vote on specific issuances, the issuance of Preferred Stock
could adversely affect the voting power of holders of Common Stock and decrease
the likelihood that such holders of Common Stock will receive dividend payments
and payments upon liquidation, and could have the effect of delaying, deferring
or preventing a change in control of the Company.
ANTI-TAKEOVER PROVISIONS
The Certificate and Bylaws of the Company, and the Delaware Law and
Oklahoma Act include a number of provisions which may have the effect of
encouraging persons considering unsolicited tender offers or other unilateral
takeover proposals to negotiate with the Board of Directors rather than pursue
non-negotiated takeover attempts. These provisions include a classified board of
directors, authorized blank check preferred stock, restrictions on business
combinations and certain stock repurchases, and the availability of authorized
but unissued Common Stock.
CLASSIFIED BOARD OF DIRECTORS
The Company's Certificate and Bylaws contain provisions for a staggered
board of directors with only one-third of the board standing for election each
year. Directors can only be removed for cause. A staggered board makes it more
difficult for stockholders to change the majority of the directors and instead
promotes a continuity of existing management.
BLANK CHECK PREFERRED STOCK
The Certificate authorizes blank check Preferred Stock. See "-- Preferred
Stock." The Board of Directors can set the voting rights, redemption rights,
conversion rights and other rights relating to such Preferred Stock and could
issue such stock in either a private or public transaction. In some
circumstances, the blank check Preferred Stock could be issued and have the
effect of preventing a merger, tender offer or other takeover attempt which the
Board of Directors opposes.
TAKEOVER STATUTES
Section 203 of the Delaware Law and Section 1090.3 of the Oklahoma Act
generally prevent an "interested stockholder" from engaging in a "business
combination" with a corporation for three years following the date such person
became an interested stockholder, unless (i) prior to the time such person
became an interested stockholder, the board of directors of the corporation
approved the transaction in which the interested stockholder became an
interested stockholder or approved the business combination; (ii) upon
consummation of the transaction that resulted in the interested stockholder
becoming an interested stockholder, the interested stockholder owns at least 85%
of the voting stock of the corporation outstanding at the time the transaction
commenced, excluding stock held by directors who are also officers of the
corporation and stock held by certain employee stock plans; or (iii) on or
subsequent to the time of the transaction in which such person became an
interested stockholder, the business combination is approved by the board of
directors of the corporation and authorized at a meeting of stockholders by the
affirmative vote of the holders of two-thirds of the outstanding voting stock of
the corporation not owned by the interested stockholder.
The statutes define a "business combination" to include (i) any merger or
consolidation involving the corporation and an interested stockholder, (ii) any
sale, transfer, pledge or other disposition involving an interested stockholder
of 10% or more of the assets of the corporation, (iii) subject to certain
exceptions, any transaction which results in the issuance or transfer by the
corporation of any stock of the corporation to an interested stockholder, (iv)
any transaction involving the corporation which has the effect of increasing the
proportionate share of the stock of any class or series of the corporation
beneficially owned by the interested stockholder or (v) the receipt by an
interested stockholder of any loans, guarantees, pledges or other financial
benefits provided by or through the corporation. For purposes of Sections 203 of
the Delaware Law and 1090.3 of the Oklahoma Act, the term "corporation" also
includes the Company's majority-owned subsidiaries. In addition, the statutes
define an "interested stockholder" as any entity or person beneficially owning
15% or
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<PAGE> 33
more of the outstanding voting stock of the corporation and any entity or person
affiliated with or controlling or controlled by such entity or person.
STOCK PURCHASE PROVISIONS
The Certificate includes a provision which requires the affirmative vote of
two-thirds of the outstanding shares of capital stock entitled to vote generally
in the election of directors held by persons who are not interested stockholders
(as defined) to approve the repurchase of any equity securities of the Company
from any interested stockholder, unless such repurchase is either (i) made on
the same terms offered to all holders of the same securities or (ii) made on the
open market and not the result of a privately negotiated transaction.
STOCKHOLDER ACTION
With respect to any act or action required of or by the holders of the
Common Stock, the affirmative vote of a majority of the shares of Common Stock
present in person or represented by proxy at a meeting and entitled to vote
thereon is sufficient to authorize, affirm, ratify or consent to such act or
actions, except as otherwise provided by law or in the Charter. Both the
Delaware Law and the Oklahoma Act require the approval of the holders of a
majority of the outstanding stock entitled to vote for certain extraordinary
corporate transactions, such as a merger, sale of substantially all assets,
dissolution or amendment of the Certificate. The Certificate provides for a vote
of the holders of two-thirds of the issued and outstanding stock having voting
power, voting as a single class, to amend, repeal or adopt any provision
inconsistent with the provisions of the Certificate limiting director liability
and stock repurchases by the Company, and providing for staggered terms of
directors and indemnity for directors. Such vote is also required for
stockholders to amend, repeal or adopt any provision of the Bylaws.
Stockholders may take actions without the holding of a meeting by written
consent or consents signed by the holders of a sufficient number of shares to
approve the transaction had all of the outstanding shares of the capital stock
of the Company entitled to vote thereon been present at a meeting. Messrs.
McClendon and Ward and the other directors and executive officers as a group
beneficially own approximately % of the outstanding Common Stock prior to
the Offering and % after the Offering. Pursuant to the rules and
regulations of the Commission, if stockholder action is taken by written
consent, the Company will be required to send each stockholder entitled to vote
on the matter acted on, but whose consent was not solicited, an information
statement containing information substantially similar to that which would have
been contained in a proxy statement.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Liberty Bank and
Trust Company of Oklahoma City, N.A.
32
<PAGE> 34
UNDERWRITING
Subject to the terms and conditions contained in the Underwriting
Agreement, each of underwriters named below (the "Underwriters"), for whom
Donaldson, Lufkin & Jenrette Securities Corporation, Bear, Stearns & Co. Inc.,
J.P. Morgan Securities Inc. and Prudential Securities Incorporated are acting as
representatives (the "Representatives"), has severally agreed to purchase
3,250,000 shares of Common Stock from the Company. The number of shares of
Common Stock that each Underwriter has agreed to purchase is set forth opposite
its name below:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
------------------------------------------------------------------------- ---------
<S> <C>
Donaldson, Lufkin & Jenrette
Securities Corporation.................................................
Bear, Stearns & Co. Inc..................................................
J.P. Morgan Securities Inc...............................................
Prudential Securities Incorporated.......................................
---------
Total.......................................................... 3,250,000
=========
</TABLE>
The Underwriting Agreement provides that the obligation of the several
Underwriters to pay for and accept delivery of the shares of Common Stock are
subject to the approval of certain legal matters by counsel and to certain other
conditions. If any of the shares of Common Stock are purchased by the
Underwriters pursuant to the Underwriting Agreement, all such shares of Common
Stock (other than the shares of Common Stock covered by the over-allotment
option described below) must be so purchased.
The Company has been advised by the Representatives that the Underwriters
propose to offer the Common Stock to the public initially at the price to the
public set forth on the cover page of this Prospectus and to certain dealers
(who may include the Underwriters) at such price less a concession not to exceed
$ per share. The Underwriters may allow, and such dealers may reallow,
a discount not in excess of $ per share to any other Underwriter and
certain other dealers.
The Company has granted to the Underwriters an option to purchase up to
487,500 additional shares of Common Stock at the public offering price set forth
on the cover page hereof less underwriting discounts and commissions, solely to
cover over-allotments. Such option may be exercised at any time until 30 days
after the date of this Prospectus. To the extent that the Underwriters exercise
such option, each of the Underwriters will be committed, subject to certain
conditions, to purchase a number of option shares proportionate to such
Underwriter's initial commitment as indicated in the preceding table.
The Company, subject to certain exceptions, has agreed not to offer, sell
or otherwise dispose of any shares of Common Stock, or any shares exercisable
for or convertible into shares of Common Stock, prior to the expiration of 90
days from the date of this Prospectus, without the prior written consent of
Donaldson, Lufkin & Jenrette Securities Corporation on behalf of the
Underwriters.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended
(the "Securities Act") or to contribute to payments that the Underwriters may be
required to make in respect thereof.
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<PAGE> 35
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby has been passed
upon for the Company by McAfee & Taft A Professional Corporation, Oklahoma City,
Oklahoma. Certain legal matters will be passed upon for the Underwriters by
Andrews & Kurth L.L.P., Houston, Texas.
EXPERTS
The Consolidated Financial Statements of the Company as of June 30, 1995
and for each of the two years in the period ended June 30, 1995 and the
financial statements of Chesapeake Exploration Limited Partnership as of and for
the same date and periods, included and incorporated by reference in this
Prospectus, have been so included and incorporated by reference in reliance on
the reports of Price Waterhouse LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
The Consolidated Financial Statements of the Company as of June 30, 1996,
and for the year then ended and the financial statements of Chesapeake
Exploration Limited Partnership as of and for the same date and period, included
and incorporated by reference in this Prospectus, have been so included and
incorporated by reference in reliance on the reports of Coopers & Lybrand
L.L.P., independent accountants, given on the authority of said firm as experts
in auditing and accounting.
Effective July 1, 1996, Price Waterhouse LLP sold its Oklahoma City
practice to Coopers & Lybrand L.L.P. and resigned as the Company's independent
accountants.
Certain estimates of oil and gas reserves appearing herein and incorporated
by reference were based upon engineering studies prepared by Williamson
Petroleum Consultants, Inc., independent petroleum engineers. Such estimates are
included herein in reliance on the authority of such firm as experts in such
matters.
34
<PAGE> 36
GLOSSARY
The terms defined below are used throughout this Prospectus.
Bcf. Billion cubic feet of gas.
Bcfe. Billion cubic feet of gas equivalent.
Bbl. One stock tank barrel, or 42 U.S. gallons liquid volume, used herein
in reference to crude oil or other liquid hydrocarbons.
Btu. British thermal unit, which is the heat required to raise the
temperature of a one-pound mass of water from 58.5 to 59.5 degrees Fahrenheit.
Commercial Well; Commercially Productive Well. An oil and gas well which
produces oil and gas in sufficient quantities such that proceeds from the sale
of such production exceed production expenses and taxes.
Developed Acreage. The number of acres which are allocated or assignable to
producing wells or wells capable of production.
Development Well. A well drilled within the proved area of an oil or gas
reservoir to the depth of a stratigraphic horizon known to be productive.
Dry Hole; Dry Well. A well found to be incapable of producing either oil or
gas in sufficient quantities to justify completion as an oil or gas well.
Exploratory Well. A well drilled to find and produce oil or gas in an
unproved area, to find a new reservoir in a field previously found to be
productive of oil or gas in another reservoir or to extend a known reservoir.
Farmout. An assignment of an interest in a drilling location and related
acreage conditional upon the drilling of a well on that location.
Formation. A succession of sedimentary beds that were deposited under the
same general geologic conditions.
Gross Acres or Gross Wells. The total acres or wells, as the case may be,
in which a working interest is owned.
Horizontal Wells. Wells which are drilled at angles greater than 70() from
vertical.
MBbl. One thousand barrels of crude oil or other liquid hydrocarbons.
MBoe. One thousand barrels of oil equivalent.
MBtu. One thousand Btus.
Mcf. One thousand cubic feet of gas.
Mcfe. One thousand cubic feet of gas equivalent.
MMBbl. One million barrels of crude oil or other liquid hydrocarbons.
MMBtu. One million Btus.
MMcf. One million cubic feet of gas.
MMcfe. One million cubic feet of gas equivalent.
Net Acres or Net Wells. The sum of the fractional working interest owned in
gross acres or gross wells.
Present Value. When used with respect to oil and gas reserves, present
value means the estimated future gross revenue to be generated from the
production of proved reserves, net of estimated production and future
development costs, using prices and costs in effect at the determination date,
without giving effect to
35
<PAGE> 37
nonproperty related expenses such as general and administrative expenses, debt
service and future income tax expense or to depreciation, depletion and
amortization, discounted using an annual discount rate of 10%.
Productive Well. A well that is producing oil or gas or that is capable of
production.
Proved Developed Reserves. Reserves that can be expected to be recovered
through existing wells with existing equipment and operating methods.
Proved Reserves. The estimated quantities of crude oil, natural gas and
natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions.
Proved Undeveloped Location. A site on which a development well can be
drilled consistent with spacing rules for purposes of recovering proved
undeveloped reserves.
Proved Undeveloped Reserves. Reserves that are expected to be recovered
from new wells drilled to a known reservoir on undrilled acreage or from
existing wells where a relatively major expenditure is required for
recompletion.
Royalty Interest. An interest in an oil and gas property entitling the
owner to a share of oil or gas production free of costs of production.
Undeveloped Acreage. Lease acreage on which wells have not been drilled or
completed to a point that would permit the production of commercial quantities
of oil and gas regardless of whether such acreage contains proved reserves.
Working Interest. The operating interest which gives the owner the right to
drill, produce and conduct operating activities on the property and a share of
production.
36
<PAGE> 38
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Chesapeake Energy Corporation
Consolidated Financial Statements:
Report of Independent Accountants for the year ended June 30, 1996.................. F-2
Report of Independent Accountants for the years ended June 30, 1995 and 1994........ F-3
Consolidated Balance Sheets at June 30, 1996 and 1995............................... F-4
Consolidated Statements of Income for the years ended June 30, 1996, 1995 and
1994............................................................................. F-5
Consolidated Statements of Cash Flows for the years ended June 30, 1996, 1995 and
1994............................................................................. F-6
Consolidated Statements of Stockholders' Equity for the years ended June 30, 1996,
1995 and 1994.................................................................... F-8
Notes to Consolidated Financial Statements.......................................... F-9
Chesapeake Exploration Limited Partnership
Financial Statements:
Report of Independent Accountants for the year ended June 30, 1996.................. F-29
Report of Independent Accountants for the years ended June 30, 1995 and 1994........ F-30
Balance Sheets at June 30, 1996 and 1995............................................ F-31
Statements of Income for the years ended June 30, 1996, 1995 and 1994............... F-32
Statements of Partners' Capital for the years ended June 30, 1996, 1995 and 1994.... F-33
Statements of Cash Flows for the years ended June 30, 1996, 1995 and 1994........... F-34
Notes to Financial Statements....................................................... F-35
</TABLE>
F-1
<PAGE> 39
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Chesapeake Energy Corporation
We have audited the accompanying consolidated balance sheet of Chesapeake
Energy Corporation and its subsidiaries as of June 30, 1996, and the related
consolidated statements of income, stockholders' equity and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Chesapeake
Energy Corporation and its subsidiaries as of June 30, 1996, and the
consolidated results of their operations and their cash flows for the year then
ended in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Oklahoma City, Oklahoma
September 13, 1996
F-2
<PAGE> 40
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Chesapeake Energy Corporation
In our opinion, the consolidated balance sheet and the related consolidated
statements of income, of cash flows and of stockholders' equity as of and for
each of the two years in the period ended June 30, 1995 present fairly, in all
material respects, the financial position, results of operations and cash flows
of Chesapeake Energy Corporation and its subsidiaries as of and for each of the
two years in the period ended June 30, 1995, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above. We have not
audited the consolidated financial statements of Chesapeake Energy Corporation
for any period subsequent to June 30, 1995.
PRICE WATERHOUSE LLP
Houston, Texas
September 20, 1995, except for Note 9
which is as of September 23, 1996
F-3
<PAGE> 41
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30,
---------------------
1996 1995
-------- --------
($ IN THOUSANDS)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............................................ $ 51,638 $ 55,535
Accounts receivable:
Oil and gas sales................................................. 12,687 10,644
Gas marketing sales............................................... 6,982 --
Joint interest and other, net of allowances of $340,000 and
$452,000, respectively........................................... 27,661 26,317
Related parties................................................... 2,884 4,386
Inventory............................................................ 5,163 8,926
Other................................................................ 2,158 633
-------- --------
Total Current Assets......................................... 109,173 106,441
-------- --------
PROPERTY AND EQUIPMENT:
Oil and gas properties, at cost based on full cost accounting:
Evaluated oil and gas properties.................................. 363,213 165,302
Unevaluated properties............................................ 165,441 27,474
Less: accumulated depreciation, depletion and amortization........ (92,720) (41,821)
-------- --------
435,934 150,955
Other property and equipment......................................... 18,162 16,966
Less: accumulated depreciation and amortization...................... (2,922) (4,120)
-------- --------
Total Property and Equipment................................. 451,174 163,801
-------- --------
OTHER ASSETS........................................................... 11,988 6,451
-------- --------
TOTAL ASSETS........................................................... $572,335 $276,693
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable and current maturities of long-term debt............... $ 6,755 $ 9,993
Accounts payable..................................................... 54,514 33,438
Accrued liabilities and other........................................ 14,062 7,688
Revenues and royalties due others.................................... 33,503 23,786
-------- --------
Total Current Liabilities.................................... 108,834 74,905
-------- --------
LONG-TERM DEBT, NET.................................................... 268,431 145,754
-------- --------
REVENUES AND ROYALTIES DUE OTHERS...................................... 5,118 3,779
-------- --------
DEFERRED INCOME TAXES.................................................. 12,185 7,280
-------- --------
CONTINGENCIES AND COMMITMENTS (Note 4)................................. -- --
-------- --------
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value, 2,000,000 shares authorized; 0
shares issued and outstanding..................................... -- --
Common Stock, 45,000,000 shares authorized; $.10 par value at June
30, 1996, $.0022 par value at June 30, 1995; 30,079,913 and
26,311,248 shares issued and outstanding at June 30, 1996 and
1995, respectively................................................ 3,008 58
Paid-in capital...................................................... 136,782 30,295
Accumulated earnings................................................. 37,977 14,622
-------- --------
Total Stockholders' Equity................................... 177,767 44,975
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............................. $572,335 $276,693
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 42
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------
1996 1995 1994
-------- ------- -------
($ IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C> <C>
REVENUES:
Oil and gas sales.......................................... $110,849 $56,983 $22,404
Gas marketing sales........................................ 28,428 -- --
Oil and gas service operations............................. 6,314 8,836 6,439
Interest and other......................................... 3,831 1,524 981
-------- ------- -------
Total Revenues..................................... 149,422 67,343 29,824
-------- ------- -------
COSTS AND EXPENSES:
Production expenses and taxes.............................. 8,303 4,256 3,647
Gas marketing expenses..................................... 27,452 -- --
Oil and gas service operations............................. 4,895 7,747 5,199
Oil and gas depreciation, depletion and amortization....... 50,899 25,410 8,141
Depreciation and amortization of other assets.............. 3,157 1,765 1,871
General and administrative................................. 4,828 3,578 3,135
Interest and other......................................... 13,679 6,627 2,676
-------- ------- -------
Total Costs and Expenses........................... 113,213 49,383 24,669
-------- ------- -------
INCOME BEFORE INCOME TAXES................................... 36,209 17,960 5,155
INCOME TAX EXPENSE........................................... 12,854 6,299 1,250
-------- ------- -------
NET INCOME................................................... $ 23,355 $11,661 $ 3,905
======== ======= =======
EARNINGS PER COMMON SHARE:
NET INCOME PER COMMON SHARE
Primary................................................. $ .80 $ .42 $ .16
======== ======= =======
Fully-diluted........................................... $ .79 $ .41 $ .16
======== ======= =======
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES
OUTSTANDING
Primary................................................. 29,171 27,936 24,120
======== ======= =======
Fully-diluted........................................... 29,461 28,303 24,183
======== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 43
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------
1996 1995 1994
--------- --------- --------
($ IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME............................................... $ 23,355 $ 11,661 $ 3,905
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED
BY OPERATING ACTIVITIES:
Depreciation, depletion and amortization............... 52,768 26,628 9,455
Deferred taxes......................................... 12,854 6,299 1,250
Amortization of loan costs............................. 1,288 548 557
Amortization of bond discount.......................... 563 567 138
Bad debt expense....................................... 114 308 222
Purchases and sales of trading securities, net......... 622 -- --
Gain on sale of fixed assets........................... (2,511) (108) --
CHANGES IN ASSETS AND LIABILITIES:
(Increase) decrease in accounts receivable............. (3,524) (22,510) (7,773)
(Increase) decrease in inventory....................... 78 (1,203) (304)
(Increase) decrease in other current assets............ (1,525) 614 (726)
Increase (decrease) in accounts payable, accrued
liabilities and other............................... 25,834 19,387 10,077
Increase in current and non-current revenues and
royalties due others................................ 11,056 12,540 2,622
--------- --------- --------
Cash provided by operating activities.......... 120,972 54,731 19,423
--------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Exploration, development and acquisition of oil and gas
properties.......................................... (347,294) (120,985) (34,654)
Proceeds from sale of oil and gas equipment, leasehold
and other........................................... 11,416 15,107 7,598
Other proceeds from sales.............................. 698 1,104 765
Investment in gas marketing company, net of cash
acquired............................................ (363) -- --
Other property and equipment additions................. (8,846) (7,929) (2,920)
--------- --------- --------
Cash used in investing activities.............. (344,389) (112,703) (29,211)
--------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Common Stock................. 99,498 -- --
Proceeds from long-term borrowings..................... 166,667 128,834 48,800
Payments on long-term borrowings....................... (48,634) (32,370) (25,738)
Placement fee on Senior Notes and Warrants............. -- -- (1,900)
Cash received from exercise of stock options........... 1,989 818 --
--------- --------- --------
Cash provided by financing activities.......... 219,520 97,282 21,162
--------- --------- --------
Net increase (decrease) in cash and cash equivalents..... (3,897) 39,310 11,374
Cash and cash equivalents, beginning of period........... 55,535 16,225 4,851
--------- --------- --------
Cash and cash equivalents, end of period................. $ 51,638 $ 55,535 $ 16,225
========= ========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
CASH PAYMENTS FOR:
Interest............................................... $ 17,179 $ 6,488 $ 1,467
Income taxes........................................... $ -- $ -- $ 109
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 44
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
The Company has a financing arrangement with a vendor to supply certain oil
and gas equipment inventory. The total amounts owed at June 30, 1996, 1995 and
1994 were $3,156,000, $6,513,000 and $5,952,000, respectively. No cash
consideration is exchanged for inventory under this financing arrangement until
actual draws on the inventory are made.
In fiscal 1996 and 1995, the Company recognized income tax benefits of
$7,950,000 and $1,229,000, respectively, related to the disposition of stock
options by directors and employees of the Company. The tax benefits were
recorded as an adjustment to deferred income taxes and paid-in capital.
Proceeds from the issuances of $90 million of 10.5% Senior Notes in May
1995 and $120 million of 9.125% Senior Notes in April 1996 are net of $2.7
million and $3.9 million, respectively, in offering fees and expenses which were
deducted from the actual cash received.
On March 31, 1994, the Company issued 8,000 units (see Note 2) to Trust
Company of the West ("TCW") primarily in consideration for the surrender of
576,923 shares of the Company's 9% convertible preferred stock, including its
rights to dividends, warrants to purchase Common Stock and an overriding royalty
interest.
In February 1994, pending litigation was settled pursuant to an agreement
requiring COI to pay $1.25 million, of which $250,000 plus interest was paid in
July 1994, and the balance of which was paid in June 1995.
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE> 45
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------
1996 1995 1994
-------- ------- -------
($ IN THOUSANDS)
<S> <C> <C> <C>
PREFERRED STOCK:
Balance, beginning of period................................. $ -- $ -- $ 6
Exchange of 576,923 shares of Preferred Stock................ -- -- (6)
-------- ------- -------
Balance, end of period....................................... -- -- --
-------- ------- -------
COMMON STOCK:
Balance, beginning of period................................. 58 51 51
Issuance of 2,994,750 shares of Common Stock................. 299 -- --
Exercise of stock options and warrants....................... 79 7 --
Change in par value from $.0022 to $.10...................... 2,572 -- --
-------- ------- -------
Balance, end of period....................................... 3,008 58 51
-------- ------- -------
COMMON STOCK WARRANTS:
Balance, beginning of period................................. -- 5 --
Issuance of Common Stock Warrants............................ -- -- 5
Exercise of Common Stock Warrants............................ -- (5) --
-------- ------- -------
Balance, end of period....................................... -- -- 5
-------- ------- -------
PAID-IN CAPITAL:
Balance, beginning of period................................. 30,295 28,243 32,704
Exchange of Preferred Stock.................................. -- -- (7,494)
Issuance of Common Stock Warrants............................ -- -- 3,033
Exercise of stock options and warrants....................... 1,910 823 --
Issuance of Common Stock..................................... 105,516 -- --
Offering expenses and other.................................. (6,317) -- --
Tax benefit from exercise of stock options................... 7,950 1,229 --
Change in par value from $.0022 to $.10...................... (2,572) -- --
-------- ------- -------
Balance, end of period....................................... 136,782 30,295 28,243
-------- ------- -------
ACCUMULATED EARNINGS (DEFICIT):
Balance, beginning of period................................. 14,622 2,961 (1,329)
Net income................................................... 23,355 11,661 3,905
Preferred dividends.......................................... -- -- (340)
Cancellation of preferred dividends.......................... -- -- 725
-------- ------- -------
Balance, end of period....................................... 37,977 14,622 2,961
-------- ------- -------
TOTAL STOCKHOLDERS' EQUITY..................................... $177,767 $44,975 $31,260
======== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE> 46
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements of Chesapeake Energy
Corporation (the "Company" or "Parent") include the accounts of Chesapeake
Operating, Inc. ("COI"), Chesapeake Exploration Limited Partnership ("CEX"), a
limited partnership, Chesapeake Gas Development Corporation ("CGDC"), Chesapeake
Energy Marketing, Inc. ("CEMI"), Lindsay Oil Field Supply, Inc. ("LOF"), Sander
Trucking Company, Inc. ("STCO") and subsidiaries of those entities. All
significant intercompany accounts and transactions have been eliminated.
In December 1995, the Company entered into the gas marketing business by
acquiring all of the outstanding stock of an Oklahoma City-based natural gas
marketing company for total consideration of $725,000. This subsidiary was
subsequently named CEMI. CEMI provides natural gas marketing services including
commodity price structuring, contract administration and nomination services for
the Company, its partners and other natural gas producers in the geographical
areas in which the Company is active.
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
Cash Equivalents
For purposes of the consolidated financial statements, the Company
considers investments in all highly liquid debt instruments with maturities of
three months or less at date of purchase to be cash equivalents.
Inventory
Inventory consists primarily of tubular goods and other lease and well
equipment which the Company plans to utilize in its ongoing exploration and
development activities and is carried at the lower of cost or market using the
specific identification method.
Oil and Gas Properties
The Company follows the full cost method of accounting under which all
costs associated with property acquisition, exploration and development
activities are capitalized. The Company capitalizes internal costs that can be
directly identified with its acquisition, exploration and development activities
and does not include any costs related to production, general corporate overhead
or similar activities (see Note 11). Capitalized costs are amortized on a
composite unit-of-production method based on proved oil and gas reserves. The
Company's oil and gas reserves are estimated annually by independent petroleum
engineers. The average composite rates used for depreciation, depletion and
amortization were $0.85, $0.80 and $0.80 per equivalent Mcf in 1996, 1995, and
1994, respectively. Proceeds from the sale of properties are accounted for as
reductions to capitalized costs unless such sales involve a significant change
in the relationship between costs and the value of proved reserves or the
underlying value of unproved properties, in which case a gain or loss is
recognized. Unamortized costs as reduced by related deferred taxes are subject
to a ceiling which limits such amounts to the estimated present value of oil and
gas reserves, reduced by operating expenses, future development costs and income
taxes. The costs of unproved properties are excluded from amortization until the
properties are evaluated.
F-9
<PAGE> 47
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On April 30, 1996, the Company purchased interests in certain producing and
non-producing oil and gas properties, including approximately 14,000 net acres
of unevaluated leasehold from Amerada Hess Corporation for $35 million, subject
to adjustment for activity after the effective date of January 1, 1996. The
properties are located in the Knox and Golden Trend fields of southern Oklahoma,
most of which are operated by the Company.
Other Property and Equipment
Other property and equipment primarily consists of vehicles, office
buildings and equipment, and software. Major renewals and betterments are
capitalized while the costs of repairs and maintenance are charged to expense as
incurred. The costs of assets retired or otherwise disposed of and the
applicable accumulated depreciation are removed from the accounts, and the
resulting gain or loss is reflected in operations. Other property and equipment
costs are depreciated on both straight-line and accelerated methods over the
estimated useful lives of the assets, which range from three to 30 years.
Leases
Included in other property and equipment in the consolidated balance sheets
is computer equipment and software held under capital leases. Minimum lease
payments under these capital leases and other operating leases are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
($ IN THOUSANDS)
<S> <C> <C>
1997...................................................... $ 62 $ 133
1998...................................................... 62 58
1999...................................................... 15 53
2000...................................................... 0 0
2001...................................................... 0 0
----- -----
Total minimum lease payments.............................. 139 $ 244
=====
Less: amount relating to interest......................... (20)
-----
Present value of minimum payments......................... $ 119
=====
</TABLE>
Capitalized Interest
During fiscal 1996, 1995 and 1994, interest of approximately $6,428,000,
$1,574,000 and $356,000 was capitalized on significant investments in unproved
properties that are not being currently depreciated, depleted, or amortized and
on which exploration or development activities are in progress.
Service Operations
Certain subsidiaries of the Company performed contractual services on wells
the Company operates as well as for third parties until June 30, 1996. Oil and
gas service operations revenues and costs and expenses reflected in the
accompanying consolidated statements of income include amounts derived from
certain of the contractual services provided. The Company's economic interest in
its oil and gas properties is not affected by the performance of these
contractual services and all intercompany profits have been eliminated.
On June 30, 1996, Peak USA Energy Services, Ltd., a limited partnership
("Peak"), was formed by Peak Oilfield Services Company (a joint venture between
Cook Inlet Region, Inc. and Nabors Industries, Inc.) and Chesapeake for the
purpose of purchasing the Company's oilfield service assets and providing rig
moving, transportation and related site construction services to the Company and
the industry. The Company sold its
F-10
<PAGE> 48
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
service company assets to Peak for $6.4 million, and simultaneously invested
$2.5 million in exchange for a 33.3% partnership interest in Peak. This
transaction resulted in recognition of a $1.8 million pre-tax gain during the
fourth fiscal quarter of 1996 reported in Interest and other. A deferred gain
from the sale of service company assets of $0.9 million was recorded as a
reduction in the Company's investment in Peak and will be amortized to income
over the estimated useful lives of the Peak assets. The Company's investment in
Peak will be accounted for using the equity method.
Income Taxes
The Company has adopted Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 requires deferred tax
liabilities or assets to be recognized for the anticipated future tax effects of
temporary differences that arise as a result of the differences in the carrying
amounts and the tax bases of assets and liabilities.
Net Income Per Share
Primary and fully diluted earnings per share for all periods have been
computed based upon the weighted average number of shares of Common Stock
outstanding after giving retroactive effect to all stock splits and the issuance
of common stock equivalents when their effect is dilutive. Dilutive options or
warrants which are issued during a period or which expire or are cancelled
during a period are reflected in both primary and fully diluted earnings per
share computations for the time they were outstanding during the period being
reported upon.
Gas Imbalances
The Company follows the "sales method" of accounting for its oil and gas
revenue whereby the Company recognizes sales revenue on all oil or gas sold to
its purchasers, regardless of whether the sales are proportionate to the
Company's ownership in the property. A liability is recognized only to the
extent that the Company has a net imbalance in excess of the reserves on the
underlying properties. The Company's net imbalance positions at June 30, 1996
and 1995 were not material.
Hedging
The Company periodically uses certain instruments to hedge its exposure to
price fluctuations on oil and natural gas transactions. Recognized gains and
losses on hedge contracts are reported as a component of the related
transaction. Results for hedging transactions are reflected in oil and gas sales
to the extent related to the Company's oil and gas production.
Debt Issue Costs
Other assets relate primarily to debt issue costs associated with the
issuance of the 12% Senior Notes on March 31, 1994, the 10.5% Senior Notes on
May 25, 1995, and the 9.125% Senior Notes on April 9, 1996 (see Note 2). The
remaining unamortized costs on these issuances of Senior Notes at June 30, 1996
totaled $8.7 million and are being amortized over the life of the Senior Notes.
Stock Options
In October 1995, the Financial Accounting Standards Board issued Statement
No. 123 ("SFAS 123"), "Accounting for Stock Based Compensation". As permitted by
SFAS 123, the Company plans to continue to retain its current method of
accounting for stock compensation and adopt the disclosure requirements of this
Statement in fiscal 1997.
F-11
<PAGE> 49
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Reclassifications
Certain reclassifications have been made to the consolidated financial
statements for the years ended June 30, 1995 and 1994 to conform to the
presentation used for the June 30, 1996 consolidated financial statements.
2. SENIOR NOTES
On April 9, 1996, the Company completed an offering of $120 million
principal amount of 9.125% Senior Notes due 2006 ("9.125% Senior Notes"). The
9.125% Senior Notes are redeemable at the option of the Company at any time at
the redemption or make-whole prices set forth in the indenture. The Company may
also redeem at its option at any time on or prior to April 15, 1999 up to $42
million of the 9.125% Senior Notes at 109.125% of the principal amount thereof
with the proceeds of an equity offering.
On May 25, 1995, the Company completed a private offering of $90 million
principal amount of 10.5% Senior Notes due 2002 ("10.5% Senior Notes"). The
10.5% Senior Notes are redeemable at the option of the Company at any time on or
after June 1, 1999. The Company may also redeem at its option any time prior to
June 1, 1998 up to $30 million of the 10.5% Senior Notes at 110% of the
principal amount thereof with the proceeds of an equity offering. In September
1995, the Company exchanged the 10.5% Senior Notes for substantially identical
notes in a registered exchange offer (also referred to as the "10.5% Senior
Notes").
On March 31, 1994, the Company completed a private offering of 47,500 Units
consisting of an aggregate of $47.5 million principal amount of 12% Senior Notes
due 2001 ("12% Senior Notes") and warrants ("Warrants") to purchase 2,190,937
shares of the Company's Common Stock at an aggregate exercise price of $4,870.
The Warrants were valued at $3 million creating a discount on the 12% Senior
Notes. All of the Warrants were subsequently exercised. In exchange for 8,000
Units, the Company acquired from Trust Company of the West ("TCW") 576,923
shares of the Company's 9% cumulative convertible preferred stock and all rights
to dividends thereon, warrants to purchase 1,404,004 shares of the Company's
Common Stock and 50% of an outstanding overriding royalty interest held by TCW.
The 12% Senior Notes are redeemable at the option of the Company at any time on
or after March 1, 1998 at an initial premium of 106% of the principal amount
thereof, declining to no premium in 2000. The Company is required to redeem
$11,875,000 principal amount of 12% Senior Notes on each of March 1, 1998, 1999
and 2000. In November 1994, the Company exchanged the 12% Senior Notes for
substantially identical notes in a registered exchange offer (also referred to
as the "12% Senior Notes").
The Company is a holding company and owns no operating assets and has no
significant operations independent of its subsidiaries. The Company's
obligations under the 12% Senior Notes, the 10.5% Senior Notes and the 9.125%
Senior Notes have been fully and unconditionally guaranteed, on a joint and
several basis, by each of the Company's "Restricted Subsidiaries" (as defined in
the respective Indentures governing the Notes): COI, LOF, STCO, Whitmire Dozer
Service, Inc. and CEX (collectively, the "Subsidiary Guarantors"). The only
subsidiaries of the Company that are not Subsidiary Guarantors are CGDC and CEMI
(together, the "Non-Guarantor Subsidiaries"). Each of the Subsidiary Guarantors
is a direct or indirect wholly-owned subsidiary of the Company. The securities
of the Subsidiary Guarantors have been pledged to secure performance of the
Company's obligations under the 12% Senior Notes. The only affiliate securities
constituting a substantial portion of the collateral for the 12% Senior Notes
are the partnership interests in CEX.
The 12%, 10.5% and 9.125% Senior Note Indentures contain certain covenants,
including covenants limiting the Company and the Subsidiary Guarantors with
respect to asset sales; restricted payments; the incurrence of additional
indebtedness and the issuance of preferred stock; liens; sale and leaseback
transactions; lines of business; dividend and other payment restrictions
affecting Subsidiary Guarantors; mergers or consolidations; and transactions
with affiliates. The Company is also obligated to repurchase 12%,
F-12
<PAGE> 50
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10.5% and 9.125% Senior Notes if it fails to maintain a specified ratio of
assets to debt and in the event of a change of control or certain asset sales.
The Company's bank credit agreement prohibits any distributions by CEX to
its partners (the Company and COI) if the maturity of any obligations to the
lender has been accelerated. The pledge agreement relating to the 12% Senior
Notes requires that all dividends and distributions from Subsidiary Guarantors
be paid to the collateral agent thereunder upon an event of default under the
12% Senior Notes Indenture. There are no other restrictions on the payment of
cash dividends by Subsidiary Guarantors.
CEX is a limited partnership which is 10% owned by COI, as sole general
partner, and 90% owned directly by the Company, as sole limited partner. CEX
owns 94% and CGDC owns 6% of the Company's producing oil and gas properties,
based on the present value of future net revenue at June 30, 1996 (discounted at
10%).
Set forth below are condensed consolidating financial statements of CEX,
the other Subsidiary Guarantors, all Subsidiary Guarantors combined, the
Non-Guarantor Subsidiaries and the Company. The CEX limited partnership
condensed financial statements were prepared on a separate entity basis as
reflected in the Company's books and records and include all material costs of
doing business as if the partnership were on a stand-alone basis except that
interest is not charged or allocated. No provision has been made for income
taxes because the partnership is not a taxpaying entity. Separate audited
financial statements of each Subsidiary Guarantor, other than CEX, have not been
provided because management has determined that they are not material to
investors.
F-13
<PAGE> 51
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF JUNE 30, 1996
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
SUBSIDIARY GUARANTORS
-------------------------------- NON-
ALL GUARANTOR COMPANY
CEX OTHERS COMBINED SUBSIDIARIES (PARENT) ELIMINATIONS CONSOLIDATED
-------- -------- ---------- ------------ -------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents......... $ -- $ 4,061 $ 4,061 $ 2,751 $44,826 $ -- $ 51,638
Accounts receivable............... 14,778 29,302 44,080 7,723 -- (1,589) 50,214
Inventory......................... -- 4,947 4,947 216 -- -- 5,163
Other............................. 1,891 264 2,155 3 -- -- 2,158
-------- -------- ---------- ------- -------- --------- --------
Total Current Assets........ 16,669 38,574 55,243 10,693 44,826 (1,589) 109,173
-------- -------- ---------- ------- -------- --------- --------
PROPERTY AND EQUIPMENT:
Oil and gas properties............ 346,821 (8,211) 338,610 24,603 -- -- 363,213
Unevaluated leasehold............. 165,441 -- 165,441 -- -- -- 165,441
Other property and equipment...... -- 9,608 9,608 61 8,493 -- 18,162
Less: accumulated depreciation,
depletion and amortization...... (84,726) (2,467) (87,193) (8,007) (442 ) -- (95,642)
-------- -------- ---------- ------- -------- --------- --------
427,536 (1,070) 426,466 16,657 8,051 -- 451,174
-------- -------- ---------- ------- -------- --------- --------
INVESTMENTS IN SUBSIDIARIES AND
INTERCOMPANY ADVANCES............. 56,055 463,331 519,386 8,132 382,388 (909,906) --
OTHER ASSETS........................ 694 1,616 2,310 940 8,738 -- 11,988
-------- -------- ---------- ------- -------- --------- --------
TOTAL ASSETS........................ $500,954 $502,451 $1,003,405 $ 36,422 $444,003 $ (911,495) $572,335
======== ======== ========== ======= ======== ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable and current
maturities of long-term debt.... $ -- $ 3,846 $ 3,846 $ 2,880 $ 29 $ -- $ 6,755
Accounts payable and other........ 789 90,280 91,069 7,339 5,260 (1,589) 102,079
-------- -------- ---------- ------- -------- --------- --------
Total Current Liabilities... 789 94,126 94,915 10,219 5,289 (1,589) 108,834
-------- -------- ---------- ------- -------- --------- --------
LONG-TERM DEBT...................... -- 2,113 2,113 10,020 256,298 -- 268,431
-------- -------- ---------- ------- -------- --------- --------
REVENUES AND ROYALTIES DUE OTHERS... -- 5,118 5,118 -- -- -- 5,118
-------- -------- ---------- ------- -------- --------- --------
DEFERRED INCOME TAXES............... -- 23,950 23,950 1,335 (13,100 ) -- 12,185
-------- -------- ---------- ------- -------- --------- --------
INTERCOMPANY PAYABLES............... 413,726 410,581 824,307 8,182 73,647 (906,136) --
-------- -------- ---------- ------- -------- --------- --------
STOCKHOLDERS' EQUITY:
Common Stock...................... -- 117 117 2 2,891 (2) 3,008
Other............................. 86,439 (33,554) 52,885 6,664 118,978 (3,768) 174,759
-------- -------- ---------- ------- -------- --------- --------
86,439 (33,437) 53,002 6,666 121,869 (3,770) 177,767
-------- -------- ---------- ------- -------- --------- --------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY............................ $500,954 $502,451 $1,003,405 $ 36,422 $444,003 $ (911,495) $572,335
======== ======== ========== ======= ======== ========= ========
</TABLE>
F-14
<PAGE> 52
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF JUNE 30, 1995
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
SUBSIDIARY GUARANTORS
------------------------------ NON-
ALL GUARANTOR COMPANY
CEX OTHERS COMBINED SUBSIDIARIES (PARENT) ELIMINATIONS CONSOLIDATED
-------- -------- -------- ------------ -------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.......... $ -- $ 53,227 $ 53,227 $ 5 $ 2,303 $ -- $ 55,535
Accounts receivable................ 9,867 30,693 40,560 777 10 -- 41,347
Inventory.......................... -- 8,895 8,895 31 -- -- 8,926
Other.............................. -- 633 633 -- -- -- 633
-------- -------- -------- -------- -------- ---------- --------
Total Current Assets......... 9,867 93,448 103,315 813 2,313 -- 106,441
-------- -------- -------- -------- -------- ---------- --------
PROPERTY AND EQUIPMENT:
Oil and gas properties............. 163,521 (16,723) 146,798 18,504 -- -- 165,302
Unevaluated leasehold.............. 27,474 -- 27,474 -- -- -- 27,474
Other property and equipment....... -- 12,199 12,199 -- 4,767 -- 16,966
Less: accumulated depreciation,
depletion and amortization....... (36,959) (3,847) (40,806) (4,861) (274) -- (45,941)
-------- -------- -------- -------- -------- ---------- --------
154,036 (8,371) 145,665 13,643 4,493 -- 163,801
-------- -------- -------- -------- -------- ---------- --------
INVESTMENTS IN SUBSIDIARIES AND
INTERCOMPANY ADVANCES.............. 17,559 181,914 199,473 -- 176,795 (376,268) --
OTHER ASSETS......................... 776 41 817 123 5,511 -- 6,451
-------- -------- -------- -------- -------- ---------- --------
TOTAL ASSETS......................... $182,238 $267,032 $449,270 $ 14,579 $189,112 $ (376,268) $276,693
======== ======== ======== ======== ======== ========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable and current
maturities of long-term debt..... $ -- $ 7,757 $ 7,757 $ 2,200 $ 36 $ -- $ 9,993
Accounts payable and other......... 516 61,777 62,293 -- 2,619 -- 64,912
-------- -------- -------- -------- -------- ---------- --------
Total Current Liabilities.... 516 69,534 70,050 2,200 2,655 -- 74,905
-------- -------- -------- -------- -------- ---------- --------
LONG-TERM DEBT....................... 10 1,326 1,336 8,600 135,818 -- 145,754
-------- -------- -------- -------- -------- ---------- --------
REVENUES AND ROYALTIES DUE OTHERS.... -- 3,779 3,779 -- -- -- 3,779
-------- -------- -------- -------- -------- ---------- --------
DEFERRED INCOME TAXES................ -- 9,621 9,621 164 (2,505) -- 7,280
-------- -------- -------- -------- -------- ---------- --------
INTERCOMPANY PAYABLES................ 140,236 201,959 342,195 3,307 30,766 (376,268) --
-------- -------- -------- -------- -------- ---------- --------
STOCKHOLDERS' EQUITY:
Common Stock....................... -- 31 31 1 58 (32) 58
Other.............................. 41,476 (19,218) 22,258 307 22,320 32 44,917
-------- -------- -------- -------- -------- ---------- --------
41,476 (19,187) 22,289 308 22,378 -- 44,975
-------- -------- -------- -------- -------- ---------- --------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY............................. $182,238 $267,032 $449,270 $ 14,579 $189,112 $ (376,268) $276,693
======== ======== ======== ======== ======== ========== ========
</TABLE>
F-15
<PAGE> 53
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
SUBSIDIARY GUARANTORS
------------------------------ NON-
ALL GUARANTOR COMPANY
CEX OTHERS COMBINED SUBSIDIARIES (PARENT) ELIMINATIONS CONSOLIDATED
-------- -------- -------- ------------ --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED JUNE 30, 1996:
REVENUES:
Oil and gas sales.................. $103,712 $ -- $103,712 $ 6 ,884 $ -- $ 253 $ 110,849
Gas marketing sales................ -- -- -- 34,973 -- (6,545) 28,428
Oil and gas service operations..... -- 6,314 6,314 -- -- -- 6,314
Interest and other................. (1,473) 3,390 1,917 238 1,676 -- 3,831
-------- -------- -------- --------- --------- ---------- ----------
102,239 9,704 111,943 42,095 1,676 (6,292) 149,422
-------- -------- -------- --------- --------- ---------- ----------
COSTS AND EXPENSES:
Production expenses and taxes...... 7,225 332 7,557 746 -- -- 8,303
Gas marketing expenses............. -- -- -- 33,744 -- (6,292) 27,452
Oil and gas service operations..... -- 4,895 4,895 -- -- -- 4,895
Oil and gas depreciation, depletion
and amortization................. 48,333 -- 48,333 2,566 -- -- 50,899
Other depreciation and
amortization..................... 258 1,666 1,924 73 1,160 -- 3,157
General and administrative......... 1,090 2,593 3,683 496 649 -- 4,828
Interest and other................. 370 138 508 711 12,460 -- 13,679
-------- -------- -------- --------- --------- ---------- ----------
57,276 9,624 66,900 38,336 14,269 (6,292) 113,213
-------- -------- -------- --------- --------- ---------- ----------
Income (loss) before income
taxes............................ 44,963 80 45,043 3,759 (12,593) -- 36,209
Income tax expense (benefit)....... -- 15,990 15,990 1,335 (4,471) -- 12,854
-------- -------- -------- --------- --------- ---------- ----------
Net income (loss).................. $ 44,963 $(15,910) $ 29,053 $ 2,424 $ (8,122) $ -- $ 23,355
======== ======== ======== ========= ========= ========== ==========
FOR THE YEAR ENDED JUNE 30, 1995:
REVENUES:
Oil and gas sales.................. $ 55,417 $ -- $ 55,417 $ 1,566 $ -- $ -- $ 56,983
Oil and gas service operations..... -- 8,836 8,836 -- -- -- 8,836
Interest and other................. -- 1,394 1,394 -- 130 -- 1,524
-------- -------- -------- --------- --------- ---------- ----------
55,417 10,230 65,647 1,566 130 -- 67,343
-------- -------- -------- --------- --------- ---------- ----------
COSTS AND EXPENSES:
Production expenses and taxes...... 3,494 551 4,045 211 -- -- 4,256
Oil and gas service operations..... -- 7,747 7,747 -- -- -- 7,747
Oil and gas depreciation, depletion
and amortization................. 24,769 6 24,775 635 -- -- 25,410
Other depreciation and
amortization..................... 138 1,107 1,245 5 515 -- 1,765
General and administrative......... 931 1,689 2,620 58 900 -- 3,578
Interest and other................. 352 218 570 184 5,873 -- 6,627
-------- -------- -------- --------- --------- ---------- ----------
29,684 11,318 41,002 1,093 7,288 -- 49,383
-------- -------- -------- --------- --------- ---------- ----------
Income (loss) before income
taxes............................ 25,733 (1,088) 24,645 473 (7,158) -- 17,960
Income tax expense (benefit)....... -- 8,639 8,639 165 (2,505) -- 6,299
-------- -------- -------- --------- --------- ---------- ---------
Net Income (loss).................. $ 25,733 $ (9,727) $ 16,006 $ 308 $ (4,653) $ -- $ 11,661
======== ======== ======== ========= ========= ========== =========
FOR THE YEAR ENDED JUNE 30, 1994:
REVENUES:
Oil and gas sales.................. $ 22,404 $ -- $ 22,404 $ -- $ -- $ -- $ 22,404
Oil and gas service operations..... -- 6,439 6,439 -- -- -- 6,439
Interest and other................. -- 622 622 -- 359 -- 981
-------- -------- -------- --------- --------- ---------- ---------
22,404 7,061 29,465 -- 359 -- 29,824
-------- -------- -------- --------- --------- ---------- ---------
COSTS AND EXPENSES:
Production expenses and taxes...... 3,185 462 3,647 -- -- -- 3,647
Oil and gas service operations..... -- 5,199 5,199 -- -- -- 5,199
Oil and gas depreciation, depletion
and amortization................. 8,141 -- 8,141 -- -- -- 8,141
Other depreciation and
amortization..................... 171 1,536 1,707 -- 164 -- 1,871
General and administrative......... 823 2,169 2,992 -- 143 -- 3,135
Interest and other................. 507 1,492 1,999 -- 677 -- 2,676
-------- -------- -------- --------- --------- ---------- ---------
12,827 10,858 23,685 -- 984 -- 24,669
-------- -------- -------- --------- --------- ---------- ---------
Income (loss) before income
taxes............................ 9,577 (3,797) 5,780 -- (625) -- 5,155
Income tax expense (benefit)....... -- 1,400 1,400 -- (150) -- 1,250
-------- -------- -------- --------- --------- ---------- ---------
Net income (loss).................. $ 9,577 $ (5,197) $ 4,380 $ -- $ (475) $ -- $ 3,905
======== ======== ======== ========= ========= ========== =========
</TABLE>
F-16
<PAGE> 54
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
SUBSIDIARY GUARANTORS
-------------------------------- NON-
ALL GUARANTOR COMPANY
CEX OTHERS COMBINED SUBSIDIARIES (PARENT) ELIMINATIONS CONSOLIDATED
--------- -------- --------- ------------ --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED JUNE 30, 1996:
CASH FLOWS FROM OPERATING
ACTIVITIES.......................... $ 91,286 $ 35,582 $126,868 $ 4,204 $ (10,100) $ -- $ 120,972
CASH FLOWS FROM INVESTING ACTIVITIES
Oil and gas properties.............. (329,507) (16,988) (346,495) (6,099) -- 5,300 (347,294)
Proceeds from sales................. 7,458 9,956 17,414 -- -- (5,300) 12,114
Investment in gas marketing
company........................... -- -- -- 266 (629) -- (363)
Other additions..................... (177) (4,506) (4,683) (109) (4,054) -- (8,846)
--------- -------- -------- -------- --------- -------- ----------
(322,226) (11,538) (333,764) (5,942) (4,683) -- (344,389)
--------- -------- -------- -------- --------- -------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings............ 39,000 1,350 40,350 10,300 116,017 -- 166,667
Payments on borrowings.............. (44,010) (1,387) (45,397) (3,200) (37) -- (48,634)
Cash received from exercise of stock
options........................... -- -- -- -- 1,989 -- 1,989
Cash received from issuance of
common stock...................... -- -- -- -- 99,498 -- 99,498
Intercompany advances, net.......... 235,950 (73,173) 162,777 (2,616) (160,161) -- --
--------- -------- -------- -------- --------- -------- ----------
230,940 (73,210) 157,730 4,484 57,306 -- 219,520
--------- -------- -------- -------- --------- -------- ----------
Net increase (decrease) in cash and
cash equivalents.................... -- (49,166) (49,166) 2,746 42,523 -- (3,897)
Cash, beginning of period............. -- 53,227 53,227 5 2,303 -- 55,535
--------- -------- -------- -------- --------- -------- ----------
Cash, end of period................... $ -- $ 4,061 $ 4,061 $ 2,751 $ 44,826 $ -- $ 51,638
========= ======== ======== ======== ========= ======== ==========
FOR THE YEAR ENDED JUNE 30, 1995:
CASH FLOWS FROM OPERATING
ACTIVITIES.......................... $ 46,753 $ 13,296 $ 60,049 $ 305 $ (4,692) $ (931) $ 54,731
CASH FLOWS FROM INVESTING ACTIVITIES:
Oil and gas properties.............. (111,980) (4,896) (116,876) (4,109) -- -- (120,985)
Proceeds from sales................. 16,579 11,132 27,711 -- -- (11,500) 16,211
Purchase of oil and gas
properties........................ -- -- -- (11,500) -- 11,500 --
Other additions..................... -- (7,929) (7,929) -- -- -- (7,929)
--------- -------- -------- -------- --------- -------- ----------
(95,401) (1,693) (97,094) (15,609) -- -- (112,703)
--------- -------- -------- -------- --------- -------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings............ 28,433 1,601 30,034 11,500 87,300 -- 128,834
Payments on borrowings.............. (28,433) (3,599) (32,032) (700) 362 -- (32,370)
Intercompany advances, net.......... 48,648 29,676 78,324 4,509 (83,764) 931 --
Other financing..................... -- -- -- -- 818 -- 818
--------- -------- -------- -------- --------- -------- ----------
48,648 27,678 76,326 15,309 4,716 931 97,282
--------- -------- -------- -------- --------- -------- ----------
Net increase (decrease) in cash and
cash equivalents.................... -- 39,281 39,281 5 24 -- 39,310
Cash, beginning of period............. -- 13,946 13,946 -- 2,279 -- 16,225
--------- -------- -------- -------- --------- -------- ----------
Cash, end of period................... $ -- $ 53,227 $ 53,227 $ 5 $ 2,303 $ -- $ 55,535
========= ======== ======== ========= ========= ======== ==========
FOR THE YEAR ENDED JUNE 30, 1994:
CASH FLOWS FROM OPERATING
ACTIVITIES.......................... $ 13,131 $ 7,707 $ 20,838 $ -- $ (1,415) $ -- $ 19,423
CASH FLOWS FROM INVESTING ACTIVITIES:
Oil and gas properties.............. (33,466) (1,188) (34,654) -- -- -- (34,654)
Proceeds from sales................. 3,268 5,095 8,363 -- -- -- 8,363
Other additions..................... (159) (1,782) (1,941) -- (979) -- (2,920)
--------- -------- -------- -------- --------- -------- ----------
(30,357) 2,125 (28,232) -- (979) -- (29,211)
--------- -------- -------- -------- --------- -------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings............ -- 8,800 8,800 -- 40,000 -- 48,800
Payments on borrowings.............. (10,201) (15,537) (25,738) -- -- -- (25,738)
Intercompany advances, net.......... 27,250 6,715 33,965 -- (33,965) -- --
Other financing..................... -- -- -- -- (1,900) -- (1,900)
--------- -------- -------- -------- --------- -------- ----------
17,049 (22) 17,027 -- 4,135 -- 21,162
--------- -------- -------- -------- --------- -------- ----------
Net increase (decrease) in cash and
cash equivalents.................... (177) 9,810 9,633 -- 1,741 -- 11,374
Cash, beginning of period............. 177 4,136 4,313 -- 538 -- 4,851
--------- -------- -------- -------- --------- -------- ----------
Cash, end of period................... $ -- $ 13,946 $ 13,946 $ -- $ 2,279 $ -- $ 16,225
========= ======== ======== ======== ========= ======== ==========
</TABLE>
F-17
<PAGE> 55
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
---------------------
1996 1995
-------- --------
($ IN THOUSANDS)
<S> <C> <C>
9.125% Senior Notes (see Note 2)............................... $120,000 $ --
Discount on 9.125% Senior Notes................................ (81) --
10.5% Senior Notes (see Note 2)................................ 90,000 90,000
12% Senior Notes (see Note 2).................................. 47,500 47,500
Discount on 12% Senior Notes................................... (1,772) (2,333)
Term note payable to Union Bank collateralized by CGDC, not
guaranteed by the Company, variable interest at Union Bank's
base rate (8.25% per annum at June 30, 1996), or at
Eurodollar rate +1.875% collateralized by CGDC's producing
oil and gas properties, payable in monthly installments
through November 2002........................................ 12,900 10,800
Term note payable to Union Bank, variable interest at Union
Bank's base rate or at Eurodollar rate + an incremental rate
(8.25% per annum at June 30, 1996), collateralized by CEX's
producing oil and gas properties and guaranteed by the
Company...................................................... -- 10
Note payable to a vendor, collateralized by oil and gas
tubulars, payments due 60 days from shipment of the
tubulars..................................................... 3,156 6,513
Note payable to a bank, variable interest at a referenced base
rate + 1.75% (10% per annum at June 30, 1996), collateralized
by office buildings, payments due in monthly installments
through May 1998............................................. 680 686
Notes payable to various entities to acquire oil service
equipment, interest varies from 7% to 11% per annum,
collateralized by equipment, payments due in monthly
installments through December 2000........................... 1,212 2,162
Other collateralized........................................... 1,469 230
Other, unsecured............................................... 122 179
-------- --------
Total notes payable and long-term debt......................... 275,186 155,747
Less -- Current maturities..................................... (6,755) (9,993)
-------- --------
Notes payable and long-term debt, net of current maturities.... $268,431 $145,754
======== ========
</TABLE>
The aggregate scheduled maturities of notes payable and long-term debt for
the next five fiscal years ending June 30, 2001 and thereafter were as follows
as of June 30, 1996 (in thousands of dollars):
<TABLE>
<S> <C>
1997.............................................................. $ 6,755
1998.............................................................. 14,234
1999.............................................................. 13,637
2000.............................................................. 13,344
2001.............................................................. 14,565
After 2001........................................................ 212,651
--------
$275,186
========
</TABLE>
In April 1993, CEX entered into an oil and gas reserve-based reducing
revolving credit facility (the "Revolving Credit Facility") with Union Bank. The
Revolving Credit Facility has been amended from time to
F-18
<PAGE> 56
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
time, most recently in September 1996. Concurrent with the September 1996
amendment, the Company increased the facility size to $125 million and expanded
its bank group with Union Bank remaining as agent.
The maturity date of the Revolving Credit Facility is April 30, 2001. The
facility provides for interest at the Union Bank reference rate (8.25% at June
30, 1996) or, at the option of the Company the Eurodollar rate plus 1.375% to
1.875% depending on the ratio of the amount outstanding to the borrowing base.
Borrowings are collateralized by a first priority lien on substantially all of
CEX's proved producing reserves, and are unconditionally guaranteed by the
Company. At June 30, 1996 and 1995 there was $0 and $10,000 outstanding under
the Revolving Credit Facility, respectively.
The amount of credit available at any time under the Revolving Credit
Facility is the lesser of the commitment amount or the borrowing base. The
borrowing base is reduced each month by a specified amount. Both the borrowing
base and the monthly reduction amount are redetermined by Union Bank each May 1
and November 1 and may be redetermined at any other time upon the request of CEX
or Union Bank. To the extent the amount outstanding at any time exceeds the
borrowing base, CEX must reduce the amount outstanding or add additional
collateral. At June 30, 1996, the commitment amount and the borrowing base under
the Revolving Credit Facility were $35 million, and the monthly reduction amount
was $700,000. The Revolving Credit Facility was amended in September 1996 to
provide for a borrowing base and a commitment amount of $75 million, with a
monthly reduction amount of $1,750,000. The Revolving Credit Facility contains
customary financial covenants, limitations on indebtedness and liabilities,
liens, prepayments of other indebtedness (including the 12%, 10.5% and 9.125%
Senior Notes) and loans, investments and guarantees by the Company and prohibits
the payment of dividends on the Company's Common Stock.
The Company's wholly-owned subsidiary, CGDC, has a credit facility with
Union Bank (the "Term Credit Facility"), with an outstanding balance of $12.9
million at June 30, 1996. Collateral for the Term Credit Facility is limited to
CGDC's producing oil and gas properties. The Term Credit Facility has not been
guaranteed by the Company or any of its other subsidiaries and is recourse only
to the assets of CGDC. CGDC acquired producing oil and gas properties from CEX
in December 1994, June 1995 and December 1995 in exchange for $5.5 million, $6
million and $5.3 million in cash, respectively, using proceeds borrowed under
this facility. CGDC has not guaranteed the payment of the Company's 12%, 10.5%
or 9.125% Senior Notes, nor has the capital stock of CGDC been pledged as
collateral for such indebtedness. The terms of the Term Credit Facility prohibit
the payment of dividends by CGDC.
4. CONTINGENCIES AND COMMITMENTS
The Company is currently involved in various 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 currently pending or
threatened litigation is not likely to have a material adverse effect on the
consolidated financial position or 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 the
respective terms of the agreements in the event of termination of employment
without cause. These agreements expire June 30, 1997 through June 30, 1998.
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 environmental issues or claims.
F-19
<PAGE> 57
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. INCOME TAXES
As discussed in Note 1, the Company has adopted SFAS 109. The components of
the income tax provision for each of the periods are as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------
1996 1995 1994
------- ------ ------
($ IN THOUSANDS)
<S> <C> <C> <C>
Current................................................. $ -- $ -- $ --
Deferred................................................ 12,854 6,299 1,250
------- ------ ------
Total......................................... $12,854 $6,299 $1,250
======= ====== ======
</TABLE>
The effective income tax rate differed from the computed "expected" federal
income tax rate on earnings before income taxes for the following reasons:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------
1996 1995 1994
------- ------ ------
($ IN THOUSANDS)
<S> <C> <C> <C>
Computed "expected" income tax provision................ $12,673 $6,286 $1,753
Tax percentage depletion................................ (238) (144) (780)
Other................................................... 419 157 277
------- ------ ------
$12,854 $6,299 $1,250
======= ====== ======
</TABLE>
Deferred income taxes are provided to reflect temporary differences in the
basis of net assets for income tax and financial reporting purposes. The tax
effected temporary differences and tax loss carryforwards which comprise
deferred taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------
1996 1995 1994
-------- -------- --------
($ IN THOUSANDS)
<S> <C> <C> <C>
Deferred tax liabilities:
Acquisition, exploration and development costs and
related depreciation, depletion and
amortization..................................... $(63,725) $(31,220) $(15,872)
-------- -------- --------
Deferred tax assets:
Net operating loss carryforwards................... 50,776 23,414 12,879
Percentage depletion carryforward.................. 764 526 780
-------- -------- --------
51,540 23,940 13,659
-------- -------- --------
Total Deferred Income Taxes........................ $(12,185) $ (7,280) $ (2,213)
======== ======== ========
</TABLE>
At June 30, 1996, the Company had regular tax net operating loss
carryforwards of approximately $140 million and alternative minimum tax net
operating loss carryforwards of approximately $15 million. These loss
carryforward amounts will expire during the years 2007 through 2011. The Company
also had a percentage depletion carryforward of approximately $2.3 million at
June 30, 1996, which is available to offset future federal income taxes payable
and has no expiration date.
In accordance with certain provisions of the Tax Reform Act of 1986, a
change of greater than 50% of the beneficial ownership of the Company within a
three-year period (an "Ownership Change") would place an annual limitation on
the Company's ability to utilize its existing tax carryforwards. Under
regulations issued by
F-20
<PAGE> 58
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the Internal Revenue Service, the Company does not believe that an Ownership
Change has occurred as of June 30, 1996.
6. RELATED PARTY TRANSACTIONS
Certain directors, shareholders and employees of the Company have acquired
working interests in certain of the Company's oil and gas properties. The owners
of such working interests are required to pay their proportionate share of all
costs. As of June 30, 1996, 1995 and 1994 the Company had accounts receivable
for these costs of $2.9 million, $4.4 million and $1.7 million, respectively.
During fiscal 1996, 1995 and 1994 the Company incurred legal expenses of
$347,000, $516,000 and $631,000, respectively, for legal services provided by
the law firm of which a director is a member.
7. EMPLOYEE BENEFIT PLANS
Effective October 1, 1989, the Company established a 401(K) profit sharing
plan. On December 1, 1993, the Company amended the plan and established the
Chesapeake Energy Savings and Incentive Plan. On January 1, 1996 the Company
amended the plan and established the Chesapeake Energy Corporation Savings and
Incentive Stock Bonus Plan (the "Savings and Incentive Stock Bonus Plan").
Eligible employees may make voluntary contributions to the Savings and Incentive
Stock Bonus Plan which are matched by the Company up to 10% of the employees'
annual salary with the Company's common stock. The amount of employee
contributions is limited as specified in the Savings and Incentive Stock Bonus
Plan. The Company may, at its discretion, make additional contributions to the
Savings and Incentive Stock Bonus Plan. The Company contributed $187,000,
$95,000 and $70,000 to the Savings and Incentive Stock Bonus Plan during the
fiscal years ended June 30, 1996, 1995 and 1994, respectively.
8. MAJOR CUSTOMERS
Sales to individual customers constituting 10% or more of total oil and gas
sales were as follows:
<TABLE>
<CAPTION>
PERCENT OF
YEAR AMOUNT OIL AND GAS SALES
- ---- ---------------- -----------------
($ IN THOUSANDS)
<S> <C> <C> <C>
1996 Aquila Southwest Pipeline Corporation $ 41,900 38%
GPM Gas Corporation $ 28,700 26%
Wickford Energy Marketing, L.C. $ 18,500 17%
1995 Aquila Southwest Pipeline Corporation $ 18,548 33%
Wickford Energy Marketing, L.C. $ 15,704 28%
GPM Gas Corporation $ 11,686 21%
1994 Wickford Energy Marketing, L.C. $ 6,190 28%
GPM Gas Corporation $ 6,105 27%
Plains Marketing and Transportation, $ 2,659 12%
Inc.
Texaco Exploration & Production, Inc. $ 2,249 10%
</TABLE>
Management believes that the loss of any of the above customers would not
have a material impact on the Company's results of operations or its financial
position.
9. STOCKHOLDERS' EQUITY
On April 9, 1996, the Company completed a public offering of 2,475,000
shares of Common Stock at a price of $35.33 per share, resulting in net proceeds
(after offering costs) to the Company of approximately $82.1 million. On April
12, 1996, the underwriters exercised an over-allotment option to purchase an
F-21
<PAGE> 59
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
additional 519,750 shares of Common Stock at a price of $35.33 per share,
resulting in additional net proceeds (after offering costs) to the Company of
approximately $17.3 million. The net proceeds from the offering were used to
fund a portion of the Company's exploration and development capital expenditures
and for general corporate purposes.
On March 31, 1994, the Company issued 12% Senior Notes and Warrants for
2,190,937 shares of the Company's Common Stock (see Note 2). The Warrants were
valued at $3.04 million and are recorded as Common Stock Warrants and paid-in
capital on the accompanying consolidated balance sheets. A portion of the 12%
Senior Notes and Warrants were issued to Trust Company of the West in exchange
for preferred stock, warrants to purchase Common Stock and an overriding royalty
interest.
A 1.8-for-1 stock split of the Common Stock in January 1993, a 2-for-1
stock split of the Common Stock in December 1994, and 3-for-2 stock splits of
the Common Stock in December 1995 and June 1996 have been given retroactive
effect in these financial statements.
Stock Option Plans
Under the Company's 1992 Incentive Stock Option Plan (the "ISO Plan"),
options to purchase Common Stock may be granted only to employees of the Company
and its subsidiaries. Subject to any adjustment as provided by the ISO Plan, the
aggregate number of shares which may be issued and sold may not exceed 1,881,000
shares. The maximum period for exercise of an option may not be more than ten
years (or five years for an optionee who owns more than 10% of the Common Stock)
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 (or 110%
of such value for an optionee who owns more than 10% of the Common Stock).
Options granted become exercisable at dates determined by the Stock Option
Committee of the Board of Directors. No options may be granted under the ISO
Plan after December 16, 1994.
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
1,566,000 shares. The maximum period for exercise of an option may not be more
than ten 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 may be granted under the
NSO Plan after December 10, 2002.
Under the Company's 1994 Stock Option Plan (the "1994 Plan"), incentive and
nonqualified stock options to purchase Common Stock may be granted to employees
of the Company and its subsidiaries. Subject to any adjustment as provided by
the 1994 Plan, the aggregate number of shares which may be issued and sold may
not exceed 2,443,455 shares. The maximum period for exercise of an option may
not be more than ten 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 may be granted
under the 1994 Plan after December 16, 2004.
F-22
<PAGE> 60
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
# OF OPTION
OPTIONS PRICES
--------- -------------
<S> <C> <C>
Options outstanding at June 30, 1993...................... 885,780 $1.11- $2.67
Options granted........................................... 1,640,250 $1.11- $1.71
Options exercised......................................... -- -
Options terminated........................................ (9,360) $1.11- $1.33
Options outstanding at June 30, 1994...................... 2,516,670 $1.11- $2.67
Options granted........................................... 1,592,775 $4.50- $9.84
Options exercised......................................... (644,366) $1.11- $2.67
Options terminated........................................ (50,783) $1.11- $4.50
Options outstanding at June 30, 1995...................... 3,414,296 $1.11- $9.84
Options granted........................................... 1,213,425 $11.33-$35.33
Options exercised......................................... (787,023) $1.11-$35.33
Options terminated........................................ (39,256) $1.11-$11.33
Options outstanding at June 30, 1996...................... 3,801,442 $1.11-$35.33
</TABLE>
The exercise of certain stock options results in state and federal income
tax benefits to the Company related to the difference between the market price
of the Common Stock at the date of disposition (or sale) and the option price.
During fiscal 1996 and 1995, $7,950,000 and $1,229,000 was recorded as an
adjustment to additional paid-in capital and deferred income taxes with respect
to such tax benefits.
10. FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
The Company has only limited involvement with derivative financial
instruments, as defined in Statement of Financial Accounting Standards No. 119
"Disclosure About Derivative Financial Instruments and Fair Value of Financial
Instruments" and does not use them for trading purposes. The Company's objective
is to hedge a portion of its exposure to price volatility from producing crude
oil and natural gas. These arrangements may expose the Company to credit risk
from its counter-parties and to basis risk.
Hedging Activities
Periodically the Company utilizes hedging strategies to hedge the price of
a portion of its future oil and gas production. These strategies include swap
arrangements that establish an index-related price above which the Company pays
the hedging partner and below which the Company is paid by the hedging partner,
the purchase of index-related puts that provide for a "floor" price to the
Company to be paid by the counter-party to the extent the price of the commodity
is below the contracted floor, and basis protection swaps.
As of June 30, 1996, the Company had established NYMEX-based crude oil swap
agreements for 1,000 Bbl per day for July 1, 1996 through August 31, 1996 at an
average price of $17.85 per Bbl. The counter-party has the option exercisable
monthly for an additional 1,000 Bbl per day for the period July 1, 1996 through
December 31, 1996 to cause a swap if the price exceeds an average $17.74 per
Bbl. The actual settlements for July and August resulted in a $0.5 million
payment to the counter-party. The Company estimates, based on NYMEX prices as of
August 30, 1996, that the effect of the September through December hedges would
be a $0.4 million payment to the counter-party.
The Company has purchased Houston Ship Channel put options which guarantee
the Company an average floor price of $2.21/Mmbtu for 20,000 Mmbtu per day for
the period of November 1, 1996 through February 28, 1997. The average cost of
these puts was $0.14 per Mmbtu.
As of June 30, 1996, the Company had NYMEX-based natural gas swaps and
NYMEX/Houston Ship Channel Basis swaps for the months of July through October
1996. These transactions resulted in payments to
F-23
<PAGE> 61
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the Company's counter-party of approximately $2 million for the month of July
1996 and $1.5 million for the month of August 1996. The Company estimates, based
on NYMEX prices as of August 30, 1996, that the effect of the September and
October hedges would be a $0.2 million payment to the counter-party.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade receivables. The
Company's accounts receivable are primarily from purchasers of oil and natural
gas products and exploration and production companies which own interests in
properties operated by the Company. The industry concentration has the potential
to impact the Company's overall exposure to credit risk, either positively or
negatively, in that the customers may be similarly affected by changes in
economic, industry or other conditions. The Company generally requires letters
of credit for receivables from customers which are not considered investment
grade, unless the credit risk can otherwise be mitigated.
Fair Value of Financial Instruments
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of Statement of
Financial Accounting Standards No. 107, "Disclosures About Fair Value of
Financial Instruments." The estimated fair value amounts have been determined by
the Company using available market information and valuation methodologies.
Considerable judgment is required in interpreting market data to develop the
estimates of fair value. The use of different market assumptions or valuation
methodologies may have a material effect on the estimated fair value amounts.
The carrying values of items comprising current assets and current
liabilities approximate fair values due to the short-term maturities of these
instruments. The Company estimates the fair value of its long-term, fixed-rate
debt using quoted market prices. The Company's carrying amount for such debt at
June 30, 1996 and 1995 was $255.6 million and $135.2 million, respectively,
compared to approximate fair values of $261.2 million and $137.8 million,
respectively. The carrying value of other long-term debt approximates its fair
value as interest rates are primarily variable, based on prevailing market
rates.
11. DISCLOSURES ABOUT OIL AND GAS PRODUCING ACTIVITIES
Net Capitalized Costs
Evaluated and unevaluated capitalized costs related to the Company's oil
and gas producing activities are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30,
---------------------
1996 1995
-------- --------
($ IN THOUSANDS)
<S> <C> <C>
Oil and gas properties:
Proved....................................................... $363,213 $165,302
Unproved..................................................... 165,441 27,474
-------- --------
Total................................................ 528,654 192,776
Less accumulated depreciation, depletion and amortization...... (92,720) (41,821)
-------- --------
Net capitalized costs.......................................... $435,934 $150,955
======== ========
</TABLE>
Unproved properties not subject to amortization at June 30, 1996 and 1995,
consist mainly of lease acquisition costs. The Company capitalized approximately
$6,428,000 and $1,574,000 of interest during the years ended June 30, 1996 and
1995 on significant investments in unproved properties that are not being
currently depreciated, depleted, or amortized and on which exploration or
development activities are in progress. The Company will continue to evaluate
its unevaluated properties; however, the timing of the ultimate evaluation and
disposition of the properties has not been determined.
F-24
<PAGE> 62
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Costs Incurred in Oil and Gas Acquisition, Exploration and Development
Costs incurred in oil and gas property acquisition, exploration and
development activities which have been capitalized are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30,
---------------------------------
1996 1995 1994
-------- -------- -------
($ IN THOUSANDS)
<S> <C> <C> <C>
Development costs................................... $143,437 $ 81,833 $26,277
Exploration costs................................... 39,410 14,129 5,358
Acquisition costs:
Unproved properties............................... 138,188 24,437 3,305
Proved properties................................. 24,560 -- --
Capitalized internal costs.......................... 1,699 586 965
Proceeds from sale of leasehold, equipment and
other............................................. (11,416) (15,107) (7,598)
-------- -------- -------
Total..................................... $335,878 $105,878 $28,307
======== ======== =======
</TABLE>
Results of Operations from Oil and Gas Producing Activities (unaudited)
The Company's results of operations from oil and gas producing activities
are presented below for the years ended June 30, 1996, 1995 and 1994,
respectively. The following table includes revenues and expenses associated
directly with the Company's oil and gas producing activities. It does not
include any allocation of the Company's interest costs and, therefore, is not
necessarily indicative of the contribution to consolidated net operating results
of the Company's oil and gas operations.
<TABLE>
<CAPTION>
JUNE 30,
---------------------------------
1996 1995 1994
-------- -------- -------
($ IN THOUSANDS)
<S> <C> <C> <C>
Oil and gas sales................................... $110,849 $ 56,983 $22,404
Production costs(a)................................. (8,303) (4,256) (3,647)
Depletion and depreciation.......................... (50,899) (25,410) (8,141)
Imputed income tax provision(b)..................... (18,335) (9,561) (3,610)
-------- -------- -------
Results of operations from oil and gas producing
activities........................................ $ 33,312 $ 17,756 $ 7,006
======== ======== =======
</TABLE>
- ---------------
(a) Production costs include lease operating expenses and production taxes.
(b) The imputed income tax provision is hypothetical and determined without
regard to the Company's deduction for general and administrative expenses,
interest costs and other income tax credits and deductions.
Oil and Gas Reserve Quantities (unaudited)
The reserve information presented below is based upon reports prepared by
the independent petroleum engineering firm of Williamson Petroleum Consultants,
Inc. ("Williamson") as of June 30, 1996, 1995 and 1994 and the Company's
petroleum engineers as of June 30, 1996 and 1995. The reserves evaluated
internally by the Company constituted approximately 0.6% and 0.5% of total
proved reserves as of June 30, 1996 and 1995, respectively. The information is
presented in accordance with regulations prescribed by the Securities and
Exchange Commission. The Company emphasizes that reserve estimates are
inherently imprecise. The Company's reserve estimates were generally based upon
extrapolation of historical production trends, analogy
F-25
<PAGE> 63
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to similar properties and volumetric calculations. Accordingly, these estimates
are expected to change, and such changes could be material, as future
information becomes available.
Proved oil and gas reserves represent the estimated quantities of crude
oil, natural gas, and natural gas liquids which geological and engineering data
demonstrate with reasonable certainty to be recoverable in future years from
known reservoirs under existing economic and operating conditions. Proved
developed oil and gas reserves are those expected to be recovered through
existing wells with existing equipment and operating methods.
Presented below is a summary of changes in estimated reserves of the
Company based upon the reports prepared by Williamson for 1996, 1995 and 1994,
along with those prepared by the Company's petroleum engineers for 1996 and
1995:
<TABLE>
<CAPTION>
JUNE 30,
-----------------------------------------------------------
1996 1995 1994
----------------- ----------------- -----------------
OIL GAS OIL GAS OIL GAS
(MBBL) (MMCF) (MBBL) (MMCF) (MBBL) (MMCF)
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Proved reserves, beginning of
year........................ 5,116 211,808 4,154 117,066 9,622 79,763
Extensions, discoveries and
other additions............. 8,924 173,577 2,345 129,444 2,335 82,965
Revisions of previous
estimate.................... (812) (2,538) (244) (9,588) (868) (5,523)
Production.................... (1,413) (51,710) (1,139) (25,114) (537) (6,927)
Sale of reserves-in-place..... -- -- -- -- (6,398) (33,212)
Purchase of
reserves-in-place........... 443 20,087 -- -- -- --
------ ------- ----- ------- ----- -------
Proved reserves, end of
year........................ 12,258 351,224 5,116 211,808 4,154 117,066
====== ======= ===== ======= ===== =======
Proved developed reserves, end
of year..................... 3,648 144,721 1,973 77,764 1,313 30,445
====== ======= ===== ======= ===== =======
</TABLE>
On April 30, 1996, the Company purchased interests in certain producing and
non-producing oil and gas properties, including approximately 14,000 net acres
of unevaluated leasehold, from Amerada Hess Corporation for $35 million, subject
to adjustment for activity after the effective date of January 1, 1996. The
properties are located in the Knox and Golden Trend fields of southern Oklahoma,
most of which are operated by the Company.
In October 1993, the Company entered into a joint development agreement
covering a 20,000 gross acre development area in the Fayette County portion of
the Giddings Field in southern Texas. The Company's ownership interests in the
proved undeveloped properties covered by the joint development agreement were
significantly less than those used in the June 30, 1993 reserve report. The
impact of the reduced ownership percentages is reflected as sales of reserves in
place in fiscal 1994 in the preceding table.
Standardized Measure of Discounted Future Net Cash Flows (unaudited)
Statement of Financial Accounting Standards No. 69 ("SFAS 69") prescribes
guidelines for computing a standardized measure of future net cash flows and
changes therein relating to estimated proved reserves. The Company has followed
these guidelines which are briefly discussed below.
Future cash inflows and future production and development costs are
determined by applying year-end prices and costs to the estimated quantities of
oil and gas to be produced. Estimates are made of quantities of proved reserves
and the future periods during which they are expected to be produced based on
year-end economic conditions. Estimated future income taxes are computed using
current statutory income tax rates including consideration for the current tax
basis of the properties and related carryforwards, giving effect to
F-26
<PAGE> 64
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
permanent differences and tax credits. The resulting future net cash flows are
reduced to present value amounts by applying a 10% annual discount factor.
The assumptions used to compute the standardized measure are those
prescribed by the Financial Accounting Standards Board and, as such, do not
necessarily reflect the Company's expectations of actual revenue to be derived
from those reserves nor their present worth. The limitations inherent in the
reserve quantity estimation process, as discussed previously, are equally
applicable to the standardized measure computations since these estimates are
the basis for the valuation process.
The following summary sets forth the Company's future net cash flows
relating to proved oil and gas reserves based on the standardized measure
prescribed in SFAS 69:
<TABLE>
<CAPTION>
JUNE 30,
----------------------------------
1996 1995 1994
---------- -------- --------
($ IN THOUSANDS)
<S> <C> <C> <C>
Future cash inflows................................. $1,101,642 $427,377 $307,600
Future production costs............................. (168,974) (75,927) (50,765)
Future development costs............................ (137,068) (76,543) (47,040)
Future income tax provision......................... (173,439) (46,537) (36,847)
---------- -------- --------
Future net cash flows............................... 622,161 228,370 172,948
Less effect of a 10% discount factor................ (171,973) (69,359) (54,340)
---------- -------- --------
Standardized measure of discounted future net cash
flows............................................. $ 450,188 $159,011 $118,608
========== ======== ========
</TABLE>
The principal sources of change in the standardized measure of discounted
future net cash flows are as follows:
<TABLE>
<CAPTION>
JUNE 30,
---------------------------------
1996 1995 1994
--------- -------- --------
($ IN THOUSANDS)
<S> <C> <C> <C>
Standardized measure, beginning of year............. $ 159,011 $118,608 $119,744
Sales of oil and gas produced, net of production
costs............................................. (102,546) (52,727) (18,757)
Net changes in prices and production costs.......... 87,736 (25,574) (10,795)
Extensions and discoveries, net of production and
development costs................................. 292,255 93,969 99,175
Changes in future development costs................. (11,201) 3,406 (2,855)
Development costs incurred during the period that
reduced future development costs.................. 43,409 23,678 9,855
Revisions of previous quantity estimates............ (10,505) (11,204) (13,107)
Purchase of undeveloped reserves-in-place........... 29,641 -- --
Sales of reserves-in-place.......................... -- -- (66,372)
Accretion of discount............................... 18,814 14,126 14,166
Net change in income taxes.......................... (67,705) (6,486) (720)
Changes in production rates and other............... 11,279 1,215 (11,726)
--------- -------- --------
Standardized measure, end of year................... $ 450,188 $159,011 $118,608
========= ======== ========
</TABLE>
F-27
<PAGE> 65
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. QUARTERLY FINANCIAL DATA (unaudited)
Summarized unaudited quarterly financial data for fiscal 1996 and 1995 are
as follows ($ in thousands except per share data):
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1995 1995 1996 1996
------------- ------------ --------- --------
<S> <C> <C> <C> <C>
Net sales............................... $21,988 $ 31,766 $44,145 $ 47,692
Gross profit(a)......................... 6,368 11,368 14,741 13,580
Net income.............................. 2,915 5,459 7,623 7,358
Net income per share:
Primary............................... .10 .19 .26 .23
Fully-diluted......................... .10 .19 .26 .23
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1994 1994 1995 1995
------------- ------------ --------- --------
<S> <C> <C> <C> <C>
Net sales............................... $13,042 $ 14,186 $15,788 $ 22,803
Gross profit(a)......................... 4,559 5,805 4,997 7,702
Net income.............................. 2,336 3,248 2,305 3,772
Net income per share:
Primary............................... .09 .12 .08 .13
Fully-diluted......................... .09 .12 .08 .13
</TABLE>
- ---------------
(a) Total revenue excluding interest and other income, less total costs and
expenses excluding interest and other expense.
F-28
<PAGE> 66
REPORT OF INDEPENDENT ACCOUNTANTS
To the General Partner and Limited Partner of
Chesapeake Exploration Limited Partnership
We have audited the accompanying balance sheet of Chesapeake Exploration
Limited Partnership ("CEX") as of June 30, 1996, and the related consolidated
statements of income, partners' capital and cash flows for the year then ended.
These financial statements are the responsibility of the CEX management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of CEX as of June 30, 1996, and
the results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.
As more fully described in Note 1, CEX is a limited partnership owned by
Chesapeake Energy Corporation ("CEC") and Chesapeake Operating, Inc. ("COI").
CEX has no employees and it is dependent on the financial resources of CEC and
COI as well as being dependent on management by COI. Accordingly, CEX has
significant transactions with CEC and COI which are disclosed in Note 4. The
financial statements of CEX should be read in conjunction with the consolidated
financial statements of CEC.
COOPERS & LYBRAND L.L.P.
Oklahoma City, Oklahoma
September 13, 1996
F-29
<PAGE> 67
REPORT OF INDEPENDENT ACCOUNTANTS
To the General Partner and Limited Partner of
Chesapeake Exploration Limited Partnership
In our opinion, the balance sheet and the related statements of income, of
partners' capital and of cash flows as of and for each of the two years in the
period ended June 30, 1995 present fairly, in all material respects, the
financial position, results of operations and cash flows of Chesapeake
Exploration Limited Partnership ("CEX" formerly Chesapeake Exploration Company)
as of and for each of the two years in the period ended June 30, 1995, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of CEX's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above. We have not
audited the financial statements of CEX for any period subsequent to June 30,
1995.
As more fully described in Note 1, CEX is a limited partnership owned by
Chesapeake Energy Corporation ("CEC") and Chesapeake Operating, Inc. ("COI").
CEX has no employees and it is dependent on the financial resources of CEC and
COI as well as being dependent on management by COI. Accordingly, CEX has
significant transactions with CEC and COI which are disclosed in Note 4. The
financial statements of CEX should be read in conjunction with the consolidated
financial statements of CEC.
PRICE WATERHOUSE LLP
Houston, Texas
September 20, 1995
F-30
<PAGE> 68
CHESAPEAKE EXPLORATION LIMITED PARTNERSHIP
(A WHOLLY-OWNED PARTNERSHIP OF CHESAPEAKE ENERGY CORPORATION)
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS JUNE 30,
---------------------
1996 1995
-------- --------
($ IN THOUSANDS)
<S> <C> <C>
CURRENT ASSETS:
Accounts receivable.................................................. $ 14,778 $ 9,867
Prepaid expenses..................................................... 1,891 --
-------- --------
Total Current Assets......................................... 16,669 9,867
-------- --------
PROPERTY AND EQUIPMENT:
Oil and gas properties, at cost based on full cost accounting:....... 346,821 163,521
Unevaluated properties............................................... 165,441 27,474
Less: accumulated depreciation, depletion and amortization........... (84,726) (36,959)
-------- --------
Total Property and Equipment................................. 427,536 154,036
-------- --------
INTERCOMPANY RECEIVABLES:
Chesapeake Energy Corporation........................................ 47,502 14,682
Chesapeake Gas Development Corporation............................... 8,171 2,877
Other................................................................ 382 --
-------- --------
56,055 17,559
-------- --------
OTHER ASSETS........................................................... 694 776
-------- --------
TOTAL ASSETS........................................................... $500,954 $182,238
======== ========
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Accrued Expenses..................................................... $ 789 $ 516
-------- --------
Total Current Liabilities.................................... 789 516
-------- --------
LONG-TERM DEBT......................................................... -- 10
-------- --------
INTERCOMPANY PAYABLES:
Lindsay Oil Field Supply............................................. 2,190 2,190
Chesapeake Operating, Inc............................................ 411,536 138,046
-------- --------
413,726 140,236
-------- --------
CONTINGENCIES AND COMMITMENTS (Note 3)................................. -- --
-------- --------
PARTNERS' CAPITAL:
Contributions........................................................ 424 424
Accumulated Earnings................................................. 86,015 41,052
-------- --------
Total Partners' Capital...................................... 86,439 41,476
-------- --------
TOTAL LIABILITIES & PARTNERS' CAPITAL.................................. $500,954 $182,238
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE> 69
CHESAPEAKE EXPLORATION LIMITED PARTNERSHIP
(A WHOLLY-OWNED PARTNERSHIP OF CHESAPEAKE ENERGY CORPORATION)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------
1996 1995 1994
-------- ------- -------
($ IN THOUSANDS)
<S> <C> <C> <C>
REVENUES:
Oil and gas sales.......................................... $103,712 $55,417 $22,404
Other income (expense)..................................... (1,473) -- --
-------- ------- -------
Total Revenues..................................... 102,239 55,417 22,404
-------- ------- -------
COSTS AND EXPENSES:
Production expenses and taxes.............................. 7,225 3,494 3,185
Oil and gas depreciation, depletion and amortization....... 48,333 24,769 8,141
General and administrative................................. 1,090 931 823
Amortization............................................... 258 138 171
Interest................................................... 370 352 507
-------- ------- -------
Total Costs and Expenses........................... 57,276 29,684 12,827
-------- ------- -------
NET INCOME................................................... $ 44,963 $25,733 $ 9,577
======== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-32
<PAGE> 70
CHESAPEAKE EXPLORATION LIMITED PARTNERSHIP
(A WHOLLY-OWNED PARTNERSHIP OF CHESAPEAKE ENERGY CORPORATION)
STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
CEC COI TOTAL
------- ------ -------
($ IN THOUSANDS)
<S> <C> <C> <C>
Balance at June 30, 1993....................................... $ 5,549 $ 617 $ 6,166
1994 Net Income................................................ 8,619 958 9,577
------- ------ -------
Balance at June 30, 1994....................................... $14,168 $1,575 $15,743
1995 Net Income................................................ 23,160 2,573 25,733
------- ------ -------
Balance at June 30, 1995....................................... $37,328 $4,148 $41,476
1996 Net Income................................................ 40,467 4,496 44,963
------- ------ -------
Balance at June 30, 1996....................................... $77,795 $8,644 $86,439
======= ====== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-33
<PAGE> 71
CHESAPEAKE EXPLORATION LIMITED PARTNERSHIP
(A WHOLLY-OWNED PARTNERSHIP OF CHESAPEAKE ENERGY CORPORATION)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------
1996 1995 1994
--------- --------- --------
($ IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME............................................... $ 44,963 $ 25,733 $ 9,577
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED
BY OPERATING ACTIVITIES:
Oil and gas depreciation, depletion and amortization... 48,333 24,769 8,141
Amortization........................................... 258 138 171
General and administrative -- Allocated................ 1,090 931 814
CHANGES IN ASSETS AND LIABILITIES:
Increase (decrease) in assets/liabilities.............. (3,358) (4,818) (5,572)
--------- --------- --------
Cash provided by operating activities............... 91,286 46,753 13,131
--------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Development and acquisition of oil and gas
properties.......................................... (329,507) (111,980) (33,466)
Proceeds from leasehold sales.......................... 2,158 5,079 3,268
Sale of producing properties........................... 5,300 11,500 --
Other.................................................. (177) -- (159)
--------- --------- --------
Cash used in investing activities................... (322,226) (95,401) (30,357)
--------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term borrowings..................... 39,000 28,433 --
Payments on long-term borrowings....................... (44,010) (28,433) (10,201)
Intercompany advances.................................. 415,270 144,596 42,496
Intercompany payments.................................. (179,320) (95,948) (15,246)
--------- --------- --------
Cash provided by financing activities............... 230,940 48,648 17,049
--------- --------- --------
Net (decrease) increase in cash and cash equivalents..... -- -- (177)
Cash and cash equivalents, beginning of period........... -- -- 177
--------- --------- --------
Cash and cash equivalents, end of period................. $ -- $ -- $ --
========= ========= ========
CASH INTEREST PAID....................................... $ 563 $ 453 $ 507
========= ========= ========
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
During the three years ended June 30, 1996, CEX had non-cash intercompany
transactions with the Company consisting primarily of allocated general and
administrative expenses. In fiscal 1996 and 1995, the difference between the net
book value and the proceeds from the sale of oil and gas properties sold to CGDC
of $782,000 and $2,852,000, respectively, resulted in a non-cash transfer.
The accompanying notes are an integral part of these consolidated financial
statements.
F-34
<PAGE> 72
CHESAPEAKE EXPLORATION LIMITED PARTNERSHIP
(A WHOLLY-OWNED PARTNERSHIP OF CHESAPEAKE ENERGY CORPORATION)
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Chesapeake Exploration Limited Partnership, an Oklahoma limited partnership
("CEX"), was formed on December 27, 1994 and acquired Chesapeake Exploration
Company ("Exploration") by merger on such date. Exploration was a general
partnership which was 10% owned by Chesapeake Operating, Inc. ("COI") and 90%
owned by Chesapeake Energy Corporation ("CEC" or the "Company"). CEC owns 100%
of the Common Stock of COI. CEX is 10% owned by COI as the sole general partner,
and 90% owned directly by the Company, as the sole limited partner.
Effective December 31, 1994, COI transferred to CEX all of the Company's
undeveloped leasehold acreage, thereby formalizing their prior economic
arrangement. Historically, COI had transferred undeveloped leasehold acreage to
CEX on a property-by-property basis as drilling commenced. CEX also owns
substantially all of the Company's proved developed oil and gas properties.
Accordingly, the financial statements of CEX include costs related to proved
undeveloped properties and unevaluated properties, as well as proved producing
properties. The change in partnership structure and the transfer of undeveloped
leasehold by COI to CEX have been accounted for as a reorganization of entities
under common control in a manner similar to a pooling-of-interests.
The CEX financial statements were prepared on a separate entity basis as
reflected in the Company's books and records and include all material costs of
doing business as if the partnership were on a stand-alone basis, except that
interest is not charged on intercompany accounts, or allocated.
Capital is provided by advances from CEC and COI, and to a lesser extent
directly by CEX's bank credit facilities.
These financial statements should be read in conjunction with CEC's
consolidated financial statements.
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Oil and Gas Properties
CEC, and therefore CEX, follows the full cost method of accounting under
which all costs associated with property acquisition, exploration and
development activities are capitalized. CEX capitalizes internal costs that can
be directly identified with its acquisition, exploration and development
activities. Such costs do not include any costs related to production, general
corporate overhead or similar activities (see Note 7). Capitalized costs are
amortized on a composite unit-of-production method based on proved oil and gas
reserves. CEX's oil and gas reserves are estimated annually by independent
petroleum engineers. The average composite rates used for depreciation,
depletion and amortization were $.85, $.80 and $.80 per equivalent Mcf in 1996,
1995 and 1994, respectively. Proceeds from the sale of properties are accounted
for as reductions to capitalized costs unless such sales involve a significant
change in the relationship between costs and the value of proved reserves or the
underlying value of unproved properties, in which case a gain or loss is
recognized. Unamortized costs, as reduced by related deferred taxes, are subject
to a ceiling which limits such amounts to the estimated present value of oil and
gas reserves, reduced by operating expenses, future development costs and income
taxes. The costs of unproved properties are excluded from amortization until the
properties are evaluated.
F-35
<PAGE> 73
CHESAPEAKE EXPLORATION LIMITED PARTNERSHIP
(A WHOLLY-OWNED PARTNERSHIP OF CHESAPEAKE ENERGY CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
On April 30, 1996, CEX purchased interests in certain producing and
non-producing oil and gas properties, including approximately 14,000 net acres
of unevaluated leasehold, from Amerada Hess Corporation for $35 million, subject
to adjustment for activity after the effective date of January 1, 1996. The
properties are located in the Knox and Golden Trend fields of southern Oklahoma,
most of which are operated by the Company.
Capitalized Interest
During fiscal 1996, 1995 and 1994, interest of approximately $6,428,000,
$1,574,000 and $356,000 was capitalized on significant investments in unproved
properties that are not being currently depreciated, depleted, or amortized and
on which exploration or development activities are in progress.
Intercompany Transactions
COI, as operator of the majority of CEX's producing properties, bills CEX,
as non-operator, on a monthly basis for services performed as operator pursuant
to a standard operating agreement which is common in the industry. Expenses
related to the operations of CEX are recorded via such joint interest billings
and via intercompany expense allocations to CEX by COI. CEX has no employees. In
the CEC consolidated group, COI employs all management personnel and employees,
except for employees of the service company subsidiaries, and the preponderance
of general and administrative expenses are reflected in the financial records of
COI. COI allocates a portion of its general and administrative expenses to CEX
each period. This allocation is based on a per well charge at a rate common in
the industry plus an estimate of time spent on CEX activities by officers and
employees of COI.
CEC makes advances to CEX as needed. Certain of CEC's service subsidiaries
perform contractual services on CEX's wells for third parties. These
subsidiaries bill COI, as operator, and COI in turn bills CEX through monthly
joint interest billings in accordance with the terms of the standard operating
agreement.
It is CEC's policy not to demand payment of intercompany accounts. Interest
is not allocated by the Company, nor is interest charged on intercompany
accounts. CEC may, at its discretion, but it is not required to, contribute
intercompany accounts to capital.
Income Taxes
CEX is a partnership and, accordingly, its taxable income or loss is
allocated to the limited partner and the general partner and is ultimately
included in CEC's consolidated tax returns.
Gas Imbalances
CEX follows the "sales method" of accounting for its oil and gas revenue
whereby CEX recognizes sales revenue on all oil or gas sold to its purchasers,
regardless of whether the sales are proportionate to CEX's ownership in the
property. A liability is recognized only to the extent that CEX has a net
imbalance in excess of the reserves on the underlying properties. CEX's net
imbalance positions at June 30, 1996 and 1995 were not material.
Hedging
The Company, on behalf of CEX, periodically uses certain instruments to
hedge its exposure to price fluctuations on oil and natural gas transactions.
Recognized gains and losses on hedge contracts are reported as a component of
the related transaction. Results for hedging transactions are reflected in oil
and gas sales to the extent related to CEX's oil and gas production.
F-36
<PAGE> 74
CHESAPEAKE EXPLORATION LIMITED PARTNERSHIP
(A WHOLLY-OWNED PARTNERSHIP OF CHESAPEAKE ENERGY CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Reclassifications
Certain reclassifications have been made to the CEX financial statements
for the years ended June 30, 1995 and 1994 to conform to the presentation used
for the June 30, 1996 financial statements.
2. LONG-TERM DEBT
In April 1993, CEX entered into an oil and gas reserve-based reducing
revolving credit facility (the "Revolving Credit Facility") with Union Bank. The
Revolving Credit Facility has been amended from time to time, most recently in
September 1996. Concurrent with the September 1996 amendment, CEX increased the
facility size to $125 million and expanded its bank group with Union Bank
remaining as agent.
The maturity date of the Revolving Credit Facility is April 30, 2001. The
facility provides for interest at the Union Bank reference rate (8.25% at June
30, 1996) or, at the option of CEX the Eurodollar rate plus 1.375% to 1.875%
depending on the ratio of the amount outstanding to the borrowing base.
Borrowings are collateralized by a first priority lien on substantially all of
CEX's proved producing reserves, and are unconditionally guaranteed by the
Company. At June 30, 1996 and 1995 there was $0 and $10,000 outstanding under
the Revolving Credit Facility, respectively.
The amount of credit available at any time under the Revolving Credit
Facility is the lesser of the commitment amount or the borrowing base. The
borrowing base is reduced each month by a specified amount. Both the borrowing
base and the monthly reduction amount are redetermined by Union Bank each May 1
and November 1 and may be redetermined at any other time upon the request of CEX
or Union Bank. To the extent the amount outstanding at any time exceeds the
borrowing base, CEX must reduce the amount outstanding or add additional
collateral. At June 30, 1996, the commitment amount and the borrowing base under
the Revolving Credit Facility were $35 million, and the monthly reduction amount
was $700,000. The Revolving Credit Facility was amended in September 1996 to
provide for a borrowing base and a commitment amount of $75 million, with a
monthly reduction amount of $1,750,000. The Revolving Credit Facility contains
customary financial covenants, limitations on indebtedness and liabilities,
liens, prepayments of other indebtedness and loans, investments and guarantees
by the Company and prohibits the payment of dividends on the Company's Common
Stock.
3. CONTINGENCIES AND COMMITMENTS
CEX has fully and unconditionally guaranteed CEC's obligations under the
$47.5 million principal amount of 12% Senior Notes due 2001, issued March 31,
1994, the $90 million principal amount of 10.5% Senior Notes due 2002, issued
May 25, 1995, and the $120 million principal amount of 9.125% Senior Notes due
2006, issued April 9, 1996. In addition, the CEX partnership interests have been
pledged as collateral under the 12% Senior Notes.
4. RELATED PARTY TRANSACTIONS
CEX has significant transactions with COI, CEC, CGDC and other affiliated
companies included in the CEC consolidated group, including:
COI as operator for CEX:
(a) acquires oil and gas properties,
(b) drills and equips wells,
(c) operates the majority of CEX's wells,
(d) sells interests in proved undeveloped properties to third parties,
and
F-37
<PAGE> 75
CHESAPEAKE EXPLORATION LIMITED PARTNERSHIP
(A WHOLLY-OWNED PARTNERSHIP OF CHESAPEAKE ENERGY CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(e) contracts services from affiliated entities in the CEC
consolidated group and from third parties on behalf of CEX.
Capitalized costs associated with these transactions are reflected in the
balance sheet as oil and gas properties and unevaluated properties for each
period presented. Production expenses and taxes included in the statement of
operations for each of the periods presented reflect expenses billed by COI to
CEX for operations. Allocated general and administrative expenses reflect
amounts allocated to CEX by COI.
The Company makes periodic advances (and contributions) to CEX.
The transactions included in the following intercompany balances are
summarized as follows:
<TABLE>
<CAPTION>
OTHER
COI CEC CGDC SUBSIDIARIES
--------- -------- -------- ------------
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE AT JUNE 30, 1993......................... $ (34,593) $(14,047) $ -- $ 1,033
========= ======== ======== ========
Joint Interest Billing........................... $ (31,925) $ (553) $ -- $ --
Cash Collected for CEX........................... 15,118 -- -- --
Debt Payments.................................... (10,135) (573) -- --
Other............................................ (123) 124 -- --
--------- -------- -------- --------
BALANCE AT JUNE 30, 1994......................... $ (61,658) $(15,049) $ -- $ 1,033
========= ======== ======== ========
Joint Interest Billing........................... $(131,018) $ (30) $ -- $ --
Cash Collected for CEX........................... 55,889 39,758 -- --
Debt Payments.................................... (23) (9,933) -- --
Transfer of Properties to CGDC................... -- -- 2,852 --
Other............................................ (1,236) (64) 25 (3,223)
--------- -------- -------- --------
BALANCE AT JUNE 30, 1995......................... $(138,046) $ 14,682 $ 2,877 $ (2,190)
========= ======== ======== ========
Joint Interest Billing........................... $(140,928) $ -- $ -- $ --
Cash Collected for CEX........................... 40,392 44,000 -- --
Debt Payments.................................... -- (5,848) -- --
Transfer of Properties to CGDC................... -- -- 5,515 --
Acquisition of properties........................ (162,748) -- -- --
Other............................................ (10,206) (5,332) (221) 382
--------- -------- -------- --------
BALANCE AT JUNE 30, 1996......................... $(411,536) $ 47,502 $ 8,171 $ (1,808)
========= ======== ======== ========
</TABLE>
F-38
<PAGE> 76
CHESAPEAKE EXPLORATION LIMITED PARTNERSHIP
(A WHOLLY-OWNED PARTNERSHIP OF CHESAPEAKE ENERGY CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. MAJOR CUSTOMERS
Sales to individual customers constituting 10% or more of total oil and gas
sales were as follows:
<TABLE>
<CAPTION>
PERCENT OF
AMOUNTS OIL AND GAS SALES
YEAR ---------------- -----------------
- ----- ($ IN THOUSANDS)
<C> <S> <C> <C>
1996 Aquila Southwest Pipeline Corporation $ 41,900 40%
GPM Gas Corporation $ 28,700 28%
Wickford Energy Marketing, L.C. $ 18,500 18%
1995 Aquila Southwest Pipeline Corporation $ 18,548 33%
Wickford Energy Marketing, L.C. $ 15,704 28%
GPM Gas Corporation $ 11,686 21%
1994 Wickford Energy Marketing, L.C. $ 6,190 28%
GPM Gas Corporation $ 6,105 27%
Plains Marketing and Transportation, Inc. $ 2,659 12%
Texaco Exploration & Production, Inc. $ 2,249 10%
</TABLE>
Management believes that the loss of any of the above customers would not
have a material impact on CEX's results of operations or its financial position.
6. FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
The Company, on behalf of CEX, has only limited involvement with derivative
financial instruments, as defined in Statement of Financial Accounting Standards
No. 119 "Disclosure About Derivative Financial Instruments and Fair Value of
Financial Instruments" and does not use them for trading purposes. The Company's
objective is to hedge a portion of its exposure to price volatility from
producing crude oil and natural gas. These arrangements may expose the Company
to credit risk from its counter-parties and to basis risk.
Hedging Activities
Periodically the Company, on behalf of CEX, utilizes hedging strategies to
hedge the price of a portion of its future oil and gas production. These
strategies include swap arrangements that establish an index-related price above
which the Company pays the hedging partner and below which the Company is paid
by the hedging partner, the purchase of index-related puts that provide for a
"floor" price to the Company to be paid by the counter-party to the extent the
price of the commodity is below the contracted floor, and basis protection
swaps.
As of June 30, 1996, the Company had NYMEX-based crude oil swap agreements
for 1,000 Bbl per day for July 1, 1996 through August 31, 1996 at an average
price of $17.85 per Bbl. The counter-party has the option exercisable monthly
for an additional 1,000 Bbl per day for the period July 1, 1996 through December
31, 1996 to cause a swap if the price exceeds an average $17.74 per Bbl. The
actual settlements for July and August resulted in a $0.5 million payment to the
counter-party. The Company estimates, based on NYMEX prices as of August 30,
1996 that the effect of the September through December hedges would be a $0.4
million payment to the counter-party.
The Company has purchased Houston Ship Channel put options which guarantee
the Company an average floor price of $2.21/Mmbtu for 20,000 Mmbtu per day for
the period of November 1, 1996 through February 28, 1997. The average cost of
these puts was $0.14 per Mmbtu.
As of June 30, 1996, the Company had NYMEX-based natural gas swaps and
NYMEX/Houston Ship Channel Basis swaps for the months of July through October
1996. These transactions resulted in payments to
F-39
<PAGE> 77
CHESAPEAKE EXPLORATION LIMITED PARTNERSHIP
(A WHOLLY-OWNED PARTNERSHIP OF CHESAPEAKE ENERGY CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
the Company's counter-party of approximately $2 million for the month of July
1996 and $1.5 million for the month of August 1996. The Company estimates, based
on NYMEX prices as of August 30, 1996, that the effect of the September and
October hedges would be a $0.2 million payment to the counter-party.
Concentration of Credit Risk
Financial instruments which potentially subject CEX to concentrations of
credit risk consist principally of trade receivables. CEX's accounts receivable
are primarily from purchasers of oil and natural gas products and exploration
and production companies which own interests in properties operated by the
Company. The industry concentration has the potential to impact CEX's overall
exposure to credit risk, either positively or negatively, in that the customers
may be similarly affected by changes in economic, industry or other conditions.
The Company generally requires letters of credit for receivables from customers
which are not considered investment grade, unless the credit risk can otherwise
be mitigated.
Fair Value of Financial Instruments
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of Statement of
Financial Accounting Standards No. 107, "Disclosures About Fair Value of
Financial Instruments". The estimated fair value amounts have been determined by
the Company using available market information and valuation methodologies.
Considerable judgment is required in interpreting market data to develop the
estimates of fair value. The use of different market assumptions or valuation
methodologies may have a material effect on the estimated fair value amounts.
The carrying values of items comprising current assets and current
liabilities approximate fair values due to the short-term maturities of these
instruments. Based on the borrowing rates currently available to CEX for bank
loans with similar terms and average maturities, the fair value of long-term
debt approximates the carrying value.
7. DISCLOSURES ABOUT OIL AND GAS PRODUCING ACTIVITIES
Net Capitalized Costs
Evaluated and unevaluated capitalized costs related to CEX's oil and gas
producing activities are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30,
---------------------
1996 1995
-------- --------
($ IN THOUSANDS)
<S> <C> <C>
Oil and gas properties:
Proved......................................................... $346,821 $163,521
Unproved....................................................... 165,441 27,474
-------- --------
Total........................................................ 512,262 190,995
Less accumulated depreciation, depletion and amortization...... (84,726) (36,959)
-------- --------
Net capitalized costs.......................................... $427,536 $154,036
======== ========
</TABLE>
Unproved properties not subject to amortization at June 30, 1996 and 1995,
consist mainly of lease acquisition costs. CEX capitalized approximately
$6,428,000 and $1,574,000 of interest during the years ended June 30, 1996 and
1995 on significant investments in unproved properties that are not being
currently depreciated, depleted, or amortized and on which exploration or
development activities are in progress. CEX will continue to evaluate its
unevaluated properties; however, the timing of the ultimate evaluation and
disposition of the properties has not been determined.
F-40
<PAGE> 78
CHESAPEAKE EXPLORATION LIMITED PARTNERSHIP
(A WHOLLY-OWNED PARTNERSHIP OF CHESAPEAKE ENERGY CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Costs Incurred in Oil and Gas Acquisition, Exploration and Development
Costs incurred in oil and gas property acquisition, exploration and
development activities which have been capitalized are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30,
---------------------------------
1996 1995 1994
-------- -------- -------
($ IN THOUSANDS)
<S> <C> <C> <C>
Development costs................................... $129,445 70,562 24,803
Exploration costs................................... 36,532 14,129 5,358
Acquisition costs:
Unproved properties............................... 138,188 24,437 3,305
Proved properties................................. 24,560 -- --
Sale of producing properties........................ (5,300) (11,500) --
Proceeds from sale of leasehold..................... (2,158) (5,079) (3,268)
-------- -------- -------
Total..................................... $321,267 $ 92,549 $30,198
======== ======== =======
</TABLE>
Results of Operations from Oil and Gas Producing Activities (unaudited)
CEX's results of operations from oil and gas producing activities are
presented below for the years ended June 30, 1996, 1995 and 1994, respectively.
The following table includes revenues and expenses associated directly with
CEX's oil and gas producing activities. It does not include any allocation of
CEC's interest costs and, therefore, is not necessarily indicative of the
contribution to consolidated net operating results of CEX's oil and gas
operations.
<TABLE>
<CAPTION>
JUNE 30,
---------------------------------
1996 1995 1994
-------- -------- -------
($ IN THOUSANDS)
<S> <C> <C> <C>
Oil and gas sales................................... $103,712 $ 55,417 $22,404
Production costs(a)................................. (7,225) (3,494) (3,185)
Depletion and depreciation.......................... (48,333) (24,769) (8,141)
-------- -------- -------
Results of operations from oil and gas producing
activities........................................ $ 48,154 $ 27,154 $11,078
======== ======== =======
</TABLE>
- ---------------
(a) Production costs include lease operating expenses and production taxes.
Oil and Gas Reserve Quantities (Unaudited)
The reserve information presented below is based upon reports prepared by
the independent petroleum engineering firm of Williamson Petroleum Consultants,
Inc. ("Williamson") as of June 30, 1996, June 30, 1995 and June 30, 1994 and the
Company's petroleum engineers as of June 30, 1996 and 1995. The reserves
evaluated by the Company's petroleum engineers constituted approximately 0.6%
and 0.5% of total proved reserves as of June 30, 1996 and 1995, respectively.
The information is presented in accordance with regulations prescribed by the
Securities and Exchange Commission. CEX emphasizes that reserve estimates are
inherently imprecise. CEX's reserve estimates were generally based upon
extrapolation of historical production trends, analogy to similar properties and
volumetric calculations. Accordingly, these estimates are expected to change,
and such changes could be material, as future information becomes available.
Proved oil and gas reserves represent the estimated quantities of crude
oil, natural gas, and natural gas liquids which geological and engineering data
demonstrate with reasonable certainty to be recoverable in
F-41
<PAGE> 79
CHESAPEAKE EXPLORATION LIMITED PARTNERSHIP
(A WHOLLY-OWNED PARTNERSHIP OF CHESAPEAKE ENERGY CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
future years from known reservoirs under existing economic and operating
conditions. Proved developed oil and gas reserves are those expected to be
recovered through existing wells with existing equipment and operating methods.
Presented below is a summary of changes in estimated reserves of CEX based
upon the reports prepared by Williamson for 1996, 1995 and 1994 along with those
prepared by the Company's petroleum engineers for 1996 and 1995.
<TABLE>
<CAPTION>
JUNE 30,
-----------------------------------------------------------
1996 1995 1994
----------------- ----------------- -----------------
OIL GAS OIL GAS OIL GAS
(MBBL) (MMCF) (MBBL) (MMCF) (MBBL) (MMCF)
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Proved reserves, beginning of year.... 4,848 199,526 4,154 117,066 9,622 79,763
Extensions, discoveries and other
additions........................... 8,924 173,576 2,345 129,444 2,335 82,965
Revisions of previous estimate........ (895) (2,589) (243) (9,587) (868) (5,523)
Production............................ (1,304) (49,320) (1,006) (22,723) (537) (6,927)
Sale of reserves-in-place............. (74) (6,359) (402) (14,674) (6,398) (33,212)
Purchase of reserves-in-place......... 443 20,087 -- -- -- --
------ ------- ------ ------- ------ -------
Proved reserves, end of year.......... 11,942 334,921 4,848 199,526 4,154 117,066
====== ======= ====== ======= ====== =======
Proved developed reserves, end of
year................................ 3,214 126,590 1,705 65,481 1,313 30,445
====== ======= ====== ======= ====== =======
</TABLE>
On April 30, 1996, the Company purchased interests in certain producing and
non-producing oil and gas properties, including approximately 14,000 net acres
of unevaluated leasehold, from Amerada Hess Corporation for $35 million, subject
to adjustment for activity after the effective date of January 1, 1996. The
properties are located in the Knox and Golden Trend fields of southern Oklahoma,
most of which are operated by the Company.
In October 1993, CEX entered into a joint development agreement covering a
20,000 gross acre development area in the Fayette County portion of the Giddings
Field in southern Texas. CEX's ownership interests in the proved undeveloped
properties covered by the joint development agreement were significantly less
than those used in the June 30, 1993 reserve report. The impact of the reduced
ownership percentages is reflected as sales of reserves in place in fiscal 1994
in the preceding table.
Standardized Measure of Discounted Future Net Cash Flows (Unaudited)
Statement of Financial Accounting Standards No. 69 ("SFAS 69") prescribes
guidelines for computing a standardized measure of future net cash flows and
changes therein relating to estimated proved reserves. CEX has followed these
guidelines which are briefly discussed below.
Future cash inflows and future production and development costs are
determined by applying year-end prices and costs to the estimated quantities of
oil and gas to be produced. Estimates are made of quantities of proved reserves
and the future periods during which they are expected to be produced based on
year-end economic conditions. Estimated future income taxes are computed using
current statutory income tax rates including consideration for the current tax
basis of the properties and related carryforwards, giving effect to permanent
differences and tax credits. The income tax effect of these future cash inflows
will be recognized by CEX's partners. The resulting future net cash flows are
reduced to present value amounts by applying a 10% annual discount factor.
The assumptions used to compute the standardized measure are those
prescribed by the Financial Accounting Standards Board and, as such, do not
necessarily reflect CEX's expectations of actual revenue to
F-42
<PAGE> 80
CHESAPEAKE EXPLORATION LIMITED PARTNERSHIP
(A WHOLLY-OWNED PARTNERSHIP OF CHESAPEAKE ENERGY CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
be derived from those reserves nor their present worth. The limitations inherent
in the reserve quantity estimation process, as discussed previously, are equally
applicable to the standardized measure computations since these estimates are
the basis for the valuation process.
The following summary sets forth CEX's future net cash flows relating to
proved oil and gas reserves based on the standardized measure prescribed in SFAS
69:
<TABLE>
<CAPTION>
JUNE 30,
------------------------------------
1996 1995 1994
---------- -------- --------
($ IN THOUSANDS)
<S> <C> <C> <C>
Future cash inflows....................................... $1,055,631 $402,027 $307,600
Future production costs................................... (161,223) (70,558) (50,765)
Future development costs.................................. (136,927) (76,542) (47,040)
Future income tax provision............................... (163,374) (42,519) (36,847)
---------- -------- --------
Future net cash flows..................................... 594,107 212,408 172,948
Less effect of a 10% discount factor...................... (160,659) (63,496) (54,340)
---------- -------- --------
Standardized measure of discounted future net cash
flows................................................... $ 433,448 $148,912 $118,608
========== ======== ========
</TABLE>
The principal sources of change in the standardized measure of discounted
future net cash flows are as follows:
<TABLE>
<CAPTION>
JUNE 30,
----------------------------------
1996 1995 1994
-------- -------- --------
($ IN THOUSANDS)
<S> <C> <C> <C>
Standardized measure, beginning of year.................... $148,912 $118,608 $119,744
Sales of oil and gas produced, net of production costs..... (96,408) (51,923) (18,757)
Net changes in prices and production costs................. 78,501 (32,623) (10,795)
Extensions and discoveries, net of production and
development
costs.................................................... 292,255 93,969 99,175
Changes in future development costs........................ (11,084) 3,406 (2,855)
Development costs incurred during the period that reduced
future development costs................................. 43,409 23,678 9,855
Revisions of previous quantity estimates................... (11,338) (11,286) (13,107)
Purchase of undeveloped reserves-in-place.................. 29,641 -- --
Sales of reserves in-place................................. (5,835) (7,514) (66,372)
Accretion of discount...................................... 17,550 14,125 14,166
Net change in income taxes................................. (65,117) (3,944) (720)
Changes in production rates and other...................... 12,962 2,416 (11,726)
-------- -------- --------
Standardized measure, end of year.......................... $433,448 $148,912 $118,608
======== ======== ========
</TABLE>
F-43
<PAGE> 81
================================================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY THE SHARES BY ANYONE IN ANY JURISDICTION IN
WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON
MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO
WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL CREATE ANY IMPLICATION THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS
DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Available Information................. 2
Incorporation of Certain Documents by
Reference........................... 2
Prospectus Summary.................... 3
Risk Factors.......................... 12
The Company........................... 17
Use of Proceeds....................... 17
Price Range of Common Stock and
Dividend Policy..................... 17
Capitalization........................ 18
Selected Consolidated Financial
Data................................ 19
Management's Discussion and Analysis
of Financial Condition.............. 20
Management............................ 27
Description of Capital Stock.......... 30
Underwriting.......................... 33
Legal Matters......................... 34
Experts............................... 34
Glossary.............................. 35
Index to Financial Statements......... F-1
</TABLE>
================================================================================
================================================================================
3,250,000 SHARES
CHESAPEAKE
ENERGY CORPORATION
COMMON STOCK
------------------------
PROSPECTUS
------------------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
BEAR, STEARNS & CO. INC.
J.P. MORGAN & CO.
PRUDENTIAL SECURITIES INCORPORATED
, 1996
================================================================================
<PAGE> 82
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Set forth below is an itemization of the costs expected to be incurred in
connection with the offer and sale of the securities registered hereby. With the
exception of the Securities Act, NASD and NYSE fees, all amounts are estimates.
<TABLE>
<S> <C>
Securities Act Registration Fee.......................................... $ 61,794
NASD Filing Fee.......................................................... 20,892
NYSE Fee................................................................. 12,950
Printing and Engraving Expenses.......................................... *
Legal Fees and Expenses.................................................. *
Accounting Fees and Expenses............................................. *
Blue Sky Qualification Fees and Expenses................................. *
Transfer Agent Fees...................................................... *
Miscellaneous............................................................ *
--------
Total.......................................................... *
========
</TABLE>
* To be supplied by amendment.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The General Corporation Law of Delaware, under which the Registrant is
incorporated, and the General Corporation Act of Oklahoma, which is expected to
become the Registrant's state of incorporation, permits indemnification against
expenses, including attorneys' fees, actually and reasonably incurred by such
persons in connection with the defense of any action, suit or proceeding in
which such a person is a party by reason of his being or having been a director,
employee or agent of the Registrant, or of any corporation, partnership, joint
venture, trust or other enterprise in which he served as such at the request of
the Registrant, provided that he acted in good faith and in a manner reasonably
believed to be in or not opposed to the best interests of the corporation, and
with respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful, and provided further (if the threatened,
pending or completed action or suit is by or in the right of the corporation)
that he shall not have been adjudged to be liable for negligence or misconduct
in the performance of his duty to the corporation (unless the court determines
that indemnity would nevertheless be proper under the circumstances). Article
VIII of the Registrant's Certificate of Incorporation provides for
indemnification of the Registrant's directors and officers. The Delaware General
Corporation Law and the Oklahoma General Corporation Act also permit the
Registrant to purchase and maintain insurance on behalf of the Registrant's
directors and officers against any liability arising out of their status as
such, whether or not Registrant would have the power to indemnify them against
such liability. These provisions may be sufficiently broad to indemnify such
persons for liabilities arising under the Securities Act of 1933 (the
"Securities Act").
The Registrant has entered into indemnity agreements with each of its
directors and executive officers. Under each indemnity agreement, the Registrant
will pay on behalf of the indemnitee, and his executors, administrators and
heirs, any amount which he is or becomes legally obligated to pay because of (i)
any claim or claims from time to time threatened or made against him by any
person because of any act or omission or neglect or breach of duty, including
any actual or alleged error or misstatement or misleading statement, which he
commits or suffers while acting in his capacity as a director and/or officer of
the Registrant or an affiliate or (ii) being a party, or being threatened to be
made a party, to any threatened, pending or contemplated action, suit or
proceeding, whether civil, criminal, administrative or investigative, by reason
of the fact that he is or was an officer, director, employee or agent of the
Registrant or an affiliate or is or was serving at the request of the Registrant
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise. The payments which the Registrant will
be obligated to make hereunder shall include, inter alia, damages, charges,
judgments, fines, penalties, settlements and costs,
II-1
<PAGE> 83
cost of investigation and cost of defense of legal, equitable or criminal
actions, claims or proceedings and appeals therefrom, and costs of attachment,
supersedeas, bail, surety or other bonds. The Registrant also provides liability
insurance for each of its directors and executive officers.
ITEM 16. EXHIBITS.
The following exhibits are filed herewith:
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
<C> <S>
1 -- Form of Underwriting Agreement
5 -- Opinion of McAfee & Taft A Professional Corporation re legality and
consent.
23.1 -- Consent of Price Waterhouse LLP.
23.2 -- Consent of Coopers & Lybrand L.L.P.
23.3 -- Consent of Williamson Petroleum Consultants, Inc.
23.4 -- Consent of McAfee & Taft A Professional Corporation, included as part
of Exhibit 5.
24 -- Power of attorney (included on page II-4)
</TABLE>
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of the registration statement in reliance upon Rule 430A and contained in
the form of prospectus filed by the registrant pursuant to Rule 424 (b) (1)
or (4) or 497(h) under the Securities Act shall be deemed to be part of the
registration statement at the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(3) For purposes of determining any liability under the Securities Act
of 1933, each filing of the Registrant's annual report pursuant to Section
13(a) or Section 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of any employee benefit plan's annual report
pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the registration statement shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 15, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issued.
II-2
<PAGE> 84
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Oklahoma City, State of Oklahoma on the 28th day of
October, 1996.
CHESAPEAKE ENERGY CORPORATION
By /s/ AUBREY K. McCLENDON
----------------------------------
Aubrey K. McClendon, Chairman of
the Board and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on October 28, 1996.
<TABLE>
<S> <C>
/s/ AUBREY K. McCLENDON /s/ TOM L. WARD
- -------------------------------------------- --------------------------------------------
Aubrey K. McClendon, Chairman of the Board Tom L. Ward, President and Director
and Chief Executive Officer
(Principal Executive Officer)
/s/ MARCUS C. ROWLAND /s/ RONALD A. LEFAIVE
- -------------------------------------------- --------------------------------------------
Marcus C. Rowland, Vice President -- Finance Ronald A. Lefaive, Controller (Principal
and Chief Financial Officer Accounting Officer)
(Principal Financial Officer)
/s/ E. F. HEIZER, JR. /s/ BREENE M. KERR
- -------------------------------------------- --------------------------------------------
E. F. Heizer, Jr., Director Breene M. Kerr, Director
/s/ SHANNON SELF /s/ FREDERICK B. WHITTEMORE
- -------------------------------------------- --------------------------------------------
Shannon Self, Director Frederick B. Whittemore, Director
/s/ WALTER C. WILSON
- --------------------------------------------
Walter C. Wilson, Director
</TABLE>
II-3
<PAGE> 85
POWER OF ATTORNEY
We, the undersigned officers and directors of Chesapeake Energy Corporation
(hereinafter, the "Company"), hereby severally constitute Aubrey K. McClendon,
Tom L. Ward and Marcus C. Rowland, and each of them, severally, our true and
lawful attorneys in fact with full power to them and each of them to sign for
us, and in our names as officers or directors, or both, of the Company, a
Registration Statement on Form S-3, any amendment thereto (including
post-effective amendments), and any registration statement for the same offering
that is to be effective upon filing pursuant to Rule 462(b) under the Securities
Act of 1933 (the "Securities Act"), for the purpose of registering under the
Securities Act shares of the Company's Common Stock, par value $.10 per share,
to be sold by the Company, granting unto said attorneys-in-fact and agents, and
each of them, full power and authority to do and to perform each and every act
and thing requisite and necessary to be done in and about the premises, as fully
to all intents and purposes as he might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents or any of them, may
lawfully do or cause to be done by virtue hereof.
DATED this 28 day of October, 1996.
<TABLE>
<S> <C>
/s/ AUBREY K. McCLENDON /s/ TOM L. WARD
- -------------------------------------------- --------------------------------------------
Aubrey K. McClendon, Chairman of the Board Tom L. Ward, President and Director
and Chief Executive Officer (Principal
Executive Officer)
/s/ MARCUS C. ROWLAND /s/ RONALD A. LEFAIVE
- -------------------------------------------- --------------------------------------------
Marcus C. Rowland, Vice President -- Finance Ronald A. Lefaive, Controller (Principal
and Chief Financial Officer (Principal Accounting Officer)
Financial Officer)
/s/ E. F. HEIZER, JR. /s/ BREENE M. KERR
- -------------------------------------------- --------------------------------------------
E. F. Heizer, Jr., Director Breene M. Kerr, Director
/s/ SHANNON SELF /s/ FREDERICK B. WHITTEMORE
- -------------------------------------------- --------------------------------------------
Shannon Self, Director Frederick B. Whittemore, Director
/s/ WALTER C. WILSON
- --------------------------------------------
Walter C. Wilson, Director
</TABLE>
II-4
<PAGE> 86
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- -------------------- ------------------------------------------------------------------------
<C> <S>
1 -- Form of Underwriting Agreement
5 -- Opinion of McAfee & Taft A Professional Corporation re legality and
consent.
23.1 -- Consent of Price Waterhouse LLP.
23.2 -- Consent of Coopers & Lybrand L.L.P.
23.3 -- Consent of Williamson Petroleum Consultants, Inc.
23.4 -- Consent of McAfee & Taft A Professional Corporation, included as part
of Exhibit 5.
24 -- Power of attorney (included on page II-4)
</TABLE>
<PAGE> 1
EXHIBIT 1
____________ Shares
CHESAPEAKE ENERGY CORPORATION
Common Stock
UNDERWRITING AGREEMENT
October ___, 1996
DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
BEAR, STEARNS & CO. INC.
J.P. MORGAN SECURITIES INC.
PRUDENTIAL SECURITIES INCORPORATED
As representatives of the
several underwriters
named in Schedule I hereto
c/o Donaldson, Lufkin & Jenrette
Securities Corporation
277 Park Avenue
New York, New York 10172
Dear Sirs:
CHESAPEAKE ENERGY CORPORATION, a Delaware corporation (the "Company"),
proposes to issue and sell to the several Underwriters (as defined below) an
aggregate of _______ shares of its common stock, par value $0.10 per share
("Common Stock"). The _______ shares of Common Stock to be issued and sold by
the Company are hereinafter called the Firm Shares.
It is understood that, subject to the conditions hereinafter stated,
the Firm Shares will be sold to the several Underwriters named in Schedule I
hereto (the "Underwriters") in connection with the offering and sale of such
Firm Shares. Donaldson, Lufkin & Jenrette Securities Corporation, Bear,
Stearns & Co. Inc., J.P. Morgan Securities Inc. and Prudential Securities
Incorporated shall act as representatives (the "Representatives") of the
several Underwriters.
The Company also proposes to issue and sell to the several
Underwriters not more than an additional _______ shares of its Common Stock
(the "Additional Shares"), if requested by the Underwriters as provided in
Section 2 hereof. The Firm Shares and the Additional Shares are herein
<PAGE> 2
collectively called the "Shares." Capitalized terms not specifically defined
herein are defined in the Prospectus referred to below, and used herein as so
defined.
1. Registration Statement and Prospectus. The Company has
prepared and filed with the Securities and Exchange Commission (the
"Commission") in accordance with the provisions of the Securities Act of 1933,
as amended, and the rules and regulations of the Commission thereunder
(collectively called the "Act"), a registration statement on Form S-3 (No.
333-_____) including a prospectus relating to the Shares, which may be amended.
The registration statement as amended at the time when it becomes effective,
including information (if any) deemed to be part of the registration statement
at the time of effectiveness pursuant to Rule 430A under the Act, and a
registration statement, if any, filed pursuant to Rule 462(b), which becomes
effective upon filing under the Act, increasing the size of the offering, are
hereinafter referred to as the "Registration Statement"; and the prospectus and
related supplements or attached term sheets, if any, in the form first used to
confirm sales of Shares is hereinafter referred to as the "Prospectus."
2. Agreements to Sell and Purchase. The Company hereby agrees to
issue and sell the Firm Shares to the several Underwriters, and each of the
Underwriters, upon the basis of the representations and warranties contained in
this Underwriting Agreement ("Agreement"), and subject to its terms and
conditions, agrees, severally and not jointly, to purchase from the Company at
a price per share of $_______ (the "Purchase Price"), the number of Firm Shares
(subject to such adjustments to eliminate fractional Shares as the
Representatives may determine) set forth on Schedule I hereto opposite the name
of such Underwriter.
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, the Company agrees to issue
and sell to the Underwriters the Additional Shares and the Underwriters shall
have the right to purchase, severally and not jointly, up to ______ Additional
Shares from the Company at the Purchase Price. The Additional Shares may be
purchased solely for the purpose of covering over-allotments made in connection
with the offering of the Firm Shares. The Underwriters may exercise their
right to purchase Additional Shares in whole or in part from time to time by
giving written notice thereof to the Company within 30 days after the date of
this Agreement. The Representatives shall give any such notice on behalf of
the Underwriters and such notice shall specify the aggregate number of
Additional Shares to be purchased pursuant to such exercise and the date for
payment and delivery thereof. The date specified in any such notice shall be a
business day (i) no earlier than the Closing Date (as hereinafter defined),
(ii) no later than 10 business days after such notice has been given and (iii)
no earlier than two business days after such notice has been given. If any
Additional Shares are to be purchased, each Underwriter, severally and not
jointly, agrees to purchase from the Company the number of Additional Shares
(subject to such adjustments to eliminate fractional Shares as the
Representatives may determine) which bears the same proportion to the total
number of Additional Shares to be purchased from the Company as the number of
Firm Shares set forth opposite the name of such Underwriter in Schedule I bears
to the total number of Firm Shares.
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<PAGE> 3
3. Terms of Public Offering. The Company is advised by you that
the Underwriters propose (i) to make a public offering of their respective
portions of the Shares as soon after the effective date of the Registration
Statement as in your judgment is advisable and (ii) initially to offer the
Shares upon the terms set forth in the Prospectus.
4. Delivery and Payment. Delivery to the Underwriters of and
payment for the Firm Shares shall be made in New York City at 10:00 A.M., New
York City time, on the third business day (the "Closing Date") following the
date of this Agreement, or at such other location as may be mutually acceptable
to you and the Company. The Closing Date and the location of delivery of and
the form of payment for the Firm Shares may be varied by agreement between you
and the Company.
Delivery to the Underwriters of and payment for any Additional Shares
to be purchased by the Underwriters shall be made at such place as the
Representatives shall designate at 10:00 A.M., New York City time, on the date
specified in the applicable exercise notice given by you pursuant to Section 2
(an "Option Closing Date"). Any such Option Closing Date and the location of
delivery of and the form of payment for such Additional Shares may be varied by
agreement between the Representatives and the Company.
Certificates for the Shares shall be registered in such names and
issued in such denominations as you shall request in writing not later than two
full business days prior to the Closing Date or an Option Closing Date, as the
case may be. Such certificates shall be made available to you for inspection
not later than 9:30 A.M., New York City time, on the business day next
preceding the Closing Date or an Option Closing Date, as the case may be.
Certificates in definitive form evidencing the Shares shall be delivered to you
on the Closing Date or an Option Closing Date, as the case may be, with any
transfer taxes thereon duly paid by the Company, for the respective accounts of
the several Underwriters, against payment of the Purchase Price therefor by
wire transfer in immediately available funds to the Company.
5. Agreements of the Company. The Company agrees with the
Underwriters as follows:
(a) The Company will, if the Registration Statement has
not heretofore become effective under the Act, and if otherwise necessary or
required by law, file an amendment to the Registration Statement or, if
necessary pursuant to Rule 430A of the Act, a post-effective amendment to the
Registration Statement, in each case as soon as practicable after the execution
and delivery of this Agreement, and will use its best efforts to cause the
Registration Statement or such post-effective amendment to become effective at
the earliest possible time. If the Registration Statement has become effective
and the Company, omitting from the Prospectus certain information in reliance
upon Rule 430A of the Act, elects not to file a post-effective amendment
pursuant to Rule 430A of the Act, it will file the form of Prospectus required
by Rule 424(b) of the Act within the time period specified by Rule 430A and
Rule 424(b) of the Act. The Company will otherwise comply fully and in a
timely manner with the applicable provisions of Rule 424, Rule 430A, and Rule
462 of the Act.
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<PAGE> 4
(b) The Company will advise the Underwriters promptly
and, if requested by any of the Underwriters, confirm such advice in writing,
(i) when the Registration Statement has become effective, if and when the
Prospectus is sent for filing pursuant to Rule 424 of the Act and when any
post-effective amendment to the Registration Statement becomes effective, (ii)
of the receipt of any comments from the Commission or any state securities
commission or any other regulatory authority that relate to the Registration
Statement or requests by the Commission or any state securities commission or
any other regulatory authority for any amendment or supplement to the
Registration Statement or any amendment or supplement to the Prospectus or for
additional information, (iii) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement, or of the
suspension of qualification of the Shares for offering or sale in any
jurisdiction, or the initiation of any proceeding for such purpose by the
Commission or any state securities commission or any other regulatory authority
and (iv) of the happening of any event during the period referred to in
paragraph (d) below, which makes any statement of a material fact made in the
Registration Statement untrue or which requires the making of any additions to
or changes in the Registration Statement in order to make the statements
therein not misleading or that makes any statement of a material fact made in
the Prospectus untrue or which requires the making of any addition to or change
in the Prospectus in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The Company shall
use its best efforts to prevent the issuance of any stop order or order
suspending the qualification or exemption of the Shares under any Federal or
state securities or Blue Sky laws, and, if at any time the Commission shall
issue any stop order suspending the effectiveness of the Registration
Statement, or any state securities commission or any other regulatory authority
shall issue an order suspending the qualification or exemption of the Shares
under any state securities or Blue Sky laws, the Company shall use every
reasonable effort to obtain the withdrawal or lifting of such order at the
earliest possible time.
(c) Promptly after the Registration Statement becomes
effective, and from time to time thereafter for such period in the
Underwriters' reasonable judgment as a prospectus is required to be delivered
in connection with sales of the Shares by an Underwriter or a dealer, the
Company will furnish to each Underwriter and each dealer, without charge, as
many copies of the Prospectus (and of any amendment or supplement to the
Prospectus) as the Underwriters may reasonably request.
(d) If during such period as in the Underwriters'
judgment the Underwriters are required to deliver a prospectus in connection
with offers or sales of the Shares by the Underwriters, any event shall occur
as a result of which it becomes necessary to amend or supplement the Prospectus
in order to make the statements therein, in the light of the circumstances
existing as of the date the Prospectus is delivered to an offeree or a
purchaser, not misleading, or if it is necessary to amend or supplement the
Prospectus to comply with any law, the Company will promptly prepare and file
with the Commission an appropriate amendment or supplement to the Prospectus so
that the statements in the Prospectus, as so amended or supplemented, will not,
in the light of the circumstances existing as of the date the Prospectus is so
delivered, be misleading, and will comply with applicable law, and will
promptly notify the Underwriters of such event and amendment or
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<PAGE> 5
supplement and furnish to the Underwriters without charge such number of copies
thereof as the Underwriters may reasonably request.
(e) The Company will mail and make generally available to
its securityholders, as soon as practicable and for the time period specified
by Rule 158 under the Act, a consolidated earnings statement which shall
satisfy the provisions of Section 11(a) and Rule 158 of the Act and will
advise the Underwriters in writing when such statement has been made available.
(f) Whether or not the transactions contemplated hereby
are consummated or this Agreement is terminated, the Company will pay and be
responsible for all costs, charges, liabilities, expenses, fees and taxes
incurred in connection with or incident to (i) the preparation, printing,
filing, distribution and delivery under the Act of the Registration Statement
(including financial statements and exhibits), each preliminary prospectus, the
Prospectus and all amendments and supplements thereto, (ii) the registration
with the Commission and the issuance and delivery of the Shares, (iii) the
preparation, printing, execution, distribution and delivery of this Agreement,
any memoranda describing state securities or Blue Sky laws and all other
agreements, memoranda, reports, correspondence and other documents printed,
distributed and delivered in connection with the offering of the Shares (but
excluding the fees of legal counsel to the Underwriters), (iv) the registration
or qualification of the Shares for offer and sale under the securities or Blue
Sky laws of the jurisdictions referred to in paragraph (i) below (including, in
each case, the fees and disbursements of counsel relating to such registration
or qualification and memoranda relating thereto and any filing fees in
connection therewith), (v) furnishing such copies of the Registration Statement
(including exhibits), Prospectus and preliminary prospectuses, and all
amendments and supplements to any of them, including any document incorporated
by reference therein, as may be requested by the Underwriters or by dealers
(but excluding the fees of legal counsel to the Underwriters), (vi) the filing,
registration and clearance with the National Association of Securities Dealers,
Inc. (the "NASD") of the Underwriters' compensation in connection with the
offering of the Shares (including, without limitation, any filing fees in
connection herewith), (vii) the listing of the Shares on the New York Stock
Exchange ("NYSE"), (viii) the costs of distributing the terms of agreement
relating to the organization of the underwriting syndicate to the members
thereof by mail, telex or other means of communication (but excluding the fees
of legal counsel to the Underwriters) and (ix) the performance by the Company
of its other obligations under this Agreement, including (without limitation)
the cost of its personnel and other internal costs, the cost of printing and
engraving the certificates representing the Shares, and all expenses and taxes
incident to the sale and delivery of the Shares to the Underwriters.
(g) The Company will furnish to each of the
Representatives upon request, without charge, signed copies of the Registration
Statement as first filed with the Commission and of each amendment or
supplement to it, including each post-effective amendment and all exhibits
filed therewith, and will furnish to each of the Representatives such number of
conformed copies of the Registration Statement as so filed and of each
amendment to it, including each post-effective amendment, but without exhibits,
as the Representatives may reasonably request.
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<PAGE> 6
(h) The Company will not file any amendment or supplement
to the Registration Statement, whether before or after the time when it becomes
effective, or make any amendment or supplement to the Prospectus, of which the
Underwriters shall not previously have been advised and provided a copy (i) in
the case of any post-effective amendment or supplement within two business
days, (ii) in the case of any post-effective amendment or supplement, prior to
the filing thereof or to which the Underwriters shall reasonably object; and
the Company will prepare and file with the Commission, promptly upon the
Underwriters' reasonable request, any amendment or supplement to the
Registration Statement or amendment or supplement to the Prospectus which may
be necessary or advisable in connection with the distribution of the Shares by
the Underwriters, and will use its best efforts to cause the same to become
effective as promptly as possible.
(i) Prior to any public offering of the Shares, the
Company will cooperate with the Underwriters and the Underwriters' counsel in
connection with the registration or qualification of the Shares for offer and
sale by the Underwriters under the state securities or Blue Sky laws of such
jurisdictions as the Underwriters may request. The Company will continue such
qualification in effect so long as required by law for distribution of the
Shares and will file such consents to service of process or other documents as
may be necessary in order to effect such registration or qualification
(provided, that the Company shall neither be obligated to qualify as a foreign
corporation in any jurisdiction in which it is not so qualified nor to take any
action that would subject it to general consent to service of process in any
jurisdiction in which its is not now so subject).
(j) The Company will timely file all reports and any
definitive proxy or information statements required to be filed by the Company
with the Commission pursuant to Section 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934, as amended, including the rules and
regulations thereunder (collectively, the "Exchange Act"), subsequent to the
date of the Prospectus and for so long as the delivery of a Prospectus is
required in connection with the offer or sale of Shares.
(k) So long as any of the Shares are outstanding, the
Company will (i) mail and make generally available, as soon as practicable
after the end of each fiscal year to the record holders of the Shares, a
financial report of the Company and its subsidiaries (each, a "Subsidiary," and
collectively, the "Subsidiaries") on a consolidated basis (and a similar
financial report of all unconsolidated Subsidiaries, if any), all such
financial reports to include a consolidated balance sheet, a consolidated
statement of operations, a consolidated statement of cash flows and a
consolidated statement of stockholders' equity as of the end of and for such
fiscal year, together with comparable information as of the end of and for the
preceding fiscal year, certified by independent certified public accountants,
(ii) mail and make generally available as soon as practicable after the end of
each quarterly period (except for the last quarterly period of each fiscal
year) to such holders, a consolidated balance sheet, a consolidated statement
of operations and a consolidated statement of cash flows (and similar financial
reports of all unconsolidated Subsidiaries, if any) as of the end of and for
such period, and for the period from the beginning of such year to the close of
such quarterly period, together with comparable information for the
corresponding periods of the
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<PAGE> 7
preceding fiscal year and (iii) mail to each of the Underwriters, without
charge, a copy of each report or such other publicly available information
furnished to holders of the Shares, or filed with the Commission, whether or
not required by law, and such other publicly available information concerning
the Company and its Subsidiaries as the Underwriters may reasonably request, at
the same time as such reports or other information are furnished to such
holders.
(l) During the period beginning on the date of this
Agreement and continuing to and including the later of the Closing Date and any
Option Closing Date, there will be no transactions entered into by the Company
or any of the Subsidiaries, which are material with respect to the Company and
the Subsidiaries, taken as a whole, and there will be no dividend or
distribution of any kind declared, paid or made by the Company on any class of
its capital stock.
(m) The Company will apply the net proceeds from the sale
of the Shares as set forth under the caption "Use of Proceeds" in the
Prospectus.
(n) The Company will not (and will direct its affiliates
not to) take, directly or indirectly, any action that is designed, or might
reasonably be expected, to cause or result in the stabilization or manipulation
of the price of any security of the Company to facilitate the sale or resale of
the Shares.
(o) During the period beginning from the date hereof and
continuing to and including the date which is 180 days after the Closing Date,
neither the Company nor the Subsidiaries shall sell, offer for sale, solicit
offers to buy or otherwise negotiate in respect of the sale of any "security"
(as defined in Section 2(1) of the Securities Act) of the same or a similar
class as the Common Stock, without the prior written consent of Donaldson,
Lufkin & Jenrette Securities Corporation. Notwithstanding the foregoing,
during such period (i) the Company may grant stock options pursuant to the
Company's existing stock option plan and (ii) the Company may issue shares of
its Common Stock upon the exercise of an option or warrant or the conversion of
a security outstanding on the date hereof.
(p) The Company will use its best efforts to maintain the
listing of the Common Stock on the NYSE for a period of five years after the
effective date of the Registration Statement.
(q) The Company will use its best efforts to do and
perform all things required or necessary to be done and performed under this
Agreement by the Company prior to the Closing Date or any Option Closing Date,
as the case may be, and to satisfy all conditions precedent to the delivery of
the Shares.
6. Representations and Warranties of the Company. The Company represents
and warrants to each of the Underwriters as follows:
(a) When the Registration Statement becomes effective,
including on the date of any post-effective amendment, at the date of the
Prospectus (if different), and at the Closing Date
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<PAGE> 8
and any Option Closing Date, the Registration Statement will comply in all
material respects with the provisions of the Act, and will not contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein not
misleading; the Prospectus and each supplement or amendment thereto will not at
the date of the Prospectus, at the date of any such supplement or amendment or
at the Closing Date and any Option Closing Date, contain any untrue statement
of a material fact or omit to state any material fact necessary in order to
make the statements therein, in the light of the circumstances under which they
were made, not misleading, except that the representations and warranties
contained in this paragraph (a) shall not apply to statements in or omissions
from the Registration Statement or the Prospectus (or any supplement or
amendment to them) made in reliance upon and in conformity with information
relating to any Underwriter furnished to the Company in writing by or on behalf
of such Underwriter through Donaldson, Lufkin & Jenrette Securities Corporation
expressly for use therein. The Company acknowledges for all purposes under
this Agreement (including this paragraph and Section 7 hereof) that the only
written information furnished to the Company by or on behalf of any Underwriter
through Donaldson, Lufkin & Jenrette Securities Corporation expressly for use
in the Registration Statement, any preliminary prospectus, or the Prospectus
(or any amendment or supplement to any of them) consists of (i) the last full
paragraph of text appearing on the outside front cover page of the Prospectus,
(ii) the names of the Underwriters in the form they appear on the outside front
and back cover pages of the Prospectus, and (iii) the third full paragraph of
text appearing under the caption "Underwriting" in the Prospectus, and that the
Underwriters shall not be deemed to have provided any information (and
therefore are not responsible for any statements or omissions) pertaining to
any arrangement or agreement with respect to any party other than the
Underwriters. No contract or document of a character required to be described
in the Registration Statement or the Prospectus or to be filed as an exhibit to
the Registration Statement has not been described and filed as required.
(b) Each preliminary prospectus and the Prospectus, filed
as part of the Registration Statement as originally filed or as part of any
amendment or supplement thereto, or filed pursuant to Rule 424 or 430A under
the Act, complied when so filed in all material respects with the Act.
(c) The documents incorporated by reference in the
Registration Statement, the Prospectus, any amendment or supplement thereto or
any preliminary prospectus, when they became or become effective under the Act
or were or are filed with the Commission under the Exchange Act, as the case
may be, conformed or will conform in all material respects with the
requirements of the Act or the Exchange Act, as applicable.
(d) No action has been taken and no statute, rule,
regulation or order has been enacted, adopted or issued by any governmental
body, agency or official which prevents the issuance of the Shares, suspends
the effectiveness of the Registration Statement, prevents or suspends the use
of any preliminary prospectus or suspends the sale of the Shares in any
jurisdiction referred to in Section 5(i) hereof; no injunction, restraining
order, or order of any nature by any Federal or state court has been issued
with respect to the Company or any of the Subsidiaries which would prevent
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<PAGE> 9
or suspend the issuance or sale of the Shares, the effectiveness of the
Registration Statement, or the use of any preliminary prospectus or Prospectus
in any jurisdiction referred to in Section 5(i) hereof; no action, suit or
proceeding before any court or arbitrator or any governmental body, agency or
official, domestic or foreign, is pending against or, to the best of the
Company's knowledge, threatened against, the Company or any of the Subsidiaries
which, if adversely determined, would interfere with or adversely affect the
issuance of the Shares or in any manner draw into question the validity of this
Agreement or the Shares; and the Company has complied with every request of the
Commission or any securities authority or agency of any jurisdiction for
additional information (to be included in the Registration Statement or the
Prospectus or otherwise).
(e) The capitalization table set forth in the Prospectus
under the caption "Capitalization" identifies in reasonable detail as of the
date specified all outstanding long-term indebtedness, including the current
portion thereof, and stockholders' equity of the Company and the Subsidiaries,
prior to and after giving pro forma effect to the offering of the Shares and
the application of proceeds therefrom; and since the respective dates as of
which information is given in the Registration Statement and the Prospectus
there has been no material change in the capital stock or long-term debt of the
Company and the Subsidiaries taken as a whole, except for the Senior Notes
Offering.
(f) Subsequent to the respective dates as of which
information is given in the Registration Statement or Prospectus, except as set
forth in the Registration Statement or Prospectus, there has not been any
material adverse change in the business, prospects, properties, operations,
financial condition or results of operations of the Company and its
Subsidiaries taken as a whole, whether or not arising from transactions in the
ordinary course of business, and since the date of the latest balance sheet
included in the Prospectus, neither the Company nor any of its Subsidiaries
has incurred or undertaken any liabilities or obligations, direct or
contingent, that are material to the Company and its Subsidiaries taken as a
whole, except for liabilities or obligations that were incurred or undertaken
in the ordinary course of business or that are fully reflected in the
Prospectus.
(g) This Agreement has been duly and validly authorized,
executed and delivered by the Company and is a valid and binding agreement of
the Company enforceable against the Company in accordance with its terms,
except insofar as (i) such enforcement may be subject to (A) applicable
bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium or
other similar laws now or hereafter in effect relating to creditors' rights
generally, and (B) general principles of equity (regardless of whether
enforcement is sought in a proceeding at law or in equity) and (ii) rights to
indemnification and contribution may be limited by federal or state securities
laws or public policy relating thereto. This Agreement conforms in all
material respects to the description thereof contained in the Prospectus.
(h) The execution, delivery, and performance of this
Agreement and the consummation of the transactions contemplated hereby,
including the issuance, sale and delivery of the Shares, and application of the
proceeds of the sale thereof as set forth in the Prospectus, will not (i)
conflict with or result in a breach of any of the terms and provisions of, or
constitute a default (or
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<PAGE> 10
an event that with notice or lapse of time, or both, would constitute a
default) or require consent under, or, result in the creation or imposition of
any lien, charge or encumbrance upon any property or assets of the Company,
pursuant to the terms of any agreement, instrument, franchise, license or
permit to or by which the Company is a party or may be bound (other than those
as to which requisite waivers or consents have been obtained by the Company),
or (ii) violate or conflict with any provision of the certificate of
incorporation, by-laws, or equivalent instruments of the Company or any
judgment, decree, order, statute, rule or regulation of any court or any
public, governmental or regulatory agency or body having jurisdiction over the
Company or any of its properties or assets. No consent, approval,
authorization, order, registration, filing, qualification, license or permit of
or with any court or any public, governmental or regulatory agency or body
having jurisdiction over the Company or any of its respective properties or
assets is required for the execution, delivery and performance of this
Agreement, except as may be required for compliance with federal and state
securities laws in connection with the offering of the Shares.
(i) Chesapeake Operating, Inc., Lindsay Oil Field Supply,
Inc., Sander Trucking Company, Inc., Whitmire Dozer Service, Inc., Chesapeake
Exploration Limited Partnership, Chesapeake Gas Development Corporation and
Chesapeake Energy Marketing, Inc., are all the Subsidiaries of the Company.
Each of the Company and the Subsidiaries has been duly incorporated or
organized as a limited partnership, is validly existing as a corporation or
limited partnership in good standing under the laws of its jurisdiction of
incorporation or organization, and has the corporate or partnership power and
authority required to carry on its business as described in the Prospectus and
to own, lease and operate its properties, and each is duly qualified and is in
good standing as a foreign corporation or limited partnership authorized to do
business in each jurisdiction in which the nature of its business or its
ownership or leasing of property requires such qualification, except where the
failure to be so qualified would not have a material adverse effect on the
business, prospects, properties, operations, financial condition or results of
operations of the Company and the Subsidiaries, taken as a whole (a "Material
Adverse Effect").
(j) All of the outstanding shares of capital stock or
other equity interests of each Subsidiary have been duly and validly authorized
and issued and are fully paid and non-assessable (subject, however, in the case
of equity interests of any limited partnership, to the general liability of
general partnership interests), and, on the Closing Date and any Option Closing
Date, will be owned by the Company or another Subsidiary, free and clear of any
security interest, claim, lien, or encumbrance other than the security interest
held by United States Trust Company of New York, as collateral agent, for and
on behalf of holders of the 12% Notes (the "12% Notes Pledge"). On the Closing
Date, there will not be any rights granted to or in favor of any person to
acquire any such capital stock or other equity interests of a Subsidiary other
than pursuant to the 12% Notes Pledge.
(k) The authorized, issued and outstanding capital stock
of the Company, as of the date hereof, is (i) 45,000,000 shares of Common Stock
authorized, of which ________ shares are issued and outstanding (before giving
effect to the issuance of the Company Shares) and (ii) 2,000,000 shares of
preferred stock, par value $.01 per share (the "Preferred Stock"), of which no
shares are issued and outstanding. As of the Closing Date, all of the
outstanding shares of Common
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<PAGE> 11
Stock (including the Shares) will have been duly authorized and validly issued,
fully paid and non-assessable and will not have been issued in violation of any
preemptive or similar rights. As of the Closing Date, except as disclosed in
the Prospectus, there will be no outstanding securities of the Company
convertible into or evidencing the right to purchase or subscribe for any
shares of capital stock of the Company (other than the outstanding options and
warrants hereafter mentioned); there will be no outstanding or authorized
options (other than pursuant to the Company's 1992 Incentive Stock Option Plan,
1992 Nonstatutory Stock Option Plan and 1994 Stock Option Plan, collectively,
the "Stock Option Plans"), warrants, calls, subscriptions, rights, commitments
or any other agreements of any character obligating the Company to issue any
shares of its capital stock or any securities convertible into or evidencing
the right to purchase or subscribe for any shares of such stock; and there will
be no agreements with respect to the voting, sale or transfer of any shares of
capital stock of the Company to which the Company is a party (other than (i)
the agreement dated February 11, 1993 with respect to the appointment of
Liberty Bank and Trust Company of Oklahoma City, N.A., as the transfer agent
and registrar of the Common Stock ("Transfer Agent/Registrar Agreement"), (ii)
the Stock Registration Agreement, dated May 21, 1992, as amended on May 26,
1992, among the Company and certain holders of options to purchase Common Stock
of the Company granted by Chesapeake Investments ("CI") and TLW Investments,
Inc. ("TLW") (the "CI/TLW Registration Agreement"), and (iii) Indemnity and
Stock Registration Agreement and First Amendment (Revised) thereto, each dated
February 12, 1993, and the Second Amendment thereto dated October 20, 1995,
among the Company, Chesapeake Operating, Inc., CI, TLW, Aubrey K. McClendon and
Tom L. Ward (the "Indemnity and Stock Registration Agreement").
(l) Neither the Company nor any Subsidiary is in
violation of its charter or by-laws or other governing instrument or in default
in the performance of any obligation, agreement or condition contained in any
bond, debenture, note or any other evidence of indebtedness or in any other
agreement, indenture or instrument to which it is a party or by which it or any
of its property is bound, except for those defaults that, individually or in
the aggregate, would not have a Material Adverse Effect.
(m) Except as disclosed or incorporated by reference in
the Prospectus, there are no legal or governmental proceedings pending to which
the Company or any Subsidiary is a party or of which any of their respective
properties or assets is the subject, and, to the best of the Company's
knowledge, no such proceedings are threatened or contemplated, which, if
adversely decided, would have, individually or in the aggregate, a Material
Adverse Effect. The descriptions contained or incorporated by reference in the
Prospectus of the proceedings disclosed therein are true, complete and accurate
in all material respects.
(n) Each of the Company and the Subsidiaries has all
necessary licenses, consents, authorizations, approvals, orders, certificates
and permits (collectively, "Licenses") of and from, and has made all
declarations and filings with and satisfied all eligibility and other similar
requirements imposed by all Federal, state, local and other governmental
authorities, all self-regulatory organizations and all courts and other
tribunals, in each case as required for the conduct of the business in which it
is engaged, and each such License is in full force and effect,
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<PAGE> 12
except to the extent that the failure to obtain any such License or to make any
such declaration or filing or satisfy any such requirement would not have a
Material Adverse Effect. Neither the Company nor any of the Subsidiaries has
received any notice of proceedings relating to, or has any reason to believe
that any governmental body or agency is considering limiting, suspending,
modifying or revoking, any such License.
(o) Neither the Company nor any of the Subsidiaries has
received any notice of infringement of or conflict with asserted rights of any
third party under any trademark, copyright, patent or license as a consequence
of the activities of the Company or any of its subsidiaries, except for
infringements or conflicts the remediation of or compensation for which would
not have a Material Adverse Effect.
(p) Coopers & Lybrand, whose reports are included or
incorporated by reference in the Prospectus, is an independent public
accountant (as defined in the Act) with respect to the Company and the
Subsidiaries.
(q) The financial statements and notes thereto included
or incorporated by reference in the Prospectus present fairly in all material
respects the consolidated financial position, results of operations, cash flows
and stockholders' equity of the Company and the Subsidiaries (as reflected in
such financial statements) in conformity with generally accepted accounting
principles on the basis stated therein at the respective dates or for the
respective periods to which they apply; such statements and notes have been
prepared in accordance with generally accepted accounting principles
consistently applied throughout the periods involved, except as disclosed
therein; and the other financial and statistical information and data set forth
in the Prospectus, in all material respects present fairly the information
purported to be shown thereby at the respective dates or for the respective
periods to which they apply and have been prepared on a basis consistent with
such financial statements and the books and records of the Company and the
other entities as to which such information is shown.
(r) The Company is not an "investment company" or a
company "controlled" by an "investment company" within the meaning of the
Investment Company Act of 1940, as amended.
(s) In the ordinary course of its business, the Company
conducts a periodic review of the effect of Environmental Laws (as defined
below) on the business, operations and properties of the Company and the
Subsidiaries, in the course of which it identifies and evaluates associated
costs and liabilities (including, without limitation, any capital or operating
expenditures required for clean-up, closure of properties or compliance with
Environmental Laws or any notice, permit, license or approval, any related
constraints on operating activities and any potential liabilities to third
parties). On the basis of such review, the Company has reasonably concluded
that such associated costs and liabilities would not, individually or in the
aggregate, result in a Material Adverse Effect on the Company and the
Subsidiaries, taken as a whole. Neither the Company nor any of the
Subsidiaries (i) has violated any environmental, safety, health or similar law
or regulation applicable to its business relating to the protection of human
health and safety, the environment or
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<PAGE> 13
hazardous or toxic substances or wastes, pollutants or contaminants, including,
without limitation, the Clean Air Act, as amended, the Clean Water Act, as
amended, the Comprehensive Environmental Response, Compensation and Liability
Act, as amended, the Federal Water Pollution Control Act, as amended, the
Resource Conservation and Recovery Act, as amended, the Toxic Substances
Control Act, as amended, the Oil Pollution Act, as amended, the Occupational
Safety and Health Act, as amended, and comparable state and local laws and
other safety, health and environmental conservation or protection laws
("Environmental Laws"), the effect of which would be to cause, individually or
in the aggregate, a Material Adverse Effect, or (ii) lacks any notices,
permits, licenses or other approvals required of them under applicable
Environmental Laws or is violating any terms and conditions of any such notice,
permit, license or approval, the effect of which would be to cause,
individually or in the aggregate, a Material Adverse Effect. Without
limitation of the foregoing, there is as of the date hereof no litigation or
action pending or, to the best knowledge of the Company, threatened against the
Company or any of the Subsidiaries relating to any violation of any
Environmental Laws with respect to the assets or business of the Company or any
of the Subsidiaries which is required to be disclosed in the Prospectus, or
which might result, individually or in the aggregate, in a Material Adverse
Effect.
(t) The Company and the Subsidiaries have good and
defensible title to their interests in oil and gas properties and to all other
real and personal property owned by them, in each case free and clear of all
liens and defects except such as are described in the Prospectus or would not
result in a Material Adverse Effect and do not materially interfere with the
use made and proposed to be made of such properties by the Company and the
Subsidiaries; and any real property and buildings held under lease by the
Company and the Subsidiaries are held by them under valid, subsisting and
enforceable leases with such exceptions as would not have a Material Adverse
Effect and do not materially interfere with the use made and proposed to be
made of such property and buildings by the Company and the Subsidiaries.
Except to the extent described in the Prospectus, the leases, options to lease,
drilling concessions or other arrangements held by the Company and the
Subsidiaries reflect in all material respects the rights of the Company and the
Subsidiaries to explore the unexplored and undeveloped acreage described or
incorporated by reference in the Prospectus. The Company and the Subsidiaries
have exercised reasonable diligence, with respect to acquiring or otherwise
procuring such leases, options to lease, drilling concessions and other
arrangements, although the investigation of record title made by the Company
and the Subsidiaries generally involved no more than a preliminary review of
local records, as is customary in the industry.
(u) The information which was supplied by the Company to
Williamson Petroleum Consultants, Inc. ("Williamson"), independent petroleum
engineers, for purposes of evaluating the oil and gas reserves of the Company
and the Subsidiaries as of June 30, 1995, including, without limitation,
production, costs of operation and development, current prices for production,
agreements relating to current and future operations and sales of production,
was true and correct in all material respects on the dates such estimates were
made and such information was supplied and was prepared in accordance with
customary industry practices; Williamson was, as of the date of such
evaluation, and is, as of the date hereof, independent with respect to the
Company and the Subsidiaries; other than normal production of the reserves and
intervening spot market
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<PAGE> 14
product price fluctuations, the Company is not aware of any facts or
circumstances that would result in a materially adverse change in the reserves,
or the present value of future net cash flows therefrom, as described in the
Prospectus and as reflected in the Williamson Letter and the reserve report
referenced therein; estimates of such reserves and present values as described
in the Prospectus and the reserve report referenced therein comply in all
material respects to the applicable requirements of Regulation S-X and Industry
Guide 2 under the Act.
(v) Except as (i) disclosed to the Underwriters in
writing, (ii) disclosed in or contemplated by the Prospectus or (iii) not
required to be disclosed in the Prospectus, the Company is not engaged in any
negotiations, nor is it a party to any existing agreements, arrangements or
understandings, with respect to any acquisitions, combinations or dispositions
of assets or securities that would be material to the Company or any
Subsidiary.
(w) Other than discounts and commissions of the
Underwriters as described in the Prospectus, no fees or commissions will be
payable by the Company to any broker, finder or investment banker with respect
to the issuance and sale of any of the Shares pursuant to the terms of this
Agreement.
(x) No statement, representation or warranty made by the
Company or any of the Subsidiaries in this Agreement or made in any certificate
or document required by any of the foregoing agreements to be delivered to the
Underwriters, is, was or will be, when made, inaccurate, untrue or incorrect in
any material respect.
(y) Neither the Company nor any agent thereof acting on
its behalf has taken, and none of them will take, any action that might cause
this Agreement or the issuance or sale of the Shares or the application of
proceeds thereof to violate Section 7 of the Exchange Act or any regulation
issued pursuant thereto, including, without limitation, Regulation G, T, U or X
of the Board of Governors of the Federal Reserve System, in each case as in
effect now or as the same may hereafter be in effect on the Closing Date or any
Option Closing Date.
(z) Except as described in the Prospectus, and except for
(i) the CI/TLW Registration Agreement and (ii) the Indemnity and Stock
Registration Agreement, which have been waived in writing as they apply to the
offering of the Shares, no holder of any security of the Company has any right
to require registration of Shares of Common Stock or any other security of the
Company.
(aa) To the best knowledge of the Company, there are no
affiliations between or among the Company's officers, directors or 5%
stockholders or any affiliates thereof and the National Association of
Securities Dealers, Inc. ("NASD") or any member or affiliate of any member of
the NASD, except as set forth in the Prospectus or as otherwise disclosed to
the Representatives.
(bb) The Common Stock is listed on the New York Stock
Exchange and the Shares have been approved for listing on the New York Stock
Exchange.
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<PAGE> 15
(cc) The Company has complied with all provisions of
Section 517.075 of the Florida Statutes, and all regulations promulgated
thereunder relating to doing business with the Government of Cuba or with any
person or any affiliate located in Cuba.
The Company hereby agrees that McAfee & Taft and Andrews & Kurth L.L.P. may
rely on the above representations and warranties for purposes of their opinions
to be delivered pursuant to this Agreement.
7. Indemnification. (a) The Company agrees to indemnify and
hold harmless each Underwriter and each person, if any, who controls any
Underwriter within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act, from and against any and all losses, claims, damages, liabilities
and judgments caused by any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement or the Prospectus (as
amended or supplemented) or any preliminary prospectus, or caused by any
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading,
except insofar as such losses, claims, damages, liabilities or judgments are
caused by any such untrue statement or omission or alleged untrue statement or
omission based upon information relating to any Underwriters furnished in
writing to the Company by or on behalf of any Underwriter through you expressly
for use therein and used in conformity therewith; provided, however, that the
indemnity obligations arising under this Section 7(a) with respect to any
preliminary prospectus, shall not inure to the benefit of an Underwriter and
its controlling persons and their respective directors, officers and employees
if the person asserting any such losses, claims, damages, liabilities or
judgments purchased the Shares from such Underwriter and if a copy of the
Prospectus (as then amended or supplemented if the Company shall have timely
furnished any amendments thereof or supplements thereto), was not sent or given
by such Underwriter or on its behalf to such person at or prior to the written
confirmation of the sale of the Shares to such person, and if the Prospectus
(as then amended or supplemented if the Company shall have timely furnished any
amendments thereof or supplements thereto), would have cured the defect giving
rise to such losses, claims, damages, liabilities or judgments. This indemnity
is and will be in addition to any liability which the Company otherwise may
have.
(b) In case any action shall be brought against any
Underwriter or any person controlling such Underwriter, based upon any
preliminary prospectus, the Registration Statement or the Prospectus or any
amendment or supplement thereto and with respect to which indemnity may be
sought against the Company, such Underwriter shall promptly notify the Company
in writing and the Company shall assume the defense thereof, including the
employment of counsel reasonably satisfactory to such indemnified party and
payment of all fees and expenses. Any Underwriter or any such controlling
person shall have the right to employ separate counsel in any such action and
participate in the defense thereof, but the fees and expenses of such counsel
shall be at the expense of such Underwriter or such controlling person unless
(i) the employment of such counsel shall have been specifically authorized in
writing by the Company, (ii) the Company shall have failed to assume the
defense and employ counsel or (iii) the named parties to any such action
(including any impleaded parties) include both such Underwriter or such
controlling person and the Company and
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<PAGE> 16
such Underwriter or such controlling person shall have been advised by such
counsel that there may be one or more legal defenses available to it which are
different from or additional to those available to the Company (in which case
the Company shall not have the right to assume the defense of such action on
behalf of such Underwriter or such controlling person, it being understood,
however, that the Company shall not, in connection with any one such action or
separate but substantially similar or related actions in the same jurisdiction
arising out of the same general allegations or circumstances, be liable for the
fees and expenses of more than one separate firm of attorneys (in addition to
any local counsel) for all such Underwriters and controlling persons, which
firm shall be designated in writing by Donaldson, Lufkin & Jenrette Securities
Corporation and that all such fees and expenses shall be reimbursed as they are
incurred). The Company shall not be liable for any settlement of any such
action effected without its written consent but if settled with the written
consent of the Company, the Company agrees to indemnify and hold harmless any
Underwriter and any such controlling person from and against any loss or
liability by reason of such settlement. Notwithstanding the immediately
preceding sentence, if in any case where the fees and expenses of counsel are
at the expense of the indemnifying party and an indemnified party shall have
requested the indemnifying party to reimburse the indemnified party for such
fees and expenses of counsel as incurred, such indemnifying party agrees that
it shall be liable for any settlement of any action effected without its
written consent if (i) such settlement is entered into more than thirty days
after the receipt by such indemnifying party of the aforesaid request and (ii)
such indemnifying party shall have failed to reimburse the indemnified party in
accordance with such request for reimbursement prior to the date of such
settlement. No indemnifying party shall, without the prior written consent of
the indemnified party, effect any settlement of any pending or threatened
proceeding in respect of which any indemnified party is or could have been a
party and indemnity could have been sought hereunder by such indemnified party,
unless such settlement includes an unconditional release of such indemnified
party from all liability on claims that are the subject matter of such
proceeding.
(c) Each Underwriter agrees, severally and not jointly,
to indemnify and hold harmless the Company, its directors, its officers who
sign the Registration Statement and any person controlling the Company within
the meaning of Section 15 of the Act or Section 20 of the Exchange Act, to the
same extent as the foregoing indemnity from the Company to each Underwriter but
only with reference to information relating to such Underwriter furnished in
writing by or on behalf of such Underwriter through Donaldson, Lufkin &
Jenrette Securities Corporation expressly for use in the Registration
Statement, the Prospectus or any preliminary prospectus. In case any action
shall be brought against the Company, any of its directors, any such officer or
any person controlling the Company based on the Registration Statement, the
Prospectus or any preliminary prospectus and in respect of which indemnity may
be sought against any Underwriter, the Underwriter shall have the rights and
duties given to the Company (except that if the Company shall have assumed the
defense thereof such Underwriter shall not be required to do so, but may employ
separate counsel therein and participate in the defense thereof but the fees
and expenses of such counsel shall be at the expense of such Underwriter), and
the Company, its directors, any such officers and any person controlling the
Company shall have the rights and duties given to the Underwriter, by Section
7(b) hereof. The Company acknowledges that the only information furnished in
writing by or on behalf of any Underwriter through Donaldson, Lufkin & Jenrette
Securities Corporation expressly for use in the
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<PAGE> 17
Registration Statement or Prospectus consists of the following: (i) the last
full paragraph of text appearing on the outside front cover page of the
Prospectus, (ii) the names of the Underwriters in the form they appear on the
outside front and back cover pages of the Prospectus, and (iii) the third full
paragraph of text appearing under the caption "Underwriting" in the Prospectus.
(d) If the indemnification provided for in this Section 7
is unavailable to an indemnified party in respect of any losses, claims,
damages, liabilities or judgments referred to therein, then each indemnifying
party, in lieu of indemnifying such indemnified party, shall contribute to the
amount paid or payable by such indemnified party as a result of such losses,
claims, damages, liabilities and judgments (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company on the one
hand and the Underwriters on the other hand from the offering of the Shares or
(ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault
of the Company and the Underwriters in connection with the statements or
omissions which resulted in such losses, claims, damages, liabilities or
judgments, as well as any other relevant equitable considerations. The
relative benefits received by the Company and the Underwriters shall be deemed
to be in the same proportion as the total net proceeds from the offering
(before deducting expenses) received by the Company, and the total underwriting
discounts and commissions received by the Underwriters, bear to the total price
to the public of the Shares, in each case as set forth in the table on the
cover page of the Prospectus. The relative fault of the Company and the
Underwriters shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission to
state a material fact relates to information supplied by the Company or the
Underwriters and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission.
The Company and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 7(d) were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of
the equitable considerations referred to in the immediately preceding
paragraph. The amount paid or payable by an indemnified party as a result of
the losses, claims, damages, liabilities or judgments referred to in the
immediately preceding paragraph shall be deemed to include, subject to the
limitations set forth above, any legal or other expenses reasonably incurred by
such indemnified party in connection with investigating or defending any such
action or claim. Notwithstanding the provisions of this Section 7, no
Underwriter shall be required to contribute any amount in excess of the amount
by which the total price at which the Shares underwritten by it and distributed
to the public were offered to the public exceeds the amount of any damages
which such Underwriter has otherwise been required to pay by reason of such
untrue or alleged untrue statement or omission or alleged omission. No person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Act) shall be entitled to contribution from any person who was not guilty
of such fraudulent misrepresentation. For purposes of this Section 7(d), each
director, officer and employee of an Underwriter or the Company, and each
person, if any, who controls an Underwriter or the Company within the meaning
of Section 15 of the Act or Section 20 of the
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<PAGE> 18
Exchange Act, shall have the same rights to contribution as such Underwriter or
the Company, as the case may be.
8. Conditions of Underwriters' Obligations. The Underwriters'
obligations to purchase and pay for the Firm Shares shall be subject to (i) the
accuracy of the representations and warranties of the Company herein contained
as of the date hereof and as of the Closing Date, (ii) the absence in any
certificates, opinions, written statements or letters furnished pursuant to
this Section 8 to the Underwriters or to their counsel, of any qualification or
limitation not previously approved by the Underwriters, (iii) the performance
by the Company of its obligations hereunder required to be performed on or
prior to the Closing Date, and (iv) the following additional conditions:
(a) (i) The Registration Statement shall have become
effective (or, if a post-effective amendment is required to be filed pursuant
to Rule 430A or 462 of the Act, such post-effective amendment shall have become
effective (or, if any Shares are sold in reliance upon Rule 430A of the Act and
no post-effective amendment is so required to be filed, the form of prospectus
required by Rule 424(b) of the Act shall have been timely filed with the
Commission in accordance with Section 5(a) hereof)) on the date of this
Agreement or at such later date and time as the Underwriters may approve in
writing, (ii) at the Closing Date, no stop order suspending the effectiveness
of the Registration Statement shall have been issued and no proceedings for
that purpose shall have been commenced or shall be pending before or
contemplated by the Commission and every request for additional information on
the part of the Commission shall have been complied with in all respects, and
(iii) no stop order suspending the sale of the Shares in any jurisdiction
referred to in Section 5(i) shall have been issued and no proceeding for that
purpose shall have been commenced or shall be pending or threatened and every
request for additional information on the part of any state securities
commission has been complied with.
(b) No action shall have been taken and no statute, rule,
regulation or order shall have been enacted, adopted or issued by any
governmental agency, body or official which would, as of the Closing Date,
prevent the issuance of the Shares; and no injunction, restraining order or
order of any nature by any court of competent jurisdiction shall have been
issued as of the Closing Date which would prevent the issuance of the Shares.
(c) Since the date of the latest balance sheet included
in the Registration Statement and Prospectus: (i) there shall not have been
any material adverse change, or any development involving a prospective
material adverse change, in the capital stock or in the long-term debt of the
Company or any of the Subsidiaries from that set forth in or contemplated by
the Registration Statement and Prospectus; (ii) the Company shall have no
liability or obligation, direct or contingent, that is material to the Company
and the Subsidiaries, taken as a whole, other than those reflected in the
Registration Statement and Prospectus; and (iii) there shall not have been any
material adverse change, or any development involving a prospective material
adverse change, in the financial condition, business, properties, prospects,
net worth or results of operations of the Company and the Subsidiaries taken as
a whole, except, in each case, as expressly described in the Registration
Statement and Prospectus.
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<PAGE> 19
(d) The representations and warranties made by the
Company herein shall be true and correct on and as of the Closing Date with the
same effect as though such representations and warranties had been made on and
as of the Closing Date; and the Company shall have complied in all material
respects with all agreements hereunder required to be performed by the Company.
(e) As to each Underwriter, the purchase of and payment
for the Shares to be purchased by such Underwriter hereunder shall not be
prohibited or enjoined (temporarily or permanently) by any applicable law or
governmental regulation, order or other restriction.
(f) On the Closing Date, the Underwriters shall have
received the opinion of McAfee & Taft A Professional Corporation, counsel to
the Company, dated the Closing Date, addressed to the Underwriters, and in form
and scope reasonably satisfactory to the Underwriters' counsel, substantially
to the effect that:
(i) The Registration Statement was declared
effective in compliance with the Act; any required filing of the
Prospectus, and any amendments or supplements thereto, pursuant to
Rule 424(b) has been made in the manner and within the time period
required by Rule 424(b); no stop order suspending the effectiveness of
the Registration Statement or any part thereof has been issued and no
proceedings therefor have been instituted or, to the best of such
counsel's knowledge, are pending or contemplated under the Act;
(ii) At the time it became effective and on the
Closing date, the Registration Statement, including all documents
incorporated by reference therein (except for financial statements,
the notes thereto and related schedules and other financial and
statistical data included therein, as to which no opinion need be
expressed), complied as to form in all material respects with the Act
and the Exchange Act;
(iii) Each document filed pursuant to the Exchange
Act and incorporated by reference in the Prospectus, at the time it
was filed or last amended (except for financial statements, the notes
thereto and related schedules and other financial, numerical,
statistical or accounting data included or incorporated by reference
therein or omitted therefrom, as to which such counsel need express no
opinion), complied as to form in all material respects to the
applicable requirements of the Exchange Act;
(iv) Such counsel does not know of any legal or
governmental proceedings required to be described in the Registration
Statement or Prospectus which are not described as required or of any
contracts or documents of a character required to be described in the
Registration Statement or Prospectus (or required to be filed under
the Exchange Act if upon such filing they would be incorporated by
reference therein) or to be filed as exhibits to the Registration
Statement which are not described and filed as required; it being
understood that such counsel need express no opinion as to the
financial statements, notes or schedules or other financial data
included therein;
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<PAGE> 20
(v) The Company is duly incorporated, validly
existing and in good standing under the laws of the State of Delaware
and is duly qualified and in good standing as a foreign corporation in
the State of Oklahoma. The Company has all requisite corporate power
and authority to own or lease and operate its properties and to
conduct the business in which it is engaged as described in the
Registration Statement or Prospectus.
(vi) The Company has the authorized capitalization
set forth in the Registration Statement and Prospectus. All of the
outstanding shares of the Company's capital stock have been duly
authorized and validly issued, are fully paid and non-assessable and
were not issued in violation of or subject to any preemptive or
similar rights arising under applicable law or the Company's charter
or bylaws or, to the knowledge of such counsel, any agreement or
contract. To the knowledge of such counsel, there are no outstanding
securities of the Company convertible into or evidencing the right to
purchase or subscribe for any shares of capital stock of the Company
(other than the outstanding options and warrants hereafter mentioned),
there are no outstanding or authorized options (other than pursuant to
the Company's Stock Option Plans), warrants, subscriptions, rights,
commitments or any other agreements of any character obligating the
Company to issue any shares of its capital stock or any securities
convertible into or evidencing the right to purchase or subscribe for
any shares of such stock, and there are no agreements with respect to
the voting, sale or transfer of any shares of capital stock of the
Company to which the Company is a party (other than (i) the Transfer
Agent/Registrar Agreement, (ii) the CI/TLW Registration Agreement, and
(iii) the Indemnity and Stock Registration Agreement).
(vii) Each of the Subsidiaries has been duly
incorporated or organized as a limited partnership, is validly
existing as a corporation or limited partnership in good standing
under the laws of its jurisdiction of incorporation or organization,
and has the corporate or partnership power and authority required to
carry on its business and to own, lease and operate its properties,
and each is duly qualified and is in good standing as a foreign
corporation or limited partnership authorized to do business in each
jurisdiction in which the nature of its business or its ownership or
leasing of property requires such qualification, except where the
failure to be so qualified would not have a material adverse effect on
the business, prospects, properties, operations, financial condition
or results of operations of the Company and its subsidiaries, taken as
a whole.
(viii) All of the outstanding shares of capital
stock or other equity interests of each Subsidiary have been duly and
validly authorized and issued and are fully paid and non-assessable
(subject, however, in the case of equity interests of any limited
partnership, to the general liability of general partnership
interests), and, on the Closing Date will be owned by the Company or
another Subsidiary, free and clear of any security interest, claim,
lien, or encumbrance other than the 12% Notes Pledge. On the Closing
Date, to the knowledge of such counsel, there will not be any rights
granted to or in favor of any person to acquire any such capital stock
or other equity interests of a Subsidiary other than pursuant
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<PAGE> 21
to the 12% Notes Pledge. To the knowledge of such counsel, the
Subsidiaries are the only subsidiaries of the Company.
(ix) the Shares to be issued and sold by the
Company hereunder have been duly authorized, and when issued and
delivered to the Underwriters against payment therefor as provided by
this Agreement, will have been validly issued and will be fully paid
and non-assessable, and the issuance of such Shares is not subject to
any preemptive or similar rights arising under applicable law or the
Company's charter or bylaws or, to the knowledge of such counsel, any
agreement or contract;
(x) This Agreement has been duly and validly
authorized, executed and delivered by the Company and is a valid and
binding agreement of the Company enforceable in accordance with its
terms, except insofar as (A) such enforcement may be subject to (i)
applicable bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium and similar laws now or hereafter in effect
relating to creditors' rights generally and (ii) general principles of
equity (whether enforcement is sought in a proceeding at law or in
equity) and (B) rights to indemnification and contribution contained
herein and therein may be limited by Federal or state securities laws
or public policy relating thereto. This Agreement conforms in all
material respects to the description thereof contained in the
Registration Statement and Prospectus.
(xi) The execution, delivery and performance by
the Company of this Agreement and the consummation of the transactions
contemplated hereby, including the issuance, sale and delivery of the
Shares will not (A) conflict with or result in a breach of any of the
terms and provisions of, or constitute a default (or an event which
with notice or lapse of time, or both, would constitute a default) or
require consent under, or result in the creation or imposition of any
lien, charge or encumbrance upon any property or assets of the Company
pursuant to the terms of any agreement, instrument, franchise, license
or permit known to such counsel to which the Company is a party or by
which any of its properties or assets may be bound and that is
material to the Company (other than those as to which the requisite
waivers or consents have been obtained), or (B) violate or conflict
with any provision of the certificate of incorporation or by-laws or
other organizational documents of the Company or, to the knowledge of
such counsel, any judgment, decree, order, statute, rule or regulation
of any court or any public, governmental or regulatory agency or body
having jurisdiction over the Company or any of its properties or
assets. No consent, approval, authorization, order, registration,
filing, qualification, license or permit of or with any court or any
public, governmental, or regulatory agency or body having jurisdiction
over the Company or any of its properties or assets is required for
the execution, delivery and performance of this Agreement, and the
consummation of the transactions contemplated hereby, except for (a)
such as have been obtained under the Act and the state securities or
Blue Sky laws and (b) such other consents, approvals, authorizations,
orders, registrations, filings, qualifications, licenses and permits
as have been obtained.
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<PAGE> 22
(xii) The Company is not an "investment company" or
a company "controlled" by an "investment company" within the meaning
of the Investment Company Act of 1940, as amended.
(xiii) the statements under the caption "Description
of Capital Stock" in the Prospectus and Item 15 of Part II of the
Registration Statement, insofar as such statements constitute a
summary of legal matters, documents or proceedings referred to
therein, fairly present the information called for by Regulation S-K
under the Act with respect to such legal matters, documents and
proceedings;
(xiv) to the best of such counsel's knowledge,
except as described in the Prospectus, and except for (i) the CI/TLW
Registration Agreement and (ii) the Indemnity and Stock Registration
Agreement, which have been waived in writing as they apply to the
offering of the Shares, no holder of any security of the Company has
any right to require registration of shares of Common Stock or any
other security of the Company.
In addition, such counsel shall state that they have participated in
conferences with officers and other representatives of the Company,
representatives of the independent certified public accountants of the Company
and representatives of the Underwriters and their counsel at which conferences
the contents of the Registration Statement and Prospectus and any amendment
thereof or supplement thereto and related matters were discussed and, although
such counsel have not undertaken to investigate or verify independently, and do
not assume any responsibility for, the accuracy, completeness or fairness of
the statements contained in the Registration Statement and Prospectus or any
amendment thereof or supplement thereto (except as to matters referred to in
the last sentence of paragraph (x) above), no facts have come to the attention
of such counsel that would lead them to believe that the Registration Statement
at the time it became effective and at the Closing Date contained an untrue
statement of a material fact or omitted to state any material fact required to
be stated therein or necessary in order to make the statements therein not
misleading or that the Prospectus, as of the date hereof and the Closing Date
and as amended or supplemented, if applicable, contained an untrue statement of
a material fact or omitted to state a material fact necessary in order to make
the statements therein, in light of the circumstances under which they were
made, not misleading (it being understood that no view need be expressed by
such counsel with respect to the financial statements and other financial and
statistical data included in the Registration Statement and Prospectus or any
amendment thereof or supplement thereto).
In rendering the foregoing opinions, such counsel may (A) rely as to
matters involving the application of laws other than the laws of the United
States, the State of Oklahoma and Delaware corporate law, to the extent such
counsel deems proper and to the extent specified in such opinion, if at all,
upon an opinion or opinions (in form and scope reasonably satisfactory to the
Underwriters' counsel) of other counsel qualified to opine with respect to the
applicable laws; (B) assume that this Agreement will be governed by the laws of
the State of Oklahoma, without giving effect to the principles of conflicts of
law thereof, notwithstanding its express terms; and (C) rely as to matters of
fact, to the extent such counsel deems proper, on certificates of responsible
officers and other
-22-
<PAGE> 23
representatives of the Company, certificates of public officials, and
certificates or other written statements of officers of departments of various
jurisdictions having custody of documents respecting the corporate existence or
good standing of the Company and its subsidiaries, provided that copies of any
such statements or certificates shall be delivered to the Underwriters'
counsel. The opinion of counsel for the Company shall state that the opinion
of any such other counsel is in form and scope satisfactory to such counsel
and, in such counsel's opinion, the Underwriters and the Underwriters' counsel
are justified in relying thereon.
(g) On the Closing Date, the Underwriters shall have
received certificates, dated the Closing Date, signed by each of the Chairman
of the Board and Chief Financial Officer or the President and the Chief
Financial Officer of the Company, and such other certificates of executive
officers as the Underwriters may specify, confirming the matters set forth in
paragraphs (a), (b), (c) and (d) of this Section 8.
(h) On the Closing Date, the Underwriters shall have
received from Andrews & Kurth L.L.P., an opinion, dated the Closing Date,
addressed to the Underwriters, with respect to the Company, the Registration
Statement and Prospectus, the offer, sale and resale of the Shares and other
related matters as the Underwriters reasonably may require, and the Company
shall have furnished to such firm such documents as they may reasonably request
for the purpose of enabling them to pass upon such matters.
(i) Concurrently with the execution and delivery of this
Agreement, the Underwriters shall have received from Coopers & Lybrand, and on
the Closing Date, the Underwriters shall have received from Coopers & Lybrand,
a letter addressed to the Underwriters, dated the date of its delivery,
substantially in the form and to the effect and with respect to such matters as
shall have been previously agreed upon by the Underwriters.
(j) Prior to the Closing Date, the Company shall have
furnished to the Underwriters such further information, certificates and
documents as the Underwriters reasonably may request.
If any of the conditions specified in this Section 8 shall not have
been fulfilled when and as required by this Agreement, or if any of the
certificates, opinions, written statements or letters furnished to the
Underwriters or to their counsel pursuant to this Section 8 shall not be
reasonably satisfactory in form and scope in all material respects to the
Underwriters and to their counsel, all of the Underwriters' obligations
hereunder may be canceled by them at, or at any time prior to, the Closing
Date. Notice of such cancellation shall be given to the Company in writing or
by telephone, telecopy, telex or telegraph, confirmed in writing.
9. Effective Date of Agreement and Termination. This Agreement
shall become effective upon the later of (i) execution of this Agreement, (ii)
unless the Company intends to rely on Rule 430A of the Act, the effectiveness
of the Registration Statement, and (iii) if the Company intends to rely on Rule
430A of the Act, the earlier of the effectiveness of a post-effective
-23-
<PAGE> 24
amendment filed in compliance with Rule 430A or Rule 462 of the Act or the
filing of a final prospectus pursuant to Rule 424(b).
This Agreement may be terminated at any time prior to the Closing Date
by you by written notice to the Company if any of the following has occurred:
(i) since the respective dates as of which information is given in the
Registration Statement and the Prospectus, any material adverse change or
development involving a prospective adverse change in the condition, financial
or otherwise, of the Company or any of its subsidiaries or the earnings,
affairs, or business prospects of the Company or any of its subsidiaries,
whether or not arising in the ordinary course of business, which would, in your
judgment, make it impracticable to market the Shares on the terms and in the
manner contemplated in the Prospectus, (ii) any outbreak or escalation of
hostilities or other national or international calamity or crisis or change in
economic conditions or in the financial markets of the United States or
elsewhere that, in your judgment, is material and adverse and would, in your
judgment, make it impracticable to market the Shares on the terms and in the
manner contemplated in the Prospectus, (iii) the suspension or material
limitation of trading in securities on the New York Stock Exchange, the
American Stock Exchange or the Nasdaq National Market or limitation on prices
for securities on any such exchange or Nasdaq National Market, (iv) the
enactment, publication, decree or other promulgation of any federal or state
statute, regulation, rule or order of any court or other governmental authority
which in your opinion materially and adversely affects, or will materially and
adversely affect, the business or operations of the Company or any subsidiary,
(v) the declaration of a banking moratorium by either federal or New York State
authorities or (vi) the taking of any action by any Federal, state or local
government or agency in respect of its monetary or fiscal affairs which in your
opinion has a material adverse effect on the financial markets in the United
States.
If on the Closing Date or on an Option Closing Date, as the case may
be, any one or more of the Underwriters shall fail or refuse to purchase the
Firm Shares or Additional Shares, as the case may be, which it or they have
agreed to purchase hereunder on such date and the aggregate number of Firm
Shares or Additional Shares, as the case may be, which such defaulting
Underwriter or Underwriters, as the case may be, agreed but failed or refused
to purchase is not more than one-tenth of the total number of Shares to be
purchased on such date by all Underwriters, each non-defaulting Underwriter
shall be obligated severally, in the proportion which the number of Firm Shares
set forth opposite its name in Schedule I bears to the total number of Firm
Shares which all the non-defaulting Underwriters, as the case may be, have
agreed to purchase, or in such other proportion as you may specify, to purchase
the Firm Shares or Additional Shares, as the case may be, which such defaulting
Underwriter or Underwriters, as the case may be, agreed but failed or refused
to purchase on such date; provided that in no event shall the number of Firm
Shares or Additional Shares, as the case may be, which any Underwriter has
agreed to purchase pursuant to Section 2 hereof be increased pursuant to this
Section 9 by an amount in excess of one-ninth of such number of Firm Shares or
Additional Shares, as the case may be, without the written consent of such
Underwriter. If on the Closing Date or on an Option Closing Date, as the case
may be, any Underwriter or Underwriters shall fail or refuse to purchase Firm
Shares, or Additional Shares, as the case may be, and the aggregate number of
Firm Shares or Additional Shares, as the case may be, with respect to which
-24-
<PAGE> 25
such default occurs is more than one-tenth of the aggregate number of Shares to
be purchased on such date by all Underwriters and arrangements satisfactory to
you and the Company for purchase of such Shares are not made within 48 hours
after such default, this Agreement will terminate without liability on the part
of any non-defaulting Underwriter and the Company. In any such case which does
not result in termination of this Agreement, either you or the Company shall
have the right to postpone the Closing Date or the applicable Option Closing
Date, as the case may be, but in no event for longer than seven days, in order
that the required changes, if any, in the Registration Statement and the
Prospectus or any other documents or arrangements may be effected. Any action
taken under this paragraph shall not relieve any defaulting Underwriter from
liability in respect of any default of any such Underwriter under this
Agreement.
10. Miscellaneous. Notices given pursuant to any provision of
this Agreement shall be given by facsimile transmission or by notice in writing
hand delivered or by certified mail, postage prepaid, return receipt requested.
All such notices shall be sent to the facsimile transmission number or address
(as the case may be) as follows:
(i) if to the Company, to:
Chesapeake Energy Corporation
6104 North Western Avenue
Oklahoma City, Oklahoma 73118
Attention: Chief Financial Officer
Facsimile transmission number: (405) 842-8871
with a copy to:
McAfee & Taft A Professional Corporation
Two Leadership Square
Oklahoma City, Oklahoma 73102
Attention: Theodore M. Elam, Esq.
Facsimile transmission number: (405) 235-0439
(ii) if to any Underwriter, to:
Donaldson, Lufkin & Jenrette Securities Corporation
277 Park Avenue
New York, New York 10172
Attention: Syndicate Department
Facsimile transmission number: (212) 892-3966
-25-
<PAGE> 26
with a copy to:
Andrews & Kurth L.L.P.
4200 Texas Commerce Tower
Houston, Texas 77002
Attention: G. Michael O'Leary, Esq.
Facsimile transmission number: (713) 220-4285
The respective indemnities, contribution agreements, representations,
warranties and other statements of the Company, its officers and directors and
of the several Underwriters set forth in or made pursuant to this Agreement
shall remain operative and in full force and effect, and will survive delivery
of and payment for the Shares, regardless of (i) any investigation, or
statement as to the results thereof, made by or on behalf of any Underwriter or
by or on behalf of the Company, the officers or directors of the Company or any
controlling person of the Company, (ii) acceptance of the Shares and payment
for them hereunder and (iii) termination of this Agreement.
If this Agreement shall be terminated by the Underwriters because of
any failure or refusal on the part of the Company to comply with the terms or
to fulfill any of the conditions of this Agreement, the Company agrees to
reimburse the several Underwriters for all out-of-pocket expenses (including
the fees and disbursements of counsel) reasonably incurred by them.
Except as otherwise provided, this Agreement has been and is made
solely for the benefit of and shall be binding upon the Company, the
Underwriters, any controlling persons referred to herein and their respective
successors and assigns, all as and to the extent provided in this Agreement,
and no other person shall acquire or have any right under or by virtue of this
Agreement. The term "successors and assigns" shall not include a purchaser of
any of the Shares from any of the several Underwriters merely because of such
purchase.
This Agreement shall be governed and construed in accordance with the
laws of the State of New York.
This Agreement may be signed in various counterparts which together
shall constitute one and the same instrument.
-26-
<PAGE> 27
Please confirm that the foregoing correctly sets forth the agreement
between the Company and the several Underwriters.
Very truly yours,
CHESAPEAKE ENERGY CORPORATION
By:
-----------------------------------
Aubrey K. McClendon,
Chief Executive Officer
DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
BEAR, STEARNS & CO. INC.
J.P. MORGAN SECURITIES INC.
PRUDENTIAL SECURITIES INCORPORATED
Acting severally on behalf of
themselves and the several
Underwriters named in
Schedule I hereto
By: DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By:
-----------------------------------
Name:
---------------------------------
Title:
---------------------------------
-27-
<PAGE> 28
SCHEDULE I
<TABLE>
<CAPTION>
Number of Firm Shares
Underwriters to be Purchased
------------ ---------------------
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation ............................
Bear, Stearns & Co. Inc. .......................................................
J.P. Morgan Securities Inc. ....................................................
Prudential Securities Incorporated..............................................
-------------
Total
=============
</TABLE>
-28-
<PAGE> 1
EXHIBIT 5
LAW OFFICES
MCAFEE & TAFT
A PROFESSIONAL CORPORATION
TENTH FLOOR, TWO LEADERSHIP SQUARE
211 NORTH ROBINSON
OKLAHOMA CITY, OKLAHOMA 73102-7101
(405) 235-9621
FAX (405) 235-0439
October 28, 1996
Chesapeake Energy Corporation
6104 North Western
Oklahoma City, Oklahoma 73118
Gentlemen:
We have reviewed the Certificate of Incorporation of Chesapeake Energy
Corporation, a Delaware corporation (the "Company"), as amended, and the
Company's By-laws, as amended, and the Company's Registration Statement on Form
S-3 (the "Registration Statement"), relating to a proposed public offering of a
maximum of 3,737,500 shares of the Company's Common Stock, par value $.10
("Common Stock") to be filed with the Securities and Exchange Commission on
October 28, 1996, and have generally conducted such investigations as we have
deemed appropriate to satisfy ourselves with respect to the opinions expressed
herein.
Based upon the foregoing, it is our opinion that:
1. The Company is duly incorporated and validly existing under
the laws of the State of Delaware, with full power and authority to own its
properties and to conduct its business as described in the preliminary
prospectus contained in the Registration Statement.
2. Upon the consummation of the purchase of the shares of Common
Stock by the Underwriters pursuant to the terms of the Underwriting Agreement,
a copy of which is included as Exhibit 1 to the Registration Statement, the
shares of Common Stock described in, and to be issued upon the terms contained
in, the Registration Statement will have been validly authorized, duly issued
under the Securities Act and, when issued, will be fully paid and
non-assessable.
Consent is hereby given to the inclusion of this opinion in the
Registration Statement as part of an application for registration of the Common
Stock with the Securities and Exchange Commission and with each and any state
regulatory body or commission, and to the use of our name in any prospectus in
connection therewith.
Very truly yours,
McAFEE & TAFT A PROFESSIONAL CORPORATION
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-3 of Chesapeake Energy Corporation (the
"Company") of (a) our report on the financial statements of the Company dated
September 20, 1995, which appears in such Prospectus, and (b) our report on the
financial statements of Chesapeake Exploration Limited Partnership ("CEX") dated
September 20, 1995, which appears in such Prospectus. We also consent to the
incorporation by reference in the Prospectus constituting part of this
Registration Statement on Form S-3 of (a) our report dated September 20, 1995
with respect to the consolidated financial statements of the Company appearing
on Page 29 of the Company's Annual Report on Form 10-K for the year ended June
30, 1996, and (b) our report dated September 20, 1995 with respect to the
financial statements of CEX appearing on page 61 of the Company's Annual Report
on Form 10-K. We also consent to the reference to us under the heading "Experts"
in such prospectus.
PRICE WATERHOUSE LLP
Houston, Texas
October 25, 1996
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the inclusion in the Prospectus constituting part of
this Registration Statement on Form S-3 of Chesapeake Energy Corporation (the
"Company") of (a) our report on the consolidated financial statements of the
Company dated September 13, 1996, which appears in such Prospectus and (b) our
report on the financial statements of Chesapeake Exploration Limited Partnership
("CEX") dated September 13, 1996, which appears in such Prospectus. We also
consent to the incorporation by reference in the Prospectus constituting part of
this Registration Statement on Form S-3 of (a) our report on the consolidated
financial statements of the Company dated September 13, 1996 appearing on page
28 of the Company's Annual Report on Form 10-K for the year ended June 30, 1996
and (b) our report on the financial statements of CEX dated September 13, 1996
appearing on page 60 of the Company's Annual Report on Form 10-K for the year
ended June 30, 1996. We also consent to the reference to us under the heading
"Experts" in such Prospectus.
COOPERS & LYBRAND L.L.P.
Oklahoma City, Oklahoma
October 25, 1996
<PAGE> 1
EXHIBIT 23.3
WILLIAMSON PETROLEUM CONSULTANTS, INC.
HOUSTON
MIDLAND
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS
As independent petroleum engineers, Williamson Petroleum Consultants, Inc.
(Williamson) hereby consents to the use by Chesapeake Energy Corporation of our
report entitled "Evaluation of Oil and Gas Reserves to the Interests of
Chesapeake Energy Corporation in Certain Properties, Effective June 30, 1996,
for Disclosure to the Securities and Exchange Commission, Williamson Project
6.8400" dated September 13, 1996 and to the references to our firm included in
or made part of the Registration Statement on Form S-3 of Chesapeake Energy
Corporation to be filed with the Securities and Exchange Commission on or about
October 28, 1996. We also consent to the incorporation by reference of this
consent and the Form S-3 into a subsequent registration statement relating to
the foregoing offering to be filed pursuant to Rule 462(b) promulgated under the
Securities Act of 1933.
WILLIAMSON PETROLEUM
CONSULTANTS, INC.
Williamson Petroleum Consultants,
Inc.
Houston, Texas
October 25, 1996
1010 Lamar Street
Suite 1000
Houston, Texas
77002-6314
713.658.8278
FAX 713.658.0218
