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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED JUNE 30, 1996
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
COMMISSION FILE NO. 1-13726
CHESAPEAKE ENERGY CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C>
DELAWARE 73-1395733
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6100 NORTH WESTERN AVENUE
OKLAHOMA CITY, OKLAHOMA 73118
(Address of principal executive offices) (Zip Code)
</TABLE>
(405) 848-8000
Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<S> <C>
Name of Each Exchange
Title of Each Class on Which Registered
COMMON STOCK, PAR VALUE $.10 NEW YORK STOCK EXCHANGE
9.125% SENIOR NOTES DUE 2006 NEW YORK STOCK EXCHANGE
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES /X/ NO / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. / /
The aggregate market value of Common Stock held by non-affiliates on August
30, 1996 was $904,362,133. At such date, there were 16,825,342 shares of Common
Stock issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
PROXY STATEMENT FOR 1996 ANNUAL MEETING
OF SHAREHOLDERS -- PART III
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PART I
ITEM 1. BUSINESS
OVERVIEW
Chesapeake Energy Corporation ("Chesapeake" or the "Company") 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 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 and revenue.
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 (76%), 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.
Reference is made to the "Glossary" that appears at the end of this Item 1
for definitions of certain terms used in this Form 10-K.
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 in areas where reservoirs such as fractured
carbonates offer (i) low geological risk, (ii) large reserve potential, and
(iii) the opportunity to earn attractive economic returns through the
application of advanced drilling and completion technologies.
The Company historically concentrated its undeveloped leasehold
acquisitions and associated drilling in the Giddings Field of southern Texas and
the Golden Trend Field of southern Oklahoma. Since early fiscal 1995, Chesapeake
has extensively developed new project areas that are either extensions of the
Company's historical focus in the Giddings and Golden Trend Fields or are new
areas in which the Company's geological and engineering expertise provides the
Company with competitive advantages. These additional project areas include the
Knox Field in southcentral Oklahoma, the Sholem Alechem Field in southern
Oklahoma, the Louisiana Austin Chalk Trend (the "Louisiana Trend"), the Arkoma
Basin in southeastern Oklahoma, the Lovington area in eastern New Mexico, and
the Williston Basin in eastern Montana and western North Dakota. Within the
Louisiana Trend, the Company has acquired over 1,000,000 acres, and has
identified six project areas: South Brookeland, Leesville, Masters Creek, St.
Landry, Baton Rouge and Livingston. An important element in the Company's
business strategy is to retain a higher level of ownership in these new project
areas than it historically retained in the Giddings and Golden Trend Fields.
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 region. 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 lower exploration costs, provide
the Company with the opportunity to develop large new reserves of oil and
natural gas and to generate attractive economic returns.
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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 deep fractured carbonate reservoirs, management
believes the Company can continue to increase its reserves and production and
generate attractive returns by integrating the Company's advanced drilling and
completion 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.
<TABLE>
<CAPTION>
UNDEVELOPED
NUMBER OF GROSS LOCATIONS(A)
WELLS UNDEVELOPED ----------------------------
OPERATING AREA DRILLED(A) GROSS ACREAGE(B) PROVED UNEVALUATED
---------------------------- --------------- ---------------- ------------ -----------
<S> <C> <C> <C> <C>
Giddings Field.............. 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
=== ===== ===
</TABLE>
- ---------------
(a) Includes wells drilling
(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 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 $0.77 per Mcfe.
Management believes the key to creating value in the independent energy industry
is the ability to generate high levels of cash flow that can be successfully
reinvested in a technologically-driven exploration program.
Management's Substantial Equity Ownership. At June 30, 1996, the Company's
management and directors beneficially owned (including outstanding vested
options of management) an aggregate of approximately 44% of the Company's
outstanding shares of Common Stock. Management believes this substantial equity
ownership provides a strong alignment of management's and investors' interests
and creates an entrepreneurial culture within the Company.
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PRIMARY OPERATING AREAS
The Company's activities are concentrated in three primary operating areas:
(i) the Navasota River and Independence areas of the downdip Giddings Field in
southern Texas, (ii) the Knox, Sholem Alechem, and Golden Trend Fields of
southern Oklahoma, and (iii) the South Brookeland, Leesville, Masters Creek, St.
Landry, Baton Rouge and Livingston areas of the Louisiana Trend.
The following table sets forth the Company's proved reserves in its primary
operating areas (net of interests of other working and royalty interest owners
and others entitled to share in production), estimated capital expenditures and
the number of potential drilling locations required to develop the Company's
proved undeveloped reserves at June 30, 1996:
<TABLE>
<CAPTION>
ESTIMATED
CAPITAL
EXPENDITURES NUMBER OF
GAS PERCENT OF REQUIRED TO PROVED
OIL GAS EQUIVALENT PROVED DEVELOP UNDEVELOPED
AREAS (MMBL) (MMCF) (MMCFE) RESERVES ($ IN 000'S) LOCATIONS
- ----------------------------------- ------ ------- ---------- ---------- ------------ -----------
<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
====== ======= ======= ===== ======== ===
</TABLE>
GIDDINGS FIELD. Chesapeake's second largest concentration of proved
reserves and its highest concentration of present value is located in the
Giddings Field, which is currently 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, 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.
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 drilled and completed 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 drilled 24
Independence wells and was drilling two additional wells. The Company has
budgeted $7 million to drill six gross (3 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
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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.
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 and the Company believes this
inventory could increase by an additional 200 increased density or step-out
wells, subject to applicable spacing requirements. The Company has budgeted $36
million in fiscal 1997 to drill 19 gross (15 net) wells in the Knox area. During
fiscal 1996, Chesapeake doubled its assets in Knox through its acquisition of
Amerada Hess Corporation's interests in Chesapeake wells.
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 drilled 25 gross (11 net) horizontal wells and has successfully
completed all of these wells. The Company has budgeted $8 million to drill 10
gross (5 net) wells during fiscal 1997. Texaco Exploration and Production, Inc.
is the Company's 50% working interest partner in this area.
LOUISIANA AUSTIN CHALK TREND. The Louisiana Trend is the newest of the
Company's three primary operating areas and will be the focus of the Company's
exploration and development activities in the foreseeable future. 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.
Based on management's belief 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 $103 million through June 30, 1996 to acquire approximately
1,000,000 acres of leasehold in the Louisiana Trend. This large acreage position
provides the Company with the opportunity to drill up to 300-500 horizontal
Austin Chalk wells, assuming spacing units of approximately 2,000 acres and
assuming continued drilling success by Chesapeake and others in the Louisiana
Trend.
During fiscal 1996, Chesapeake operated five wells (4.9 net) in the
Louisiana Trend and participated in the second well drilled by Occidental in
this area. Production commenced from Chesapeake's first well, the Laddie James
#7-1, on June 30, 1996, and the other wells were drilling at that date.
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 acres. The primary focus
of Chesapeake's exploration efforts in this area is the horizontally-drilled,
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 has budgeted
$6 million to drill six gross and net wells during fiscal 1997.
PERMIAN BASIN. In late 1994, the Company initiated activity in the Permian
Basin in the Lovington area of Lea County, New Mexico. In this project, the
Company is utilizing 3-D seismic technology to search for
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algal reef 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 Company has identified approximately 25 prospects in the Lovington
area, where the Company is targeting oil reserves at depths from 11,000 to
13,000 feet. The Company drilled its first well during fiscal 1996 and has
budgeted $4 million to drill six gross (5 net) wells during fiscal 1997.
ARKOMA BASIN. The Arkoma Basin is Oklahoma's second largest gas basin. In
late 1994, the Company initiated a seismic and leasehold acquisition program in
the Jackfork and Deep Spiro areas of the Arkoma Basin of southeastern Oklahoma.
The Jackfork and Deep Spiro plays are located in the southern portion of the
basin, a deeper and more geologically complex area that has been less heavily
explored than the updip northern portion.
The Company believes recent developments in 3-D seismic technology and in
drilling and completion technologies have created an excellent opportunity for
the Company to establish a significant project area in the Arkoma Basin. The
Company is targeting gas reserves at depths from 4,000 to 16,000 feet. As of
June 30, 1996, the Company had drilled 14 gross (6 net) Arkoma Basin wells on
its acreage position of approximately 125,000 gross acres. The Company has
budgeted $3 million to drill eight gross (4 net) wells during fiscal 1997.
OTHER. The Company maintains significant interests in other acreage,
primarily in Fayette, Grimes, and Karnes Counties, Texas, where the Company
conducts horizontal drilling operations targeting the Austin Chalk, Buda,
Georgetown, and Edwards formations. The Company has budgeted $6 million to drill
six gross (4 net) horizontal wells in these and other areas of Texas during
fiscal 1997.
HORIZONTAL DRILLING OPERATIONS
Horizontal drilling involves the drilling of a horizontal borehole within a
narrow segment of a single stratigraphic formation. Through June 30, 1996,
Chesapeake had drilled 275 horizontal wells in southern Texas, southern Oklahoma
and Louisiana.
In general, horizontal drilling permits the operator to intersect a greater
number of fractures than in conventional vertical drilling. This can result in
both increased initial production rates and greater ultimate recoveries of
hydrocarbons on a per well basis. Based on the Company's experience, the typical
production profile of a horizontal well reflects relatively higher production in
the early life of the well, allowing for more of the drilling costs to be
quickly recovered, followed by a significant decline in production and a
stabilization of production at lower rates thereafter. The Company believes that
horizontal drilling tends to decrease field development costs by reducing the
number of wells needed to drain a given reservoir.
The technology enabling the Company to drill profitable horizontal wells in
the Giddings Field in southern Texas, the Sholem Alechem Field in southern
Oklahoma and recently in the Louisiana Trend has progressed rapidly and has
resulted in lower finding costs. Advances in drilling technology such as
"measurement-while-drilling" tools, which provide a continuous analysis of the
drillbit's location when drilling horizontally, assist the Company's engineers
in guiding the drillbit into a more tightly defined target zone, or "sweet
spot," in the formation. Additionally, innovations in downhole motor, drillbit,
and whipstock technology have doubled the rate of drilling penetration during
the past two years and have enabled the Company to drill multiple lateral
horizontal wells. The Company's geologists are using "logging-while-drilling"
and enhanced seismic technology to more accurately locate the existence of
hydrocarbon-bearing fractures within target formations. Further innovations in
horizontal drilling tools and techniques continue at a rapid pace and management
believes such innovations will enable the Company to expand its drilling success
further downdip in the Louisiana Trend and in Giddings and into other horizontal
drilling projects elsewhere in the United States.
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DRILLING ACTIVITY
The following table sets forth the wells drilled by the Company during the
periods indicated. In the table, "gross" refers to the total wells in which the
Company has a working interest and "net" refers to gross wells multiplied by the
Company's working interest therein.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------------------------
1996 1995 1994
-------------- -------------- --------------
GROSS NET GROSS NET GROSS NET
----- ---- ----- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C>
Development:
Productive............................ 111 49.5 133 42.6 70 15.2
Non-productive........................ 4 1.6 5 2.8 4 .1
---- ---- ---- ---- ---- ----
Total................................. 115 51.1 138 45.4 74 15.3
==== ==== ==== ==== ==== ====
Exploratory:
Productive............................ 29 16.5 11 5.3 17 3.0
Non-productive........................ 4 1.4 1 .7 1 .1
---- ---- ---- ---- ---- ----
Total................................. 33 17.9 12 6.0 18 3.1
==== ==== ==== ==== ==== ====
</TABLE>
At June 30, 1996, the Company was drilling 28 gross (16.2 net) exploratory
or development wells, of which 24 gross (12.6 net) have been successfully
completed and four gross (3.6 net) are still being drilled or tested. The
Company was also participating with minority interests in nine non-operated
wells being drilled at that date.
WELL DATA
At June 30, 1996, the Company had interests in approximately 474 producing
wells, of which 93 (29.9 net) were classified as primarily oil producing wells
and 381 (124.0 net) were classified as primarily gas producing wells.
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VOLUMES, REVENUE, PRICES AND PRODUCTION COSTS
The following table sets forth certain information regarding the production
volumes, revenue, average prices received and average production costs
associated with the Company's sale of oil and gas for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------------
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
Net production:
Oil (MBbl)........................................ 1,413 1,139 537
Gas (MMcf)........................................ 51,710 25,114 6,927
Gas equivalent (MMcfe)............................ 60,190 31,947 10,152
Oil and gas sales ($ in 000's):
Oil............................................... $ 25,224 $ 19,784 $ 8,111
Gas............................................... 85,625 37,199 14,293
-------- -------- -------
Total oil and gas sales................... $110,849 $ 56,983 $22,404
======== ======== =======
Average sales price:
Oil ($ per Bbl)................................... $ 17.85 $ 17.36 $ 15.09
Gas ($ per Mcf)................................... $ 1.66 $ 1.48 $ 2.06
Gas equivalent ($ per Mcfe)....................... $ 1.84 $ 1.78 $ 2.21
Oil and gas costs ($ per Mcfe):
Production expenses and taxes..................... $ .14 $ .13 $ .36
General and administrative........................ $ .08 $ .11 $ .31
Depreciation, depletion and amortization of oil
and gas properties............................. $ .85 $ .80 $ .80
</TABLE>
DEVELOPMENT, EXPLORATION AND ACQUISITION EXPENDITURES
The following table sets forth certain information regarding the costs
incurred by the Company in its development, exploration and acquisition
activities during the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED 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 $28,307
======== ======== =======
</TABLE>
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ACREAGE
The following table sets forth as of June 30, 1996 the gross and net acres
of both developed and undeveloped oil and gas leases which the Company holds.
"Gross" acres are the total number of acres in which the Company owns a working
interest. "Net" acres refer to gross acres multiplied by the Company's
fractional working interest. Acreage numbers are stated in thousands.
<TABLE>
<CAPTION>
TOTAL DEVELOPED
AND UNDEVELOPED
---------------
GROSS NET
----- -----
<S> <C> <C>
Giddings..................................................... 251 170
Southern Oklahoma............................................ 137 48
Louisiana Trend.............................................. 1,012 900
Williston Basin.............................................. 550 381
Other Areas.................................................. 319 201
----- -----
Total.............................................. 2,269 1,700
===== =====
</TABLE>
MARKETING
The Company's oil production is sold under market sensitive or spot price
contracts. The Company's natural gas production is sold to purchasers under
varying percentage-of-proceeds and percentage-of-index contracts. By the terms
of these contracts, the Company receives a percentage of the resale price
received by the purchaser for sales of residue gas and natural gas liquids
recovered after gathering and processing the Company's gas. The residue gas and
natural gas liquids sold by these purchasers are sold primarily based on spot
market prices. The revenue received by the Company from the sale of natural gas
liquids is included in natural gas sales. During fiscal 1996, the following
three customers individually accounted for 10% or more of the Company's total
oil and gas sales:
<TABLE>
<CAPTION>
AMOUNT PERCENT OF OIL
($ IN THOUSANDS) AND GAS SALES
---------------- --------------
<S> <C> <C>
Aquila Southwest Pipeline Corporation......... $ 41,900 38%
GPM Gas Corporation........................... $ 28,700 26%
Wickford Energy Marketing, L.C................ $ 18,500 17%
</TABLE>
Management believes that the loss of any of the above customers would not have a
material adverse effect on the Company's results of operations or its financial
position.
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. 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.
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.
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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-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.
The Company has only limited involvement with derivative financial
instruments, as defined in Statement of Financial Accounting Standards No. 119
("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 from its counter-parties and to basis risk.
COMPETITION
The oil and gas industry is highly competitive. The Company competes for
the acquisition of oil and gas properties with numerous other entities,
including major oil companies, other independent oil and gas concerns and
individual producers and operators. Many of these competitors have financial,
technical and other resources substantially greater than those of the Company.
SEASONAL NATURE OF BUSINESS
Historically the demand for natural gas decreases during the summer months
and increases during the winter months. However, pipelines, utilities, local
distribution companies and industrial users may more effectively utilize natural
gas storage capacity by purchasing some of the winter load in the summer at
reduced prices.
REGULATION
General
Numerous departments and agencies, federal, state and local, issue rules
and regulations binding on the oil and gas industry, some of which carry
substantial penalties for failure to comply. The regulatory burden on the oil
and gas industry increases the Company's cost of doing business and,
consequently, affects its profitability.
Exploration and Production
The Company's operations are subject to various types of regulation at the
federal, state and local levels. Such regulation includes requiring permits for
the drilling of wells, maintaining bonding requirements in order to drill or
operate wells and regulating the location of wells, the method of drilling and
casing wells, the surface use and restoration of properties upon which wells are
drilled, the plugging and abandoning of wells and the disposal of fluids used in
connection with operations. The Company's operations are also subject to various
conservation regulations. These include the regulation of the size of drilling
and spacing units and the density of wells which may be drilled and the
unitization or pooling of oil and gas properties. In this regard, some states
(such as Oklahoma) allow the forced pooling or integration of tracts to
facilitate exploration while other states (such as Texas) rely on voluntary
pooling of lands and leases. In areas where pooling is voluntary, it may be more
difficult to form units and, therefore, more difficult to develop a project if
the operator owns less than 100% of the leasehold. In addition, state
conservation laws establish maximum rates of production from oil and gas wells,
generally prohibit the venting or flaring of gas and impose certain requirements
regarding the ratability of production. The effect of these regulations is to
limit the amount of oil and gas the Company can produce from its wells and to
limit the number of wells or the locations at which the Company can drill. The
extent of any impact on the Company of such restrictions cannot be predicted.
9
<PAGE> 11
Marketing and Transportation
Historically, the transportation and sale for resale of natural gas in
interstate commerce have been regulated pursuant to the Natural Gas Act of 1938,
the Natural Gas Policy Act of 1978 (the "NGPA"), and the regulations promulgated
thereunder by the Federal Energy Regulatory Commission (the "FERC"). Since 1978,
maximum selling prices of certain categories of natural gas sold in "first
sales," whether sold in interstate or intrastate commerce, have been regulated
pursuant to the NGPA. The NGPA established various categories of natural gas and
provided for graduated deregulation of price controls of several categories of
natural gas and the deregulation of sales of certain categories of natural gas.
Most "first sale" price deregulation contemplated under the NGPA has already
occurred. Moreover, in July 1989, the Natural Gas Wellhead Decontrol Act was
enacted. This Act amended the NGPA to remove both price and non-price controls
from natural gas sold in "first sales" as of January 1, 1993.
Several major regulatory changes have been implemented by the FERC from
1985 to the present that affect the economics of natural gas production,
transportation and sales. In addition, the FERC continues to promulgate
revisions to various aspects of the rules and regulations affecting those
segments of the natural gas industry, most notably interstate natural gas
transmission companies, which remain subject to the FERC's jurisdiction. These
initiatives may also affect the intrastate transportation of gas under certain
circumstances. The stated purposes of many of these regulatory changes is to
promote competition among the various sectors of the gas industry. The ultimate
impact of these complex and overlapping rules and regulations, many of which are
repeatedly subjected to judicial challenge and interpretation, cannot be
predicted.
Environmental and Occupational Regulation
General. The Company's activities are subject to existing federal, state
and local laws and regulations governing environmental quality and pollution
control. It is anticipated that, absent the occurrence of an extraordinary
event, compliance with existing federal, state and local laws, rules and
regulations regulating the release of materials in the environment or otherwise
relating to the protection of the environment will not have a material effect
upon the operations, capital expenditures, earnings or the competitive position
of the Company. The Company cannot predict what effect additional regulation or
legislation, enforcement policies thereunder and claims for damages to property,
employees, other persons and the environment resulting from the Company's
operations could have on its activities.
Activities of the Company with respect to the exploration, development and
production of oil and natural gas are subject to stringent environmental
regulation by state and federal authorities including the Environmental
Protection Agency ("EPA"). Such regulation has increased the cost of planning,
designing, drilling, operating and in some instances, abandoning wells. In most
instances, the regulatory requirements relate to the handling and disposal of
drilling and production waste products and waste created by water and air
pollution control procedures. Although the Company believes that compliance with
environmental regulations will not have a material adverse effect on operations
or earnings, risks of substantial costs and liabilities are inherent in oil and
gas operations, and there can be no assurance that significant costs and
liabilities, including criminal penalties, will not be incurred. Moreover, it is
possible that other developments, such as stricter environmental laws and
regulations, and claims for damages to property or persons resulting from the
Company's operations could result in substantial costs and liabilities.
Waste Disposal. The Company currently owns or leases, and has in the past
owned or leased, numerous properties that for many years have been used for the
exploration and production of oil and gas. Although the Company has utilized
operating and disposal practices that were standard in the industry at the time,
hydrocarbons or other wastes may have been disposed of or released on or under
the properties owned or leased by the Company or on or under other locations
where such wastes have been taken for disposal. In addition, many of these
properties have been operated by third parties whose treatment and disposal or
release of hydrocarbons or other wastes was not under the Company's control.
State and federal laws applicable to oil and natural gas wastes and properties
have gradually become more strict. Under such laws, the Company could be
required to remove or remediate previously disposed wastes (including wastes
disposed of or released
10
<PAGE> 12
by prior owners or operators) or property contamination (including groundwater
contamination) or to perform remedial plugging operations to prevent future
contamination.
The Company generates wastes, including hazardous wastes, that are subject
to the federal Resource Conservation and Recovery Act ("RCRA") and comparable
state statutes. The EPA and various state agencies have limited the disposal
options for certain hazardous and nonhazardous wastes and is considering the
adoption of stricter disposal standards for nonhazardous wastes. Furthermore,
certain wastes generated by the Company's oil and natural gas operations that
are currently exempt from treatment as hazardous wastes may in the future be
designated as hazardous wastes, and therefore be subject to more rigorous and
costly operating and disposal requirements.
Superfund. The Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA"), also known as the "Superfund" law, imposes liability,
without regard to fault or the legality of the original conduct, on certain
classes of persons with respect to the release of a "hazardous substance" into
the environment. These persons include the owner and operator of a site and
persons that disposed of or arranged for the disposal of the hazardous
substances found at a site. CERCLA also authorizes the EPA and, in some cases,
third parties to take actions in response to threats to the public health or the
environment and to seek to recover from responsible classes of persons the costs
of such action. In the course of its operations, the Company may have generated
and may generate wastes that fall within CERCLA's definition of "hazardous
substances." The Company may also be an owner of sites on which "hazardous
substances" have been released by previous owners or operators. The Company may
be responsible under CERCLA for all or part of the costs to clean up sites at
which such wastes have been released. To date, however, neither the Company nor,
to its knowledge, its predecessors have been named a potentially responsible
party under CERCLA or similar state superfund laws affecting property owned or
leased by the Company.
Air Emissions. The operations of the Company are subject to local, state
and federal regulations for the control of emissions of air pollution. Legal and
regulatory requirements in this area are increasing, and there can be no
assurance that significant costs and liabilities will not be incurred in the
future as a result of new regulatory developments. In particular, regulations
promulgated under the Clean Air Act Amendments of 1990 may impose additional
compliance requirements that could affect the Company's operations. However, it
is impossible to predict accurately the effect, if any, of the Clean Air Act
Amendments on the Company at this time. The Company may in the future be subject
to civil or administrative enforcement actions for failure to comply strictly
with air regulations or permits. These enforcement actions are generally
resolved by payment of monetary fines and correction of any identified
deficiencies. Alternatively, regulatory agencies could require the Company to
forego construction or operation of certain air emission sources.
OSHA. The Company is subject to the requirements of the federal
Occupational Safety and Health Act ("OSHA") and comparable state statutes. The
OSHA hazard communication standard, the EPA community right-to-know regulations
under Title III of the federal Superfund Amendment and Reauthorization Act and
similar state statutes require the Company to organize information about
hazardous materials used or produced in its operations. Certain of this
information must be provided to employees, state and local governmental
authorities and local citizens. The Company is also subject to the requirements
and reporting set forth in OSHA workplace standards. The Company provides safety
training and personal protective equipment to its employees.
OPA and Clean Water Act. Federal regulations require certain owners or
operators of facilities that store or otherwise handle oil, such as the Company,
to prepare and implement spill prevention control plans, countermeasure plans
and facilities response plans relating to the possible discharge of oil into
surface waters. The Oil Pollution Act of 1990 ("OPA") amends certain provisions
of the federal Water Pollution Control Act of 1972, commonly referred to as the
Clean Water Act ("CWA") and other statutes as they pertain to the prevention of
and response to oil spills into navigable waters. The OPA subjects owners of
facilities to strict joint and several liability for all containment and cleanup
costs and certain other damages arising from a spill, including, but not limited
to, the costs of responding to a release of oil to surface waters. The CWA
provides penalties for any discharges of petroleum product in reportable
quantities and imposes substantial liability for the costs of removing a spill.
State laws for the control of water pollution also provide varying civil and
11
<PAGE> 13
criminal penalties and liabilities in the case of releases of petroleum or its
derivatives into surface waters or into the ground. Regulations are currently
being developed under OPA and state laws concerning oil pollution prevention and
other matters that may impose additional regulatory burdens on the Company. In
addition, the CWA and analogous state laws require permits to be obtained to
authorize discharges into surface waters or to construct facilities in wetland
areas. With respect to certain of its operations, the Company is required to
maintain such permits or meet general permit requirements. The EPA recently
adopted regulations concerning discharges of storm water runoff. This program
requires covered facilities to obtain individual permits, participate in a group
permit or seek coverage under an EPA general permit. The Company believes that
it will be able to obtain, or be included under, such permits, where necessary,
with minor modifications to existing facilities and operations that would not
have a material effect on the Company.
NORM. Oil and gas exploration and production activities have been
identified as generators of concentrations of low-level naturally-occurring
radioactive materials ("NORM"). NORM regulations have recently been adopted in
several states. The Company is unable to estimate the effect of these
regulations, although based upon the Company's preliminary analysis to date, the
Company does not believe that its compliance with such regulations will have a
material adverse effect on its operations or financial condition.
Safe Drinking Water Act. The Company's operations involve the disposal of
produced saltwater and other nonhazardous oil-field wastes by reinjection into
the subsurface. Under the Safe Drinking Water Act ("SDWA"), oil and gas
operators, such as the Company, must obtain a permit for the construction and
operation of underground Class II injection wells. To protect against
contamination of drinking water, periodic mechanical integrity tests are often
required to be performed by the well operator. The Company has obtained such
permits for the Class II wells it operates. The Company also has disposed of
wastes in facilities other than those owned by the Company (commercial Class II
injection wells).
Toxic Substances Control Act. The Toxic Substances Control Act ("TSCA") was
enacted to control the adverse effects of newly manufactured and existing
chemical substances. Under the TSCA, the EPA has issued specific rules and
regulations governing the use, labeling, maintenance, removal from service and
disposal of PCB items, such as transformers and capacitors used by oil and gas
companies. The Company may own such PCB items but does not believe compliance
with TSCA has or will have a material adverse effect on the Company's operations
or financial condition.
TITLE TO PROPERTIES
Title to properties is subject to royalty, overriding royalty, carried, net
profits, working and other similar interests and contractual arrangements
customary in the oil and gas industry, to liens for current taxes not yet due
and to other encumbrances. As is customary in the industry in the case of
undeveloped properties, little investigation of record title is made at the time
of acquisition (other than a preliminary review of local records). Drilling
title opinions are always prepared before commencement of drilling operations.
From time to time the Company's title to oil and gas properties is challenged
through legal proceedings. The Company is routinely involved in litigation
involving title to certain of its oil and gas properties, none of which
management believes will be materially adverse to the Company, individually or
in the aggregate.
OPERATING HAZARDS AND INSURANCE
The oil and gas business involves a variety of operating risks, including
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's horizontal drilling
activities involve greater risk of mechanical problems than conventional
vertical drilling operations.
The Company maintains a $5 million oil and gas lease operator policy that
insures the Company against certain sudden and accidental risks associated with
drilling, completing and operating its wells. There can be no assurance that
this insurance will be adequate to cover any losses or exposure to liability.
The Company
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<PAGE> 14
also carries comprehensive general liability policies and a $25 million umbrella
policy. The Company and its subsidiaries carry workers' compensation insurance
in all states in which they operate. While the Company believes these policies
are customary in the industry, they do not provide complete coverage against all
operating risks.
EMPLOYEES
The Company had 344 full-time employees as of June 30, 1996 of which 68
were involved in the oil and gas service operations of the Company. The sale of
the oil and gas service operations as of June 30, 1996 resulted in a transfer of
the service employees to the purchaser. No employees are represented by
organized labor unions. The Company considers its employee relations to be good.
FACILITIES
The Company owns 11 buildings totaling approximately 74,000 square feet in
an office complex in Oklahoma City that comprise its headquarters' offices and
also owns a field office in Lindsay, Oklahoma. The Company leases field office
space in College Station, Texas and in Lafayette, Louisiana.
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<PAGE> 15
GLOSSARY
The terms defined in this section are used throughout this Form 10-K.
BCF. Billion cubic feet.
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.
MBTU. One thousand Btus.
MCF. One thousand cubic feet.
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.
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 non-property 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%.
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<PAGE> 16
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 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.
TCF. One trillion cubic feet.
TCFE. One trillion cubic feet of gas equivalent.
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.
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<PAGE> 17
ITEM 2. PROPERTIES
OIL AND GAS RESERVES
The tables below set forth information as of June 30, 1996 with respect to
the Company's estimated net proved reserves, the estimated future net revenue
therefrom and the present value thereof at such date, based on estimates
prepared by Williamson Petroleum Consultants, Inc. ("Williamson") and the
Company's petroleum engineers. The reserves evaluated internally by the Company
constituted 0.6% of total proved reserves for fiscal 1996. The estimates were
prepared based upon a review of production histories and other geologic,
economic, ownership and engineering data developed by the Company. The present
value of estimated future net revenue shown is not intended to represent the
current market value of the estimated oil and gas reserves owned by the Company.
For further information concerning the present value of future net revenue from
these proved reserves, see Note 10 of Notes to the Company's Consolidated
Financial Statements included in Item 8.
<TABLE>
<CAPTION>
ESTIMATED PROVED RESERVES OIL GAS TOTAL
AS OF JUNE 30, 1996 (MMBBL) (BCF) (BCFE)
- ------------------------------------------------------------- --------- ----------- ------
<S> <C> <C> <C>
Proved developed............................................. 3.7 144.7 166.6
Proved undeveloped........................................... 8.6 206.5 258.2
Total proved................................................. 12.3 351.2 424.8
</TABLE>
<TABLE>
<CAPTION>
ESTIMATED FUTURE NET REVENUE PROVED PROVED TOTAL
AS OF JUNE 30, 1996(A) DEVELOPED UNDEVELOPED PROVED
- ------------------------------------------------------------- --------- ----------- ------
($ IN MILLIONS)
<S> <C> <C> <C>
Estimated future net revenue................................. $ 340.8 $ 454.8 $795.6
Present value of future net revenue.......................... $ 242.0 $ 305.0 $547.0
</TABLE>
- ---------------
(a) Estimated future net revenue represents 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 June 30, 1996. The amounts shown do not give effect to non-property
related expenses, such as general and administrative expenses, debt service
and future income tax expense or to depreciation, depletion and
amortization. The prices used in the Williamson report yield average prices
of $20.90 per barrel of oil and $2.41 per Mcf of gas.
The future net revenue attributable to the Company's estimated proved
undeveloped reserves of $454.8 million at June 30, 1996, and the $305 million
present value thereof, have been calculated assuming that the Company will
expend approximately $135.6 million to develop these reserves through June 30,
2000. The amount and timing of these expenditures will depend on a number of
factors, including actual drilling results, product prices and the availability
of capital.
No estimates of proved reserves comparable to those included herein have
been included in reports to any federal agency other than the Securities and
Exchange Commission.
The Company's interest used in calculating proved reserves and the
estimated future net revenue therefrom was determined after giving effect to the
assumed maximum participation by other parties to the Company's farmout and
participation agreements. The prices used in calculating the estimated future
net revenue attributable to proved reserves do not necessarily reflect market
prices for oil and gas production sold subsequent to June 30, 1996. There can be
no assurance that all of the estimated proved reserves will be produced and sold
at the assumed prices or that existing contracts will be honored or judicially
enforced.
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. The reserve data set forth herein represent only estimates. Reserve
engineering is a subjective process of estimating underground accumulations of
oil and gas that cannot be measured in an exact way, and the accuracy of any
reserve estimate is a function of the quality of available data and of
engineering and geological interpretation and judgment. As a result, estimates
made by different engineers often vary. In
16
<PAGE> 18
addition, results of drilling, testing and production subsequent to the date of
an estimate may justify revision of such estimates, and such revisions may be
material. Accordingly, reserve estimates are often different from the actual
quantities of oil and gas that are ultimately recovered. Furthermore, the
estimated future net revenue from proved reserves and the present value thereof
are based upon certain assumptions, including prices, future production levels
and cost, that may not prove correct. Predictions about prices and future
production levels are subject to great uncertainty, and this is particularly
true as to proved undeveloped reserves, which are inherently less certain than
proved developed reserves and which comprise a significant portion of the
Company's proved reserves.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in ordinary routine litigation incidental to its
business. There are presently no material pending legal proceedings to which the
Company is a party or of which any of its property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of the Company's fiscal year ended June 30, 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The Common Stock was quoted through the Nasdaq National Market under the
symbol "CSPK" from February 4, 1993 through April 27, 1995. On April 28, 1995
the Common Stock began trading on the New York Stock Exchange under the symbol
"CHK." The following table sets forth, for the periods indicated, the high and
low sales prices per share (adjusted for a 2-for-1 stock split on December 16,
1994 and 3-for-2 stock splits on December 15, 1995 and June 28, 1996) of the
Common Stock as reported by the Nasdaq National Market through April 27, 1995,
and the New York Stock Exchange thereafter:
<TABLE>
<CAPTION>
COMMON STOCK
-------------------
HIGH LOW
------ ------
<S> <C> <C>
Fiscal year ended June 30, 1995:
First Quarter.................................................. $ 4.89 $ 1.72
Second Quarter................................................. 7.67 4.28
Third Quarter.................................................. 9.67 4.44
Fourth Quarter................................................. 13.39 9.33
Fiscal year ended June 30, 1996:
First Quarter.................................................. 14.56 9.06
Second Quarter................................................. 22.17 12.39
Third Quarter.................................................. 33.00 21.33
Fourth Quarter................................................. 60.75 31.00
</TABLE>
At August 31, 1996 there were 167 holders of record of Common Stock and
approximately 7,815 beneficial owners.
DIVIDENDS
The Company has never 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. The Board of Directors of the Company does not intend to pay
cash dividends on the Company's Common Stock in the foreseeable future. The
payment of future cash dividends, if any, will be reviewed periodically by the
Board of Directors and will depend upon,
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<PAGE> 19
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.
The Indentures governing the Company's outstanding Senior Notes and its
revolving bank credit facility contain certain restrictions on the Company's
ability to declare and pay dividends. The revolving credit facility prohibits
the Company from declaring or paying any dividends in respect of its Common
Stock unless the lender otherwise consents in writing. Under the Indentures, the
Company may not pay any cash dividends in respect of its Common Stock if (i) a
default or an event of default has occurred and is continuing at the time of or
immediately after giving effect to the dividend payment, (ii) the Company would
not be able to incur at least $1 of additional indebtedness under the terms of
the Indentures, or (iii) immediately after giving effect to the dividend
payment, the aggregate of all Restricted Payments (as defined) declared or made
after the respective issue dates of the notes exceeds the sum of specified
income, proceeds from the issuance of stock and debt by the Company and other
amounts from the quarter in which the respective note issuances occurred to the
quarter immediately preceding the date of the dividend payment.
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<PAGE> 20
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data of the
Company for each of the five fiscal years ended June 30, 1996. The data is
derived from the Consolidated Financial Statements of the Company, including the
Notes thereto, appearing elsewhere in this report. The data set forth in this
table should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the Consolidated Financial
Statements, including the Notes thereto included elsewhere in this report.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- ------- -------
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Oil and gas sales.................... $110,849 $ 56,983 $ 22,404 $11,602 $10,520
Gas marketing sales.................. 28,428 -- -- -- --
Oil and gas service operations....... 6,314 8,836 6,439 5,526 7,656
Interest and other................... 3,831 1,524 981 880 542
-------- -------- -------- ------- -------
Total revenues.................. 149,422 67,343 29,824 18,008 18,718
-------- -------- -------- ------- -------
Costs and expenses:
Production expenses and taxes........ 8,303 4,256 3,647 2,890 2,103
Gas marketing expenses............... 27,452 -- -- -- --
Oil and gas service operations....... 4,895 7,747 5,199 3,653 4,113
Oil and gas depreciation, depletion
and amortization................... 50,899 25,410 8,141 4,184 2,910
Depreciation and amortization of
other assets....................... 3,157 1,765 1,871 557 974
General and administrative........... 4,828 3,578 3,135 3,620 3,314
Provision for legal and other
settlements........................ -- -- -- 1,286 --
Interest and other................... 13,679 6,627 2,676 2,282 2,577
-------- -------- -------- ------- -------
Total costs and expenses........ 113,213 49,383 24,669 18,472 15,991
-------- -------- -------- ------- -------
Income (loss) before income taxes....... 36,209 17,960 5,155 (464) 2,727
Income tax expense (benefit)............ 12,854 6,299 1,250 (99) 1,337
-------- -------- -------- ------- -------
Net income (loss)....................... $ 23,355 $ 11,661 $ 3,905 $ (365) $ 1,390
======== ======== ======== ======= =======
Net income (loss) per common share...... $ .80 $ .42 $ .16 $ (.04) $ .10
======== ======== ======== ======= =======
CASH FLOW DATA:
Cash provided by (used in) operating
activities........................... $120,972 $ 54,731 $ 19,423 $(1,499) $11,550
Cash used in investing activities....... 344,389 112,703 29,211 15,142 26,987
Cash provided by financing activities... 219,520 97,282 21,162 20,802 12,779
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets............................ $572,335 $276,693 $125,690 $78,707 $61,095
Long-term debt, net of current
maturities........................... 268,431 145,754 47,878 14,051 22,154
Stockholders' equity.................... 177,767 44,975 31,260 31,432 132
</TABLE>
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<PAGE> 21
ITEM 7. 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 3 million shares of common stock in April 1996, allowed the Company to
fund its net capital expenditures of $344 million. The Company also repaid all
amounts outstanding under its $125 million Revolving Credit Facility and
currently has $75 million of available bank credit committed under this expanded
credit facility.
During fiscal 1996, the Company participated in 148 gross wells (69.0 net),
of which 111 were operated by the Company. The Company's proved reserves
increased by 183 Bcfe to 425 Bcfe as a result of this drilling and the purchase
of proved reserves from Amerada Hess Corporation compared to 60.2 Bcfe of
production, resulting in reserve replacement in excess of 300% compared to
production.
The Company's business strategy has continued to emphasize the acquisition
of large prospective leasehold positions to provide a multi-year inventory of
drilling locations. By June 1996, the Company had increased its acreage position
to approximately 200,000 gross acres of developed leasehold and approximately 2
million gross acres of undeveloped leasehold. During 1996, the Company continued
the expansion of its exploration focus in the Louisiana Austin Chalk Trend and
began a significant acreage acquisition program in the Williston Basin. The
Company also conducted or participated in 3-D seismic programs in the Lovington
area, the Giddings Field, the Knox Field and in the Williston and Arkoma Basin
areas to evaluate the Company's acreage inventory.
The following table sets forth certain operating data of the Company for
the periods presented:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------
1996 1995 1994
-------- ------- -------
<S> <C> <C> <C>
Net Production Data:
Oil (MBbl)......................................... 1,413 1,139 537
Gas (MMcf)......................................... 51,710 25,114 6,927
Gas equivalent (MMcfe)............................. 60,190 31,947 10,152
Oil and Gas Sales ($ in 000's):
Oil................................................ $ 25,224 $19,784 $ 8,111
Gas................................................ 85,625 37,199 14,293
-------- ------- -------
Total oil and gas sales.................... $110,849 $56,983 $22,404
======== ======= =======
Average Sales Price:
Oil ($ per Bbl).................................... $ 17.85 $ 17.36 $ 15.09
Gas ($ per Mcf).................................... $ 1.66 $ 1.48 $ 2.06
Gas equivalent ($ per Mcfe)........................ $ 1.84 $ 1.78 $ 2.21
Oil and Gas Costs ($ per Mcfe):
Production expenses and taxes...................... $ .14 $ .13 $ .36
General and administrative......................... $ .08 $ .11 $ .31
Depreciation, depletion and amortization........... $ .85 $ .80 $ .80
Net Wells Drilled:
Horizontal wells................................... 42.0 28.5 11.1
Vertical wells..................................... 27.0 23.0 7.9
Net Wells at End of Period........................... 186.2 91.2 57.9
</TABLE>
RESULTS OF OPERATIONS
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 $0.42 per common
share, on total revenues of $67.3 million in 1995, and net income of $3.9
million, or $0.16
20
<PAGE> 22
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 1996 and fiscal 1995:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JUNE 30,
-------------------------------------------------
1996 1995
---------------------- ----------------------
PRODUCTION PRODUCTION
(MMCFE) PERCENT (MMCFE) PERCENT
---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C>
Giddings -- Navasota River................ 28,360 47% 16,881 53%
-- Independence.................. 11,601 19% 3,784 12%
-- Other Giddings................ 7,205 12% 5,976 19%
Oklahoma -- Knox.......................... 3,901 6% 1,255 4%
-- Golden Trend.................. 2,758 5% 1,880 6%
-- Sholem Alechem................ 2,010 3% 749 2%
All Other Fields.............................. 4,355 8% 1,422 4%
------ ---- ------ ----
Total Production.................... 60,190 100% 31,947 100%
====== ==== ====== ====
</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.
The Company realized $0.9 million less in oil revenues than it would have
received from unhedged market prices in fiscal 1996.
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 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.
21
<PAGE> 23
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, 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 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.
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 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.
Interest and Other. Interest and other income 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 investment
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 an 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 Giddings 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 based on the Company's
expansion of drilling efforts into the Louisiana Trend and the Williston Basin,
because both are oil prone areas which generally have 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 Giddings.
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, but the Company's rate could
trend upward 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 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 the
22
<PAGE> 24
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
10 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 between 36 and 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.
Recognized gains and losses on hedge contracts are reported as a component of
the related transaction. 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 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 the Company's counter-party of
approximately $2 million for the month of July 1996 and $1.5 million for
23
<PAGE> 25
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.
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
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
to the Company of approximately $82.1 million. On April 12, 1996, the
underwriters exercised an over-allotment option to purchase an additional
519,750 shares of Common Stock at a price of $35.33 per share, resulting in
additional net proceeds to the Company of approximately $17.3 million.
On April 9, 1996 the Company also concluded the sale of $120 million of
9.125% Senior Notes due 2006 (the "9.125% Senior Notes"), which offering
resulted in net proceeds to the Company of approximately $116 million. The
9.125% Senior Notes were issued at 99.931% of par. Approximately $44 million of
the proceeds of these offerings was used to retire all amounts outstanding under
the Company's revolving credit facility. The Company may, at its option, redeem
prior to April 15, 1999 up to $42 million principal amount of the 9.125% Senior
Notes at 109.125% of the principal amount thereof from the proceeds of any
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,
largely as the result of issuance of $90 million of 10.5% Senior Notes due 2002
(the "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 at any time prior to June 1, 1998 up to $30 million of the 10.5%
Senior Notes with the proceeds of an equity offering at 110% of the principal
amount thereof.
In fiscal 1994, the Company received proceeds from long term borrowings of
$48.8 million, primarily from the issuance of $47.5 million of 12% Senior Notes
due 2001 (the "12% Senior Notes") and warrants to purchase 2,190,937 shares of
the Company's Common Stock at an aggregate exercise price of $4,870. The 12%
Senior Note Indenture provides for mandatory redemption of $11.9 million on each
of March 1, 1998, 1999 and 2000. The 12% Senior Notes are redeemable at the
option of the Company at any time on or after March 1, 1998.
All of the Company's subsidiaries except Chesapeake Gas Development
Corporation ("CGDC") and Chesapeake Energy Marketing, Inc. ("CEMI") have fully
and unconditionally guaranteed on a joint and several basis all three issues of
Senior Notes, and the securities of the guaranteeing subsidiaries have been
pledged to secure obligations under the 12% Senior Notes. See Note 2 of Notes to
the Company's Consolidated Financial Statements included in Item 8 of this
report. The Senior Note Indentures contain certain covenants, including
covenants limiting the Company and the guaranteeing subsidiaries 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 guaranteeing
subsidiaries, mergers or consolidations, and transactions with affiliates. The
Company is obligated to repurchase the Senior Notes in the event of 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 approximately $0.3 million at June 30,
1996. Additionally, the Company has unused revolving credit facility commitments
that have been increased to $75 million. The total
24
<PAGE> 26
facility size has been set at $125 million. This 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. Although the Senior Note
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 recourse 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 June
30, 1996). 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. 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. The Company's goal is to achieve an equity to capital ratio of
at least 50% and a further increase in its credit ratings during fiscal 1997.
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 include 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. Cash provided by operating activities
is expected to be the primary source 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 sale 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 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
drilling and completion of non-proved reserves, $10 million for seismic
programs, $42 million for acreage acquisition and $13 million for other
corporate purposes. Absent a significant increase in the Company's drilling
schedule, the Company's internally generated cash flow, existing cash resources
and credit facilities should be sufficient to fund its operating activities,
budgeted capital expenditures, and its debt service obligations in fiscal 1997.
However, the Company may seek additional capital in fiscal 1997 to expand its
exploration and development activities or reduce outstanding long-term debt. 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
FORWARD LOOKING STATEMENTS
The information contained in this Form 10-K includes certain
forward-looking statements. When used in this document, the words budget,
budgeted, anticipate, expects, believes, goals 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. Important factors that could cause
actual results to differ materially from those projected in the forward-looking
statements include, but are 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.
26
<PAGE> 28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Financial Statements:
Report of Independent Accountants for the Year Ended June 30, 1996.................. 28
Report of Independent Accountants for the Years Ended June 30, 1995 and 1994........ 29
Consolidated Balance Sheets June 30, 1996 and 1995.................................. 30
Consolidated Statements of Income for the Years Ended June 30, 1996, 1995 and
1994............................................................................. 31
Consolidated Statements of Cash Flows for the Years Ended June 30, 1996, 1995 and
1994............................................................................. 32
Consolidated Statements of Stockholders' Equity for the Years Ended June 30, 1996,
1995 and 1994.................................................................... 34
Notes to Consolidated Financial Statements.......................................... 35
</TABLE>
27
<PAGE> 29
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
28
<PAGE> 30
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
29
<PAGE> 31
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 $276,693
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
30
<PAGE> 32
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------
1996 1995 1994
-------- ------- -------
($ 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.
31
<PAGE> 33
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.
32
<PAGE> 34
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 $250,000 plus interest was paid in
July 1994, and the balance of which was paid in June 1995.
The accompanying notes are an integral part of these consolidated financial
statements.
33
<PAGE> 35
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------
1996 1995 1994
-------- ------- -------
($ 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.
34
<PAGE> 36
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.
35
<PAGE> 37
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
36
<PAGE> 38
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.
37
<PAGE> 39
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%,
38
<PAGE> 40
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.
39
<PAGE> 41
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>
40
<PAGE> 42
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) $276,693
======== ======== ======== ======= ======== ========= ========
</TABLE>
41
<PAGE> 43
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
($ 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>
42
<PAGE> 44
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>
43
<PAGE> 45
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
44
<PAGE> 46
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.
45
<PAGE> 47
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
46
<PAGE> 48
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 $70,000 to the Savings and Incentive Stock Bonus Plan during the
fiscal years ended June 30, 1996, 1995 and 1994, respectively.
8. MAJOR CUSTOMERS
Sales to individual customers constituting 10% or more of total oil and gas
sales were as follows:
<TABLE>
<CAPTION>
AMOUNT
---------------- PERCENT OF
YEAR ($ IN THOUSANDS) OIL AND GAS SALES
- ---- -----------------
<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
47
<PAGE> 49
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.
48
<PAGE> 50
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
49
<PAGE> 51
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 $137.8 million,
respectively. The carrying value of other long-term debt approximates its fair
value as interest rates are primarily variable, based on prevailing market
rates.
11. DISCLOSURES ABOUT OIL AND GAS PRODUCING ACTIVITIES
Net Capitalized Costs
Evaluated and unevaluated capitalized costs related to the Company's oil
and gas producing activities are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30,
---------------------
1996 1995
-------- --------
<S> <C> <C>
($ IN THOUSANDS)
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 $1,574,000 of interest during the years ended June 30, 1996 and
1995 on significant investments in unproved properties that are not being
currently depreciated, depleted, or amortized and on which exploration or
development activities are in progress. The Company will continue to evaluate
its unevaluated properties; however, the timing of the ultimate evaluation and
disposition of the properties has not been determined.
50
<PAGE> 52
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Costs Incurred in Oil and Gas Acquisition, Exploration and Development
Costs incurred in oil and gas property acquisition, exploration and
development activities which have been capitalized are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30,
---------------------------------
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
($ IN THOUSANDS)
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 $28,307
======== ======== =======
</TABLE>
Results of Operations from Oil and Gas Producing Activities (unaudited)
The Company's results of operations from oil and gas producing activities
are presented below for the years ended June 30, 1996, 1995 and 1994,
respectively. The following table includes revenues and expenses associated
directly with the Company's oil and gas producing activities. It does not
include any allocation of the Company's interest costs and, therefore, is not
necessarily indicative of the contribution to consolidated net operating results
of the Company's oil and gas operations.
<TABLE>
<CAPTION>
JUNE 30,
---------------------------------
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
($ IN THOUSANDS)
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
51
<PAGE> 53
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
52
<PAGE> 54
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 $118,608
========= ======== ========
</TABLE>
53
<PAGE> 55
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. QUARTERLY FINANCIAL DATA (unaudited)
Summarized unaudited quarterly financial data for fiscal 1996 and 1995 are
as follows ($ 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.
54
<PAGE> 56
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
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. The Company's decision to change independent accountants and retain
Coopers & Lybrand L.L.P. was approved by the Audit Committee of the Board of
Directors and by the Board of Directors. During the period Price Waterhouse LLP
was engaged by the Company, Price Waterhouse LLP did not issue any report on the
Company's financial statements containing an adverse opinion, disclaimer of
opinion, or qualification. There were no disagreements between the Company and
Price Waterhouse LLP on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure, nor were there
any reportable events.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for by this Item 10 is incorporated herein by
reference to the definitive Proxy Statement to be filed by the Company pursuant
to Regulation 14A of the General Rules and Regulations under the Securities
Exchange Act of 1934 not later than October 28, 1996.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by this Item 11 is incorporated herein by
reference to the definitive Proxy Statement to be filed by the Company pursuant
to Regulation 14A of the General Rules and Regulations under the Securities
Exchange Act of 1934 not later than October 28, 1996.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by this Item 12 is incorporated herein by
reference to the definitive Proxy Statement to be filed by the Company pursuant
to Regulation 14A of the General Rules and Regulations under the Securities
Exchange Act of 1934 not later than October 28, 1996.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by this Item 13 is incorporated herein by
reference to the definitive Proxy Statement to be filed by the Company pursuant
to Regulation 14A of the General Rules and Regulations under the Securities
Exchange Act of 1934 not later than October 28, 1996.
55
<PAGE> 57
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements. The Company's Consolidated Financial
Statements are included in Item 8 of this report. Reference is made to the
accompanying Index to Consolidated Financial Statements.
2. Financial Statement Schedules. No financial statement schedules are
filed with this report as no schedules are applicable or required. The
Financial Statements of Chesapeake Exploration Limited Partnership are
included in this Item 14. Reference is made to the accompanying Index to
Chesapeake Exploration Limited Partnership Financial Statements.
3. Exhibits. The following exhibits are filed herewith pursuant to the
requirements of Item 601 of Regulation S-K:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<C> <S>
3.1 -- Registrant's Certificate of Incorporation. Incorporated herein by
reference to Exhibit 3.1 to Registrant's quarterly report on Form
10-Q for the quarter ended December 31, 1995.
3.2 -- Registrant's Bylaws. Incorporated herein by reference to Exhibit 3.2
to Registrant's registration statement on Form S-1 (No. 33-55600).
4.1* -- Second Amended and Restated Credit Agreement dated as of September
20, 1996, by and among Chesapeake Energy Corporation, Chesapeake
Exploration Limited Partnership, an Oklahoma Limited Partnership and
Union Bank of California, N.A., as agent and the lenders from time to
time parties hereto.
4.2 -- Indenture dated as of March 31, 1994, as amended by First
Supplemental Indenture dated May 9, 1994, Second Supplemental
Indenture dated as of August 31, 1994 and Third Supplemental
Indenture dated December 27, 1994, among Chesapeake Energy
Corporation, its subsidiaries signatory thereto as Subsidiary
Guarantors and United States Trust Company of New York, as Trustee.
Incorporated herein by reference to Exhibits 4.2 and 4.2(a) to
Registrant's registration statement on Form S-4 (No. 33-78218)
Exhibit 4.2.1 to Registrant's quarterly report on Form 10-Q for the
quarter ended September 30, 1994 and Exhibit 4.2.1 to Registrant's
annual report on Form 10-K for the year ended June 30, 1995.
4.3 -- Indenture dated as of May 15, 1995 among Chesapeake Energy
Corporation, its subsidiaries signatory thereto as Subsidiary
Guarantors and United States Trust Company of New York, as Trustee.
Incorporated herein by reference to Exhibit 4.3 to Registrant's
registration statement on Form S-4 (No. 33-93718).
4.4 -- Indenture dated April 1, 1996 among Chesapeake Energy Corporation,
its subsidiaries signatory thereto as Subsidiary Guarantors and
United States Trust Company of New York, as Trustee. Incorporated
herein by reference to Exhibit 4.6 to Registrant's registration
statement on Form S-3 Registration Statement (No. 333-1588)
4.5 -- Agreement to furnish copies of unfiled long-term debt instruments.
Incorporated herein by reference to Exhibit 4.3 to Registrant's
annual report on Form 10-K for the year ended June 30, 1993.
</TABLE>
56
<PAGE> 58
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<C> <S>
4.7 -- Pledge Agreement dated as of March 31, 1994, as amended by First
Amendment to Pledge Agreement dated as of August 31, 1994 and Second
Amendment to Pledge Agreement dated as of December 27, 1994, among
Chesapeake Energy Corporation, Chesapeake Operating, Inc., Lindsay
Oil Field Supply, Inc. and United States Trust Company of New York.
Incorporated herein by reference to Exhibit B to Indenture filed as
Exhibit 4.2 to Registrant's registration statement on Form S-4 (No.
33-78218), Exhibit 4.7.1 Registrant's quarterly report on Form 10-Q
for the quarter ended December 31, 1995, and to Exhibit 4.7.1 to
Registrant's annual report on Form 10-K for the year ended June 30,
1995.
4.8 -- Stock Registration Agreement dated May 21, 1992 between Chesapeake
Energy Corporation and various lenders, as amended by First Amendment
thereto dated May 26, 1992. Incorporated herein by reference to
Exhibits 10.26.1 and 10.26.2 to Registrant's registration statement
on Form S-1 (No. 33-55600).
10.1.1+ -- Registrant's 1992 Incentive Stock Option Plan. Incorporated herein by
reference to Exhibit 10.1.1 to Registrant's registration statement on
Form S-4 (No. 33-93718).
10.1.2+* -- Registrant's 1992 Nonstatutory Stock Option Plan.
10.1.3+ -- Registrant's 1994 Stock Option Plan. Incorporated herein by reference
to Exhibit 99 to Registrant's registration statement on Form S-8 (No.
33-88196).
10.2.1+ -- Employment Agreement dated as of July 1, 1995 between Aubrey K.
McClendon and Chesapeake Energy Corporation. Incorporated herein by
reference to Exhibit 10.2.1 to Registrant's quarterly report on Form
10-Q for the quarter ended September 30, 1995.
10.2.2+ -- Employment Agreement dated as of July 1, 1995 between Tom L. Ward and
Chesapeake Energy Corporation. Incorporated herein by reference to
Exhibit 10.2.2 to Registrant's quarterly report on Form 10-Q for the
quarter ended September 30, 1995.
10.2.3+ -- Employment Agreement dated as of March 1, 1995 between Marcus C.
Rowland and Chesapeake Energy Corporation. Incorporated herein by
reference to Exhibit 10.2.3 to Registrant's quarterly report on Form
10-Q for the quarter ended September 30, 1995.
10.2.4+ -- Employment Agreement dated as of July 1, 1995 between Steven C. Dixon
and Chesapeake Energy Corporation. Incorporated herein by reference
to Exhibit 10.2.4 to Registrant's quarterly report on Form 10-Q for
the quarter ended September 30, 1995.
10.2.5+ -- Employment Agreement dated as of July 1, 1995 between J. Mark Lester
and Chesapeake Energy Corporation. Incorporated herein by reference
to Exhibit 10.2.5 to Registrant's quarterly report on Form 10-Q for
the quarter ended September 30, 1995.
10.2.6+ -- Employment Agreement dated as of July 1, 1995 between Henry J. Hood
and Chesapeake Energy Corporation. Incorporated herein by reference
to Exhibit 10.2.6 to Registrant's quarterly report on Form 10-Q for
the quarter ended September 30, 1995.
10.2.7+ -- Employment Agreement dated as of May 1, 1995 between Ronald A.
Lefaive and Chesapeake Energy Corporation. Incorporated herein by
reference to Exhibit 10.2.7 to Registrant's quarterly report on Form
10-Q for the quarter ended September 30, 1995.
10.2.8+* -- Employment Agreement dated as of July 1, 1995 between Martha A.
Burger and Chesapeake Operating, Inc.
</TABLE>
57
<PAGE> 59
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<C> <S>
10.3+ -- Form of Indemnity Agreement for officers and directors of Registrant
and its subsidiaries. Incorporated herein by reference to Exhibit
10.30 to Registrant's registration statement on Form S-1 (No.
33-55600).
10.9 -- Indemnity and Stock Registration Agreement, as amended by First
Amendment (Revised) thereto, dated as of February 12, 1993, and as
amended by Second Amendment thereto dated as of October 20, 1995,
among Chesapeake Energy Corporation, Chesapeake Operating, Inc.,
Chesapeake Investments, TLW Investments, Inc., et al. Incorporated
herein by reference to Exhibit 10.35 to Registrant's annual report on
Form 10-K for the year ended June 30, 1993 and Exhibit 10.4.1 to
Registrant's quarterly report on Form 10-Q for the quarter ended
December 31, 1995.
10.10 -- Partnership Agreement of Chesapeake Exploration Limited Partnership
dated December 27, 1994 between Chesapeake Energy Corporation and
Chesapeake Operating, Inc. Incorporated herein by reference to
Exhibit 10.10 to Registrant's registration statement on Form S-4 (No.
33-93718).
11* -- Statement re computation of per share earnings.
21 -- Subsidiaries of Registrant. Incorporated herein by reference to
Exhibit 21 to Registrant's quarterly report on Form 10-Q for the
quarter ended December 31, 1995.
23.1* -- Consent of Coopers & Lybrand L.L.P.
23.2* -- Consent of Price Waterhouse LLP
23.3* -- Consent of Williamson Petroleum Consultants, Inc.
27* -- Financial Data Schedule
</TABLE>
- ---------------
* Filed herewith.
+ Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
During the quarter ended June 30, 1996, the Company filed a Current Report
on Form 8-K dated April 30, 1996 (filed on May 15, 1996) reporting the
acquisition of interest in certain producing and nonproducing oil and gas
properties from Amerada Hess Corporation. Form 8-K/A was filed July 15, 1996 to
add financial information to such Current Report.
58
<PAGE> 60
INDEX TO CHESAPEAKE EXPLORATION LIMITED PARTNERSHIP
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants for the Year Ended June 30, 1996.................... 60
Report of Independent Accountants for the Years Ended June 30, 1995 and 1994.......... 61
Balance Sheets at June 30, 1996 and June 30, 1995..................................... 62
Statements of Income for the Years Ended June 30, 1996, 1995, and 1994................ 63
Statements of Partners' Capital for the Years Ended June 30, 1996, 1995, and 1994..... 64
Statements of Cash Flows for the Years Ended June 30, 1996, 1995, and 1994............ 65
Notes to Financial Statements......................................................... 66
</TABLE>
59
<PAGE> 61
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
60
<PAGE> 62
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
61
<PAGE> 63
CHESAPEAKE EXPLORATION LIMITED PARTNERSHIP
(A WHOLLY-OWNED PARTNERSHIP OF CHESAPEAKE ENERGY CORPORATION)
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
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 $182,238
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
62
<PAGE> 64
CHESAPEAKE EXPLORATION LIMITED PARTNERSHIP
(A WHOLLY-OWNED PARTNERSHIP OF CHESAPEAKE ENERGY CORPORATION)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------
1996 1995 1994
-------- ------- -------
($ 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.
63
<PAGE> 65
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 $86,439
======= ====== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
64
<PAGE> 66
CHESAPEAKE EXPLORATION LIMITED PARTNERSHIP
(A WHOLLY-OWNED PARTNERSHIP OF CHESAPEAKE ENERGY CORPORATION)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------
1996 1995 1994
--------- --------- --------
($ 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.
65
<PAGE> 67
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.
66
<PAGE> 68
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.
67
<PAGE> 69
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 $120 million principal amount of 9.125% Senior Notes due
2006, issued April 9, 1996. In addition, the CEX partnership interests have been
pledged as collateral under the 12% Senior Notes.
4. RELATED PARTY TRANSACTIONS
CEX has significant transactions with COI, CEC, CGDC and other affiliated
companies included in the CEC consolidated group, including:
COI as operator for CEX:
(a) acquires oil and gas properties,
(b) drills and equips wells,
(c) operates the majority of CEX's wells,
(d) sells interests in proved undeveloped properties to third parties,
and
68
<PAGE> 70
CHESAPEAKE EXPLORATION LIMITED PARTNERSHIP
(A WHOLLY-OWNED PARTNERSHIP OF CHESAPEAKE ENERGY CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(e) contracts services from affiliated entities in the CEC
consolidated group and from third parties on behalf of CEX.
Capitalized costs associated with these transactions are reflected in the
balance sheet as oil and gas properties and unevaluated properties for each
period presented. Production expenses and taxes included in the statement of
operations for each of the periods presented reflect expenses billed by COI to
CEX for operations. Allocated general and administrative expenses reflect
amounts allocated to CEX by COI.
The Company makes periodic advances (and contributions) to CEX.
The transactions included in the following intercompany balances are
summarized as follows:
<TABLE>
<CAPTION>
OTHER
COI CEC CGDC SUBSIDIARIES
--------- -------- -------- ------------
($ 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>
69
<PAGE> 71
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
70
<PAGE> 72
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
-------- --------
<S> <C> <C>
($ IN THOUSANDS)
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 $1,574,000 of interest during the years ended June 30, 1996 and
1995 on significant investments in unproved properties that are not being
currently depreciated, depleted, or amortized and on which exploration or
development activities are in progress. CEX will continue to evaluate its
unevaluated properties; however, the timing of the ultimate evaluation and
disposition of the properties has not been determined.
71
<PAGE> 73
CHESAPEAKE EXPLORATION LIMITED PARTNERSHIP
(A WHOLLY-OWNED PARTNERSHIP OF CHESAPEAKE ENERGY CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Costs Incurred in Oil and Gas Acquisition, Exploration and Development
Costs incurred in oil and gas property acquisition, exploration and
development activities which have been capitalized are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30,
---------------------------------
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
($ IN THOUSANDS)
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
72
<PAGE> 74
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
73
<PAGE> 75
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>
74
<PAGE> 76
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
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 Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ---------------------------- ------------------
<C> <S> <C>
/s/ AUBREY K. McCLENDON Chairman of the Board, Chief September 30, 1996
- --------------------------------------------- Executive Officer and
Aubrey K. McClendon Director (Principal
Executive Officer)
/s/ TOM L. WARD President, Chief Operating September 30, 1996
- --------------------------------------------- Officer and Director
Tom L. Ward (Principal Executive
Officer)
/s/ MARCUS C. ROWLAND Vice President -- Finance September 30, 1996
- --------------------------------------------- and Chief Financial
Marcus C. Rowland Officer (Principal
Financial Officer)
/s/ RONALD A. LEFAIVE Controller (Principal September 30, 1996
- --------------------------------------------- Accounting Officer)
Ronald A. Lefaive
/s/ EDGAR F. HEIZER, JR. Director September 30, 1996
- ---------------------------------------------
Edgar F. Heizer, Jr.
/s/ BREENE M. KERR Director September 30, 1996
- ---------------------------------------------
Breene M. Kerr
/s/ SHANNON T. SELF Director September 30, 1996
- ---------------------------------------------
Shannon T. Self
/s/ FREDERICK B. WHITTEMORE Director September 30, 1996
- ---------------------------------------------
Frederick B. Whittemore
/s/ WALTER C. WILSON Director September 30, 1996
- ---------------------------------------------
Walter C. Wilson
</TABLE>
75
<PAGE> 77
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- ---------- ----------- ----------
<C> <S> <C>
3.1 -- Registrant's Certificate of Incorporation. Incorporated herein by
reference to Exhibit 3.1 to Registrant's quarterly report on Form
10-Q for the quarter ended December 31, 1995.
3.2 -- Registrant's Bylaws. Incorporated herein by reference to Exhibit 3.2
to Registrant's registration statement on Form S-1 (No. 33-55600).
4.1* -- Second Amended and Restated Credit Agreement dated as of September
20, 1996, by and among Chesapeake Energy Corporation, Chesapeake
Exploration Limited Partnership, an Oklahoma Limited Partnership and
Union Bank of California, N.A., as agent and the lenders from time to
time parties hereto.
4.2 -- Indenture dated as of March 31, 1994, as amended by First
Supplemental Indenture dated May 9, 1994, Second Supplemental
Indenture dated as of August 31, 1994 and Third Supplemental
Indenture dated December 27, 1994, among Chesapeake Energy
Corporation, its subsidiaries signatory thereto as Subsidiary
Guarantors and United States Trust Company of New York, as Trustee.
Incorporated herein by reference to Exhibits 4.2 and 4.2(a) to
Registrant's registration statement on Form S-4 (No. 33-78218)
Exhibit 4.2.1 to Registrant's quarterly report on Form 10-Q for the
quarter ended September 30, 1994 and Exhibit 4.2.1 to Registrant's
annual report on Form 10-K for the year ended June 30, 1995.
4.3 -- Indenture dated as of May 15, 1995 among Chesapeake Energy
Corporation, its subsidiaries signatory thereto as Subsidiary
Guarantors and United States Trust Company of New York, as Trustee.
Incorporated herein by reference to Exhibit 4.3 to Registrant's
registration statement on Form S-4 (No. 33-93718).
4.4 -- Indenture dated April 1, 1996 among Chesapeake Energy Corporation,
its subsidiaries signatory thereto as Subsidiary Guarantors and
United States Trust Company of New York, as Trustee. Incorporated
herein by reference to Exhibit 4.6 to Registrant's registration
statement on Form S-3 Registration Statement (No. 333-1588)
4.5 -- Agreement to furnish copies of unfiled long-term debt instruments.
Incorporated herein by reference to Exhibit 4.3 to Registrant's
annual report on Form 10-K for the year ended June 30, 1993.
4.7 -- Pledge Agreement dated as of March 31, 1994, as amended by First
Amendment to Pledge Agreement dated as of August 31, 1994 and Second
Amendment to Pledge Agreement dated as of December 27, 1994, among
Chesapeake Energy Corporation, Chesapeake Operating, Inc., Lindsay
Oil Field Supply, Inc. and United States Trust Company of New York.
Incorporated herein by reference to Exhibit B to Indenture filed as
Exhibit 4.2 to Registrant's registration statement on Form S-4 (No.
33-78218), Exhibit 4.7.1 Registrant's quarterly report on Form 10-Q
for the quarter ended December 31, 1995, and to Exhibit 4.7.1 to
Registrant's annual report on Form 10-K for the year ended June 30,
1995.
4.8 -- Stock Registration Agreement dated May 21, 1992 between Chesapeake
Energy Corporation and various lenders, as amended by First Amendment
thereto dated May 26, 1992. Incorporated herein by reference to
Exhibits 10.26.1 and 10.26.2 to Registrant's registration statement
on Form S-1 (No. 33-55600).
10.1.1+ -- Registrant's 1992 Incentive Stock Option Plan. Incorporated herein by
reference to Exhibit 10.1.1 to Registrant's registration statement on
Form S-4 (No. 33-93718).
10.1.2+* -- Registrant's 1992 Nonstatutory Stock Option Plan.
</TABLE>
<PAGE> 78
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- ---------- ----------- ----------
<C> <S> <C>
10.1.3+ -- Registrant's 1994 Stock Option Plan. Incorporated herein by reference
to Exhibit 99 to Registrant's registration statement on Form S-8 (No.
33-88196).
10.2.1+ -- Employment Agreement dated as of July 1, 1995 between Aubrey K.
McClendon and Chesapeake Energy Corporation. Incorporated herein by
reference to Exhibit 10.2.1 to Registrant's quarterly report on Form
10-Q for the quarter ended September 30, 1995.
10.2.2+ -- Employment Agreement dated as of July 1, 1995 between Tom L. Ward and
Chesapeake Energy Corporation. Incorporated herein by reference to
Exhibit 10.2.2 to Registrant's quarterly report on Form 10-Q for the
quarter ended September 30, 1995.
10.2.3+ -- Employment Agreement dated as of March 1, 1995 between Marcus C.
Rowland and Chesapeake Energy Corporation. Incorporated herein by
reference to Exhibit 10.2.3 to Registrant's quarterly report on Form
10-Q for the quarter ended September 30, 1995.
10.2.4+ -- Employment Agreement dated as of July 1, 1995 between Steven C. Dixon
and Chesapeake Energy Corporation. Incorporated herein by reference
to Exhibit 10.2.4 to Registrant's quarterly report on Form 10-Q for
the quarter ended September 30, 1995.
10.2.5+ -- Employment Agreement dated as of July 1, 1995 between J. Mark Lester
and Chesapeake Energy Corporation. Incorporated herein by reference
to Exhibit 10.2.5 to Registrant's quarterly report on Form 10-Q for
the quarter ended September 30, 1995.
10.2.6+ -- Employment Agreement dated as of July 1, 1995 between Henry J. Hood
and Chesapeake Energy Corporation. Incorporated herein by reference
to Exhibit 10.2.6 to Registrant's quarterly report on Form 10-Q for
the quarter ended September 30, 1995.
10.2.7+ -- Employment Agreement dated as of May 1, 1995 between Ronald A.
Lefaive and Chesapeake Energy Corporation. Incorporated herein by
reference to Exhibit 10.2.7 to Registrant's quarterly report on Form
10-Q for the quarter ended September 30, 1995.
10.2.8+* -- Employment Agreement dated as of July 1, 1995 between Martha A.
Burger and Chesapeake Operating, Inc.
10.3+ -- Form of Indemnity Agreement for officers and directors of Registrant
and its subsidiaries. Incorporated herein by reference to Exhibit
10.30 to Registrant's registration statement on Form S-1 (No.
33-55600).
10.9 -- Indemnity and Stock Registration Agreement, as amended by First
Amendment (Revised) thereto, dated as of February 12, 1993, and as
amended by Second Amendment thereto dated as of October 20, 1995,
among Chesapeake Energy Corporation, Chesapeake Operating, Inc.,
Chesapeake Investments, TLW Investments, Inc., et al. Incorporated
herein by reference to Exhibit 10.35 to Registrant's annual report on
Form 10-K for the year ended June 30, 1993 and Exhibit 10.4.1 to
Registrant's quarterly report on Form 10-Q for the quarter ended
December 31, 1995.
10.10 -- Partnership Agreement of Chesapeake Exploration Limited Partnership
dated December 27, 1994 between Chesapeake Energy Corporation and
Chesapeake Operating, Inc. Incorporated herein by reference to
Exhibit 10.10 to Registrant's registration statement on Form S-4 (No.
33-93718).
11* -- Statement re computation of per share earnings.
</TABLE>
<PAGE> 79
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- ---------- ----------- ----------
<C> <S> <C>
21 -- Subsidiaries of Registrant. Incorporated herein by reference to
Exhibit 21 to Registrant's quarterly report on Form 10-Q for the
quarter ended December 31, 1995.
23.1* -- Consent of Coopers & Lybrand L.L.P.
23.2* -- Consent of Price Waterhouse LLP
23.3* -- Consent of Williamson Petroleum Consultants, Inc.
27* -- Financial Data Schedule
</TABLE>
- ---------------
* Filed herewith.
+ Management contract or compensatory plan or arrangement.
<PAGE> 1
EXHIBIT 4.1
EXECUTION
SECOND AMENDED AND RESTATED CREDIT AGREEMENT
BY AND AMONG
CHESAPEAKE EXPLORATION LIMITED PARTNERSHIP,
CHESAPEAKE ENERGY CORPORATION
and
UNION BANK OF CALIFORNIA, N.A.,
As Agent
and THE LENDERS
FROM TIME TO TIME PARTIES HERETO
DATED AS OF SEPTEMBER 20, 1996
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE ONE
DEFINITIONAL PROVISIONS . . . . . . . . . . . 1
-----------------------
1.01. Specific Definitions of Terms . . . . . . . . . . . . . . 1
-----------------------------
1.02. General Definitional Provisions . . . . . . . . . . . . . 16
-------------------------------
ARTICLE TWO
REVOLVING LOANS; CONVERSION TO TERM LOAN . . . . . . 17
----------------------------------------
2.01. Revolving Commitment . . . . . . . . . . . . . . . . . . . 17
--------------------
2.02. Manner of Borrowing . . . . . . . . . . . . . . . . . . . 17
-------------------
(a) Notice of Borrowing . . . . . . . . . . . . . . . . 17
-------------------
(b) Funding . . . . . . . . . . . . . . . . . . . . . . 17
-------
2.03. Revolving Commitment Fee . . . . . . . . . . . . . . . . . 18
------------------------
2.04. Optional Reduction of Revolving Commitment . . . . . . . . 18
------------------------------------------
2.05. Reductions to Borrowing Base . . . . . . . . . . . . . . . 18
----------------------------
2.06. Use of Proceeds . . . . . . . . . . . . . . . . . . . . . 19
---------------
2.07. Conversion of Revolving Loans . . . . . . . . . . . . . . 19
-----------------------------
ARTICLE THREE
NOTE AND NOTE PAYMENTS . . . . . . . . . . . 19
----------------------
3.01. Revolving Notes . . . . . . . . . . . . . . . . . . . . . 19
---------------
3.02. Term Notes . . . . . . . . . . . . . . . . . . . . . . . . 19
----------
3.03. Interest Rates . . . . . . . . . . . . . . . . . . . . . . 20
--------------
(a) Rate Elections . . . . . . . . . . . . . . . . . . . 20
--------------
(b) Adjusted Base Rate . . . . . . . . . . . . . . . . . 21
------------------
(c) Adjusted Fixed Rate . . . . . . . . . . . . . . . . . 21
-------------------
(d) Default Rate . . . . . . . . . . . . . . . . . . . . 21
------------
(e) Recapture Rate . . . . . . . . . . . . . . . . . . . 21
--------------
3.04. Principal Payments . . . . . . . . . . . . . . . . . . . . 21
------------------
(a) Revolving Notes . . . . . . . . . . . . . . . . . . 21
---------------
(b) Term Note . . . . . . . . . . . . . . . . . . . . . 21
---------
3.05. Prepayments . . . . . . . . . . . . . . . . . . . . . . . 22
-----------
(a) Revolving Commitment Exceeded . . . . . . . . . . . 22
-----------------------------
(b) Borrowing Base Exceeded . . . . . . . . . . . . . . 22
-----------------------
(c) Optional Prepayments . . . . . . . . . . . . . . . 22
--------------------
3.06. Borrowing Base Determination . . . . . . . . . . . . . . . 22
----------------------------
(a) Initial Borrowing Base . . . . . . . . . . . . . . 22
----------------------
(b) Periodic Redetermination of Borrowing Base . . . . 23
------------------------------------------
3.07. Payment of Interest . . . . . . . . . . . . . . . . . . . 23
-------------------
3.08. Calculation of Interest . . . . . . . . . . . . . . . . . 23
-----------------------
3.09. Manner and Application of Payments . . . . . . . . . . . . 24
----------------------------------
3.10. Sharing of Set-Offs and Other Payments . . . . . . . . . . 24
--------------------------------------
3.11. Facility Fee . . . . . . . . . . . . . . . . . . . . . . . 25
------------
3.12. Agent Fees . . . . . . . . . . . . . . . . . . . . . . . . 25
----------
3.13. Production Proceeds . . . . . . . . . . . . . . . . . . . 25
-------------------
3.14. Increased Cost of Fixed Rate Portions . . . . . . . . . . 26
-------------------------------------
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C> <C>
3.15. Availability . . . . . . . . . . . . . . . . . . . . . . . 27
------------
3.16. Funding Losses . . . . . . . . . . . . . . . . . . . . . . 27
--------------
3.17. Reimbursable Taxes . . . . . . . . . . . . . . . . . . . . 28
------------------
3.18. Capital Reimbursement . . . . . . . . . . . . . . . . . . 29
---------------------
ARTICLE FOUR
------------
CONDITIONS PRECEDENT . . . . . . . . . . . 30
--------------------
4.01. Initial Advance . . . . . . . . . . . . . . . . . . . . . 30
---------------
(a) Revolving Notes . . . . . . . . . . . . . . . . . . 30
---------------
(b) Guaranty Agreements . . . . . . . . . . . . . . . . 30
-------------------
(c) Affiliate Subordination Agreement . . . . . . . . . 30
---------------------------------
(d) Opinion of Borrower's Counsel . . . . . . . . . . . 30
-----------------------------
(e) Notice of Borrowing . . . . . . . . . . . . . . . . 30
-------------------
(f) Resolutions . . . . . . . . . . . . . . . . . . . . 30
-----------
(g) Incumbency . . . . . . . . . . . . . . . . . . . . 30
----------
(h) Official Certificates . . . . . . . . . . . . . . . 31
---------------------
(i) Articles of Incorporation, Partnership Agreement,
-------------------------------------------------
Charter and Bylaws . . . . . . . . . . . . . . . . 31
------------------
(j) Security Documents . . . . . . . . . . . . . . . . 31
------------------
(k) Title and Perfection . . . . . . . . . . . . . . . 32
--------------------
(l) Contracts . . . . . . . . . . . . . . . . . . . . . 32
---------
(m) Indenture Documents . . . . . . . . . . . . . . 32
-----------------------
(n) Insurance . . . . . . . . . . . . . . . . . . . . . 32
---------
(o) Litigation Reports . . . . . . . . . . . . . . . . 32
------------------
(p) Approvals . . . . . . . . . . . . . . . . . . . . . 32
---------
(q) Compliance With Laws . . . . . . . . . . . . . . . 32
--------------------
(r) Payments of Financing Fees . . . . . . . . . . . . 32
--------------------------
(s) Additional Information . . . . . . . . . . . . . . 32
----------------------
4.02. All Advances . . . . . . . . . . . . . . . . . . . . . . . 32
------------
(a) No Defaults . . . . . . . . . . . . . . . . . . . . 33
-----------
(b) Compliance with Agreement . . . . . . . . . . . . . 33
-------------------------
(c) No Material Adverse Change . . . . . . . . . . . . 33
--------------------------
(d) Representations and Warranties . . . . . . . . . . 33
------------------------------
(e) Debtor Laws . . . . . . . . . . . . . . . . . . . . 33
-----------
(f) Notice of Borrowing . . . . . . . . . . . . . . . . 33
-------------------
4.03. Title and Letters-in-Lieu . . . . . . . . . . . . . . . . 33
-------------------------
5.01. Organization and Good Standing . . . . . . . . . . . . . . 33
------------------------------
5.02. Authorization and Power . . . . . . . . . . . . . . . . . 34
-----------------------
5.03. No Conflicts or Consents . . . . . . . . . . . . . . . . . 34
------------------------
5.04. Enforceable Obligations . . . . . . . . . . . . . . . . . 34
-----------------------
5.05. No Liens . . . . . . . . . . . . . . . . . . . . . . . . . 35
--------
5.06. Financial Condition . . . . . . . . . . . . . . . . . . . 35
-------------------
(a) CEC . . . . . . . . . . . . . . . . . . . . . . . . 35
---
(b) Solvency . . . . . . . . . . . . . . . . . . . . . 35
--------
5.07. Full Disclosure . . . . . . . . . . . . . . . . . . . . . 35
---------------
5.08. No Default . . . . . . . . . . . . . . . . . . . . . . . . 35
----------
5.09. Material Agreements . . . . . . . . . . . . . . . . . . . 35
-------------------
5.10. No Litigation . . . . . . . . . . . . . . . . . . . . . . 36
-------------
5.11. Use of Proceeds; Margin Stock . . . . . . . . . . . . . . 36
-----------------------------
5.12. No Financing of Regulated Corporate Takeovers . . . . . . 36
---------------------------------------------
5.13. Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . 36
-----
5.14. Principal Offices . . . . . . . . . . . . . . . . . . . . 36
-----------------
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C> <C> <C>
5.15. ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . 37
-----
5.16. Compliance With Law . . . . . . . . . . . . . . . . . . . 37
-------------------
5.17. Government Regulation . . . . . . . . . . . . . . . . . . 37
---------------------
5.18. Insider . . . . . . . . . . . . . . . . . . . . . . . . . 37
-------
5.19. Environmental Matters . . . . . . . . . . . . . . . . . . 37
---------------------
5.20. Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . 38
------------
5.21. Survival of Representations and Warranties . . . . . . . . 38
------------------------------------------
ARTICLE SIX
AFFIRMATIVE COVENANTS . . . . . . . . . . . 38
---------------------
6.01. Financial Statements, Reports and Documents . . . . . . . 38
-------------------------------------------
(a) Quarterly Statements . . . . . . . . . . . . . . . 38
--------------------
(b) Annual Statements . . . . . . . . . . . . . . . . . 38
-----------------
(c) Audit Reports . . . . . . . . . . . . . . . . . . . 39
-------------
(d) Compliance Certificate . . . . . . . . . . . . . . 39
----------------------
(e) Accountants' Certificates . . . . . . . . . . . . . 39
-------------------------
(f) Engineering and Production Information . . . . . . 39
--------------------------------------
(g) Insurance Report . . . . . . . . . . . . . . . . . 40
----------------
(h) Litigation Reports . . . . . . . . . . . . . . . . 40
------------------
(i) Environmental Notices . . . . . . . . . . . . . . . 40
---------------------
(j) Aging of Payables and Receivables . . . . . . . . . 41
---------------------------------
(k) SEC and Other Reports . . . . . . . . . . . . . . . 41
---------------------
(l) Gas Balancing; Hedging Contracts . . . . . . . . . 41
--------------------------------
(m) Other Information . . . . . . . . . . . . . . . . . 41
-----------------
(n) Reports to Trustee . . . . . . . . . . . . . . . . 41
------------------
(o) Notice of Permitted Payment . . . . . . . . . . . . 41
---------------------------
6.02. Payment of Taxes and Other Indebtedness . . . . . . . . . 42
---------------------------------------
6.03. Maintenance of Existence and Rights; Conduct of Business . 42
--------------------------------------------------------
6.04. Notice of Default . . . . . . . . . . . . . . . . . . . . 42
-----------------
6.05. Other Notices . . . . . . . . . . . . . . . . . . . . . . 42
-------------
6.06. Compliance with Loan Documents . . . . . . . . . . . . . . 42
------------------------------
6.07. Compliance with Material Agreements . . . . . . . . . . . 42
-----------------------------------
6.08. Operations and Properties . . . . . . . . . . . . . . . . 43
-------------------------
6.09. Books and Records . . . . . . . . . . . . . . . . . . . . 43
-----------------
6.10. Compliance with Law . . . . . . . . . . . . . . . . . . . 43
-------------------
6.11. Insurance . . . . . . . . . . . . . . . . . . . . . . . . 43
---------
6.12. ERISA Compliance . . . . . . . . . . . . . . . . . . . . . 43
----------------
6.13. Further Assurances . . . . . . . . . . . . . . . . . . . . 44
------------------
6.14. Subordination of Affiliate Obligations . . . . . . . . . . 44
--------------------------------------
6.15. Maintenance of Corporate Identity . . . . . . . . . . . . 44
---------------------------------
6.16. Liens on Oil and Gas Properties Acquired in the Future . . 45
------------------------------------------------------
6.17. Clearing Account . . . . . . . . . . . . . . . . . . . . . 45
----------------
6.18. Hedging Contracts . . . . . . . . . . . . . . . . . . . . 45
-----------------
6.19. Use of Distributions . . . . . . . . . . . . . . . . . . . 45
--------------------
ARTICLE SEVEN
- -------------
NEGATIVE COVENANTS . . . . . . . . . . . . 46
------------------
7.01. Limitation on Indebtedness . . . . . . . . . . . . . . . . 46
--------------------------
7.02. Negative Pledge . . . . . . . . . . . . . . . . . . . . . 46
---------------
</TABLE>
iii
<PAGE> 5
<TABLE>
<S> <C>
7.03. Limitation on Dividends and Restricted Payments . . . . . 47
-----------------------------------------------
7.04. Limitation on Investments . . . . . . . . . . . . . . . . 47
-------------------------
7.05. Affiliate Transactions . . . . . . . . . . . . . . . . . . 47
----------------------
7.06. Limitation on Sale of Assets . . . . . . . . . . . . . . . 47
----------------------------
7.07. Fiscal Year and Accounting Method . . . . . . . . . . . . 48
---------------------------------
7.08. Liquidations, Mergers, Consolidations and Acquisitions of
---------------------------------------------------------
Substantial Assets . . . . . . . . . . . . . . . . . . . . 48
------------------
7.09. No Amendments of Charter or Bylaws . . . . . . . . . . . . 48
----------------------------------
7.10. Environmental Matters . . . . . . . . . . . . . . . . . . 48
---------------------
7.11. Indenture Notes . . . . . . . . . . . . . . . . . . . . . 49
---------------
7.12. Permitted Transfers . . . . . . . . . . . . . . . . . . . 49
-------------------
7.13. Weighted-Average Payable Maturity . . . . . . . . . . . . 49
---------------------------------
ARTICLE EIGHT
EVENTS OF DEFAULT . . . . . . . . . . . . 49
-----------------
8.01. Events of Default . . . . . . . . . . . . . . . . . . . . 49
-----------------
8.02. Lenders' Knowledge of Events of Default . . . . . . . . . 52
---------------------------------------
8.03. Remedies Upon Event of Default . . . . . . . . . . . . . . 52
------------------------------
8.04. Performance by Agent . . . . . . . . . . . . . . . . . . . 52
--------------------
ARTICLE NINE
AGENT . . . . . . . . . . . . . . . 53
-----
9.01. Appointment and Authority . . . . . . . . . . . . . . . . 53
-------------------------
9.02. Exculpation, Agent's Reliance, Etc. . . . . . . . . . . . 53
----------------------------------
9.03. Lenders' Credit Decisions . . . . . . . . . . . . . . . . 54
-------------------------
9.04. INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . 54
---------------
9.05. Rights as Lender . . . . . . . . . . . . . . . . . . . . . 55
----------------
9.06. Investments . . . . . . . . . . . . . . . . . . . . . . . 55
-----------
9.07. Benefit of Article Nine . . . . . . . . . . . . . . . . . 55
-----------------------
9.08. Resignation . . . . . . . . . . . . . . . . . . . . . . . 55
-----------
ARTICLE TEN
MISCELLANEOUS . . . . . . . . . . . . . 56
-------------
10.01. Strict Compliance; Independence of Covenants . . . . . . . 56
--------------------------------------------
10.02. Amendments and Waivers . . . . . . . . . . . . . . . . . . 56
----------------------
10.03. Accounting Reports . . . . . . . . . . . . . . . . . . . . 57
------------------
10.04. No Implied Waivers of Rights . . . . . . . . . . . . . . . 57
----------------------------
10.05. Payment of Expenses: Indemnity . . . . . . . . . . . . . . 57
------------------------------
10.06. Notices . . . . . . . . . . . . . . . . . . . . . . . . . 59
-------
10.07. GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . . 59
-------------
10.08. CHOICE OF FORUM AND JURISDICTION . . . . . . . . . . . . . 60
--------------------------------
10.09. Invalid Provisions . . . . . . . . . . . . . . . . . . . . 60
------------------
10.10. Limitation on Interest . . . . . . . . . . . . . . . . . . 60
----------------------
10.11. Offset . . . . . . . . . . . . . . . . . . . . . . . . . . 61
------
10.12. Binding Effect . . . . . . . . . . . . . . . . . . . . . . 62
--------------
10.13. Table of Contents and Headings . . . . . . . . . . . . . . 62
------------------------------
10.14. Survival . . . . . . . . . . . . . . . . . . . . . . . . . 62
--------
10.15. Assignments and Participations . . . . . . . . . . . . . . 62
------------------------------
10.16. Benefit . . . . . . . . . . . . . . . . . . . . . . . . . 64
-------
10.17. Multiple Counterparts . . . . . . . . . . . . . . . . . . 64
---------------------
</TABLE>
iv
<PAGE> 6
<TABLE>
<S> <C>
10.18. Article 15.10(b) . . . . . . . . . . . . . . . . . . . . . 64
----------------
10.19. WRITTEN LOAN AGREEMENT . . . . . . . . . . . . . . . . . . 64
----------------------
10.20. Restatement . . . . . . . . . . . . . . . . . . . . . . . 65
-----------
Schedule 1 - Schedule of Lenders
Exhibit A - Notice of Borrowing
Exhibit B - Form of Revolving Note
Exhibit C - Form of Term Note
Exhibit D - Opinion of Borrower's Counsel
Exhibit E - Insurance Schedule
Exhibit F - Principal Office of Borrower and CEC
Exhibit G - Environmental Matters
Exhibit H - Indebtedness
Exhibit I - Oil and Gas Properties
Exhibit J - Form of Guaranty Agreement
Exhibit K - Form of Subordination Agreement
Exhibit L - Subsidiaries of CEC
Exhibit M - Rate Election
Exhibit N - Assignment and Acceptance
Exhibit O - Agreement to be Bound
</TABLE>
v
<PAGE> 7
SECOND AMENDED AND RESTATED CREDIT AGREEMENT
This Second Amended and Restated Credit Agreement (this "Agreement") is
entered into as of September 20, 1996, among Chesapeake Exploration Limited
Partnership, an Oklahoma limited partnership (the "Borrower"), Chesapeake
Energy Corporation, a Delaware corporation ("CEC"), Union Bank of California,
N.A. (individually, "Union Bank" and as agent for Lenders, "Agent") and the
Lenders referred to below.
W I T N E S S E T H:
WHEREAS, Borrower, CEC as guarantor and Union Bank entered into that
certain Amended and Restated Credit Agreement dated as of March 22, 1994, as
amended by that certain First Amendment to Amended and Restated Credit
Agreement dated as of December 27, 1994, that certain Second Amendment to
Amended and Restated Credit Agreement dated as of May 25, 1995, that certain
Third Amendment to Amended and Restated Credit Agreement dated as of February
5, 1996, that certain Agreement dated as of March 7, 1996, that certain
Agreement dated as of March 8, 1996, that certain Agreement dated as of March
27, 1996, and that certain Fourth Amendment to Amended and Restated Credit
Agreement dated as of April 2, 1996 (as so amended, the "Original Agreement")
for the purposes and consideration therein expressed, pursuant to which Union
Bank became obligated to make loans to Borrower as therein provided; and
WHEREAS, Borrower has requested, and Agent and Lenders have agreed, to
amend and restate the Original Agreement in its entirety;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements contained herein and in the Original Agreement, in
consideration of the loans which may hereafter be made by Lenders to Borrower,
and for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto do hereby agree as follows:
ARTICLE ONE
DEFINITIONAL PROVISIONS
1.01. Specific Definitions of Terms. For purposes of this Agreement,
unless the context otherwise requires, the following terms shall have the
respective meanings assigned to them in this Article One or in the Section or
recital referred to below:
"Adjusted Base Rate" has the meaning given it in Section 3.03(b).
1
<PAGE> 8
"Adjusted Fixed Rate" has the meaning given it in Section 3.03(c).
"Advance" means the disbursement by a Lender of a sum or sums loaned
pursuant to this Agreement.
"Affiliate" means any Person which, directly or indirectly, controls, is
controlled by or is under common control with the relevant Person. For the
purposes of this definition, "control" (including, with correlative meanings,
the terms "controlled by" and "under common control with"), as used with
respect to any Person, shall mean a member of the board of directors, a partner
or an officer of such Person, or any other Person with possession, directly or
indirectly, of the power to direct or cause the direction of the management and
policies of such Person, through the ownership (of record, beneficially, as
trustee or by proxy) of Voting Shares, through a management contract, or
otherwise. Any Person owning or controlling directly or indirectly 5% or more
of the Voting Shares, or other equity interests of another Person shall be
deemed to be an Affiliate of such Person.
"Agent" means Union Bank, as Agent hereunder, and its successors in such
capacity.
"Agreement" means this Agreement as the same may be amended, modified,
increased, supplemented and/or restated from time to time hereafter.
"Annual Reserve Report" has the meaning set forth in Section 6.01(f).
"Applicable Lending Office" means, with respect to each Lender, such
Lender's Domestic Lending Office in the case of the Base Rate Portion of an
Advance and such Lender's Eurodollar Lending Office in the case of the Fixed
Rate Portion of an Advance.
"Applicable Margin" means (i) with respect to the Base Rate Portion of
the Loans, zero and (ii) with respect to the Fixed Rate Portion of the Loans,
(A) one and three-eighths of one percent (1.375%) per annum, if the Borrowing
Base Ratio in effect on the date of determination is less than 50%, (B) one and
five-eighths of one percent (1.625%) per annum, if the Borrowing Base Ratio in
effect on the date of determination is equal to or greater than 50% but less
than 75%, and (C) one and seven-eighths of one percent (1.875%) per annum, if
the Borrowing Base Ratio in effect on the date of determination is equal to or
greater than 75%.
"Base Rate" means, as of any particular date, the greater of (i) the
Reference Rate per annum in effect on such day, and (ii) the Federal Funds Rate
plus one-half of one percent (.50%) per annum. Each change in the Base Rate
shall become effective
2
<PAGE> 9
without prior notice to Borrower automatically as of the opening of business on
the date of such change in the Base Rate. The Base Rate shall in no event,
however, exceed the Highest Lawful Rate. "Federal Funds Rate" means, for any
period, a fluctuating interest rate per annum equal for each day during such
period to the weighted average of the rates on overnight federal funds
transactions with members of the Federal Reserve System arranged by federal
funds brokers, as published for such day (or, if such day is not a Business
Day, for the next preceding Business Day) by The Federal Reserve Bank of
Dallas, or, if such rate is not so published for any day which is a Business
Day, the average of the quotations for such day on such transactions received
by the Agent from three federal funds brokers of recognized standing selected
by it. "Reference Rate" means the variable rate of interest per annum
established from time to time by Agent as its "reference rate" (which rate of
interest may not be the lowest rate charged on similar loans).
"Base Rate Portion" means that portion of the unpaid principal balance
of the Loans which is not made up of Fixed Rate Portions.
"Borrower" means Chesapeake Exploration Limited Partnership, an Oklahoma
limited partnership, whose general partner is Chesapeake Operating Inc., an
Oklahoma corporation.
"Borrowing Base", at any time, means the remainder of (i) the Borrowing
Base as determined in Section 3.06(b), minus (ii) the sum of all Reductions
since the last Redetermination Date. The initial Borrowing Base shall be as
set forth in Section 3.06(a).
"Borrowing Base Ratio" means the percentage determined on a daily basis
by dividing (a) the unpaid aggregate principal amount of the Loans at the end
of such day by (b) the Borrowing Base at the end of such day.
"Business Day" means every day upon which commercial banks are open for
business in Dallas, Texas and Los Angeles, California. Any Business Day in any
way relating to Fixed Rate Portions (such as the day on which an Interest
Period begins or ends) must also be a day on which, in the judgment of Agent,
significant transactions in dollars are carried out in the interbank
eurocurrency market.
"CEC" means Chesapeake Energy Corporation, a Delaware corporation.
"Chief Executive Officer" means the chief executive officer of CEC
unless stated otherwise.
"Chief Financial Officer" means the chief financial officer of CEC
unless stated otherwise.
3
<PAGE> 10
"Clearing Account" means the account to be established by Borrower with
the Agent as set forth in Section 6.17.
"Closing Date" means the date the initial Advances under the Revolving
Loans are made.
"Collateral" means all present and future tangible or intangible
property or rights in which the Lenders (or the Agent for the benefit of
Lenders) are to be granted a security interest (whether perfected or
enforceable or not), including without limitation the items set forth in
Section 4.01(j), together with any other collateral now or hereafter securing
payment of all or any part of the Obligations.
"Companies" means CEC, Borrower and all other present and future
Subsidiaries of CEC (except, however, Chesapeake Gas Development Corporation
and Chesapeake Energy Marketing, Inc.).
"Consolidated" refers to the consolidation of any Person, in accordance
with GAAP, with its properly consolidated subsidiaries. References herein to a
Person's Consolidated financial statements, financial position, financial
condition, liabilities, etc. refer to the consolidated financial statements,
financial position, financial condition, liabilities, etc. of such Person and
its properly consolidated subsidiaries.
"Contested Claim" means any Tax, Indebtedness or other claim or
liability, (i) the validity or amount of which is being contested by
appropriate proceedings, (ii) for which adequate reserves, as required by GAAP,
have been established and (iii) with respect to which any right to execute upon
or sell any assets of Borrower has not matured or has been and continues to be
effectively enjoined, superseded or stayed.
"Controlled Group" means (i) a controlled group of corporations as
defined in Section 1563(a) of the Internal Revenue Code or (ii) a group of
trades or businesses under common control, as defined in Section 414(c) of the
Internal Revenue Code, of which Borrower is a part or becomes a part.
"Conversion" has the meaning stated in Section 2.07.
"Debtor Laws" means all applicable liquidation, conservatorship,
bankruptcy, moratorium, arrangement, receivership, insolvency, reorganization
or similar Laws or general equitable principles from time to time in effect
affecting the Rights of creditors generally.
"Default" means any of the events specified in Section 8.01, regardless
of whether there shall have occurred any passage of time or giving of notice or
both that would be necessary in order to constitute such event an Event of
Default.
4
<PAGE> 11
"Default Rate" means at the time in question the lesser of (i) five
percent (5.0%) per annum plus the Base Rate then in effect or (ii) the Highest
Lawful Rate; provided that, with respect to any Fixed Rate Portion with an
Interest Period extending beyond the date such Fixed Rate Portion becomes due
and payable, "Default Rate" shall mean the lesser of (i) five percent (5.0%)
per annum plus the related Fixed Rate or (ii) the Highest Lawful Rate.
"Dividends" means, in respect of any corporation, cash distributions or
any other distributions on, or in respect of, any shares of capital stock of
such corporation, except for distributions made solely in shares of stock of
the same class and, in respect of any partnership, cash distributions or any
other distributions on, or in respect of, any partnership interest in such
partnership.
"Dollars" and the sign "$" refer to currency of the United States of
America.
"Domestic Lending Office" means, with respect to any Lender, the office
of such Lender specified as its "Domestic Lending Office" below its name on
Schedule 1 hereto, or such other office as such Lender may from time to time
specify to Borrower and Agent.
"Environmental Laws" means (i) the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended by the Superfund Amendments
and Reauthorization Act of 1986, 42 U.S.C.A. Section 9601 et seq., (ii) the
Resource Conservation and Recovery Act, as amended by the Hazardous and Solid
Waste Amendment of 1984, 42 U.S.C.A. Section 6901 et seq., (iii) the Clean Air
Act, 42 U.S.C.A. Section 7401 et seq., (iv) the Clean Water Act of 1977, 33
U.S.C.A. Section 1251 et seq., (v) the Toxic Substances Control Act, 15
U.S.C.A. Section 2601 et seq., and (vi) all other Laws relating to air
pollution, water pollution, noise control and/or the handling, discharge,
disposal or recovery of on-site or off-site hazardous substances or materials,
as each of the foregoing may be amended from time to time.
"Environmental Liability" means any claim, demand, obligation, cause of
action, accusation, allegation, order, violation, damage, injury, judgment,
penalty or fine, cost of enforcement, cost of remedial action or any other cost
or expense whatsoever, including reasonable attorneys' fees and disbursements,
resulting from the violation or alleged violation of any Environmental Law or
the imposition of any Environmental Lien.
"Environmental Lien" means a Lien in favor of a Tribunal or other Person
(i) for any liability under an Environmental Law or (ii) for damages arising
from or costs incurred by such Tribunal or other person in response to a
release or threatened release of
5
<PAGE> 12
hazardous or toxic waste, substance or constituent into the environment.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, together with all presently effective and future regulations issued
pursuant thereto.
"Eurodollar Lending Office" means, with respect to any Lender, the
office of such Lender specified as its "Eurodollar Lending Office" below its
name on Schedule 1 hereto (or, if no such office is specified, its Domestic
Lending Office), or such other office of such Lender as such Lender may from
time to time specify to Borrower and Agent.
"Eurodollar Rate" means, with respect to each particular Fixed Rate
Portion within a Tranche and the related Interest Period, the rate of interest
per annum determined by Agent in accordance with its customary general
practices to be representative of the rates at which deposits of dollars are
offered to Agent at approximately 9:00 a.m. Los Angeles, California time two
Business Days prior to the first day of such Interest Period (by prime banks in
the interbank eurocurrency market which have been selected by Agent in
accordance with its customary general practices) for delivery on the first day
of such Interest Period in an amount equal or comparable to the amount of
Agent's Fixed Rate Portion within such Tranche and for a period of time equal
or comparable to the length of such Interest Period. The Eurodollar Rate
determined by Agent with respect to a particular Fixed Rate Portion shall be
fixed at such rate for the duration of the associated Interest Period. If
Agent is unable so to determine the Eurodollar Rate for any Fixed Rate Portion,
or if the associated Fixed Rate would exceed the Highest Lawful Rate, Borrower
shall be deemed not to have elected such Fixed Rate Portion.
"Event of Default" has the meaning stated in Section 8.01.
"First Indenture Notes" means all of the 12% Senior Notes due 2001 in
the aggregate original principal amount of FORTY-SEVEN MILLION FIVE HUNDRED
THOUSAND DOLLARS ($47,500,000) issued by CEC pursuant to the March 31, 1994
Indenture.
"Fiscal quarter" and "fiscal year" refer to the fiscal quarter and
fiscal year of CEC or Borrower respectively.
"Fixed Rate" means, with respect to each particular Fixed Rate Portion
and the associated Eurodollar Rate and Reserve Percentage, the rate per annum
calculated by Agent (rounded upwards, if necessary, to the next higher 0.01%)
determined on a daily basis pursuant to the following formula:
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Fixed Rate =
Eurodollar Rate
---------------------------
100.0% - Reserve Percentage
The Fixed Rate for any Fixed Rate Portion shall change as the Reserve
Percentage changes, but if the Reserve Percentage changes during the Interest
Period for a Fixed Rate Portion, Majority Lenders may, at their option, either
change the Fixed Rate for such Fixed Rate Portion or leave it unchanged for the
duration of such Interest Period.
"Fixed Rate Payment Date" means, with respect to any Fixed Rate Portion:
(i) the day on which the related Interest Period ends (and, if such Interest
Period is three months or longer, the three-month anniversary of the first day
of such Interest Period), and (ii) any day on which past due interest or past
due principal is owed with respect to such Fixed Rate Portion and is unpaid.
If the terms hereof or of the Notes provide that payments of interest or
principal with respect to such Fixed Rate Portion shall be deferred from one
Fixed Rate Payment Date to another day, such other day shall also be a Fixed
Rate Payment Date.
"Fixed Rate Portion" means any portion of the unpaid principal balance
of the Loans which Borrower designates as such in a Rate Election.
"GAAP" means those generally accepted accounting principles and
practices which are recognized as such by the American Institute of Certified
Public Accountants acting through its Accounting Principles Board or by the
Financial Accounting Standards Board or through other appropriate boards or
committees thereof and which are consistently applied for all periods after the
date hereof so as to properly reflect the financial conditions and the results
of operations and changes in financial position, of the Companies, except that
any accounting principle or practice required to be changed by the Accounting
Principles Board or Financial Accounting Standards Board (or other appropriate
board committee of such Boards) in order to continue as a generally accepted
accounting principle or practice may so be changed. In the event of a change
in GAAP, the Loan Documents shall continue to be construed in accordance with
GAAP as in existence on the date hereof; provided, however, Lenders and
Borrower will thereafter negotiate in good faith to revise any affected
covenants to make such covenants consistent with GAAP as then in effect, and,
after any such revision, the Loan Documents will be construed in accordance
with GAAP as then in effect.
"Guaranty" of any Person means any contract, agreement or understanding
of such Person pursuant to which such Person guarantees, or in effect
guarantees, any Indebtedness, obligation, fixed or contingent liability,
dividend or distribution (the "primary obligation") of any other Person (the
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<PAGE> 14
"primary obligor") in any manner, whether directly or indirectly, including
without limitation:
(a) agreements to purchase the primary obligation or any property
constituting security therefor;
(b) agreements to advance or supply funds (i) for the purchase or
payment of the primary obligation, or (ii) to maintain working
capital, equity capital or other balance sheet conditions;
(c) agreements to purchase property, securities or services primarily
for the purpose of assuring the holder of the primary obligation
of the ability of the primary obligor to make payment of the
primary obligation;
(d) letters or agreements commonly known as "comfort" or "keep well"
letters or agreements; or
(e) any other agreements to assure the holder of the primary
obligation of the primary obligor against loss in respect
thereof.
except that "Guaranty" shall not include the endorsement by the Companies in
the ordinary course of business of negotiable instruments or documents for
deposit or collection.
"Highest Lawful Rate" means, with respect to each Lender, the maximum
nonusurious rate of interest that such Lender is permitted under applicable law
to contract for, take, charge, or receive with respect to its Loan. All
determinations herein of the Highest Lawful Rate, or of any interest rate
determined by reference to the Highest Lawful Rate, shall be made separately
for each Lender as appropriate to assure that the Loan Documents are not
construed to obligate any Person to pay interest to any Lender at a rate in
excess of the Highest Lawful Rate applicable to such Lender.
"Incremental Redetermination Date" has the meaning set forth in Section
3.06(b).
"Indebtedness" means, with respect to any Person, all indebtedness,
obligations and liabilities of such Person, including, without limitation and
without duplication, the following:
(a) all liabilities, except deferred taxes, which would be reflected
on a balance sheet of such Person, prepared in accordance with
GAAP;
(b) all obligations of such Person in respect of any Guaranty or
letter of credit;
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<PAGE> 15
(c) all obligations of such Person in respect of any capital lease;
(d) all production payment obligations of such Person whether or not
reflected as a liability; and
(e) all obligations, indebtedness and liabilities secured by any Lien
on any property or assets of any Person;
except that, "Indebtedness" shall not include trade payables incurred in the
ordinary course of business for the purchase of goods or services which are not
outstanding for longer than (i) 90 days past the date of invoice or incurrence
or (ii) 100 days past the date of invoice or incurrence if the Companies have a
written agreement with the vendor or supplier thereof and such written
agreement provides for such extended payment terms.
"Indenture" means any of (i) that certain Indenture entered into among
CEC, the Subsidiary Guarantors (as defined therein) and the Trustee, setting
forth the terms and conditions of the First Indenture Notes issued by CEC and
the guaranties thereof by the Subsidiary Guarantors; (ii) that certain
Indenture entered into among CEC, the Subsidiary Guarantors (as defined
therein) and the Trustee, setting forth the terms and conditions of Second
Indenture Notes issued by CEC and the guaranties thereof by the Subsidiary
Guarantors; or (iii) that certain Indenture entered into among CEC, the
Subsidiary Guarantors (as defined therein) and the Trustee, setting forth the
terms and conditions of the Third Indenture Notes issued by CEC and the
guaranties thereof by the Subsidiary Guarantors.
"Indenture Documents" means one or more of the Indenture, the Indenture
Notes, the Offering Memoranda, the warrant agreements and the purchase
agreement or agreements with the purchasers pursuant to the Offering Memoranda,
and any and all other agreements or documents (and any amendments or
supplements thereto or modifications or restatements thereof) executed or
delivered pursuant to the terms of any Indenture or in connection therewith.
"Indenture Notes" means the First Indenture Notes, the Second Indenture
Notes and the Third Indenture Notes.
"Interest Payment Date" means the last day of each month hereafter,
beginning September 30, 1996.
"Interest Period" means, with respect to each particular Fixed Rate
Portion, a period of 1, 2, 3 or 6 months, as specified in the Rate Election
applicable thereto, beginning on and including the date specified in such Rate
Election (which must be a Business Day), and ending on but not including the
same day of the month as the day on which it began (e.g., a period beginning on
the third day of one month shall end on but not include the third day of
another month), provided that each Interest Period
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<PAGE> 16
which would otherwise end on a day which is not a Business Day shall end on the
next succeeding Business Day (unless such next succeeding Business Day is the
first Business Day of a calendar month, in which case such Interest Period
shall end on the immediately preceding Business Day). No Interest Period may
be elected which would extend past the date on which any Note is due and
payable in full.
"Internal Revenue Code" means the United States Internal Revenue Code of
1986, as amended, and regulations promulgated thereunder and any successor
statutes.
"Investment" in any Person means any investment, whether by means of
share purchase, loan, advance, extension of credit, capital contribution or
otherwise, in or to such Person, the Guaranty of any Indebtedness of such
Person or the subordination of any claim against such Person to other
Indebtedness of such Person; except that "Investment" shall not include (i)
trade receivables incurred in the ordinary course of business for the sale of
goods or services nor (ii) the purchase of oil and gas properties in the
ordinary course of business.
"Laws" means all applicable statutes, laws, ordinances, regulations,
orders, judgments, writs, injunctions or decrees of any state, commonwealth,
nation, territory, possession, province, county, parish, town, township,
village, municipality or Tribunal; and "Law" means each of the foregoing.
"Lenders" means each signatory hereto (other than Borrower and CEC),
including Union Bank in its capacity as a lender hereunder rather than as
Agent, and the successors of each as holder of a Note.
"Lien" means any lien, mortgage, security interest, tax lien, pledge,
encumbrance, Environmental Lien, conditional sale or title retention
arrangement, or any other interest in property designed to secure the repayment
of a liability, whether arising by agreement or under any Law, or otherwise.
"Litigation" means any proceeding, claim, lawsuit and/or investigation
conducted or threatened by or before any Tribunal.
"Litigation Reports" means the reports delivered pursuant to Section
4.01(o) and Section 6.01(h).
"Loan Documents" means: (a) this Agreement, (b) the Notes, (c) the
guaranty agreement provided for in Section 4.01(b), (d) the Subordination
Agreement, (e) the Security Documents executed by Borrower in connection with
the Original Agreement and this Agreement and (f) any and all other agreements
or documents (and any amendments or supplements thereto or modifications or
restatements thereof) executed or delivered pursuant to the terms of this
Agreement or in connection herewith or therewith.
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"Loans" mean the Revolving Loans and the Term Loans, and each,
individually, a Loan.
"Majority Lenders" means at the time in question one or more Lenders
whose aggregate Percentage Shares equal or exceed sixty-six and two-thirds
percent (66 2/3%).
"Material Adverse Effect" means any circumstance or event which (i)
could reasonably be expected to have any material adverse effect whatsoever
upon the validity, performance, perfection or enforceability of any Loan
Documents, (ii) is material and adverse to the financial condition or business
operations of Borrower or of CEC, individually or with its Consolidated
Subsidiaries, (iii) could reasonably be expected to materially impair the
ability of Borrower or CEC to fulfill their respective obligations under the
Loan Documents, or (iv) may result in or cause a Default or an Event of
Default.
"Monthly Reduction Amount" shall be an amount equal to One Million Seven
Hundred Fifty Thousand Dollars ($1,750,000), which amount shall be periodically
redetermined by Majority Lenders on each Redetermination Date.
"Monthly Reduction Date" shall mean October 5, 1996 and the fifth day of
each month thereafter.
"Mortgages" has the meaning stated in Section 4.01(j).
"Notes" means the Revolving Notes, the Term Notes, and all renewals and
extensions thereof and/or replacements or substitutions therefor.
"Notice of Borrowing" has the meaning stated in Section 2.02(a).
"Obligations" means all present and future indebtedness, obligations and
liabilities of Borrower to Agent or any Lender, and all renewals and extensions
thereof, or any part thereof, arising pursuant to this Agreement or any other
Loan Document, or represented by the Notes, and all interest accruing thereon
(including, without limitation, interest which, but for the filing of a
petition in bankruptcy with respect to Borrower, would accrue on such
Obligations), and attorneys fees incurred in the enforcement or collection
thereof, regardless of whether such indebtedness, obligations and liabilities
are direct, indirect, fixed, contingent, joint, several or joint and several.
"Offering Memoranda" means (i) the final offering memorandum dated March
31, 1994 with respect to the First Indenture Notes and warrants to be issued in
connection with the First Indenture Notes; (ii) the final offering memorandum
dated May 18, 1995 with respect to the Second Indenture Notes; and (iii) the
final offering memorandum dated April 1, 1996 with respect to the Third
Indenture Notes.
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<PAGE> 18
"Oil and Gas Properties" means the properties set forth on Exhibit "I",
and as from time to time supplemented as set forth in Section 6.16.
"PBGC" shall mean the Pension Benefit Guaranty Corporation, and any
successor to all or any of the Pension Benefit Guaranty Corporation's functions
under ERISA.
"Percentage Share" means, with respect to any Lender (a) when used in
Section 2.01, in any Notice of Borrowing, or when no Loans are outstanding
hereunder, the percentage set forth opposite such Lender's name on Schedule 1
hereto, and (b) when used otherwise, the percentage equal to the unpaid
principal balance of such Lender's Loan at the time in question divided by the
aggregate unpaid principal balance of all Loans at such time.
"Permitted Indebtedness" has the meaning stated in Section 7.01.
"Permitted Liens" means: (i) Liens granted to the Lenders (or the Agent
for the benefit of Lenders) to secure the Obligations, (ii) Liens described on
Exhibit "H" and renewals and extensions thereof so long as the Indebtedness
secured thereby and the interest rate payable thereon is not increased or the
maturity shortened, (iii) pledges or deposits made to secure payment of
worker's compensation insurance (or to participate in any fund in connection
with worker's compensation insurance), unemployment insurance, pensions or
social security programs, (iv) Liens imposed by mandatory provisions of Law
such as carrier's, materialmen's, mechanics', warehousemen's, landlord's and
other like Liens arising in the ordinary course of business, securing
Indebtedness not yet due or which qualifies as a Contested Claim, (v) Liens for
Taxes, if the same are not yet due and payable or qualify as a Contested Claim,
(vi) Liens arising in the ordinary course of business from pledges or deposits
to secure public or statutory obligations, deposits to secure (or in lieu of)
surety, stay, appeal or customs bonds and deposits to secure the payment of
Taxes, (vii) encumbrances consisting of zoning restrictions, easements or other
restrictions on the use of real property, provided that such items do not
materially impair the use of such property for the purposes intended, and none
of which are violated by existing or proposed structures or land use, (viii)
Liens arising under operating agreements governing operation of the Oil and Gas
Properties, (ix) Liens on stock of, or partnership interests in, Subsidiaries
of CEC securing Indebtedness permitted by Section 7.01(iv), and (x) Liens on
assets or property of a Company other than CEC or Borrower securing
Indebtedness permitted by Section 7.01(v).
"Permitted Payment" means any of the following in cash or Temporary Cash
Investments (i) payment on a current basis (not later than 90 days after the
incurrence thereof) of amounts owed to Chesapeake Operating Inc., as operator,
in respect to leasehold operating costs and drilling and development costs
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<PAGE> 19
under an approved AFE, in an amount not in excess of the actual out of pocket
costs incurred by Chesapeake Operating Inc. for such costs, (ii) reimbursement
for production and severance taxes paid by another Company with respect to
Borrower's production, (iii) reimbursement on a current basis (not later than
90 days after the incurrence thereof) to another Company of accounts payable
and similar obligations of Borrower arising in the ordinary course of business
of Borrower which have been paid or incurred by such Company on behalf of
Borrower, (iv) any dividends or any other distributions by Borrower or any
Subsidiary of Borrower or any Restricted Subsidiary (as defined in the
Indenture) (any one of which being hereinafter referred to as a "Payor Party")
on its Capital Stock (as defined in the Indenture) or on any other interest or
participation in the Payor Party, (v) payment of any Indebtedness (as defined
in the Indenture) owed by a Payor Party to CEC or any Restricted Subsidiary (as
defined in the Indenture) of CEC, (vi) any loan or advance from a Payor Party
to CEC or to any Restricted Subsidiary (as defined in the Indenture) of CEC
that directly or indirectly owns a majority ownership interest in such Payor
Party (any one of which being hereinafter referred to as a "Parent"), or (vii)
transfer of property from a Payor Party to its Parent.
"Person" includes any individual, corporation, limited liability
company, joint venture, general or limited partnership, trust, organization,
association, other entity or Tribunal.
"Plan" means an employee benefit plan as defined in Section 3(3) of
ERISA maintained by CEC or a member of the Controlled Group for its employees.
"Rate Election" has the meaning given to it in Section 3.03(a).
"Redemptions" means, in respect of any corporation, any and all funds,
cash, property or other payments made in respect of the redemption, repurchase
or acquisition of any class of capital stock or other securities of such
corporation, unless such stock or other securities are redeemed or acquired
through the exchange of such stock or other securities with stock or other
securities of the same class.
"Redetermination Date" has the meaning stated in Section 3.06(b).
"Reductions" means the reductions set forth in Section 2.05(a) and
Section 2.05(b).
"Regulation D", "Regulation G", "Regulation T", "Regulation U" and
"Regulation X" mean Regulation D, G, T, U or X, as the case may be, of the
Board of Governors of the Federal Reserve System, or any successor or other
regulation hereafter promulgated by said Board to replace the prior Regulation
D, G, T, U or X and having substantially the same function.
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"Reportable Event" has the meaning stated in Title IV of ERISA.
"Reserve Percentage" means, on any day with respect to each particular
Fixed Rate Portion in a Tranche, the maximum reserve requirement, as determined
by Agent (including without limitation any basic, supplemental, marginal,
emergency or similar reserves), expressed as a percentage and rounded to the
next higher 0.01%, which would then apply to any bank in the New York Federal
Reserve System under Regulation D with respect to "Eurocurrency liabilities"
(as such term is defined in Regulation D). If such reserve requirement shall
change after the date hereof, the Reserve Percentage shall be automatically
increased or decreased, as the case may be, from time to time as of the
effective time of each such change in such reserve requirement.
"Restricted Payments" means any Dividend or other distribution, any
loan, Investment, advance, payment or prepayment of Indebtedness, obligation,
or debt, purchase of assets or Indebtedness, obligation, or debt, transfer of
assets or other payment by Borrower to any other Company or to any Affiliate.
"Revolver Maturity Date" means the earlier of (a) April 30, 2001 or (b)
the Conversion date.
"Revolving Commitment", at any time, means $75,000,000, less the sum of
all reductions pursuant to Section 2.04. The face amounts of the Revolving
Notes totalling an aggregate sum of $125,000,000 have been established as an
administrative convenience and do not commit any Lender to advance funds
hereunder under any circumstances in excess of such Lender's Percentage Share
of $75,000,000, as each Lender's commitment to advance funds hereunder is
determined by reference to such Lender's Percentage Share of the lesser of (i)
the Revolving Commitment or (ii) the Borrowing Base from time to time in
effect.
"Revolving Commitment Fee" has the meaning stated in Section 2.03.
"Revolving Commitment Period" means the period beginning on the date
hereof and ending on the earlier of (i) the Revolver Maturity Date or (ii) the
date on which the Revolving Commitment is terminated or reduced to zero.
"Revolving Loans" has the meaning stated in Section 2.01.
"Revolving Note" means the promissory note from Borrower to a Lender
delivered pursuant to Section 3.01, and all renewals and extensions thereof and
substitutions and replacements therefor.
"Rights" means rights, remedies, powers and privileges.
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"Second Indenture Notes" means all of the 10.5% Senior Notes due 2002 in
the aggregate principal amount of NINETY MILLION DOLLARS ($90,000,000.00)
issued by CEC pursuant to the May 25, 1995 Indenture.
"Secretary" includes any Assistant Secretary.
"Security Documents" has the meaning set forth in Section 4.01(j).
"Subsidiary" means any corporation or partnership of which 50% or more
of the Voting Shares is owned or which is otherwise controlled, directly or
indirectly through one or more intermediaries, by a Person, and "Subsidiaries"
means all of such corporations or partnerships.
"Subordination Agreement" has the meaning set forth in Section 4.01(c).
"Taxes" means all taxes, assessments, fees, levies, imposts, duties,
penalties, deductions, withholdings or other charges of any nature whatsoever
from time to time or at any time imposed by any Law or any Tribunal.
"Temporary Cash Investment" means any Investment in (i) direct
obligations of the USA or any agency thereof, or obligations fully guaranteed
by the USA or any agency thereof (including indirect investments in such
obligations through repurchase agreements with commercial banks or nationally
recognized investment banks), provided that such obligations mature within 30
days of the date of acquisition thereof, (ii) commercial paper rated in the
highest grade by two or more national credit rating agencies and maturing not
more than 30 days from the date of acquisition thereof, (iii) time deposits
with, and certificates of deposit and banker's acceptances issued by, Agent,
any Lender or any USA commercial bank having capital, surplus and undivided
profits aggregating at least $250,000,000, (iv) money market funds acceptable
to Agent in its sole and absolute discretion, and (v) commercial paper maturing
not more than 30 days from the acquisition thereof issued by Agent or any
Lender.
"Term Loans" means the Loans to which the Revolving Loans may be
converted pursuant to Section 2.07.
"Term Notes" means the promissory notes from Borrower to the Lenders
delivered pursuant to Section 3.02 and all renewals and extensions thereof and
substitutions and replacements therefor.
"Third Indenture Notes" means all of the Senior Notes due 2006 in the
aggregate principal amount of ONE HUNDRED TWENTY MILLION DOLLARS
($120,000,000.00) issued by CEC pursuant to the April 1, 1996 Indenture.
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"Tranche" has the meaning set forth in Section 3.03(a).
"Tribunal" means any government, any arbitration panel, any court or any
governmental department, commission, board, bureau, agency or instrumentality
of the USA or any state, province, commonwealth, nation, territory, possession,
county, parish, town, township, village or municipality, whether now or
hereafter constituted and/or existing.
"Trustee" means the trustee under the Indenture.
"UCC" means the Uniform Commercial Code of the State of Texas and of any
other state to the extent Texas Law requires application of the same.
"USA" means the United States of America.
"Voting Shares" of any corporation means shares of any class or classes
(however designated) having ordinary voting power for the election of at least
a majority of the members of the Board of Directors (or other governing bodies)
of such corporation.
1.02. General Definitional Provisions.
(a) All terms defined in Article One shall have the meanings
specified therein when used in this Agreement, the Notes or any other
Loan Documents, certificate, report or other document made or delivered
pursuant to this Agreement or the other Loan Documents, unless in any
case the context states or implies otherwise.
(b) All terms used herein in the singular shall include the
plural, and vice versa.
(c) The words "hereof", "herein", "hereunder" and "hereto" and
similar terms when used in this Agreement refer to this Agreement as a
whole and not to any particular provision of this Agreement.
(d) All accounting terms not specifically defined herein shall
be construed in accordance with GAAP.
(e) The terms "Section" and "Article" refer to Sections and
Articles of this Agreement, and the term "Exhibit" refers to Exhibits
attached hereto and any amendments to such Exhibits, unless in any case
the context states or implies otherwise.
(f) Each determination by Agent or any Lender of amounts to be
paid under Sections 3.14 through 3.18 shall, in the absence of manifest
error, be conclusive and binding.
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ARTICLE TWO
REVOLVING LOANS; CONVERSION TO TERM LOAN
2.01. Revolving Commitment. Subject to the terms and conditions of
this Agreement, each Lender severally agrees to lend to Borrower, on a
revolving basis in one or more Advances from time to time during the Revolving
Commitment Period, the amounts requested by Borrower in each Notice of
Borrowing (the aggregate amount of such Advances made by a Lender being called
such Lender's "Revolving Loan"); provided, however, that (i) no Lender shall
be obligated to make Advances in excess of such Lender's Percentage Share of
the lesser of the Borrowing Base or the Revolving Commitment then in effect,
(ii) the aggregate amount of Advances outstanding at any time with respect to
the Revolving Loans shall never exceed the lesser of the Borrowing Base or the
Revolving Commitment in effect at such time, and (iii) the aggregate amount of
all Advances requested of Lenders, except Advances of the remaining unborrowed
Revolving Commitment, shall be in an amount of $1,000,000 or more in increments
of $100,000.
2.02. Manner of Borrowing.
(a) Notice of Borrowing. Not less than the time required for
notice by Section 4.02(f), prior to the requested date of any Advance,
Borrower shall give the Agent written notice of each requested Advance
in the form of Exhibit "A" (a "Notice of Borrowing"), after which Agent
shall give each Lender prompt notice thereof.
(b) Funding. Upon fulfillment of all applicable conditions
with respect to an Advance, each Lender shall before 10:00 a.m. (Los
Angeles, California time) on the date requested promptly remit for the
account of its Applicable Lending Office to Agent at Agent's office in
Los Angeles, California the amount of such Lender's Advance in
immediately available funds, and upon receipt of such funds, unless to
its actual knowledge any conditions precedent to such Advances have been
neither met nor waived as provided herein, Agent shall promptly make the
Advances available to Borrower at Borrower's operating account at the
principal office of Agent. Unless Agent shall have received prompt
notice from a Lender that such Lender will not make available to Agent
such Lender's Advance, Agent may in its discretion assume that such
Lender has made such Advance available to Agent in accordance with this
section and Agent may if it chooses, in reliance upon such assumption,
make such Advance available to Borrower. If and to the extent such
Lender shall not so make its Advance available to Agent, such Lender and
Borrower severally agree to pay or repay to Agent within three days
after demand the amount of
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such Advance together with interest thereon, for each day from the date
such amount is made available to Borrower until the date such amount is
paid or repaid to Agent, at the interest rate applicable at the time to
the other Advances made on such date. The failure of any Lender to make
any Advance to be made by it hereunder shall not relieve any other
Lender of its obligation hereunder, if any, to make its Advance, but no
Lender shall be responsible for the failure of any other Lender to make
any Advance to be made by such other Lender.
2.03. Revolving Commitment Fee. Borrower agrees to pay to the Agent
for the account of each Lender in arrears on the last Business Day of each
March, June, September, and December during the Revolving Commitment Period,
beginning September 30, 1996, a commitment fee (the "Revolving Commitment Fee")
computed on a daily basis at the following rates, as applicable on such day,
times such Lender's Percentage Share of the entire unused portion of the lesser
of the Borrowing Base or the Revolving Commitment then in effect during the
three month period for which payment is made (calculated and computed on such
per annum rate on the basis of the actual days elapsed):
(a) For each day on which the aggregate amount of Advances
outstanding is less than, or equal to, TEN MILLION DOLLARS
($10,000,000), three-eighths of one percent (0.375%) per annum; and
(b) For each day on which the aggregate amount of Advances
outstanding is greater than TEN MILLION DOLLARS ($10,000,000),
one-fourth of one percent (0.25%) per annum.
2.04. Optional Reduction of Revolving Commitment. Borrower may at any
time, or from time to time, upon not less than five (5) Business Days' prior
written notice to Agent and each Lender, reduce or terminate the Revolving
Commitment; provided, however, that (i) each reduction must be in the amount of
$100,000 or more in increments of $100,000 and (ii) each reduction must be
accompanied by a prepayment of the Revolving Notes in the amount by which the
principal balance exceeds the reduced Revolving Commitment plus all then
accrued but unpaid interest. Borrower shall have no right to reinstate the
amount of any reduction without the prior written consent of Lenders.
2.05. Reductions to Borrowing Base.
(a) The Borrowing Base shall be reduced on each Monthly
Reduction Date by the Monthly Reduction Amount.
(b) The Borrowing Base shall be additionally reduced by an
amount equal to the proceeds (net of reasonable transaction costs) of
all sales or transfers of Collateral made by Borrower pursuant to
Section 7.06(v) or for which consent has been obtained from Majority
Lenders, each such
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reduction to be made on the last day of the second calendar month
following consummation of a sale or transfer made pursuant to Section
7.06(v) and at the time of consummation of a sale or transfer for which
consent has been obtained from Majority Lenders.
2.06. Use of Proceeds. The proceeds of the initial Advances shall be
used to refinance all outstanding Indebtedness of Borrower owing to Union Bank
under the Original Agreement. The proceeds of all other Advances shall be used
to provide funds for the acquisition and development of oil and gas properties
and for working capital needs.
2.07. Conversion of Revolving Loans. If at any time the aggregate
outstanding principal amount of the Revolving Notes ever exceeds the Borrowing
Base and Borrower fails to cure such excess as provided in Section 3.05(b) of
this Agreement, Lenders may at their option, either: (a) declare such failure
to be an Event of Default; or (b) convert the Revolving Loans (the
"Conversion") into term loans in the aggregate principal amount of the
aggregate outstanding balance of the Advances under the Revolving Loans as of
the date of Conversion with monthly principal and interest payments thereon
based upon an amortization schedule acceptable to Lenders. In such event, on
the final day of the Revolving Commitment Period, Borrower will execute and
deliver to each Lender a Term Note in the amount of such Lender's Revolving
Note. Upon delivery of a Term Note to a Lender, such Lender's Revolving Note
shall be marked "Renewed" and such Lender shall retain the Revolving Note, so
marked, as additional evidence of the Indebtedness of Borrower hereunder.
ARTICLE THREE
NOTE AND NOTE PAYMENTS
3.01. Revolving Notes. The Advances made by each Lender under Section
2.01 shall be evidenced by promissory notes of Borrower in the form of Exhibit
"B", which Revolving Notes shall (i) be dated the date hereof (or a later date,
in case of renewal, substitute or replacement Revolving Notes), (ii) be in the
principal amount of such Lender's Percentage Share of the Revolving Commitment,
(iii) bear interest in accordance with Section 3.03 and (iv) be payable to the
order of such Lender. Notwithstanding the aggregate principal amount of the
Revolving Notes as stated on the faces thereof, the aggregate amount of
principal actually owing on such Revolving Notes at any given time and the
amount on which interest is calculated shall be the aggregate of all Advances
theretofore made to Borrower, less all payments of principal theretofore
actually received by the holders thereof.
3.02. Term Notes. The Conversion, if it occurs, shall be evidenced by
Term Notes of Borrower payable to Lenders in the
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form of Exhibit "C" and each such Term Note shall (i) be dated as of the date
of the Conversion (or a later date in case of any renewal, substitute or
replacement Term Note), (ii) be in the aggregate principal amount of the
outstanding principal balance of the Revolving Notes as of the time of the
Conversion, (iii) bear interest in accordance with Section 3.03 and (iv) be
payable to the order of each Lender.
3.03. Interest Rates.
(a) Rate Elections. Borrower may from time to time designate
all or any portion of the Loans (including any yet to be made Advances
which are to be made prior to or at the beginning of the designated
Interest Period but excluding any portions of the Loans which are
required to be repaid prior to the end of the designated Interest
Period) as a "Tranche", which term refers to a set of Fixed Rate
Portions with identical Interest Periods and with each Lender
participating in such Tranche in accordance with its Percentage Share.
Without the consent of Majority Lenders, Borrower may make no such
election during the continuance of a Default and Borrower may make such
an election with respect to an already existing Fixed Rate Portion only
if such election will take effect at or after the termination of the
Interest Period applicable to such already existing Fixed Rate Portion.
Each election by Borrower of a Tranche shall:
(i) Be made in writing in the form and substance of the
"Rate Election" attached hereto as Exhibit "M," duly completed;
(ii) Specify the amount of the Loans which Borrower
desires to designate as such Tranche, the first day of the
Interest Period which is to apply thereto, and the length of such
Interest Period; and
(iii) Be received by Agent not later than 10:00 a.m., Los
Angeles, California time, on the third Business Day preceding the
first day of the specified Interest Period.
Promptly after receiving any such election (herein called a "Rate
Election") which meets the requirements of this section, Agent shall
notify each Lender thereof. Each Rate Election shall be irrevocable.
Borrower may make no Rate Election which does not specify an Interest
Period complying with the definition of "Interest Period" in Section
1.01, and the amount of the Tranche elected in any Rate Election shall
be $1,000,000 or more in increments of $100,000. Upon the termination
of each Interest Period the portion of each Loan theretofore
constituting the related Fixed Rate Portion shall, unless the subject of
a new Rate Election then taking effect, automatically become a part of
the Base Rate Portion
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of such Loan and become subject to all provisions of the Loan Documents
governing the Base Rate Portion. Borrower shall have no more than six
(6) Tranches in effect at any time.
(b) Adjusted Base Rate. The Base Rate Portion of the Loans
outstanding from day to day shall bear interest at the rate per annum
from day to day equal to the lesser of (i) the Base Rate plus the
Applicable Margin (the "Adjusted Base Rate"), or (ii) the Highest Lawful
Rate.
(c) Adjusted Fixed Rate. Each Fixed Rate Portion of the Loans
outstanding from day to day shall bear interest on each day during the
related Interest Period at the lesser of (i) the related Fixed Rate in
effect as of such day for such Fixed Rate Portion plus the Applicable
Margin (the "Adjusted Fixed Rate") or (ii) the Highest Lawful Rate.
(d) Default Rate. After maturity, which shall include, without
limitation, the maturity of any principal required by Section 3.04 or
Section 3.05, committed to be prepaid pursuant to Section 2.04, stated
or by acceleration, the principal of and overdue interest on the Notes
and all other Obligations shall bear interest, to the extent permitted
by Law, from such maturity until the date paid at a rate per annum from
day to day equal to the Default Rate.
(e) Recapture Rate. Notwithstanding the foregoing, if at any
time the Adjusted Base Rate, the Adjusted Fixed Rate or the Default Rate
(without reference to the Highest Lawful Rate limitation) exceeds the
Highest Lawful Rate, and therefore, the rate of interest on any Note is
limited to the Highest Lawful Rate, then any subsequent reductions in
the Adjusted Base Rate or the Adjusted Fixed Rate shall not reduce the
rate of interest on any Note below the Highest Lawful Rate until the
total amount of interest accrued on such Note equals the amount of
interest which would have accrued thereon if the Adjusted Base Rate or
the Adjusted Fixed Rate (without reference to the Highest Lawful Rate
limitation), as the case may be, had at all times been in effect, but in
no event shall the aggregate interest payable or paid during the period
beginning on the date the initial Advance is made until the Obligations
are paid in full exceed the amount equal to interest at the Highest
Lawful Rate.
3.04. Principal Payments.
(a) Revolving Notes. The unpaid principal balance of each
Revolving Note shall be due and payable on the Revolver Maturity Date.
(b) Term Note. Upon Conversion pursuant to Section 2.07, the
amortization schedule for each Term Note
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shall be determined by Lenders in their sole discretion, based upon
Lenders' evaluation of the Collateral and other factors Lenders deem
appropriate, at the time of Conversion.
3.05. Prepayments.
(a) Revolving Commitment Exceeded. If at any time the
outstanding principal balance of the Revolving Loans ever exceeds the
Revolving Commitment then in effect, then Borrower shall immediately
repay the amount of such excess, together with accrued interest thereon,
so as to reduce the outstanding principal balance of the Revolving Loans
to the Revolving Commitment.
(b) Borrowing Base Exceeded. If at any time the aggregate
outstanding principal balance of the Revolving Notes ever exceeds the
Borrowing Base then in effect, then Borrower shall within 30 days
thereof, either (i) repay the amount of such excess, together with
accrued interest thereon, so as to reduce the aggregate outstanding
principal balance of such Revolving Notes to the Borrowing Base or (ii)
grant Lenders first perfected Liens in and to such additional Collateral
satisfactory to Majority Lenders, pursuant to documentation in form and
substance satisfactory to Majority Lenders to increase the Borrowing
Base to an amount at least equal to the then aggregate outstanding
principal balance of the Revolving Notes. In the event Borrower fails
to comply with this Section 3.05(b), then, upon the expiration of the 30
day period set forth in the first sentence in this Section 3.05(b), such
failure shall constitute an Event of Default unless Lenders implement
the Conversion pursuant to Section 2.07.
(c) Optional Prepayments. Borrower may, without premium or
penalty, upon one Business Day's prior written notice to each Lender,
prepay the principal of any Note then outstanding, in whole or in part,
at par at any time or from time to time; provided, however that each
prepayment of less than the full outstanding principal balance of such
Note shall be in the amount of $100,000 or more in increments of
$100,000. A notice of prepayment shall constitute a binding obligation
of Borrower to make a prepayment on the date stated therein.
3.06. Borrowing Base Determination. The Borrowing Base shall be
determined as follows:
(a) Initial Borrowing Base. At any time during the period
from the date of execution hereof until the first Redetermination Date
occurring thereafter, the amount of the Borrowing Base shall be an
amount equal to $75,000,000 minus the sum of all Reductions to such
date. Notwithstanding the foregoing, until such time as Agent has
received evidence of good and defensible title to the Oil and Gas
Properties
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pursuant to Section 4.03, the amount of the Borrowing Base as of any
date shall be an amount equal to $35,000,000 minus the sum of all
Reductions to such date.
(b) Periodic Redetermination of Borrowing Base. The Borrowing
Base will be redetermined by each May 1 and November 1 hereafter during
the Revolving Commitment Period commencing November 1, 1996 (each such
redetermination date being referred to as a "Redetermination Date").
The Borrowing Base shall be redetermined by Agent and approved by
Majority Lenders, provided that all Lenders must approve any increase in
the Borrowing Base. In addition, either Majority Lenders or Borrower
may at any time request additional Borrowing Base redeterminations.
Each such request made by Borrower shall be accompanied by the
information set forth in Section 6.01(f) and by an engineering fee, for
the sole account of Agent, in the amount set forth in that certain
letter agreement dated of even date herewith between Agent and Borrower
(the date of each such incremental redetermination shall be referred to
as an "Incremental Redetermination Date"). Each month, Borrower shall
furnish or cause to be furnished to each Lender all information and data
pertaining to the Collateral as Agent may reasonably request or that is
currently being delivered, all in form and substance reasonably
satisfactory to Agent. On each Redetermination Date or Incremental
Redetermination Date, or as soon thereafter as reasonably practicable,
Agent shall send written notice to Borrower of the new Borrowing Base.
The amount set forth in such notice shall be effective on the date of
such notice, as the amount of the Borrowing Base (subject to Reductions)
for all purposes of this Agreement, until notice of a new Borrowing Base
determined in accordance with the provisions of this Agreement is given
by Agent to Borrower. The amount of the Borrowing Base shall always be
determined by Lenders in their sole and absolute discretion based upon
such factors as Lenders, in their sole and absolute discretion, shall
determine to be appropriate.
3.07. Payment of Interest. Interest on the Base Rate Portion of each
Note shall be payable on each Interest Payment Date. Interest on the Fixed
Rate Portion of each Note shall be payable on each Fixed Rate Payment Date. On
the date of the Conversion, Borrower will pay Agent for the account of each
Lender to whom such payment is owed upon the Conversion, all accrued but unpaid
interest on each Revolving Note.
3.08. Calculation of Interest. Interest on the Fixed Rate Portion of
each Note shall be calculated on the basis of actual days elapsed and a year of
360 days. All other calculations of interest on each Note shall be made on the
basis of the actual days elapsed in each year consisting of 365 or 366 days, as
appropriate.
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3.09. Manner and Application of Payments. All payments and prepayments
of principal of, and interest on, each Note shall be made by Borrower to the
Agent for the account of each Lender to whom such payment is owed. Each
payment of principal, interest, fees and other obligations must be made to
Agent at or before 10:00 a.m. (Los Angeles, California, time), in federal or
other immediately available funds at 445 South Figueroa Street, Los Angeles,
California 90071. Any payment received after 10:00 a.m. (Los Angeles,
California, time) shall be deemed to have been made on the next succeeding
Business Day. Should any principal of or interest on any Note, or any fee,
become due and payable on a day other than a Business Day, the maturity thereof
shall be extended to the next succeeding Business Day and interest thereon
shall be payable at the then applicable interest rate during such extension.
When Agent collects or receives money on account of the Obligations, Agent
shall distribute all money so collected or received and Lenders shall apply all
such money they receive from Agent, as follows:
(a) first, for the payment of all Obligations which are then
due (and if such money is insufficient to pay all such Obligations,
first to any reimbursements due Agent under Sections 8.04 and 10.05(a)
and then to the partial payment of all other Obligations then due in
proportion to the amounts thereof, or as Lenders shall otherwise agree);
(b) then for the prepayment of amounts owing under the Loan
Documents (other than principal on the Notes) if so specified by
Borrower;
(c) then for the prepayment of principal on the Notes,
together with accrued and unpaid interest on the principal so prepaid;
and
(d) last, for the payment or prepayment of any other
Obligations.
All payments applied to principal or interest on any Note shall be applied
first to any interest then due and payable, then to principal then due and
payable, and last to any prepayment of principal and interest in compliance
with Section 3.05(c). All distributions of amounts described in any of
subsections (b), (c) or (d) above shall be made by Agent pro rata to Agent and
each Lender then owed Obligations described in such subsections in proportion
to all amounts owed to Agent and all Lenders which are described in such
subsections.
3.10. Sharing of Set-Offs and Other Payments. Agent and each Lender
agrees that if it shall, whether through the exercise of rights under Security
Documents or rights of banker's lien, set off, or counterclaim against any
Company or otherwise, obtain payment of a portion of the aggregate Obligations
owed to it which, taking into account all distributions made by Agent under
Section 3.09, causes Agent or such Lender to have received more
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than it would have received had such payment been received by Agent and
distributed pursuant to Section 3.09, then (a) it shall be deemed to have
simultaneously purchased and shall be obligated to purchase interests in the
Obligations as necessary to cause Agent and all Lenders to share all payments
as provided for in Section 3.09, and (b) such other adjustments shall be made
from time to time as shall be equitable to ensure that Agent and all Lenders
share all payments of Obligations as provided in Section 3.09; provided,
however, that nothing herein contained shall in any way affect the right of
Agent or any Lender to obtain payment (whether by exercise of rights of
banker's lien, set-off or counterclaim or otherwise) of indebtedness other than
the Obligations. Borrower expressly consents to the foregoing arrangements and
agrees that any holder of any such interest or other participation in the
Obligations, whether or not acquired pursuant to the foregoing arrangements,
may to the fullest extent permitted by law exercise any and all rights of
banker's lien, set-off, or counterclaim as fully as if such holder were a
holder of the Obligations in the amount of such interest or other
participation. If all or any part of any funds transferred pursuant to this
section is thereafter recovered from the seller under this section which
received the same, the purchase provided for in this section shall be deemed to
have been rescinded to the extent of such recovery, together with interest, if
any, if interest is required pursuant to court order to be paid on account of
the possession of such funds prior to such recovery.
3.11. Facility Fee. Borrower shall pay to Agent for the account of
each Lender, on the date hereof, a facility fee in the amount set forth in
those certain letter agreements dated of even date herewith between each Lender
and Borrower. Borrower further agrees to pay to Agent for the account of each
Lender, on each Redetermination Date, a facility fee in the amount of
three-eighths of one percent (.375%) of the amount, if any, by which the
Borrowing Base determined on such Redetermination Date exceeds the Borrowing
Base determined on the prior Redetermination Date.
3.12. Agent Fees. Borrower will pay to Agent, for its sole account,
agent fees as set forth in the certain letter agreement dated of even date
herewith between Agent and Borrower.
3.13. Production Proceeds. Notwithstanding that, by the terms of the
various Security Documents, Borrower is and will be assigning to Agent for the
benefit of Lenders all of the "Production Proceeds" (as defined therein)
accruing to the property covered thereby, and Agent is entitled to apply the
same as a prepayment on the indebtedness secured thereby, including the Term
Loan, (i) so long as Agent has not requested, pursuant to Section 6.17, that
all purchasers of production remit payments to the Clearing Account, then
Borrower may continue to receive Production Proceeds and (ii) so long as no
Event of Default has occurred which is continuing, Agent shall not apply such
Production Proceeds as a prepayment on the indebtedness secured
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by the Security Documents, including the Term Loan, and so long as no Default
or Event of Default shall have occurred which is continuing, any such
Production Proceeds received by Agent in excess of the amounts of such
indebtedness then due and owing to Lenders shall be paid to Borrower. In no
case shall any failure, whether purposed or inadvertent, by Agent or any Lender
to collect directly any such Production Proceeds constitute in any way a
waiver, remission or release of any of its rights under the Security Documents,
nor shall any release of any Production Proceeds by Agent or any Lender to
Borrower constitute a waiver, remission, or release of any other Production
Proceeds or of any rights of Agent and/or Lenders to collect other Production
Proceeds thereafter.
3.14. Increased Cost of Fixed Rate Portions. If any applicable
domestic or foreign law, treaty, rule or regulation (whether now in effect or
hereinafter enacted or promulgated, including Regulation D) or any
interpretation or administration thereof by any governmental authority charged
with the interpretation or administration thereof (whether or not having the
force of law):
(a) shall change the basis of taxation of payments to any Lender
of any principal, interest, or other amounts attributable to any Fixed
Rate Portion or otherwise due under this Agreement in respect of any
Fixed Rate Portion (other than taxes imposed on the overall net income
of such Lender or any lending office of such Lender by any jurisdiction
in which such Lender or any such lending office is located); or
(b) shall change, impose, modify, apply or deem applicable any
reserve, special deposit or similar requirements in respect of any Fixed
Rate Portion of any Lender (excluding those for which such Lender is
fully compensated pursuant to adjustments made in the definition of
Fixed Rate) or against assets of, deposits with or for the account of,
or credit extended by, such Lender; or
(c) shall impose on any Lender or the interbank eurocurrency
deposit market any other condition affecting any Fixed Rate Portion, the
result of which is to increase the cost to such Lender of funding or
maintaining any Fixed Rate Portion or to reduce the amount of any sum
receivable by any Lender in respect of any Fixed Rate Portion by an
amount deemed by such Lender to be material,
then such Lender shall promptly notify Borrower in writing of the happening of
such event and of the amount required to compensate such Lender for such event
(on an after-tax basis, taking into account any taxes on such compensation),
whereupon (i) Borrower shall pay such amount to such Lender and (ii) Borrower
may elect, by giving to such Lender not less than three Business Days'
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notice, to convert all (but not less than all) of any such Fixed Rate Portion
into a part of the Base Rate Portion.
3.15. Availability. If (a) any change in applicable laws, treaties,
rules or regulations or in the interpretation or administration thereof of or
in any jurisdiction whatsoever, domestic or foreign, shall make it unlawful or
impracticable for any Lender to fund or maintain Fixed Rate Portions, or shall
materially restrict the authority of any Lender to purchase or take offshore
deposits of dollars (i.e., "eurodollars"), or (b) any Lender determines that
matching deposits appropriate to fund or maintain any Fixed Rate Portion are
not available to it, or (c) any Lender determines that the formula for
calculating the Fixed Rate does not fairly reflect the cost to such Lender of
making or maintaining loans based on such rate, then Borrower's right to elect
Fixed Rate Portions shall be suspended to the extent and for the duration of
such illegality, impracticability or restriction and all Fixed Rate Portions
(or portions thereof) which are then outstanding or are then the subject of any
Rate Election and which cannot lawfully or practicably be maintained or funded
shall immediately become or remain part of the Base Rate Portion. Borrower
agrees to indemnify each Lender and hold it harmless against all costs,
expenses, claims, penalties, liabilities and damages which may result from any
such change in law, treaty, rule, regulation, interpretation or administration
directly related to Fixed Rate Portions outstanding at such time such items are
incurred by such Lender. Such indemnification shall be on an after-tax basis,
taking into account any taxes imposed on the amounts paid as indemnity.
3.16. Funding Losses. In addition to its other obligations hereunder,
Borrower will indemnify Agent and each Lender against, and reimburse Agent and
each Lender on demand for, any loss or expense incurred or sustained by Agent
or such Lender (including any loss or expense incurred by reason of the
liquidation or reemployment of deposits or other funds acquired by a Lender to
fund or maintain Fixed Rate Portions), as a result of (a) any payment or
prepayment (whether authorized or required hereunder or otherwise) of all or a
portion of a Fixed Rate Portion on a day other than the day on which the
applicable Interest Period ends, (b) any payment or prepayment, whether
required hereunder or otherwise, of a Loan made after the delivery, but before
the effective date, of a Rate Election, if such payment or prepayment prevents
such Rate Election from becoming fully effective, (c) the failure of any
Advance to be made or of any Rate Election to become effective due to any
condition precedent not being satisfied or due to any other action or inaction
of any of the Companies, or (d) any conversion (whether authorized or required
hereunder or otherwise) of all or any portion of any Fixed Rate Portion into
the Base Rate Portion or into a different Fixed Rate Portion on a day other
than the day on which the applicable Interest Period ends. Such
indemnification shall be on an after-tax basis, taking into account any taxes
imposed on the amounts paid as indemnity.
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3.17. Reimbursable Taxes. Borrower covenants and agrees that:
(a) Borrower will indemnify Agent and each Lender against and
reimburse Agent and each Lender for all present and future income, stamp
and other taxes, levies, costs and charges whatsoever imposed, assessed,
levied or collected on or in respect of this Agreement or any Fixed Rate
Portions (whether or not legally or correctly imposed, assessed, levied
or collected), excluding, however, any franchise taxes or taxes imposed
on or measured by the overall net income of Agent or such Lender or any
lending office of Agent or such Lender by any jurisdiction in which
Agent or such Lender or any such lending office is located (all such
non-excluded taxes, levies, costs and charges being collectively called
"Reimbursable Taxes" in this section). Such indemnification shall be on
an after-tax basis, taking into account any taxes imposed on the amounts
paid as indemnity.
(b) All payments on account of the principal of, and interest
on, each Lender's Loan and each Lender's Notes, and all other amounts
payable by Borrower to Agent and each Lender hereunder, shall be made in
full without set-off or counterclaim and shall be made free and clear of
and without deductions or withholdings of any nature by reason of any
Reimbursable Taxes, all of which will be for the account of Borrower.
In the event of Borrower being compelled by law or other regulations to
make any such deduction or withholding from any payment to Agent or any
Lender, Borrower shall pay on the due date of such payment, by way of
additional interest, such additional amounts as are needed to cause the
amount receivable by Agent or such Lender after such deduction or
withholding to equal the amount which would have been receivable in the
absence of such deduction or withholding. If Borrower should make any
deduction or withholding as aforesaid, Borrower shall within 60 days
thereafter forward to Agent or such Lender an official receipt or other
official document evidencing payment of such deduction or withholding.
(c) If Borrower is ever required to pay any Reimbursable Tax
with respect to any Fixed Rate Portion Borrower may elect, by giving to
Agent and each Lender not less than three Business Days' notice, to
convert all (but not less than all) of any such Fixed Rate Portion into
a part of the Base Rate Portion, but such election shall not diminish
Borrower's obligation to pay all Reimbursable Taxes.
(d) Each Lender represents and warrants to Agent and Borrower
that such Lender is either (i) a corporation organized under the laws of
the United States or a state thereof or (ii) entitled to complete
exemption from United
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States withholding tax imposed on or with respect to any payments,
including fees, to be made to it pursuant to this Agreement and the
other Loan Documents (x) under an applicable provision of a tax
convention to which the United States is a party or (y) because it is
acting through a branch, agency or office in the United States and any
payment to be received by it hereunder is effectively connected with a
trade or business in the United States. Upon becoming a party to this
Agreement (whether by assignment or as an original signatory hereto),
and in any event, from time to time upon the request of Agent or
Borrower, each Lender which is not a corporation, organized under the
laws of the United States or any state thereof shall deliver to Agent
and Borrower such forms, certificates or other instruments as may be
required by Agent in order to establish that such Lender is entitled to
complete exemption from United States withholding taxes imposed on or
with respect to any payments, including fees, to be made to such Lender
under this Agreement and the other Loan Documents. Each Lender also
agrees to deliver to Borrower and Agent and such other supplemental
forms as may at any time be required as a result of the passage of time
or changes in applicable law or regulation in order to confirm or
maintain in effect its entitlement to exemption from U.S. withholding
tax on any payments hereunder; provided, that the circumstances of
Lender at the relevant time and applicable laws permit it to do so. If
a Lender determines, as a result of any change in either (1) applicable
law, regulation or treaty, or in any official application thereof or (2)
its circumstances, that it is unable to submit any form or certificate
that it is obligated to submit pursuant to this Section 3.17(d), or that
it is required to withdraw or cancel any such form or certificate
previously submitted, it shall promptly notify Borrower and Agent of
such fact. If a Lender is organized under the laws of a jurisdiction
outside the United States, and Borrower and Agent have not received
forms, certificates or other instruments indicating to their
satisfaction that all payments to be made to such Lender hereunder are
not subject to United States withholding tax or Agent otherwise has
reason to believe that such Lender is subject to U.S. withholding tax,
Borrower shall withhold taxes from such payments at the applicable
statutory rate. Each Lender shall indemnify and hold Borrower and Agent
harmless from any United States taxes, penalties, interest and other
expenses, costs and losses incurred or payable by them as a result of
either (A) such Lender's failure to submit any form or certificate that
it is required to provide pursuant to this Section 3.17(d) or (B)
reliance by Borrower or Agent on any such form or certificate which such
Lender has provided to them pursuant to this Section 3.17(d).
3.18. Capital Reimbursement. If either (a) the introduction or
implementation of or the compliance with or any change in or in the
interpretation of any law, rule or
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regulation, or (b) the introduction or implementation of or the compliance with
any request, directive or guideline from any central bank or other governmental
authority (whether or not having the force of law) affects or would affect the
amount of capital required or expected to be maintained by any Lender or any
corporation controlling any Lender, then, upon demand by such Lender, Borrower
will pay to Agent for the benefit of such Lender, from time to time as
specified by such Lender, such additional amount or amounts which such Lender
shall determine to be appropriate to compensate such Lender or any corporation
controlling such Lender in light of such circumstances, to the extent that such
Lender reasonably determines that the amount of any such capital would be
increased or the rate of return on any such capital would be reduced by or in
whole or in part based on the existence of such Lender's Loan or commitments
under this Agreement.
ARTICLE FOUR
CONDITIONS PRECEDENT
4.01. Initial Advances. The effectiveness of this Agreement, and the
obligation of each Lender to make the initial Advance on its Revolving Loan,
are subject to the conditions precedent that on or before the Closing Date,
Agent shall have received the following, each in form and substance and dated
as of a date satisfactory to Agent and its counsel:
(a) Revolving Notes. Each of the duly executed renewal
Revolving Notes.
(b) Guaranty Agreements. Guaranty agreements in the form of
Exhibit "J" duly executed by each of CEC and Chesapeake Operating, Inc.
(c) Affiliate Subordination Agreement. The subordination
agreement in the form of Exhibit "K" duly executed by each Company (the
"Subordination Agreement").
(d) Opinion of Borrower's Counsel. Opinion(s) of legal
counsel for Borrower substantially in the form of Exhibit "D".
(e) Notice of Borrowing. A Notice of Borrowing signed by the
Chief Executive Officer.
(f) Resolutions. Resolutions duly adopted by the Board of
Directors and accompanied by a certificate of the Secretary of each
Company (other than Borrower).
(g) Incumbency. A signed certificate of the Secretary or the
general partners of each Company, certifying the names of the officers
authorized to sign each of the Loan Documents, and the other documents
or certificates to be
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delivered by such corporations pursuant to the Loan Documents together
with the true signatures of each of such officers. Agent and Lenders
may conclusively rely on each such certificate until Agent and Lenders
receive a further certificate of the Secretary or general partner of
respective Company canceling or amending the prior certificate and
submitting the signatures of the officers named in such further
certificate.
(h) Official Certificates. Certificates as to incorporation,
existence and good standing for each Company (other than Borrower)
issued by the Secretary of State (or other appropriate official) of the
state of incorporation of each Company (other than Borrower) and, if and
to the extent requested by Agent or its counsel, certificates of
qualification and good standing (or other similar instruments) for each
Company (other than Borrower) issued by the Secretary of State of each
of the states wherein each Company (other than Borrower) is or should be
qualified to do business as a foreign corporation. Certificates of
existence for Borrower issued by the Secretary of State (or other
appropriate official) of the state of organization of Borrower.
(i) Articles of Incorporation, Partnership Agreement, Charter
and Bylaws. A copy of the Certificate or Articles of Incorporation of
each Company (other than Borrower) and all amendments thereto, certified
by the Secretary of each Company (other than Borrower) as being true,
correct and complete (and in the case of CEC and Chesapeake Operating,
Inc., certified by the Secretary of State of the state of incorporation
of such Companies as being true, correct and complete), and a copy of
the partnership agreement or bylaws of each Company and all amendments
thereto, certified by the Secretary or a general partner of each
Company, as the case may be, as being true, correct and complete.
(j) Security Documents. Mortgages, deeds of trust, security
agreements, assignments of production and financing statements (or
amendments and supplements to the mortgages, deeds of trust, security
agreements, assignments of production and financing statements in
connection with the Original Agreement) or similar documentation
covering Oil and Gas Properties and such further documents and
instruments as Agent may request, including without limitation a
Mortgage, Deed of Trust, Assignment of Production, Security Agreement,
Financing Statement (Personal Property Including Hydrocarbons) and
Fixture Filing ("Mortgages") each in form and substance satisfactory to
Lenders (collectively, "Security Documents") executed by Borrower,
granting to Lenders (or Agent for the benefit of Lenders) first
perfected Liens (subject to no other Liens other than Permitted Liens),
on and in (i) all Oil and Gas Properties, (ii) all accounts receivable,
inventory,
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equipment and contract rights of Borrower, (iii) all proceeds and
products of, from or with respect to the foregoing.
(k) Title and Perfection. Duly executed UCC-1 financing
statements and all other requisite filing documents necessary to perfect
the Liens granted pursuant hereto, in form satisfactory for filing with
the appropriate filing offices.
(l) Contracts. Upon the request of the Agent, a copy of any
material contracts of Borrower not previously delivered to Agent.
(m) Indenture Documents. Copies of the final and duly
executed and delivered Indenture Documents.
(n) Insurance. Endorsements naming Lenders as additional
insureds on all liability insurance policies and Agent as loss payee on
all property insurance of Borrower which covers any Collateral and a
detailed schedule of all insurance of Borrower attached hereto as
Exhibit "E".
(o) Litigation Reports. Reports of counsel to Borrower
describing all pending or threatened Litigation by or against any
Company. There shall be no outstanding order or injunction of any
Tribunal which would prohibit any of the transactions contemplated by
the Loan Documents.
(p) Approvals. Evidence that all necessary approvals of
Tribunals and others have been obtained.
(q) Compliance With Laws. Evidence that Borrower has complied
with all Laws necessary to consummate the transactions contemplated by
this Agreement.
(r) Payments of Financing Fees. Payment of all fees payable
to Agent and each Lender set forth herein, and payment of all reasonable
fees and expenses of or incurred by Agent and all reasonable fees and
expenses of Thompson & Knight, P.C., counsel to Agent and other local or
special counsel selected by Agent or its counsel to and including the
Closing Date in connection with the negotiation and closing of the
transactions contemplated herein.
(s) Additional Information. Such other information and
documents as may be reasonably requested by Agent or its counsel.
4.02. All Advances. The obligations of each Lender to make any Advance
under the Revolving Commitment (including its initial Advance) shall be subject
to the performance by Borrower to the satisfaction of such Lender and its
counsel of the following additional conditions precedent:
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(a) No Defaults. As of the date of the making of such
Advance, there exists no Default or Event of Default.
(b) Compliance with Agreement. Borrower and CEC have
performed and complied with all agreements and conditions contained
herein which are required to be performed or complied with by Borrower
or CEC before or on the making of such Advance.
(c) No Material Adverse Change. As of the date of making such
Advance, no change or event that might cause a Material Adverse Effect
has occurred.
(d) Representations and Warranties. The representations and
warranties contained in Article Five are true and correct in all
material respects on the date of the making of such Advance, with the
same force and effect as though made on and as of that date.
(e) Debtor Laws. No proceeding under any Debtor Laws has been
commenced by or against any Company.
(f) Notice of Borrowing. Agent has received from Borrower a
Notice of Borrowing at least three Business Days prior to any Advance
that Borrower has designated as a Tranche or at least two days prior to
any other Advance (other than the initial Advance).
4.03. Title and Letters-in-Lieu. Agent shall receive (i) evidence
(including, without limitation, opinions of counsel to Borrower and/or special
counsel to Agent with respect to perfection) that Borrower has good and
defensible title to the Oil and Gas Properties and (ii) the initial executed
letters described in Section 6.17, in form and substance satisfactory to Agent
and its counsel, within sixty (60) days after the Closing Date.
ARTICLE FIVE
REPRESENTATIONS AND WARRANTIES
To induce each Lender to make its Loans, Borrower and CEC represent and
warrant to Agent and each Lender that, at the time of execution hereof and
after consummation of the transactions contemplated hereby:
5.01. Organization and Good Standing.
(i) Each Company (other than Borrower) is a corporation,
duly organized and existing under the laws of the state of its
organization. Each Company (other than Borrower) has the power
and authority to own its properties and assets and to transact
the business in which it is engaged and is duly qualified as a
foreign corporation and in good standing in all states in
which it is doing
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business, except where failure to be qualified will not have a
Material Adverse Effect.
(ii) Borrower is a limited partnership, duly formed and
existing under the laws of the State of Oklahoma. Borrower has
the power and authority to own its properties and assets and to
transact business in which it is engaged and is duly qualified as
a foreign partnership and in good standing in all states in which
it is doing business, except where failure to be qualified will
not have a Material Adverse Effect.
5.02. Authorization and Power.
(i) CEC has the corporate power and requisite
authority, and has taken all corporate action necessary, to
execute, deliver and perform the Loan Documents to be
executed by it.
(ii) Borrower has the partnership power and requisite
authority, and has taken all partnership action necessary, to
execute, deliver and perform the Loan Documents to be executed
by it.
5.03. No Conflicts or Consents. The execution and delivery of each of
the Loan Documents by Borrower and CEC, and of the Subordination Agreement by
each of the other Companies, the consummation of any of the transactions herein
or therein contemplated, and compliance with the terms and provisions hereof or
thereof to be executed and performed respectively by each such Company, will
not contravene or materially conflict with: (a) any provision of Law to which
any Company is subject; (b) any material judgment, license, order or permit
applicable to any Company; (c) any material contract, lease, indenture, loan
agreement, mortgage, deed of trust or other agreement or instrument to which
any Company is a party or by which any Company may be bound, or to which any
Company may be subject including the Indenture Documents binding on any
Company; or (d) violate any provision of the charter, bylaws or partnership
agreement, as the case may be, of any Company, which would in any case have a
Material Adverse Effect. No consent, approval, authorization or order of any
Tribunal or other Person is required in connection with the execution and
delivery by any Company of the Loan Documents or consummation of the
transactions contemplated hereby or thereby, except as disclosed in a separate
certificate executed by Borrower and delivered contemporaneously herewith, all
of which required consents, approvals and authorizations have been obtained or
have been waived in writing by Majority Lenders. The representations and
warranties by each Company in the Subordination Agreement are true and correct.
5.04. Enforceable Obligations. The Loan Documents have been duly
executed and delivered by Borrower and CEC and are the
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legal and binding obligations of Borrower and CEC, enforceable in accordance
with their respective terms, except as limited by Debtor Laws.
5.05. No Liens. Except for Permitted Liens and except as disclosed in
the Exhibits hereto, all of the assets of each Company are free and clear of
all Liens and other adverse claims of any nature, each Company has good and
indefeasible title to such assets, and there are no presently effective
financing statements of record in any jurisdiction covering any tangible or
intangible assets of each Company.
5.06. Financial Condition.
(a) CEC. CEC has delivered to each Lender a copy of the
financial statements of CEC as of and for the fiscal year ended June 30,
1995, and for the period ended March 31, 1996. Such financial
statements fairly present the Consolidated financial condition and
results of operations of CEC and its Consolidated Subsidiaries as of
such date and have been prepared in accordance with GAAP except as
stated therein. As of the date hereof, there are no obligations,
liabilities or Indebtedness (including contingent and indirect
liabilities and obligations) which are (separately or in the aggregate)
material and are not reflected in such financial statements or in the
notes thereto; and no changes having a Material Adverse Effect have
occurred since the date of such financial statements.
(b) Solvency. Upon giving effect to the issuance of the
Notes, the execution of the Loan Documents by Borrower and the
consummation of the transactions contemplated hereby, Borrower will be
solvent (as such term is used in Debtor Laws).
5.07. Full Disclosure. There is no material fact that Borrower has not
disclosed to Lenders which might reasonably be expected to have a Material
Adverse Effect. Neither the financial statements referenced in Section 5.06(a)
nor any certificate or other information delivered herewith or heretofore by
Borrower to Lenders in connection with the negotiation, execution and
consummation of this Agreement, contain any untrue statement of a material fact
or omit to state any material fact necessary to keep the statements contained
herein or therein from being misleading.
5.08. No Default. No event has occurred and is continuing which
constitutes a Default or an Event of Default.
5.09. Material Agreements. No Company is in default in any material
respect under any material partnership agreement, indenture, promissory note,
contract, lease, loan agreement, mortgage, deed of trust, security agreement,
license, permit, franchise or other agreement or obligation to which it is a
party
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or by which any of its properties is bound, and no Company is a party to or
bound by any material contracts or agreements other than those disclosed to
Agent and Lenders. The respective representations, warranties and covenants of
CEC and Borrower, if any, set forth in the Offering Memorandum, the Indenture
and the other Indenture Documents are true and correct as of the date thereof
and there is no material fact that is not disclosed therein which might
reasonably be expected to have a Material Adverse Effect.
5.10. No Litigation. Except for the Litigation described in the
Litigation Reports, there is no Litigation pending, or to the knowledge of
Borrower or CEC threatened, by or against any Company, and, to the best of
Borrower's or CEC's knowledge, none of such Litigation, whether disclosed or
undisclosed, will have a Material Adverse Effect. There are no outstanding
injunctions or restraining orders prohibiting consummation of any of the
transactions contemplated by the Loan Documents.
5.11. Use of Proceeds; Margin Stock. The proceeds of the Revolving
Loans will be used solely for the purposes specified herein. None of such
proceeds will be used for the purpose of purchasing or carrying any "margin
stock" as defined in Regulations G, T, U or X, or for the purpose of reducing
or retiring any Indebtedness which was originally incurred to purchase or carry
a "margin stock" or for any other purpose which might constitute this
transaction a "purpose credit" within the meaning of Regulations G, T, U or X.
No Company has taken nor will any Company take any action which might cause any
of the Loan Documents to violate Regulations G, T, U or X, or any other
regulations of the Board of Governors of the Federal Reserve System or to
violate Section 8 of the Securities Exchange Act of 1934 or any rule or
regulation thereunder, in each case as now in effect or as the same may be in
effect at the time such proceeds are used.
5.12. No Financing of Regulated Corporate Takeovers. No proceeds of
the Revolving Loans will be used to acquire any security in any transaction
which is subject to Sections 13 or 14 of the Securities Exchange Act of 1934,
including particularly (but without limitation) Sections 13(d) and 14(d)
thereof.
5.13. Taxes. All Tax returns required to be filed by any Company in
any jurisdiction have been filed, and all Taxes upon any Company or upon any of
their respective properties, income, franchises or Plans have been paid prior
to the time that such Taxes could give rise to a Lien thereon, except for
Contested Claims. There is no material proposed Tax assessment against any
Company or any Plan, and there is no basis for such assessment.
5.14. Principal Offices. The actual and anticipated principal office
and principal place of business of Borrower and
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CEC is shown on Exhibit "F", and Borrower and CEC intend to maintain their
respective principal records and books at such principal office. Borrower and
CEC will give Agent prior written notice if their principal office is changed.
5.15. ERISA. (i) No Reportable Event has occurred and is continuing
with respect to any Plan, (ii) PBGC has not instituted proceedings to terminate
any Plan, (iii) none of CEC, any member of the Controlled Group nor any
duly-appointed administrator of a Plan (A) has incurred any liability to PBGC
with respect to any Plan other than for premiums not yet due and payable or (B)
has instituted or intends to institute proceedings to terminate any Plan under
Sections 4041 or 4041A of ERISA or withdraw from any Multi-Employer Pension
Plan (as that term is defined in Section 3(37) of ERISA), (iv) no Plan of CEC
has been maintained and funded in any material respect in violation of its
terms or of any provisions of ERISA applicable thereto, and (v) no "accumulated
funding deficiency" (as defined in Section 302(a)(2) of ERISA) exists with
respect to any Plan.
5.16. Compliance With Law. Each Company is in compliance with all
Laws, except where failure to comply will not have a Material Adverse Effect.
5.17. Government Regulation. No Company is subject to regulation under
the Public Utility Holding Company Act of 1935, the Federal Power Act, the
Investment Company Act of 1940 (as any of the preceding acts have been amended)
or any other Law which regulates the incurring by Borrower of Indebtedness,
including, but not limited to, Laws relating to common contract carriers or the
sale of electricity, gas, steam, water or other public utility services.
5.18. Insider. No Company is, and no Person having "control" (as that
term is defined in 12 U.S.C. Section 375(b)(5) or in regulations promulgated
pursuant thereto) of any Company is, an "executive officer", "director" or
"principal shareholder" (as those terms are defined in 12 U.S.C. Section
375(b) or in regulations promulgated pursuant thereto) of Agent or any Lender,
of a bank holding company of which Agent or any Lender is a subsidiary or of
any subsidiary of a bank holding company of which Agent or any Lender is a
subsidiary.
5.19. Environmental Matters. Except as disclosed on Exhibit "G" or
pursuant to Section 6.01(i), no Company (i) has received notice or otherwise
learned of any Environmental Liability which would individually or in the
aggregate have a Material Adverse Effect, arising in connection with (A) any
non-compliance with or violation of the requirements of any Environmental Law
or (B) the release or threatened release of any toxic or hazardous waste,
substance or constituent, or other substance into the environment, (ii) has had
any threatened or actual liability in connection with the release or threatened
release of any toxic or hazardous waste, substance or
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constituent, or other substance into the environment which would individually
or in the aggregate have a Material Adverse Effect or (iii) has received notice
or otherwise learned of any federal or state legislation evaluating whether any
remedial action is needed to respond to a release or threatened release of any
toxic or hazardous waste, substance or constituent into the environment for
which any Company is or may be liable.
5.20. Subsidiaries. Exhibit "L" hereto lists all Subsidiaries of CEC
as of the Closing Date.
5.21. Survival of Representations and Warranties. All representations
and warranties in the Loan Documents shall survive delivery of the Notes and
the making of the Loans and shall continue until one year after repayment of
the Notes and the Obligations, and any investigation at any time made by or on
behalf of Agent or any Lender shall not diminish Agent's or Lenders' right to
rely thereon.
ARTICLE SIX
AFFIRMATIVE COVENANTS
So long as any Lender has any commitment to make Advances, and until
payment in full of the Notes and the performance of the Obligations, Borrower
and CEC agree that (unless Majority Lenders shall otherwise consent in
writing):
6.01. Financial Statements, Reports and Documents. Borrower and CEC
shall deliver or cause to be delivered the following to Agent and each Lender:
(a) Quarterly Statements. As soon as available, and in any
event within 45 days after the end of each fiscal quarter, copies of the
Consolidated and consolidating balance sheets of CEC as of the end of
such quarter, and Consolidated and consolidating statements of income
and cash flow of CEC for such quarter and for the portion of the fiscal
year ending with such quarter, in each case setting forth in comparative
form the figures for the corresponding periods of the preceding fiscal
year, all in reasonable detail, and certified by the Chief Financial
Officer as fairly presenting the Consolidated financial condition and
results of operations of CEC and as having been prepared in accordance
with GAAP (excluding the notes thereto), subject to year-end audit
adjustments;
(b) Annual Statements. As soon as available and in any event
within 90 days after the close of each fiscal year, copies of the
Consolidated and consolidating balance sheets of CEC as of the close of
such fiscal year, and the Consolidated and consolidating statements of
income and cash flow of CEC for such fiscal year, in each case setting
forth
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in comparative form the figures for the preceding fiscal year, all in
reasonable detail and accompanied by (i) an unqualified opinion of Price
Waterhouse or such other independent public accountants of recognized
national standing selected by CEC and reasonably satisfactory to Agent,
to the effect that such financial statements have been prepared in
accordance with GAAP and fairly present the Consolidated financial
condition and results of operations of CEC, and (ii) a certificate
executed by the Chief Executive Officer and Chief Financial Officer of
CEC to the same effect as such opinion;
(c) Audit Reports. Promptly upon receipt thereof, one copy of
each written report submitted to each Company by independent accountants
in any annual, quarterly or special audit, review or examination,
together with all report or letters to management or the board of
directors of any Company;
(d) Compliance Certificate. Within 45 days after the end of
each fiscal quarter of each fiscal year a certificate executed by the
Chief Financial Officer stating that a review of the activities of the
Companies during such quarter and during the portion of the fiscal year
ending with such quarter has been made under such officer's supervision
and that to the knowledge of such officer, Borrower and CEC have
observed, performed and fulfilled each and every obligation and covenant
contained in each of the Loan Documents (except to the extent properly
waived as provided herein) and are not in Default under the Loan
Documents, or, if any such Default has occurred, specifying the nature
and status thereof;
(e) Accountants' Certificates. Concurrently with delivery of
the statements set forth in Section 6.01(b), a certificate of the
accountants who render an opinion with respect to the financial
statements of CEC, stating that they have reviewed this Agreement and
stating further whether, in making their audit, such accountants have
become aware of any condition or event which would constitute a Default
or an Event of Default under any of the terms or provisions of this
Agreement and, if any such condition or event then exists, specifying
the nature and period of existence thereof;
(f) Engineering and Production Information. As soon as
available and within 45 days after the end of each month during the
Revolving Commitment Period, (i) a report in form and substance
satisfactory to Agent prepared by Borrower for each of the Oil and Gas
Properties (net to Borrower's interest) detailing, both by well and in
summary form, production volume by product, revenue by product, net
lease operating expenses, capital expenditures, severance, ad valorem
and other taxes on production, operating profit or
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loss, and price information and further detailing any changes to any
producing reservoir, production equipment, or producing well which would
have a Material Adverse Effect and (ii) a report in form and substance
satisfactory to Agent prepared by Borrower detailing a summary of
revenues and expenses from operations other than the Oil and Gas
Properties; and by September 20, 1996 and each September 1 thereafter, a
reserve report ("Annual Reserve Report") (on a fiscal year basis) in
form and substance satisfactory to Agent prepared by Williamson
Petroleum Consultants, Inc. or another independent petroleum engineering
firm acceptable to Majority Lenders reflecting an estimate of remaining
reserves, annual production, cash flow and discounted value of Oil and
Gas Properties to be included in the Borrowing Base; and by each March 1
hereafter, and contemporaneously with a request for any Incremental
Redetermination Date, as to all properties to be included therein which
were not evaluated in the immediately preceding Annual Reserve Report or
any preceding incremental redetermination report delivered by Borrower,
a reserve report (the "Interim Reserve Report") in form and substance
satisfactory to Agent prepared by Williamson Petroleum Consultants, Inc.
or another independent petroleum engineering firm acceptable to Majority
Lenders reflecting an estimate of remaining reserves, annual production,
cash flow and discounted value of such additional Oil and Gas Properties
to be included in the Borrowing Base, together with a report prepared by
Borrower, in form and substance acceptable to Agent, adjusting and
updating the most recently delivered Annual Reserve Report.
(g) Insurance Report. Within 15 days after any material
change in insurance coverage by the Companies, a report describing such
change, and, within 30 days after the end of each fiscal year, a report
describing the insurance coverage of the Companies;
(h) Litigation Reports. (i) Within 90 days after the end of
each fiscal year, complete reports by counsel to the Companies,
describing all Litigation of any Company and (ii) within 10 days after
the end of each fiscal quarter (except the last) of each fiscal year in
which a material change in reported Litigation has occurred or
additional Litigation which, in the opinion of counsel to the Companies
could have a Material Adverse Effect, has been threatened in writing or
commenced, reports by counsel to the Companies, describing such material
changes in or additions to the last annual Litigation Report;
(i) Environmental Notices. Notice to Agent and each Lender,
in writing, promptly upon any Company's learning that any Company has
received notice or otherwise learned of any claim, demand, action,
event, condition, report or investigation indicating any potential or
actual liability
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arising in connection with (i) the non-compliance with or violation of
the requirements of any Environmental Law which individually or in the
aggregate might have a Material Adverse Effect, (ii) the release or
threatened release of any toxic or hazardous waste, substance or
constituent into the environment which individually or in the aggregate
might have a Material Adverse Effect or which release any Company would
have a duty to report to a Tribunal under an Environmental Law, or (iii)
the existence of any Environmental Lien on any properties or assets of
any Company;
(j) Aging of Payables and Receivables. Within 45 days after
the end of each fiscal quarter, a report in form and substance
satisfactory to Agent showing the aging of each outstanding account
receivable and account payable of CEC and its Subsidiaries on a
Consolidated basis.
(k) SEC and Other Reports. Promptly upon it becoming
available, one copy of each financial statement, report, notice or proxy
statement sent by any Company to stockholders or debt holders generally
and of each regular or periodic report, registration statement or
prospectus filed by any Company with any securities exchange or the
Securities and Exchange Commission or any successor agency or any
similar Tribunal of a foreign country, and of any material order issued
by any Tribunal in any material proceeding to which any Company is a
party;
(l) Gas Balancing; Hedging Contracts. Within 45 days after
the end of each fiscal quarter, Borrower will provide to Agent and each
Lender a report in form and substance satisfactory to Agent (i)
itemizing all obligations in respect of gas imbalances or take or pay
obligation of the Companies if such obligations, in the aggregate,
exceed $100,000.00 outstanding during such fiscal quarter, and (ii)
itemizing each of the Company's outstanding interest, commodity or other
swap, cap, floor or other hedging arrangements, all in such detail as
may be requested by Agent;
(m) Other Information. Such other information concerning the
business, properties or financial condition of any Company or any Plan
as Agent or any Lender shall reasonably request;
(n) Reports to Trustee. Contemporaneously with the delivery
to the Trustee pursuant to the terms of the Indenture of any annual
reports, documents, information, other reports, certificates or
opinions, a copy of such report, document, information, certificate or
opinion; and
(o) Notice of Permitted Payment. After the occurrence and
during the continuance of a Default, Borrower will
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provide to each Lender a written report explaining any Permitted Payment
of the type described in clause (iv) or (v) of the definition of
Permitted Payments at least thirty days prior to such Permitted Payment
being made, in such detail as such Lender shall require.
6.02. Payment of Taxes and Other Indebtedness. Except for Contested
Claims, each Company will pay and discharge when due (i) all Taxes, (ii) all
lawful claims (including claims for trade payables, labor, materials and
supplies), which, if unpaid, might give rise to a Lien upon any of its property
and (iii) all of its other Indebtedness, obligations and liabilities, except as
prohibited hereunder.
6.03. Maintenance of Existence and Rights; Conduct of Business. Each
Company will preserve and maintain its existence and all of their respective
rights, privileges, licenses and franchises necessary or desirable in the
normal conduct of its business, and conduct its business in an orderly and
efficient manner consistent with good business practices and in accordance with
all valid regulations and orders of any Tribunal, except when failure to so
preserve, maintain or conduct will not have a Material Adverse Effect.
6.04. Notice of Default. Borrower or CEC shall furnish to Agent and
each Lender, immediately upon becoming aware of the existence of any condition
or event which constitutes an Event of Default, written notice specifying the
nature and period of existence thereof and the action which Borrower or CEC is
taking or proposes to take with respect thereto.
6.05. Other Notices. Borrower or CEC will promptly notify Agent and
each Lender of (i) any material adverse change in the financial condition or
business of any Company, (ii) any acceleration of the maturity of any material
Indebtedness owing by any Company (a "material" Indebtedness being one with a
monetary obligation of $500,000 or more or one with respect to which a default
thereunder would have a Material Adverse Effect), (iii) any material adverse
claim against or affecting any Company, (iv) the commencement of, and/or any
material determinations in, any Litigation which could have a Material Adverse
Effect and (v) any event or condition which may reasonably be expected to
result in a default under any of the Indenture Documents.
6.06. Compliance with Loan Documents. Borrower and CEC will each
promptly comply with any and all covenants and provisions of the Loan Documents
applicable to such Company and will cause each other Company to promptly comply
with any and all covenants and provisions of the Subordination Agreement
applicable to such Company.
6.07. Compliance with Material Agreements. Each Company will comply in
all material respects with all material contracts,
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leases, agreements, indentures, mortgages or documents binding on it or
affecting its properties or business if noncompliance could have a Material
Adverse Effect, including, without limitation, the Indenture Documents.
6.08. Operations and Properties. Each Company will act prudently and
in accordance with customary industry standards in managing and operating its
assets, properties, business and investments and will keep in good working
order and condition, ordinary wear and tear excepted, all of its assets and
properties which are necessary to the conduct of its business, if failure to do
any of the foregoing might have a Material Adverse Effect.
6.09. Books and Records. During all business hours, each Company will
give any representative of Agent access to and permission for such
representative to examine, copy or make excerpts from any and all books,
records and documents in the possession of such Company that relate to its
affairs, and to inspect any of the properties of such Company. Each Company
will maintain complete and accurate books and records of its transactions in
accordance with GAAP.
6.10. Compliance with Law. Each Company will comply with all Laws, a
violation of which could have a Material Adverse Effect.
6.11. Insurance. Each Company (i) will maintain (A) worker's
compensation or similar insurance as may be required by applicable Law, (B)
public liability insurance against claims for personal injury, death or
property damage suffered upon, in or about any premises occupied by such
Company or occurring as a result of the ownership, maintenance or operation by
such Company of any automobile, truck or other vehicle or as the result of
services rendered by it, all such insurance to be maintained with financially
sound and reputable insurance companies against such casualties, risks and
contingencies, and in such types and amounts, as are consistent with customary
practices and standards of companies engaged in similar businesses, (ii) will
name Lenders as additional insureds on all such liability insurance and Agent
as loss payee on all such property insurance which covers any Collateral and
(iii) will deliver copies of the policies and endorsements for such insurance
to Agent promptly after issuance or renewal of each.
6.12. ERISA Compliance. Each Company will (i) make prompt payment of
all contributions required under all Plans and required to meet the minimum
funding standard set forth in ERISA with respect to its Plans, (ii) within 30
days after the filing thereof, furnish to Agent and each Lender each annual
report/return (Form 5500 Series), as well as all schedules and attachments
required to be filed with the Department of Labor and/or the Internal Revenue
Service pursuant to ERISA, and the regulations promulgated thereunder, in
connection with each of its Plans for each Plan year, and (iii) notify Agent
immediately
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of any fact, including, but not limited to, any Reportable Event arising in
connection with any of its Plans, which might constitute grounds for
termination thereof by the PBGC or for the appointment by the appropriate
United States District Court of a trustee to administer such Plan, together
with a statement, if requested by Agent, as to the reason therefor and the
action, if any, proposed to be taken with respect thereto.
6.13. Further Assurances. Each Company will make, execute or endorse,
and acknowledge and deliver or file or cause the same to be done, all such
vouchers, invoices, notices, certifications and additional agreements,
undertakings, conveyances, deeds of trust, mortgages, security agreements,
transfers, assignments, financing statements or other assurances, and take any
and all such other action, as Agent may, from time to time, deem reasonably
necessary or proper in connection with any of the Loan Documents and the
obligations of such Company thereunder, or for better assuring and confirming
unto Agent all or any part of the security for any of such obligations.
6.14. Subordination of Affiliate Obligations. Borrower and CEC agree
and covenant until such time as (a) Lenders have received full and final
payment of the Notes and (b) all Obligations have been performed in their
entirety, all indebtedness, liability and obligations of any type (other than
(i) salaries of Affiliates who are employees of a Company, (ii) revenue
distributions to Affiliates who own working or mineral interests or overriding
royalty interests in any land or leases which are operated by any Company and
(iii) payments described in clause (i) of the definition of Permitted Payments)
to any Affiliate of Borrower (the "Affiliate Obligations"), shall be
subordinate and inferior to all Indebtedness, obligations and liability of
Borrower to Agent and Lenders as more particularly set forth in Exhibit "K".
Upon the acceleration of any of the Obligations, no Affiliate Obligation may be
paid by Borrower until the Obligations have been repaid in full in cash. If,
after the acceleration of any of the Obligations any Company or any Affiliate
of Borrower receives payment on any Affiliate Obligations, such Company or
Affiliate shall hold such proceeds in trust for Lenders and shall immediately
remit same to Agent for application against the Obligations.
6.15. Maintenance of Corporate Identity. (i) Each Company shall
maintain separate corporate records, books and accounts; (ii) each Company
shall observe the formal legal, financial and accounting requirements necessary
for the maintenance of such Company as a separate legal entity, and (iii) all
monies and funds advanced and to be advanced to or on behalf of any Company by
any Affiliates thereof (other than another Company), pursuant to a loan or
otherwise, will be evidenced by valid, binding and enforceable written
obligations to repay such monies and funds either on demand or at a future date
and will include a rate of return to the Affiliate advancing the same at an
interest rate not less than the Adjusted Base Rate, except for
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certain minor operating expenses, none of which are material in amount and none
of which relate to significant transactions.
6.16. Liens on Oil and Gas Properties Acquired in the Future. Borrower
will identify on each Annual Reserve Report and each Interim Reserve Report, or
on a separate schedule, such individual wells with respect to which the oil,
gas and mineral lease(s) is not then currently subject to a Mortgage. On or
before each Redetermination Date and each Incremental Redetermination Date,
Borrower will except with respect to wells of a de minimis value as specified
by Agent from time to time and (ii) execute and deliver Mortgages granting to
Agent for the benefit of Lenders first perfected Liens (subject to no other
Liens except Permitted Liens) on and in the oil, gas and mineral lease(s)
covering each such well which is to be included in the Borrowing Base, and such
properties shall then for all purposes be deemed to be Oil and Gas Properties.
On the later to occur of (i) each Redetermination Date or Incremental
Redetermination Date or (ii) 45 days after Agent notifies Borrower of which
wells Agent shall require title information for, Borrower will provide title
opinions or other title information acceptable to Majority Lenders in form
satisfactory to Majority Lenders with respect to such wells and leases.
6.17. Clearing Account. Upon the request of Agent (at the direction of
Majority Lenders), Borrower shall promptly cause all purchasers of production
of oil, gas and other hydrocarbons from the Oil and Gas Properties to remit all
payments therefor into a controlled access (Agent only) account at Agent (the
"Clearing Account"). So long as no Default or Event of Default has occurred
and is continuing, Agent will, from time to time, transfer funds from the
Clearing Account at Borrower's direction, provided, however, that Agent will
have the right to reserve funds in the Clearing Account in an amount sufficient
to pay the next principal and/or interest payment due on the Notes. On the
execution of this Agreement, and from time to time hereafter upon the request
of Agent, Borrower shall execute and deliver to Agent letters addressed to
purchasers of production instructing them to remit such payment to the Clearing
Account. Further, within forty-five (45) days after the end of each fiscal
quarter, Borrower will deliver a report to Agent listing the names and
addresses of all purchasers of production and such other information as Agent
shall request.
6.18. Hedging Contracts. No Company will be a party to or in any
manner liable on any forward, future, swap or hedging contract, or enter into
any sale of future production except contracts entered into solely with the
purpose and effect of fixing prices on oil and/or gas expected to be produced
by such Company provided the contract is with a counter party of recognized
satisfactory financial standing and is not for volumes in excess of projected
future production for the corresponding periods of the contract.
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6.19. Use of Distributions. After the occurrence and during the
continuance of a Default, CEC will use all dividends, distributions and
Permitted Payments made by Borrower or any Subsidiary of Borrower to CEC and
all income and other proceeds derived therefrom for the following purposes
only:
(a) to make scheduled payments when due of the Indenture
Notes; and
(b) to pay an amount equal to CEC's income tax obligation to
the extent, if any, CEC has paid or will thereupon pay in cash, income
tax or state franchise tax in a like amount; provided such amount does
not exceed the highest marginal Federal corporate income tax rate in
effect with respect to the relevant income of Borrower's taxable income
for the relevant period plus any applicable state franchise tax amount.
ARTICLE SEVEN
NEGATIVE COVENANTS
So long as any Lender has any commitment to make Advances hereunder,
until payment in full of the Notes and the performance of the Obligations,
Borrower and CEC agree that (unless Majority Lenders shall otherwise consent
in writing):
7.01. Limitation on Indebtedness. No Company will incur, create,
contract, assume, have outstanding, permit to exist, guarantee or otherwise be
or become, directly or indirectly, liable in respect of any Indebtedness,
except (i) the Obligations, (ii) Indebtedness of such Company described on
Exhibit "H," (iii) current liabilities of such Company for Taxes and
assessments incurred in the ordinary course of its business, (iv) the
Indebtedness of CEC evidenced by the Indenture Notes and the guaranties by the
Subsidiary Guarantors thereof, (v) Indebtedness incurred by the Companies
(other than Borrower and CEC) in the ordinary course of business, not in excess
of an aggregate amount outstanding at any time equal to $5,000,000 for all
Companies (other than Borrower and CEC), (vi) Indebtedness of such Company to
another Company, (vii) Debt arising under forward, future, swap or hedging
contracts permitted under Section 6.18. (Indebtedness described in clauses (i)
through (vii) is collectively referred to as the "Permitted Indebtedness"). No
Company shall make any Guaranty or other undertaking commonly known as
"comfort" or "keep well" letters, except for (i) such undertakings on behalf of
other Companies to support Indebtedness and (ii) such undertakings by CEC to
support trade payables otherwise permitted by this Agreement.
7.02. Negative Pledge. No Company will (i) grant, create, incur,
permit or suffer to exist any Lien upon any of its property or assets,
including, without limitation, the
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Collateral, now owned or hereafter acquired, except for Permitted Liens, (ii)
enter into any sale-and-lease back transaction, or (iii) agree with any Person
(other than in the Loan Documents) that such Company will not grant, create,
incur, permit or suffer to exist any Lien upon any of its property or assets.
Anything in the foregoing or elsewhere in the Loan Documents to the contrary
notwithstanding, it is understood that no Liens, other than Permitted Liens,
are permitted on or with respect to any of the Collateral.
7.03. Limitation on Dividends and Restricted Payments. Borrower will
not, and will not permit its Subsidiaries to, directly or indirectly declare or
make, or incur any liability to make, any Restricted Payments to any other
Company (including but not limited to CEC) other than Permitted Payments made
with cash or Temporary Cash Investments. CEC will not, and will not permit its
Subsidiaries to, directly or indirectly declare or make, or incur any liability
to make any Dividends or Redemptions in respect to capital stock of CEC.
Borrower will not, and will not permit its Subsidiaries to, make any Permitted
Payments (other than payments described in clause (i) of the definition of
Permitted Payments) if the maturity of any Obligation has been accelerated at
the time of such proposed Permitted Payment.
7.04. Limitation on Investments. No Company will make nor have
outstanding any Investments in any Person, except (i) Temporary Cash
Investments, (ii) Investments in the oil and gas business or otherwise
contemplated or permitted by other provisions of this Agreement, (iii)
Investments in wholly owned Subsidiaries in amounts reflected in the financial
statements set forth in Section 5.06, (iv) Investments in another Company which
do not violate Section 7.05, (v) the Investment in Chesapeake Gas Development
Corporation as in effect on the Closing Date, (vi) the Investment in Chesapeake
Energy Marketing, Inc. as in effect on the Closing Date, and (vii) the
Investment in Peak USA Energy Services, Ltd. as in effect on the Closing Date.
7.05. Affiliate Transactions. Except in the ordinary course of
business and in an arms length transaction, no Company will enter into any
transaction with, nor pay any management or other fees or compensation to, any
Affiliate of any Company.
7.06. Limitation on Sale of Assets. No Company will sell, assign,
lease, sublease or discount any of its assets other than (i) sales of
hydrocarbons in the ordinary course of business (ii) sales or other
dispositions of obsolete equipment which is either no longer needed for the
ordinary business of such Company or is being replaced by equipment of at least
comparable value and utility, (iii) sales or other dispositions of equipment
which is not used by such Company in connection with its primary business
operations, (iv) sales or transfers of oil, gas and mineral fee and leasehold
acreage upon which there exists no well capable of production of oil, gas or
other hydrocarbons in paying quantities, (v) sales or other dispositions not
otherwise
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permitted hereunder, not to exceed $500,000 in any single transaction and
$1,000,000 in the aggregate in any fiscal year and (vi) sales or assignments by
Borrower to Chesapeake Gas Development Corporation of certain subject
interests, as permitted by Majority Lenders from time to time.
7.07. Fiscal Year and Accounting Method. No Company will change its
fiscal year or method of accounting.
7.08. Liquidations, Mergers, Consolidations and Acquisitions of
Substantial Assets. No Company will dissolve, liquidate, become a party to any
merger or consolidation or acquire by purchase, lease or merger all or
substantially all of the assets or any capital stock of any Person other than a
Consolidation between or among Companies (other than Borrower); provided that
if CEC is a party to any such consolidation with another Company, CEC must be
the surviving business entity.
7.09. No Amendments of Charter or Bylaws. No Company will amend its
charter, bylaws or partnership agreement in any respect which could have a
Material Adverse Effect.
7.10. Environmental Matters. Except in compliance with Environmental
Laws, and except for non-compliance thereof which will not give rise to
Environmental Liability in excess of $10,000 in the aggregate at any time
outstanding, no Company will (i) cause nor permit any Hazardous Material (as
defined in this Section 7.10) to be placed, held, located or disposed of on,
under or at any property now or hereafter owned, leased or otherwise controlled
directly or indirectly by any Company (for purposes of this Section 7.10, the
"Property") or (ii) permit the Property to ever be used (whether by such
Company or any other Person) as a dump site or storage site (whether permanent
or temporary) for any Hazardous Material. "Hazardous Material" means any
hazardous, toxic or dangerous waste, substance or material defined as such in
any Environmental Laws. Without limitation of Agent's and each Lender's Rights
under the Loan Documents, Agent, each Lender and their representatives shall
have the right, but not the obligation, to enter upon the Property or take such
other actions as Agent or such Lender deems necessary or advisable to cleanup,
remove, resolve or minimize the impact of, or otherwise deal with, any
Hazardous Discharge (as defined in this Section 7.10) or Environmental
Complaint (as defined in this Section 7.10) upon Agent's or such Lender's
receipt of any notice from any Tribunal or other Person, asserting the
existence of any Hazardous Discharge or Environmental Complaint on or
pertaining to the Property which, if true, could result in Environmental
Liability against any Company, Agent or such Lender or otherwise which, in the
sole opinion of Agent or such Lender, could jeopardize any of Agent's or such
Lender's present or future Liens against the Property. All costs and expenses
incurred by Agent or any Lender and its representatives in the exercise of any
such Rights shall become part of the Obligations and be payable upon demand,
together with
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interest thereon at the Default Rate. "Hazardous Discharge" means the
happening of any event involving the use, storage, spill, discharge or cleanup
of any Hazardous Material that violates Environmental Laws and might cause a
Material Adverse Effect. "Environmental Complaint" means any complaint, order,
citation or notice with regard to air emissions, water discharges, noise
emissions or any other environmental, health or safety matter affecting any
Company or the Property.
7.11. Indenture Notes. No Company will directly or indirectly, (i)
amend or modify any terms of any of the Indenture Documents (other than
amendments or modifications of the type permitted under Article Nine of any
Indenture which would not otherwise be a Default or Event of Default
hereunder), (ii) repurchase, redeem, prepay, whether optional or, subject to
clause (iii) hereof, mandatory, or defease any of the Indenture Notes (other
than scheduled payments of accrued interest) or (iv) take any action or fail to
take any action which would obligate CEC or any Company to repurchase, redeem
or prepay any of the Indenture Notes other than scheduled payments of accrued
interest and the scheduled mandatory redemption of 25% of the original
principal amount of the First Indenture Notes on March 1 of 1998, 1999, 2000
and 2001.
7.12. Permitted Transfers. Notwithstanding anything to the contrary
herein contained, no provision of Section 6.14, Section 7.03, Section 7.04,
Section 7.05, or Section 7.06 shall be construed to prohibit a Permitted
Payment unless the maturity of any Obligation has been accelerated at the time
of such proposed Permitted Payment.
7.13. Weighted-Average Payable Maturity. The weighted-average maturity
of all Indebtedness of the Companies incurred on ordinary terms to vendors,
suppliers and other Persons providing goods and services used by the Companies
in the ordinary course of business (excluding vendors and suppliers with which
the Companies have written agreements providing extended payment terms not in
excess of 100 days) shall not exceed 75 days at any time.
ARTICLE EIGHT
EVENTS OF DEFAULT
8.01. Events of Default. An "Event of Default" shall exist if any one
or more of the following events shall occur and be continuing:
(a) Failure or refusal to pay when due any principal of, or
interest on, any Note, or any fee, expense or other payment required
hereunder, including any prepayment pursuant to Section 3.05; or
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(b) Any representation or warranty made under any of the Loan
Documents, or in any certificate or statement furnished or made to Agent
or any Lender pursuant hereto or in connection herewith or with the
Loans hereunder, is untrue or inaccurate in any material respect as of
the date on which such representation or warranty is made; or
(c) Failure to perform or a breach of any of the covenants or
agreements contained in this Agreement (other than in Article Seven and
in Section 3.05) or in any of the other Loan Documents and such failure
to perform or breach shall remain unremedied for a period of 30 days; or
(d) Failure to perform or a breach of any of the covenants or
agreements contained in Article Seven and in Section 3.05;
(e) (i) any default in the payment of any Indebtedness in
excess of $500,000 of any Company or (ii) any breach or default in the
observance or performance of any note, loan agreement, credit agreement
or other agreement or instrument relating to, evidencing, governing or
securing any such Indebtedness in excess of $500,000, which breach or
default continues for more than the period of grace, if any, specified
therein or (iii) any such Indebtedness in excess of $500,000, including,
without limitation, the Indenture Notes, becomes due before its stated
maturity by acceleration of the maturity thereof; or
(f) Any Company shall (i) apply for or consent to the
appointment of a receiver, trustee, custodian, intervenor or liquidator
of any Company or of all or a substantial part of its assets, (ii) file
a voluntary petition in bankruptcy, admit in writing that it is unable
to pay its debts as they become due or generally not pay its debts as
they become due, (iii) make a general assignment for the benefit of
creditors, (iv) file a petition or answer to seek reorganization or an
arrangement with creditors or to take advantage of any Debtor Laws, (v)
file an answer admitting the material allegations of or consenting to,
or default in answering a petition filed against it in any bankruptcy,
reorganization or insolvency proceeding or (vi) take corporate action
for the purpose of effecting any of the foregoing; or
(g) An involuntary petition or complaint is filed against any
Company seeking bankruptcy or reorganization of any Company or the
appointment of a receiver, custodian, trustee, intervenor or liquidator
of it, or all or substantially all of the assets of any Company; or an
order, order for relief, judgment or decree shall be entered by any
court of competent jurisdiction or other competent authority approving a
petition or complaint seeking reorganization of any Company or
appointing a receiver, custodian, trustee,
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intervenor or liquidator of CEC or Borrower, or of all or substantially
all of its assets, and such proceeding or case shall continue
undismissed, or an order, judgment or decree approving or ordering any
of the foregoing shall be entered and continue unstayed and in effect,
for a period of 60 days; or
(h) Any final judgment for the payment of money in excess of
the sum of $250,000 shall be rendered against any Company and such
judgment shall not be satisfied or discharged within thirty days after
the date of entry thereof or an appeal or appropriate proceeding for
review thereof is taken within such period and a stay of execution
pending such appeal is obtained; or
(i) Both (i) and (ii) following shall occur: (i) either (A)
proceedings have been instituted to terminate, or a notice of
termination has been filed with respect to, any Plan (other than a
multi-employer pension plan) by any Company, any member of the
Controlled Group, PBGC or any representative of any thereof, or any such
Plan shall be terminated, in each case under Section 4041 or 4042 of
ERISA, or (B) a Reportable Event, the occurrence of which would cause
the imposition of a Lien under Section 4068 of ERISA, has occurred with
respect to any Plan (other than a multi-employer pension Plan) and
continues for a period of 60 days, and (ii) the estimated liability
under Section 4062 of ERISA to the PBGC and to the trustee appointed
under Section 4042 of ERISA under the Plan or Plans subject to such
event exceeds 10% of the net worth of CEC at such time; or
(j) Any or all of the following events shall occur with
respect to any multi-employer pension plan to which any Company
contributes or contributed on behalf of its employees: (i) any Company
incurs a withdrawal liability under Section 4201 of ERISA, or (ii) any
such plan is "in reorganization" as that term is defined in Section 4241
of ERISA, or (iii) any such Plan is terminated under Section 4041A of
ERISA and the aggregate liability likely to be incurred by any Company
as a result of all or any of the events specified in claims (i), (ii)
and (iii) above occurring, shall have a Material Adverse Effect; or
(k) Either (i) any principal amount of any of the Indenture
Notes shall be subject to a required repurchase, redemption or
prepayment (including without limitation under or pursuant to Article
Three, Article Four or Article Eight of any Indenture) other than the
scheduled mandatory redemption of 25% of the original payment amount of
the First Indenture Notes on March 1 of 1998, 1999, 2000 and 2001 or
(ii) an Event of Default (as defined in any Indenture) shall occur under
any Indenture; or
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(l) Debt under any of the Indenture Documents has been
accelerated prior to the scheduled maturity thereof; or
(m) CEC ceases to own, directly or indirectly, a 100% ownership
interest in Borrower; or
(n) Borrower is terminated or dissolved.
8.02. Lenders' Knowledge of Events of Default. No Lender shall be
deemed to have knowledge of the occurrence of any Default or Event of Default
unless such Lender has received written notice from Borrower specifying such
Default or Event of Default. In the event Agent or any Lender receives such
notice of the occurrence of a Default or an Event of Default, Agent or such
Lender shall give notice thereof to Borrower.
8.03. Remedies Upon Event of Default. If an Event of Default occurs
and is continuing, then Agent may and upon written instructions from Majority
Lenders, Agent shall exercise any one or more of the following Rights, and any
other Rights provided in any of the Loan Documents: (i) terminate the
commitments to lend hereunder, (ii) declare the principal of, and all interest
on, the Notes and any other obligations hereunder to be forthwith due and
payable, whereupon the same shall forthwith become due and payable without
presentment, demand, protest, notice of default, notice of acceleration or of
intention to accelerate or other notice of any kind, all of which Borrower
hereby expressly waives, anything contained herein or in the Notes to the
contrary notwithstanding, (iii) reduce any claim to judgment and/or (iv)
without notice of default or demand, pursue and enforce any of Agent's or
Lenders' Rights under the Loan Documents or otherwise provided under or
pursuant to any applicable Law or agreement; provided, however, that if any
Event of Default specified in Sections 8.01(f), (g), (l) or (n) shall occur,
the principal of, and all interest then accrued on, the Notes and other
liabilities hereunder shall thereupon become due and payable automatically and
concurrently therewith, and Lenders' obligations to lend shall immediately
terminate hereunder, without any further action by Agent or Lenders and without
presentment, demand, protest, notice of default, notice of acceleration or of
intention to accelerate or other notice of any kind, all of which Borrower
hereby expressly waives.
8.04. Performance by Agent. Should Borrower or CEC fail to perform any
covenant, duty or agreement contained in any of the Loan Documents, Agent may
perform or attempt to perform such covenant, duty or agreement on behalf of
Borrower or CEC. Agent will give Borrower notice of such performance or
attempted performance. Borrower and CEC shall, at the request of Agent,
promptly pay any amount expended in such performance or attempted performance
to Agent at its principal office, together with interest thereon at the Default
Rate. Notwithstanding the foregoing, it is expressly understood that Agent
assumes no liability or responsibility for the performance of any duties of
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any Company hereunder or under any of the Loan Documents or any other
documents, or other control over the management and affairs of any Company.
ARTICLE NINE
AGENT
9.01. Appointment and Authority. Each Lender hereby irrevocably
authorizes Agent, and Agent hereby undertakes, to receive payments of
principal, interest and other amounts due hereunder as specified herein, to
hold and deal with all Liens securing the Obligations, and to take all other
actions and to exercise such powers under the Loan Documents as are
specifically delegated to Agent by the terms hereof or thereof, together with
all other powers reasonably incidental thereto. The relationship of Agent to
Lenders is only that of one commercial bank acting as administrative agent for
others, and nothing in the Loan Documents shall be construed to constitute
Agent a trustee or other fiduciary for any holder of any of the Notes or of any
participation therein nor to impose on Agent duties and obligations other than
those expressly provided for in the Loan Documents. With respect to any
matters not expressly provided for in the Loan Documents and any matters which
the Loan Documents place within the discretion of Agent, Agent shall not be
required to exercise any discretion or take any action, and it may request
instructions from Lenders with respect to any such matter, in which case it
shall be required to act or to refrain from acting (and shall be fully
protected and free from liability to all Lenders in so acting or refraining
from acting) upon the instructions of Majority Lenders (including itself),
provided, however, that Agent shall not be required to take any action which
exposes it to a risk of personal liability that it considers unreasonable or
which is contrary to the Loan Documents or to applicable law. Upon receipt by
Agent from Borrower of any communication calling for action on the part of
Lenders or upon notice from any Lender to Agent of any Default or Event of
Default, Agent shall promptly notify each Lender thereof.
9.02. Exculpation, Agent's Reliance, Etc. NEITHER AGENT NOR ANY OF ITS
DIRECTORS, OFFICERS, AGENTS, ATTORNEYS, OR EMPLOYEES SHALL BE LIABLE FOR ANY
ACTION TAKEN OR OMITTED TO BE TAKEN BY ANY OF THEM UNDER OR IN CONNECTION WITH
THE LOAN DOCUMENTS, INCLUDING THEIR NEGLIGENCE OF ANY KIND, EXCEPT THAT EACH
SHALL BE LIABLE FOR ITS OWN GROSS NEGLIGENCE OR WILLFUL MISCONDUCT. Without
limiting the generality of the foregoing, Agent (a) may treat the payee of any
Note as the holder thereof until Agent receives written notice of the
assignment or transfer thereof in accordance with this Agreement, signed by
such payee and in form satisfactory to Agent; (b) may consult with legal
counsel (including counsel for the Companies), independent public accountants
and other experts selected by it and shall not be liable for any action taken
or omitted to be taken in good faith
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by it in accordance with the advice of such counsel, accountants or experts;
(c) makes no warranty or representation to any Lender and shall not be
responsible to any Lender for any statements, warranties or representations
made in or in connection with the Loan Documents; (d) shall not have any duty
to ascertain or to inquire as to the performance or observance of any of the
terms, covenants or conditions of the Loan Documents on the part of any Company
or to inspect the property (including the books and records) of any Company;
(e) shall not be responsible to any Lender for the due execution, legality,
validity, enforceability, genuineness, sufficiency or value of any Loan
Document or any instrument or document furnished in connection therewith; (f)
may rely upon the representations and warranties of the Companies and Lenders
in exercising its powers hereunder; and (g) shall incur no liability under or
in respect of the Loan Documents by acting upon any notice, consent,
certificate or other instrument or writing (including any telecopy, telegram,
cable or telex) believed by it to be genuine and signed or sent by the proper
Person or Persons.
9.03. Lenders' Credit Decisions. Each Lender acknowledges that it has,
independently and without reliance upon Agent or any other Lender, made its own
analysis of Borrower and the transactions contemplated hereby and its own
independent decision to enter into this Agreement and the other Loan Documents.
Each Lender also acknowledges that it will, independently and without reliance
upon Agent or any other Lender and based on such documents and information as
it shall deem appropriate at the time, continue to make its own credit
decisions in taking or not taking action under the Loan Documents.
9.04. INDEMNIFICATION. EACH LENDER AGREES TO INDEMNIFY AGENT (TO THE
EXTENT NOT REIMBURSED BY BORROWER WITHIN TEN (10) DAYS AFTER DEMAND) FROM AND
AGAINST SUCH LENDER'S PERCENTAGE SHARE OF ANY AND ALL LIABILITIES, OBLIGATIONS,
CLAIMS, LOSSES, DAMAGES, PENALTIES, FINES, ACTIONS, JUDGMENTS, SUITS,
SETTLEMENTS, COSTS, EXPENSES OR DISBURSEMENTS (INCLUDING REASONABLE FEES OF
ATTORNEYS, ACCOUNTANTS, EXPERTS AND ADVISORS) OF ANY KIND OR NATURE WHATSOEVER
(IN THIS SECTION COLLECTIVELY CALLED "LIABILITIES AND COSTS") WHICH TO ANY
EXTENT (IN WHOLE OR IN PART) MAY BE IMPOSED ON, INCURRED BY, OR ASSERTED
AGAINST AGENT GROWING OUT OF, RESULTING FROM OR IN ANY OTHER WAY ASSOCIATED
WITH ANY OF THE COLLATERAL, THE LOAN DOCUMENTS AND THE TRANSACTIONS AND EVENTS
(INCLUDING THE ENFORCEMENT THEREOF) AT ANY TIME ASSOCIATED THEREWITH OR
CONTEMPLATED THEREIN (INCLUDING ANY VIOLATION OR NONCOMPLIANCE WITH ANY
ENVIRONMENTAL LAWS BY ANY PERSON). THE FOREGOING INDEMNIFICATION SHALL APPLY
WHETHER OR NOT SUCH LIABILITIES AND COSTS ARE IN ANY WAY OR TO ANY EXTENT
CAUSED, IN WHOLE OR IN PART, BY ANY NEGLIGENT ACT OR OMISSION OF ANY KIND BY
AGENT, PROVIDED ONLY THAT NO LENDER SHALL BE OBLIGATED UNDER THIS SECTION TO
INDEMNIFY AGENT FOR THAT PORTION, IF ANY, OF ANY LIABILITIES AND COSTS WHICH IS
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PROXIMATELY CAUSED BY AGENT'S OWN INDIVIDUAL GROSS NEGLIGENCE OR WILLFUL
MISCONDUCT, AS DETERMINED IN A FINAL JUDGMENT. CUMULATIVE OF THE FOREGOING,
EACH LENDER AGREES TO REIMBURSE AGENT PROMPTLY UPON DEMAND FOR SUCH LENDER'S
PERCENTAGE SHARE OF ANY COSTS AND EXPENSES TO BE PAID TO AGENT BY BORROWER
UNDER SECTION 10.05 TO THE EXTENT THAT AGENT IS NOT TIMELY REIMBURSED FOR SUCH
EXPENSES BY BORROWER AS PROVIDED IN SUCH SECTION. AS USED IN THIS SECTION THE
TERM "AGENT" SHALL REFER NOT ONLY TO THE PERSON DESIGNATED AS SUCH IN SECTION
1.01 BUT ALSO TO EACH DIRECTOR, OFFICER, AGENT, ATTORNEY, EMPLOYEE,
REPRESENTATIVE AND AFFILIATE OF SUCH PERSON.
9.05. Rights as Lender. In its capacity as a Lender, Agent shall have
the same rights and obligations as any Lender and may exercise such rights as
though it were not Agent. Agent may accept deposits from, lend money to, act
as Trustee under indentures of, and generally engage in any kind of business
with any of the Companies or their Affiliates, all as if it were not Agent
hereunder and without any duty to account therefor to any other Lender.
9.06. Investments. Whenever Agent in good faith determines that it is
uncertain about how to distribute to Lenders any funds which it has received,
or whenever Agent in good faith determines that there is any dispute among
Lenders about how such funds should be distributed, Agent may choose to defer
distribution of the funds which are the subject of such uncertainty or dispute.
If Agent in good faith believes that the uncertainty or dispute will not be
promptly resolved, or if Agent is otherwise required to invest funds pending
distribution to Lenders, Agent shall invest such funds pending distribution;
all interest on any such investment shall be distributed upon the distribution
of such investment and in the same proportion and to the same Persons as such
investment. All moneys received by Agent for distribution to Lenders (other
than to the Person who is Agent in its separate capacity as a Lender) shall be
held by Agent pending such distribution solely as Agent for such Lenders, and
Agent shall have no equitable title to any portion thereof.
9.07. Benefit of Article Nine. The provisions of this Article (other
than the following Section 9.08) are intended solely for the benefit of Agent
and Lenders, and no Company shall be entitled to rely on any such provision or
assert any such provision in a claim or defense against Agent or any Lender.
Agent and Lenders may waive or amend such provisions as they desire without any
notice to or consent of Borrower or any other Company.
9.08. Resignation. Agent may resign at any time by giving written
notice thereof to Lenders and Borrower. Each such notice shall set forth the
date of such resignation. Upon any such resignation Majority Lenders shall
have the right to appoint a successor Agent. A successor must be appointed for
any
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retiring Agent, and such Agent's resignation shall become effective when such
successor accepts such appointment. If, within thirty days after the date of
the retiring Agent's resignation, no successor Agent has been appointed and has
accepted such appointment, then the retiring Agent may appoint a successor
Agent, which shall be a commercial bank organized or licensed to conduct a
banking or trust business under the laws of the United States of America or of
any state thereof. Upon the acceptance of any appointment as Agent hereunder
by a successor Agent, the retiring Agent shall be discharged from its duties
and obligations under this Agreement and the other Loan Documents. After any
retiring Agent's resignation hereunder the provisions of this Article Nine
shall continue to inure to its benefit as to any actions taken or omitted to be
taken by it while it was Agent under the Loan Documents.
ARTICLE TEN
MISCELLANEOUS
10.01. Strict Compliance; Independence of Covenants. If any action or
failure to act by Borrower or CEC violates any covenant or obligation of
Borrower or CEC contained herein, then such violation shall not be excused by
the fact that such action or failure to act would otherwise be required or
permitted by any covenant (or exception to any covenant) other than the
covenant violated.
10.02. Amendments and Waivers. No failure or delay (whether by course
of conduct or otherwise) by Agent or any Lender in exercising any right, power
or remedy which Agent or such Lender may have under any of the Loan Documents
shall operate as a waiver thereof or of any other right, power or remedy, nor
shall any single or partial exercise by Agent or such Lender of any such right,
power or remedy preclude any other or further exercise thereof or of any other
right, power or remedy. No waiver of any provision of any Loan Document and no
consent to any departure therefrom shall ever be effective unless it is in
writing and signed as provided below in this section, and then such waiver or
consent shall be effective only in the specific instances and for the purposes
for which given and to the extent specified in such writing. No notice to or
demand on any Company shall in any case of itself entitle any Company to any
other or further notice or demand in similar or other circumstances. This
Agreement and the other Loan Documents set forth the entire understanding
between the parties hereto with respect to the transactions contemplated herein
and therein and supersede all prior discussions and understandings with respect
to the subject matter hereof and thereof, and no waiver, consent, release,
modification or amendment of or supplement to this Agreement or the other Loan
Documents shall be valid or effective against any party hereto unless the same
is in writing and signed by (i) if such party is Borrower, by Borrower (ii)if
such party is Agent,
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by Agent and (iii) if such party is a Lender, by such Lender or by Agent on
behalf of Lenders with the written consent of Majority Lenders.
Notwithstanding the foregoing or anything to the contrary herein, Agent shall
not, without the prior consent of each individual Lender, execute and deliver
on behalf of such Lender any waiver or amendment which would: (1) waive any of
the conditions specified in Article Four (provided that Agent may in its
discretion withdraw any request it has made under Section 4.01(s)), (2) subject
such Lender to any additional obligations, (3) reduce any fees hereunder, or
the principal of, or interest on, such Lender's Notes, (4) postpone any date
fixed for any payment of any fees hereunder, or principal of, or interest on,
such Lender's Notes, (5) amend the definition herein of "Majority Lenders" or
otherwise change the aggregate amount of Percentage Shares which is required
for Agent, Lenders or any of them to take any particular action under the Loan
Documents, (6) amend any of the provisions of Article IX, (7) release Borrower
from its obligation to pay such Lender's Note or (8) release any guarantor from
its payment obligations to such Lender.
10.03. Accounting Reports. All financial reports furnished by Borrower
and CEC pursuant to this Agreement shall be prepared in such form and such
detail as shall be reasonably satisfactory to Agent, shall be prepared in
accordance with GAAP and, as to CEC, shall be the same financial reports as
those furnished to CEC's shareholders.
10.04. No Implied Waivers of Rights. No failure to exercise, and no
delay in exercising, on the part of Agent or any Lender, any Right shall
operate as a waiver thereof, nor shall any single or partial exercise thereof
preclude any other or further exercise thereof or the exercise of any other
Right. No notice or demand given in any case shall constitute a waiver of the
right to take other action in the same, similar or other instances without such
notice or demand.
10.05. Payment of Expenses: Indemnity.
(a) Borrower and CEC, jointly and severally, agree to pay all
costs and expenses (i) of Agent and each Lender (including, without
limitation, all reasonable attorneys' fees, costs and expenses of Agent
or such Lender's legal counsel) incurred in connection with the
negotiation, preparation, execution and delivery of the Loan Documents
and any and all renewals, amendments, waivers and modifications thereto
and any and all participation, sales and assignments of interests in the
Notes and (ii) of Agent and each Lender in connection with the
preservation and enforcement of Agent's and Lenders' Rights after an
Event of Default under the Loan Documents, specifically including,
without limitation, all costs and expenses incurred with respect to any
bankruptcy, insolvency or reorganization proceeding, regardless of
whether Agent or Lenders ultimately prevail in such bankruptcy,
insolvency or
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reorganization proceeding. Borrower and CEC, jointly and severally,
shall indemnify and hold harmless Agent and each Lender against any
transfer taxes, excise taxes, documentary taxes, assessments or charges
made by any Tribunal or any other Person by reason of the execution and
delivery of this Agreement, the Notes or any other Loan Document, any
modifications thereof or in connection with the Collateral.
(b) BORROWER AND CEC, JOINTLY AND SEVERALLY, SHALL INDEMNIFY,
DEFEND AND SAVE HARMLESS, AGENT, EACH LENDER AND ITS OFFICERS,
DIRECTORS, EMPLOYEES, AGENTS AND ATTORNEY, AND EACH OF THEM (THE
"INDEMNIFIED PARTIES"), FROM AND AGAINST ALL CLAIMS, ACTIONS, SUITS AND
OTHER LEGAL PROCEEDINGS, DAMAGES, COSTS, INTEREST, CHARGES, COUNSEL FEES
AND OTHER EXPENSES AND PENALTIES WHICH ANY OF THE INDEMNIFIED PARTIES
MAY SUSTAIN OR INCUR BY REASON OF OR ARISING OUT OF THE EXECUTION AND
DELIVERY OF ANY OF THE LOAN DOCUMENTS, THE CONSUMMATION OF THE
TRANSACTIONS CONTEMPLATED THEREBY OR HEREBY (COLLECTIVELY, THE "SUBJECT
TRANSACTIONS"), INCLUDING, WITHOUT LIMITATION, DAMAGES, COSTS AND
EXPENSES INCURRED BY ANY OF THE INDEMNIFIED PARTIES IN INVESTIGATING,
PREPARING FOR, DEFENDING AGAINST, OR PROVIDING EVIDENCE, PRODUCING
DOCUMENTS, OR TAKING ANY OTHER ACTION IN RESPECT OF ANY COMMENCED OR
THREATENED LITIGATION UNDER ANY FEDERAL SECURITIES LAW OR ANY OTHER LAW
OF ANY JURISDICTION OR AT COMMON LAW WHICH IS ALLEGED TO ARISE OUT OF OR
IS BASED UPON:
(i) THE CLAIMS OF ANY PERSON THAT, IN CONNECTION WITH
THE SUBJECT TRANSACTIONS, ANY OF THE INDEMNIFIED PARTIES HAS
VIOLATED ANY FIDUCIARY OR CONFIDENTIALITY RESPONSIBILITIES, OR
ANY REPRESENTATIONS, WARRANTIES OR COVENANTS, EXPRESS OR IMPLIED,
MADE OR ALLEGED TO HAVE BEEN MADE BY ANY OF THE INDEMNIFIED
PARTIES, TO OR IN FAVOR OF SUCH PERSON;
(ii) ANY UNTRUE STATEMENT OR ALLEGED UNTRUE STATEMENT OF
ANY MATERIAL FACT BY BORROWER OR CEC OR ANY AFFILIATE OF BORROWER
OR CEC OR ANY DOCUMENT OR SCHEDULE FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION OR ANY OTHER GOVERNMENTAL BODY;
(iii) ANY OMISSION OR ALLEGED OMISSION TO STATE ANY
MATERIAL FACT REQUIRED TO BE STATED IN SUCH DOCUMENT OR SCHEDULE
OR NECESSARY TO MAKE THE STATEMENTS MADE THEREIN NOT MISLEADING
IN LIGHT OF THE CIRCUMSTANCES UNDER WHICH MADE;
(iv) ANY WITHDRAWALS, TERMINATION OR CANCELLATION OF ANY
AGREEMENT PURSUANT TO WHICH BORROWER INTENDS TO ACQUIRE ASSETS;
OR
(v) ANY OTHER CLAIMS OF ANY NATURE WHATSOEVER ARISING
FROM OR RELATED TO THE SUBJECT TRANSACTIONS.
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(c) BORROWER AND CEC, JOINTLY AND SEVERALLY, SHALL INDEMNIFY,
DEFEND AND SAVE HARMLESS THE INDEMNIFIED PARTIES FROM AND AGAINST ALL
CLAIMS, ACTIONS, SUITS AND OTHER LEGAL PROCEEDINGS, DAMAGES, COSTS,
INTEREST, CHARGES, COUNSEL FEES AND OTHER EXPENSES AND PENALTIES WHICH
ANY OF THE INDEMNIFIED PARTIES MAY SUSTAIN OR INCUR BY REASON OF OR
ARISING OUT OF ANY ENVIRONMENTAL LIABILITY ARISING FROM OR RELATED TO
THE SUBJECT TRANSACTIONS.
(d) THIS AGREEMENT IS INTENDED TO PROTECT AND INDEMNIFY THE
INDEMNIFIED PARTIES AGAINST ALL RISKS INVOLVED IN THE SUBJECT
TRANSACTIONS INCLUDING, WITHOUT LIMITATION, THE NEGLIGENCE OF AGENT OR
ANY LENDER, ALL OF WHICH ARE HEREBY ASSUMED BY BORROWER AND CEC, JOINTLY
AND SEVERALLY. THE OBLIGATIONS OF BORROWER AND CEC UNDER THIS SECTION
10.05 SHALL SURVIVE ANY TERMINATION OF THIS AGREEMENT AND PAYMENT OF THE
NOTES;
PROVIDED, THAT NO INDEMNIFIED PARTY SHALL BE ENTITLED TO INDEMNIFICATION TO THE
EXTENT ITS OWN GROSS NEGLIGENCE OR WILLFUL MISCONDUCT CONTRIBUTED TO ITS LOSS.
10.06. Notices. Except for telephonic notices permitted herein, any
notices or other communications required or permitted to be given by any Loan
Documents and instruments referred to herein must be (i) given in writing and
personally delivered or mailed by prepaid certified or registered mail, or (ii)
made by telex or telecopy delivered or transmitted, to the party to whom such
notice of communication is directed, to the address of such party as follows:
(A) Borrower and CEC: Chesapeake Energy Corporation or Chesapeake Exploration
Limited Partnership, 6104 North Western, Oklahoma City, Oklahoma 73118
(Attention: Chief Financial Officer) with a copy to Self, Giddens & Lees, Inc.,
2725 Oklahoma Tower, 210 Park Avenue, Oklahoma City, Oklahoma 73102 (Attention:
C. Ray Lees); (B) Agent: Union Bank of California, N.A., 500 North Akard, 4200
Lincoln Plaza, Dallas, Texas 75201 (Attention: Randall L. Osterberg), with a
copy to Thompson & Knight, P.C., 3300 First City Center, 1700 Pacific Avenue,
Dallas, Texas 75201 (Attention: James W. McKellar, Esquire) and (C) to each
Lender at the address set forth for such Lender on Schedule 1 hereto. Any
notice to be mailed or personally delivered may be mailed or delivered to the
principal offices of the party to whom such notice is addressed. Any such
notice or other communication shall be deemed to have been given (whether
actually received or not) on the third day after it is mailed or the day it is
personally delivered as aforesaid or, if transmitted by telex or telecopy, on
the day that such notice is transmitted as aforesaid. Any party may change its
address for purposes of this Agreement by giving notice of such change to the
other parties pursuant to this Section 10.06.
10.07. GOVERNING LAW. THIS AGREEMENT HAS BEEN NEGOTIATED, AND IS BEING
EXECUTED AND DELIVERED, IN THE STATE OF TEXAS, AND THE SUBSTANTIVE LAWS OF SUCH
STATE AND THE APPLICABLE
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FEDERAL LAWS OF THE USA SHALL GOVERN THE VALIDITY, CONSTRUCTION, ENFORCEMENT
AND INTERPRETATION OF THE LOAN DOCUMENTS, EXCEPT TO THE EXTENT THE LAWS OF ANY
JURISDICTION WHERE OTHER COLLATERAL IS LOCATED REQUIRE APPLICATION OF SUCH LAWS
WITH RESPECT TO SUCH COLLATERAL; PROVIDED, THAT, THE LAWS OF TEXAS AND/OR THE
USA SHALL NOT LIMIT THE AMOUNT OR RATE OF INTEREST WHICH THE HOLDER OF THE
NOTES MAY CONTRACT FOR, CHARGE, RECEIVE, COLLECT AND/OR APPLY IF OTHER
APPLICABLE LAWS PERMIT A HIGHER AMOUNT OR RATE.
10.08. CHOICE OF FORUM AND JURISDICTION. THE OBLIGATIONS OF BORROWER OR
CEC FOR PAYMENT OF ALL AMOUNTS DUE UNDER THIS AGREEMENT AND THE LOAN DOCUMENTS
ARE PERFORMABLE IN LOS ANGELES COUNTY, CALIFORNIA, AND ALL OTHER OBLIGATIONS OF
BORROWER OR CEC UNDER THIS AGREEMENT AND THE LOAN DOCUMENTS ARE PERFORMABLE IN
DALLAS COUNTY, TEXAS. ANY SUIT, ACTION OR PROCEEDING AGAINST BORROWER OR CEC
WITH RESPECT TO THIS AGREEMENT, THE NOTES, THE OTHER LOAN DOCUMENTS OR ANY
JUDGMENT ENTERED BY ANY COURT IN RESPECT THEREOF, MAY BE BROUGHT IN THE COURTS
OF THE STATE OF TEXAS, COUNTY OF DALLAS, OR IN THE UNITED STATES COURTS LOCATED
IN THE STATE OF TEXAS AS AGENT MAY ELECT, AND BORROWER AND CEC HEREBY SUBMIT TO
THE NON-EXCLUSIVE JURISDICTION OF SUCH COURTS FOR THE PURPOSE OF ANY SUCH SUIT,
ACTION OR PROCEEDING. BORROWER AND CEC EACH HEREBY IRREVOCABLY WAIVE ANY
OBJECTIONS WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY
SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT, THE
NOTES OR ANY OTHER LOAN DOCUMENT BROUGHT IN THE COURTS LOCATED IN THE STATE OF
TEXAS, COUNTY OF DALLAS, AND HEREBY FURTHER IRREVOCABLY WAIVES ANY CLAIM THAT
ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT
IN AN INCONVENIENT FORUM.
10.09. Invalid Provisions. If any provision of any Loan Document is
held to be illegal, invalid or unenforceable under present or future Laws
during the term of this Agreement, such provision shall be fully severable;
such Loan Document shall be construed and enforced as if such illegal, invalid
or unenforceable provision had never comprised a part of such Loan Document;
and the remaining provisions of such Loan Document shall remain in full force
and effect and shall not be affected by the illegal, invalid or unenforceable
provision or by its severance from such Loan Document.
10.10. Limitation on Interest. Agent, each Lender, the Companies and
any other parties to the Loan Documents intend to contract in strict compliance
with applicable usury law from time to time in effect. In furtherance thereof
such Persons stipulate and agree that none of the terms and provisions
contained in the Loan Documents shall ever be construed to create a contract to
pay, for the use, forbearance or detention of money, interest in excess of the
maximum amount of interest permitted to be charged by applicable law from time
to time in effect. Neither any Companies nor any present or future guarantors,
endorsers, or other Persons hereafter becoming liable for payment of any
Obligation shall ever be liable for unearned interest thereon or shall ever be
required to pay interest thereon in excess of the
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maximum amount that may be lawfully charged under applicable law from time to
time in effect, and the provisions of this section shall control over all other
provisions of the Loan Documents which may be in conflict or apparent conflict
herewith. Agent and each Lender expressly disavows any intention to charge or
collect excessive unearned interest or finance charges in the event the
maturity of any Obligation is accelerated. If (a) the maturity of any
Obligation is accelerated for any reason, (b) any Obligation is prepaid and as
a result any amounts held to constitute interest are determined to be in excess
of the legal maximum, or (c) Agent, any Lender or any other holder of any or
all of the Obligations shall otherwise collect monies which are determined to
constitute interest which would otherwise increase the interest on any or all
of the Obligations to an amount in excess of that permitted to be charged by
applicable law then in effect, then all such sums determined to constitute
interest in excess of such legal limit shall, without penalty, be promptly
applied to reduce the then outstanding principal of the related Obligations or,
at Agent's, such Lender's or such holder's option, promptly returned to
Borrower or the other payor thereof upon such determination. In determining
whether or not the interest paid or payable, under any specific circumstance,
exceeds the maximum amount permitted under applicable law, Agent, Lenders and
the Companies (and any other payors thereof) shall to the greatest extent
permitted under applicable law, (i) characterize any non-principal payment as
an expense, fee or premium rather than as interest, (ii) exclude voluntary
prepayments and the effect thereof, and (iii) amortize, prorate, allocate, and
spread the total amount of interest throughout the entire contemplated term of
the instruments evidencing the Obligations in accordance with the amounts
outstanding from time to time thereunder and the maximum legal rate of interest
from time to time in effect under applicable law in order to lawfully charge
the maximum amount of interest permitted under applicable law. In the event
applicable law provides for an interest ceiling under Texas Revised Civil
Statutes Annotated article 5069- 1.04, that ceiling shall be the indicated rate
ceiling and shall be used when appropriate in determining the Highest Lawful
Rate. As used in this section the term "applicable law" means the laws of the
State of Texas or the laws of the United States of America, whichever laws
allow the greater interest, as such laws now exist or may be changed or amended
or come into effect in the future.
10.11. Offset. Borrower hereby grants to Agent and each Lender the
right of offset to secure repayment of the Obligations, upon any and all
moneys, securities or other property of Borrower and the proceeds therefrom,
now or hereafter held or received by or in transit to Agent or such Lender or
any of its agents, from or for the account of Borrower, whether for safe
keeping, custody, pledge, transmission, collection or otherwise, and also upon
any and all deposits (general or special) and credits of Borrower, and any and
all claims of Borrower against Agent or such Lender at any time existing.
Borrower agrees that any lender purchasing a participation from
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any Lender may, to the fullest extent permitted by law, exercise all of such
Lender's rights of payment (including the right of set-off) with respect to
such participation as fully as if such lender were the direct creditor of
Borrower as appropriate in the amount of such participation. Borrower agrees
that the Loans hereunder are the genesis of all future revenues of Borrower
from which deposit accounts of Borrower with Agent will have arisen, and are a
result of the Agreement and the transactions contemplated hereby; and Agent and
each Lender shall be entitled to exercise the right of recoupment with respect
to all such deposit accounts.
10.12. Binding Effect. The Loan Documents shall be binding upon and
inure to the benefit of Borrower, CEC and Lenders and their respective
successors and assigns; provided, however, Borrower may not, without the prior
written consent of Majority Lenders, assign any rights, powers, duties or
obligations thereunder. Neither any Company nor any Affiliates of any Company
shall directly or indirectly purchase or otherwise retire any Obligations owed
to any Lender nor will any Lender accept any offer to do so, unless each Lender
shall have received substantially the same offer with respect to the same
Percentage Share of the Obligations owed to it. If any Company or any
Affiliate of any Company at any time purchases some but less than all of the
Obligations owed to Agent and all Lenders, such purchaser shall not be entitled
to any rights of Agent or any Lender under the Loan Documents unless and until
any Company or its Affiliates have purchased all of the Obligations.
10.13. Table of Contents and Headings. The table of contents and
section headings are for convenience of reference only and shall in no way
affect the interpretation of this Agreement.
10.14. Survival. All representations, warranties, conditions and
covenants made herein shall survive the execution and delivery of the Loan
Documents and the making of the Loans, and no investigation by Agent or any
Lender nor any closing shall affect the representations, warranties, conditions
and covenants of Borrower or CEC or the right of Agent or any Lender to rely on
and enforce them. Any Obligations under Sections 3.14 through 3.17 shall
survive any termination of this Agreement or any other Loan Document.
10.15. Assignments and Participations.
(a) Any Lender may from time to time grant participations in all
or any part of the Obligations owed to such Lender to any Person (a
"Participant") on such terms and conditions as may be determined by such
Lender in its sole and absolute discretion, provided that the grant of
such participation shall not relieve any Lender of its obligations
hereunder nor create any additional obligations of any Company, provided
further, that the Companies agree that if any Obligations are due and
unpaid, or shall have
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been declared or shall have become due and payable upon the occurrence
and during the continuance of an Event of Default, each Participant
shall be deemed to have the right of setoff in respect of its
participation interest in amounts owing under the Loan Documents to the
same extent as if the amount of its participating interest were owing
directly to it as a Lender under the Loan Documents, provided further,
that such right of setoff shall be subject to the obligations of such
Participant to share with Lenders and Lenders agree to share with such
Participant. Borrower also agrees that each participant shall be
entitled to the benefits of Section 2.03 provided that no Participant
shall be entitled to receive any greater amount pursuant to such section
than the transferor Lender would have been entitled to receive in
respect of the amount of the participating interest transferred by such
transferor Lender to such Participant had no such transfer occurred.
Each Lender agrees that any agreement between such Lender and any such
Participant in respect of such participating interest shall not restrict
such Lender's right to agree to any amendment, supplement, waiver or
modification to this Agreement or any other Loan Document, except for
actions which would require the consent of all Lenders under Section
10.02.
(b) Each Lender may at any time sell to one or more financial
institutions (a "Purchasing Lender") any part of its rights and
obligations under the Loan Documents pursuant to an Assignment and
Acceptance, substantially in the form of Exhibit "N", appropriately
completed, executed by such Purchasing Lender, such transferor Lender
and Agent; provided that such transferor Lender shall have received the
prior written consent thereto of Agent and Borrower (which consent shall
not be unreasonably withheld), and provided further that no Lender shall
hold an interest in Loans under this Agreement which in the aggregate is
less than $10,000,000. Upon (x) delivery to Agent of both an
appropriately completed Assignment and Acceptance and an appropriately
completed Agreement to Be Bound in the form of Exhibit "O", (y) payment
of a processing fee payable to the Agent in the amount of $5,000, and
(z) payment of the amount of its participation, the Purchasing Lender
shall for all purposes be a Lender party to this Agreement and shall
have all the rights and obligations of a Lender under this Agreement, to
the same extent as if it were an original party hereto with the
Percentage Share of the Loans set forth in the Assignment and
Acceptance. Upon the consummation of any transfer pursuant to this
Section 10.15(b), the transferor Lender, Agent and Borrower shall make
appropriate arrangements so that, if required, replacement Notes are
issued to such transferor Lender and new Notes or, as appropriate,
replacement Notes, are issued to such Purchasing Lender, in each case in
principal amounts reflecting their respective Percentage Shares of the
Loans. Prior to selling or otherwise transferring any Note, transferor
Lender shall endorse on such Note all Loans and
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all payments of principal and interest that have been made in respect of
such Note.
(c) Nothing contained in this Section 10.15 shall prevent or
prohibit any Lender from assigning or pledging all or any portion of its
Loan and its Note to any Federal Reserve Bank as collateral security
pursuant to Regulation A of the Board of Governors of the Federal
Reserve System and any Operating Circular issued by such Federal Reserve
Bank; provided that no such assignment or pledge shall relieve such
Lender from its obligations hereunder.
10.16. Benefit. Without prior written consent of Majority Lenders,
neither Borrower nor CEC may transfer or assign its Rights and obligations
under any Loan Documents and, subject to such restriction, the provisions
hereof and of the other Loan Documents shall extend to and be binding upon the
successors and assigns of Borrower and CEC; all covenants and agreements
contained herein by or on behalf of any of the parties hereto shall bind and
inure to the benefit of, and be enforceable by, the respective successors and
assigns of the parties hereto, whether so expressed or not, and, in particular,
shall inure to the benefit of, and be enforceable by, the holder or holders of
the Notes. The parties do not intend the benefits of the Loan Documents to
inure to the benefit of any third party, nor shall the Loan Documents be
construed to make or render Agent or any Lender liable to any materialmen,
supplier, contractor, subcontractor, purchaser or lessee of any property owned
by Borrower, or for debts or claims accruing to any such Person against
Borrower. Notwithstanding anything contained in the Loan Documents or any
conduct or course of conduct by any or all of the parties hereto, before or
after signing this Agreement, nothing in any Loan Document shall be construed
as creating any right, claim or cause of action against Agent or any Lender or
any of its officers, directors, or employees, in favor of any materialmen,
supplier, contractor, subcontractor, purchaser or lessee of any property owned
by Borrower, nor in favor of any other Person other than Borrower.
10.17. Multiple Counterparts. This Agreement may be executed in any
number of counterparts, all of which taken together shall constitute one and
the same agreement, and any of the parties hereto may execute this Agreement by
signing any such counterpart.
10.18. Article 15.10(b). Borrower, Agent and Lenders hereby agree that,
except for Section 15.10(b) thereof, the provisions of Art. 5069-15.01 et seq.
of the Revised Civil Statutes of Texas, 1925, as amended (regulating certain
revolving credit loans and revolving tri-party accounts), shall not apply to
the Loan Documents.
10.19. WRITTEN LOAN AGREEMENT. THIS WRITTEN LOAN AGREEMENT AND THE
OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AS OF
THE DATE HEREOF AND MAY NOT
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BE CONTRADICTED BY EVIDENCE OF ANY ACTUAL, ALLEGED OR OTHER PRIOR,
CONTEMPORANEOUS OR SUBSEQUENT UNDERSTANDINGS OR AGREEMENTS OF THE PARTIES,
WRITTEN OR ORAL, EXPRESSED OR IMPLIED, OTHER THAN A WRITING WHICH EXPRESSLY
AMENDS OR SUPERSEDES THIS AGREEMENT. THERE ARE NO UNWRITTEN, ORAL AGREEMENTS
BETWEEN THE PARTIES.
10.20. Restatement. This Agreement restates and amends the Original
Agreement, in its entirety effective as of the Closing Date, and all of the
terms and provisions hereof shall supersede the terms and provisions thereof.
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IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the day and year first above written.
BORROWER:
CHESAPEAKE EXPLORATION LIMITED PARTNERSHIP
By: CHESAPEAKE OPERATING, INC.,
its general partner
By: /s/ AUBREY K. MCCLENDON
-----------------------------------------
Aubrey K. McClendon
President
CEC:
CHESAPEAKE ENERGY CORPORATION
By: /s/ AUBREY K. MCCLENDON
-----------------------------------------
Aubrey K. McClendon
Chief Executive Officer
AGENT:
UNION BANK OF CALIFORNIA, N.A.
By: /s/ RANDALL L. OSTERBERG
-----------------------------------------
Randall L. Osterberg
Vice President
By: /s/ MICHAEL TREGONING
-----------------------------------------
Name: Michael Tregoning
Title: Senior Vice President
66
<PAGE> 73
LENDERS:
UNION BANK OF CALIFORNIA, N.A.
By: /s/ RANDALL L. OSTERBERG
-----------------------------------
Randall L. Osterberg
Vice President
By: /s/ MICHAEL TREGONING
-----------------------------------
Name: Michael Tregoning
Title: Senior Vice President
THE FIRST NATIONAL BANK OF CHICAGO
By: /s/ DIXON P. SCHULTZ
-----------------------------------
Name: Dixon P. Schultz
Title: Vice President
BANKERS TRUST COMPANY
By: /s/ MARY JO JOLLY
-----------------------------------
Name: Mary Jo Jolly
Title: Assistant Vice President
67
<PAGE> 74
SCHEDULE 1
SCHEDULE OF LENDERS
Lender Percentage Share
------ ----------------
1. Name:
Union Bank of California, N.A. 40%
Domestic Lending Office:
445 South Figueroa Street
Los Angeles, California 90071
Eurodollar Lending Office:
Same
Address for Notices:
500 North Akard
4200 Lincoln Plaza
Dallas, Texas 75201
Attn: Randall Osterberg
Phone: (214) 922-4200
Fax: (214) 922-4209
w/copy to:
Thompson & Knight, P.C.
1700 Pacific Avenue, Suite 3300
Dallas, Texas 75201
Attn: James McKellar
Phone: (214) 969-1605
Fax: (214) 969-1751
2. Name:
The First National Bank of Chicago 30%
Domestic Lending Office:
The First National Bank of Chicago
One First National Plaza
0634, IFNP, 10
Chicago, Illinois 60670
Eurodollar Lending Office:
Same
Address for Notices:
Credit Contacts: Dixon Schultz
1100 Louisiana, Suite 3200
Houston, Texas 77002
Phone: (713) 654-7329
Fax: (713) 654-7370
68
<PAGE> 75
Administrative Contacts:
(Borrowings, Payments, Interest) Mike Lorenzi
One First National Plaza
0634, IFNP, 10
Chicago Illinois 60670
Phone: (312) 732-8573
Fax: (312) 732-4840
3. Name:
Bankers Trust Company 30%
Domestic Lending Office:
130 Liberty Street
New York, New York 10006
Eurodollar Lending Office:
Same
Address for Notices:
Credit Contact: Richard J. Doleshek
Vice President
Bankers Trust Company
909 Fannin Street
Houston, Texas 77010
Phone: (713) 759-6754
Fax: (713) 759-6708
Operations Contact:
(Notices, Advances, Payments) James T. Cullen
Assistant Treasurer
Loan Div., 14th Floor
130 Liberty Street
New York, New York 10006
Phone: (212) 250-7343
Fax: (212) 250-7351 or
250-6029
69
<PAGE> 1
EXHIBIT 10.1.2
CHESAPEAKE ENERGY CORPORATION
THIRD AMENDED AND RESTATED
1992 NONSTATUTORY STOCK OPTION PLAN
[As amended and restated through
December 16, 1994]
[Gives effect to 2 for 1 stock split]
<PAGE> 2
CHESAPEAKE ENERGY CORPORATION
THIRD AMENDED AND RESTATED
1992 NONSTATUTORY STOCK OPTION PLAN
[As amended and restated through
December 16, 1994]
1. Purpose. The purpose of the Chesapeake Energy
Corporation Third Amended and Restated 1992 Nonstatutory Stock Option Plan (the
"Plan") is to aid Chesapeake Energy Corporation (the "Company") and its
Subsidiaries, in attracting and retaining (a) members on their Board of
Directors ("Directors") and (b) professionals and independent consultants
(collectively, "Consultants") of outstanding competence and to enable Directors
and Consultants of the Company and any Subsidiary to acquire or increase
ownership interests in the Company on a basis that will encourage them to use
their best efforts to promote the growth and profitability of the Company or
any Subsidiary. Consistent with these objectives, the Plan authorizes the
granting to Directors and Consultants of options to acquire shares of Company
stock pursuant to the terms and conditions hereinafter set forth.
2. Definitions. The following terms have the meanings
set forth unless the context clearly indicates to the contrary:
2.1 Board shall mean the Board of Directors of
the Company.
2.2 Code shall mean the Internal Revenue Code of
1986, as amended, and any successor statute of similar import,
together with the regulations thereunder, in each case as in effect
from time to time.
2.3 Committee shall mean the Stock Option
Committee of the Board.
2.4 Company shall mean Chesapeake Energy
Corporation.
2.5 Consultant shall mean a person who is engaged
by the Company or a Subsidiary to provide services to the Company or a
Subsidiary on a regular basis but who is not an employee. The term
includes, but is not limited to, attorneys and accountants.
2.6 Date of Grant shall mean the date on which an
Option is granted under the Plan to an Optionee.
2.7 Director shall mean a member of the Board.
2.8 ERISA shall mean the Employee Retirement
Income Security Act of 1974, as amended, and any successor statute of
similar import, together with the regulations thereunder, in each case
as in effect from time to time.
2.9 Exchange shall mean the Securities Exchange
Act of 1934, as amended, and any successor statute of similar import,
together with the regulations thereunder, in each case as in effect
from time to time.
<PAGE> 3
2.10 Option shall mean a "stock option" to
purchase Shares of the Company granted pursuant to the provisions of
Paragraph 6 hereof.
2.11 Option Period shall mean the period during
which an Option may be exercised by the Optionee or Successor
Optionee.
2.12 Option Price shall mean the price to be paid
by the Optionee to the Company upon the exercise of an Option.
2.13 Optionee shall mean a Director or Consultant
to whom an Option has been granted under the Plan.
2.14 Parent shall mean any future corporation
which is a "parent" of the Company as defined in Sections 424(e) and
(g) of the Code.
2.15 Plan shall mean the Chesapeake Energy
Corporation Amended and Restated 1992 Nonstatutory Stock Option Plan.
2.16 Shares shall mean the $0.005 par value common
stock of the Company.
2.17 Stock Option Agreement shall mean the
agreement entered into between the Company and the Optionee under
which the Optionee may purchase Shares pursuant to the Plan.
2.18 Subsidiary shall mean any present or future
corporation which is a "subsidiary" of the Company as defined in
Sections 424(f) and (g) of the Code.
2.19 Successor Company shall mean any future
corporation which succeeds to or is assigned or has transferred to it
the business of the Company as a result of or in connection with a
corporate merger, consolidation, combination, reorganization or
liquidation.
2.20 Successor Optionee shall mean the personal
representative of the estate of a deceased Optionee.
3. Administration. The Plan shall be administered by the
Committee appointed by the Board.
3.1 Composition of Committee. The Committee shall
consist of two (2) or more members of the Board appointed by the
Board. The members of the Committee shall serve, and may be removed,
at the pleasure of the Board. The grant of an Option under the Plan
and any participation in the Plan by an Optionee who is a member of
the Committee must be ratified and approved by a majority of the
Directors who are not employees of the Company or a Subsidiary. Any
member may serve concurrently as a member of any other administrative
committee of any other plan of the Company or any of its affiliates
entitling participants therein to acquire stock, stock options or
deferred compensation rights (including stock appreciation rights).
<PAGE> 4
3.2 Duties and Powers of Committee. Except with
respect to Options granted or to be granted pursuant to Paragraph 6.11
of this Plan, the Committee shall have the power where consistent with
the general purpose and intent of the Plan (a) to establish policies
and to adopt rules and regulations for carrying out the purposes and
provisions of the Plan; (b) to interpret and construe the Plan and
determine all questions arising under the Plan and any agreement made
pursuant to the Plan, and any such interpretation, construction or
determination made by the Committee shall be final, binding and
conclusive; (c) to determine the number of Shares covered by each
Option; (d) to determine the time or times when Options will be
granted and exercised; (e) to determine the conditions and
restrictions under which Options may be granted and exercised; (f) to
determine if the Shares will be subject to any restrictions upon the
exercise of such Option; and (g) to prescribe the form of the
instruments relating to the grant, exercise and other terms of
Options. With respect to participation in the Plan by an Optionee who
is a member of the Committee, the exercise of the foregoing powers
must be ratified and approved by a majority of the Directors who are
not employees of the Company or any Subsidiary.
3.3 Majority Rule. A majority of the members of
the Committee (but not less than two (2)) shall constitute a quorum
for the transaction of any business under the Plan and any action
taken by a majority present at a meeting at which a quorum is present
shall constitute the action of the Committee. Notwithstanding
anything herein to the contrary, any action with respect to
participation in the Plan by any Optionee who is a member of the
Committee must be ratified and approved by not less than a majority of
the Directors who are not employees of the Company or any Subsidiary.
3.4 Company Assistance. The Company shall supply
full and timely information to the Committee on all matters relating
to (a) eligible Directors, their membership on the Board, death,
retirement, disability or other termination of membership on the
Board, (b) eligible Consultants, the term of their engagement with the
Company or with a Subsidiary, death, retirement, disability or other
termination as a Consultant for the Company or for a Subsidiary and
(c) such other pertinent facts as the Committee may require. The
Company shall furnish the Committee with such clerical and other
assistance as is necessary in the performance of its duties.
3.5 Reliance on Reports. Each member of the
Committee and each member of the Board shall be fully justified in
relying or acting in good faith upon any report made by the
independent public accountants of the Company, its Subsidiaries and
Successor Companies and upon any other information furnished in
connection with the Plan by any person or persons. In no event shall
any person who is or shall have been a member of the Committee or the
Board be liable for any determination made or other action taken or
any omission to act in reliance upon any such report or information or
for any action or failure to act if made or done in good faith.
<PAGE> 5
4. Eligibility; Participation in the Plan. Options may
be granted only to Directors and Consultants. Subject to the terms and
conditions of the Plan, the Committee shall determine from time to time those
Directors and Consultants who are to be granted Options. Except as provided in
paragraph 6.11 of this Plan, in making any determination as to Optionees to
whom Options shall be granted and as to the number of Shares to be covered by
such Options, the Committee shall take into account the duties of the
respective Optionees, their present and potential contributions to the success
of the Company, and such other factors as the Committee shall deem relevant in
connection with accomplishing the purposes of the Plan.
5. Shares Subject to Plan. Subject to any adjustment
required by Paragraph 5.1, the aggregate number of Shares which may be issued
and sold hereunder shall not exceed 290,000 Shares. Such Shares may be either
authorized and unissued Shares or Shares issued and thereafter acquired by the
Company. If any Option for Shares granted under the Plan lapses, or is
otherwise terminated, the Committee may grant Options for such Shares to other
Optionees.
5.1 Adjustments. If the outstanding Shares are
hereafter increased, decreased, changed into or exchanged for a
different number or kind of shares or other securities of the Company
or of another corporation by reason of merger, consolidation,
reorganization, recapitalization, reclassification, combination of
shares, stock split-up, spin-off, or stock dividend, then the
following shall apply:
(a) Subject to the provisions of
Paragraph 5.1(b), the aggregate number and kind of Shares
subject to Options which may be granted hereunder shall be
adjusted accordingly. For example, if there were a
two-for-one stock split, or if there were declared a stock
dividend of one share per Share, the aggregate number of
Shares which may be issued and sold hereunder would increase
from 290,000 Shares to 580,000 Shares.
(b) Where dissolution or liquidation of
the Company or any merger or combination in which the Company
is not a surviving corporation is involved and no provision is
made for the assumption of outstanding Options or the
substitution therefor, consistent with Paragraph 6.4 hereof,
each outstanding Option granted hereunder shall terminate, but
the Optionee shall have the right, immediately prior to such
dissolution, liquidation, merger, or combination, to exercise
his or her Option, in whole or in part, to the extent that it
shall not have been previously exercised, without regard to
any vesting provisions.
(c) Subject to the provisions of
Paragraph 5.1(b), rights under outstanding Options granted
hereunder, both as to the number of Shares and the Option
Price, shall be adjusted accordingly. For example, if an
Option were granted under this Plan to purchase 1,000 Shares
at $13.00 per Share and there were a two-for-one stock split
or if there were declared a stock dividend of one share per
Share, the aggregate number of Shares which could be purchased
and sold under the Option would increase from 1,000
<PAGE> 6
Shares to 2,000 Shares and the Option Price for the Shares
would decrease from $13.00 per Share to $6.50 per Share.
5.2 Determination by Committee. The adjustments
required by Paragraph 5.1 and the manner of application of Paragraph
5.1 shall be determined solely by the Committee, and any such
adjustments may provide for the elimination of fractional Share
interests.
6. Option Grant and Stock Option Agreement. Each Option
granted under this Plan shall be evidenced by the minutes of a meeting of the
Committee or by the written consent of the Committee and by a written Stock
Option Agreement effective on the Date of Grant and executed by the Company and
the Optionee. Each Option granted hereunder shall contain such terms,
restrictions and conditions as the Committee may determine, which terms,
restrictions and conditions may or may not be the same in each case, subject to
the following provisions of this Paragraph 6. Optionees may be granted more
than one Option. The granting of an Option shall not affect any outstanding
Option previously granted to an Optionee under the Plan.
6.1 Option Price. The Option Price for Shares
shall be determined by the Committee but in no event shall such Option
Price for Options granted after the initial public offering of the
Shares be less than the greater of (a) the fair market value of the
common stock of the Company on the date of grant or (b) the par value
of the Shares. "Fair market value" shall be determined by the
Committee as follows: (i) if the common stock of the Company is
listed for trading on one or more national securities exchanges
(including the NASDAQ National Market System), the reported last sales
price on such principal exchange as of the granting date, or other
relevant date, or if such common stock shall not have been traded on
such principal exchange on such date, the reported last sales price on
such principal exchange on the first day prior thereto on which such
common stock was so traded; or (ii) if the common stock of the Company
is not listed for trading on a national securities exchange (including
the NASDAQ National Market System) but is traded in the over-the-
counter market, the mean of the highest and lowest bid prices for such
common stock as of the granting date, or other relevant date, or if
there are no such bid prices for such common stock on such date, the
mean of the highest and lowest bid prices on the first day prior
thereto on which such prices existed. Provided, if the price of such
common stock is not reported or listed as aforesaid, then the "fair
market value" of such common stock shall be determined by the
Committee as of the relevant date, and the Committee shall utilize any
reasonable and prudent method in determining such fair market value,
including without limitation, the obtaining of opinions of independent
and well-qualified experts.
6.2 Option Period. No Options may be granted
under the Plan after December 10, 2002. The maximum Option Period for
exercise of an Option shall be established by the Committee at the
Date of Grant, but the Option Period shall not be more than ten (10)
years from the Date of Grant or such shorter period as provided in
Paragraph 6.3 with respect to early termination.
<PAGE> 7
6.3 Vesting of Options. Each Option granted
hereunder may only be exercised to the extent that the Optionee is
vested in such Option. An Optionee shall vest separately in each
Option granted hereunder in accordance with a schedule determined by
the Committee in its sole discretion, which will be included in the
Stock Option Agreement.
6.4 Merger, Consolidation, Etc. In the event
that the Company shall, pursuant to action by its Board, at any time
propose to merge into, consolidate with, or sell or otherwise transfer
all or substantially all of its assets to another corporation and
provision is not made pursuant to the terms of such transaction for
the assumption by the surviving, resulting or acquiring corporation of
outstanding Options under the Plan, or for the substitution of new
options therefor, the Committee shall cause written notice of the
proposed transaction to be given to each Optionee not less than forty
(40) days prior to the anticipated effective date of the proposed
transaction, and his or her Option shall become one hundred percent
(100%) vested and, prior to a date specified in such notice, which
shall be not more than ten (10) days prior to the anticipated
effective date of the proposed transaction, each Optionee shall have
the right to exercise his or her Option to purchase any or all of the
Shares then subject to such Option, including those, if any, which by
reason of other provisions of the Plan have not then become available
for purchase. Each Optionee, by so notifying the Company in writing,
may, in exercising his or her Option, condition such exercise upon,
and provide that such exercise shall become effective at the time of,
but immediately prior to, the consummation of the transaction, in
which event such Optionee need not make payment for the Shares to be
purchased upon exercise of such Option until five (5) days after
written notice by the Company to such Optionee that the transaction
has been consummated. If the transaction is consummated, each Option,
to the extent not previously exercised prior to the date specified in
the foregoing notice, shall terminate on the effective date of such
consummation. If the transaction is abandoned, (i) any Shares not
purchased upon exercise of such Option shall continue to be available
for purchase in accordance with the other provisions of the Plan and
(ii) to the extent that any Option not exercised prior to such
abandonment shall have vested solely by operation of this Paragraph
6.4, such vesting shall be deemed annulled, and the vesting schedule
set forth in Paragraph 6.3 shall be reinstituted, as of the date of
such abandonment.
6.5 Option Exercise. At all times during the
period commencing with the date an Option is granted to an Optionee
and ending on the earlier of the expiration of the Option Period
applicable to such Option or the date which is one (1) year prior to
the date the Option is exercised by such Optionee, such Optionee must
be a Director, a Consultant or an employee of the Company or a
Subsidiary (in the event that after the date an Option is granted a
Director is or becomes a Consultant or an employee of the Company or a
Subsidiary or a Consultant is or becomes a Director or an employee of
the Company or a Subsidiary). In the event an Optionee's membership
on the Board, his engagement as a Consultant for the Company or a
Subsidiary or his employment by the Company or a Subsidiary is
terminated by reason of his death, the
<PAGE> 8
Successor Optionee may exercise any unexercised Option granted to the
Optionee under the Plan at any time within three (3) years after the
Optionee's death but in any event not after the expiration of the
Option Period applicable to such Option. If an Optionee's membership
on the Board, his engagement as a Consultant for the Company or a
Subsidiary or his employment by the Company or a Subsidiary is
terminated for cause, the Optionee's Option shall expire thirty (30)
days after such termination. Discharge for cause shall include
termination for malfeasance or gross misfeasance in the performance of
duties, conviction of illegal activity in connection therewith, or any
conduct detrimental to the interests of the Company, and in any event
the determination of the Committee with respect thereto shall be final
and conclusive. Notwithstanding the foregoing, the Committee, in its
sole discretion at the time an Option is granted, may establish an
earlier date (or dates) on which an Option must be exercised.
6.6 Notice of Option Exercise and Payment.
Options may be exercised in whole at any time, or in part from time to
time, with respect to whole shares only, within the period provided
for the exercise thereof in the Stock Option Agreement, and such
Option shall be exercised by a written notice of intent to exercise
the Option with respect to a specified number of Shares delivered to
the Company at its principal office in Oklahoma City, Oklahoma.
Payment for Shares purchased under this Plan shall be made in full,
either in cash, or in common stock of the Company or in a combination
of cash and common stock of the Company, at the time of the exercise
of the Option as a condition thereof. If common stock of the Company
is utilized as consideration for the purchase of Shares upon exercise
of an Option, such common stock shall be valued at the "fair market
value" as determined in Paragraph 6.1 hereof as of the exercise date
or other relevant date. In addition to the foregoing procedure which
may be available for the exercise of any Option, the Optionee may
deliver to the Company a notice of exercise including an irrevocable
instruction to the Company to deliver the stock certificate
representing the Shares subject to an Option to a broker authorized to
trade in the common stock of the Company. Upon receipt of such
notice, the Company will acknowledge receipt of the executed notice of
exercise and forward the notice to the broker. Upon receipt of the
copy of the notice which has been acknowledged by the Company, and
without waiting for issuance of the actual stock certificate with
respect to the exercise of the Option, the broker may sell the Shares
(or that portion of the Shares necessary to cover the Option Price and
any withholding taxes due). Upon receipt of the stock certificate
from the Company, the broker will deliver directly to the Company that
portion of the sales proceeds to cover the Option Price and any
withholding taxes. Further, the broker may also facilitate a loan to
the Optionee upon receipt of the notice of exercise in advance of the
issuance of the actual stock certificate as an alternative means of
financing and facilitating the exercise of any Option. For all
purposes of effecting the exercise of an Option, the date on which the
Optionee gives the notice of exercise to the Company will be the date
he becomes bound contractually to take and pay for the Shares
underlying the Option.
<PAGE> 9
6.7 Non-Transferability of Option. An Option
shall not be transferable otherwise than by will or the laws of
descent and distribution, and the Option may be exercised, during the
lifetime of the Optionee, only by him. More particularly (but without
limiting the generality of the foregoing), the Option may not be
assigned, transferred (except as provided above), pledged or
hypothecated in any way, shall not be assignable by operation of law
and shall not be subject to execution, attachment or similar process.
Any attempted assignment, transfer, pledge, hypothecation, or other
disposition of the Option contrary to the provisions hereof shall be
null and void and without effect.
6.8 Additional Documents on Death of Optionee.
No transfer of an Option by the Optionee by will or the laws of
descent and distribution shall be effective to bind the Company unless
the Company shall have been furnished with written notice of such
transfer and an authenticated copy of the will and/or such other
evidence as the Committee may deem necessary to establish the validity
of the transfer and the acceptance by the Successor Optionee of the
terms and conditions of such Option.
6.9 No Rights as Stockholder or to Continued
Membership on the Board or to Continued Engagement as a Consultant.
No Optionee shall have any rights as a stockholder of the Company with
respect to any Shares prior to the date of issuance to him or her of
the certificate or certificates for such Shares and neither the Plan
nor any Option granted under the Plan shall confer upon an Optionee
any right to continuance of membership on the Board or Board of
Directors of a Subsidiary, to continuance of engagement as a
Consultant for the Company or for a Subsidiary or to continuance of
employment by the Company or a Subsidiary (in the event a Director or
Consultant is or becomes an employee of the Company after the date an
Option is granted to any such Optionee) or interfere in any way with
the right of the shareholders of the Company to terminate the
Optionee's membership on the Board or Board of Directors of a
Subsidiary or interfere in any way with the right of any officer of
the Company or a Subsidiary to terminate the engagement of any
Consultant or the employment of any employee.
6.10 Surrender of Options. The Committee may
permit the voluntary surrender of all or a portion of any Option to be
conditioned upon the granting to the Optionee under this Plan of a new
Option for the same or a different number of Shares as the Option
surrendered, or may require such voluntary surrender as a condition
precedent to a grant of a new Option to such Optionee. Such new
Option shall be exercisable at the price, during the period, and in
accordance with any other terms or conditions specified by the
Committee at the time the new Option is granted, all determined in
accordance with the provisions of this Plan without regard to the
price, period of exercise, or any other terms or conditions of the
Option surrendered.
6.11 Director Formula Awards. Notwithstanding
anything to the contrary in this Plan, each Director, who is not an
executive officer of the Company on the date this Paragraph 6.11 is
approved by the shareholders of the Company, shall be granted on such
date an Option for
<PAGE> 10
the purchase of 5,000 Shares, and thereafter each person serving as a
Director on the second Tuesday of each succeeding October, other than
any Director who is an executive officer of the Company, shall be
granted on such date an option to purchase 5,000 Shares. A Director
shall be eligible to exercise any Option granted under this Paragraph
6.11 immediately. The Option Price for Options granted under this
Paragraph 6.11 shall be equal to the fair market value (as defined in
Paragraph 6.1 of this Plan) on the date of grant. The number of
shares and the option price shall be subject to adjustment as provided
in Paragraph 5.1 and the option price shall be payable as provided in
Paragraph 6.6. The terms of each option granted under this Paragraph
6.11 shall be for a period which shall expire upon the first to occur
of (x) ten (10) years from the date of grant or (y) one (1) year after
the date that the Optionee ceases to be a Director of the Company;
provided, however, if an Optionee ceases to be a Director by reason of
his death or is terminated for cause, the exercise period shall be as
provided in Paragraph 6.5 hereof. Notwithstanding anything herein to
the contrary, pursuant to Rule 16(b)-3(c)(2)(ii)(B) promulgated under
the Exchange Act (or any successor rule) the provisions of this
Paragraph 6.11 cannot be amended more than once every six (6) months,
other than to comport with changes to the Code or rules and
regulations thereunder.
7. Issuance of Shares; Restrictions. Subject to the
conditions and restrictions provided in this Paragraph 7, the Company shall,
within twenty (20) business days after an Option has been duly exercised in
whole or in part, deliver to the person who exercised the Option a certificate,
registered in the name of such person, for the number of Shares with respect to
which the Option has been exercised. The Company may legend any stock
certificate issued hereunder to reflect any restrictions provided for in this
Paragraph 7.
7.1 Registration. Unless the Shares subject to
Options granted under the Plan have been registered under the
Securities Act of 1933, as amended, and any applicable state
securities laws (collectively, the "Act") (and, in the case of any
Optionee who may be deemed an "affiliate" of the Company as defined in
Rule 405 under the Act (or any successor rule), such Shares have been
registered under the Act for resale by such Optionee), or the Company
has determined that an exemption from registration is available, the
Company may require prior to and as a condition of the issuance of any
Shares that the person exercising an Option hereunder furnish the
Company with a written representation in a form prescribed by the
Committee to the effect that such person is acquiring such Shares
solely with a view to investment for his or her own account and not
with a view to the resale or distribution of all or any part thereof,
and that such person will not dispose of any of such Shares otherwise
than in accordance with the provisions of Rule 144 under the Act (or
any successor rule) unless and until either the Shares are registered
under the Act or the Company is satisfied that an exemption for such
registration is available.
7.2 No Obligation to Issue. Anything contained
herein to the contrary notwithstanding, the Company shall not be
obligated to sell or issue any Shares under the Plan unless and until
the Company is satisfied that such sale or issuance complies with (i)
all applicable
<PAGE> 11
requirements of any stock exchange on which the Shares are listed for
trading or all requirements of the National Association of Securities
Dealers, Inc. if the Shares are included in the NASDAQ National Market
System (or the governing body of the principal market in which such
Shares are traded), (ii) all applicable provisions of the Act, and
(iii) all other laws or regulations by which the Company is bound or
to which the Company is subject.
7.3 Disposition. Each Stock Option Agreement
shall authorize the Company (or a Subsidiary) to make such provision
as it may deem appropriate for the withholding of any applicable
federal, state or local taxes that it determines it may be obligated
to withhold or pay in connection with the grant or exercise of such
Option or the disposition of Shares acquired upon exercise of such
Option.
8. Amendment and Termination of the Plan. The Plan
shall terminate after December 10, 2002, provided that the Plan shall continue
with respect to Options which are in effect as of such date. Prior to any such
termination, the Plan may be terminated, altered, changed, modified or amended
by the Board for any reason including, but not limited to, the necessity of
modifying requirements of the Plan to conform with the law or to meet special
circumstances not anticipated or covered by the Plan; provided that except as
required by Paragraph 5.1 hereof, no action of the Board may, without the
approval of the shareholders of the Company, (a) increase the aggregate number
of Shares which may be purchased under Options granted under the Plan; (b)
materially change the persons or class of persons eligible to participate in
the Plan; (c) withdraw the administration of the Plan from the Committee; (d)
amend or alter the Option Price; (e) extend the maximum Option Period or extend
the term of the Plan; (f) materially increase the benefit accruing to
participants under the Plan; or (g) amend the Plan in any manner which would
impair the applicability of Rule 16b-3 as promulgated under the Exchange Act
(or any successor rule) to the Plan. No amendment, modification or termination
of the Plan shall in any manner adversely affect any Option theretofore granted
under the Plan without the consent of the affected Optionee.
9. Indemnification. Each person who is or shall have
been a member of the Committee or of the Board shall be indemnified and held
harmless by the Company against and from any loss, cost, liability or expense
that may be imposed upon or be reasonably incurred by him in connection with or
resulting from any claim, action, suit, or proceeding to which he may be a
party or in which he may be involved by reason of any action taken or failure
to act under the Plan and against and from any and all amounts paid by him in
settlement thereof with the Company's approval or paid by him in satisfaction
of a judgment in any such action, suit, or proceeding against him; provided, he
shall give the Company an opportunity, at its own expense, to defend the same
before he undertakes to handle and defend it on his own behalf. The foregoing
right of indemnification shall not be exclusive of any other rights of
indemnification to which such person may be entitled by the Company's
Certificate of Incorporation, Bylaws, as a matter of law, or otherwise. This
indemnification shall not apply or be available if it is determined by the
Company that such acts or omissions to act were willfully committed by the
person involved.
<PAGE> 12
10. General.
10.1 Other Compensation Plans. The adoption of
this Plan shall not affect any other stock option or incentive or
other compensation plans in effect for the Company, any Subsidiary or
Successor Company, nor shall the Plan preclude the Company from
establishing any other forms of incentive or other compensation for
employees, directors or consultants of the Company, its Subsidiaries
or Successor Company.
10.2 Plan Binding on Successors. This Plan shall
be binding on the successors of the Company (including any Successor
Company) and any Optionee hereunder.
10.3 Singular, Plural; Gender. Whenever used
herein, nouns in the singular shall include the plural and the
masculine pronoun shall include the feminine gender.
10.4 Headings No Part of Plan. Headings of
paragraphs are inserted for convenience and reference only and they
constitute no part of the Plan.
10.5 Requirements of Law. If required, the
granting of Options and the issuance of Shares upon the exercise of an
Option shall not be issued except upon the approval of proper
governmental agencies or securities exchanges, if required, and only
in compliance with the Act, and any other applicable securities law or
pursuant to an exemption therefrom.
10.6 Unsecured Obligation. Optionees under this
Plan shall not have any interest in any fund or specific asset of the
Company by reason of this Plan.
10.7 Expenses of the Plan. The expenses of
administering the Plan shall be borne by the Company, its Subsidiaries
and its Successor Companies.
<PAGE> 13
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
1. Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.1 Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.2 Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.3 Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.4 Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.5 Consultant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.6 Date of Grant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.7 Director . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.8 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.9 Exchange Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.10 Option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.11 Option Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.12 Option Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.13 Optionee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.14 Parent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.15 Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.16 Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.17 Stock Option Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.18 Subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.19 Successor Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.20 Successor Optionee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
3. Administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
3.1 Composition of Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
3.2 Duties and Powers of Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
3.3 Majority Rule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
3.4 Company Assistance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
3.5 Reliance on Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
4. Eligibility; Participation in the Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
5. Shares Subject to Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
5.1 Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
5.2 Determination by Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
6. Option Grant and Stock Option Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
6.1 Option Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
6.2 Option Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
6.3 Vesting of Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
6.4 Merger, Consolidation, Etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
6.5 Option Exercise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
6.6 Notice of Option Exercise and Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
</TABLE>
<PAGE> 14
<TABLE>
<S> <C> <C>
6.7 Non-Transferability of Option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
6.8 Additional Documents on Death of Optionee . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
6.9 No Rights as Stockholder or to Continued
Membership on the Board or to Continued
Engagement as a Consultant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
6.10 Surrender of Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
6.11 Director Formula Awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
7. Issuance of Shares; Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
7.1 Registration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
7.2 No Obligation to Issue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
7.3 Disposition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
8. Amendment and Termination of the Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
9. Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
10. General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
10.1 Other Compensation Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
10.2 Plan Binding on Successors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
10.3 Singular, Plural; Gender . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
10.4 Headings No Part of Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
10.5 Requirements of Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
10.6 Unsecured Obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
10.7 Expenses of the Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
</TABLE>
<PAGE> 1
EXHIBIT 10.2.8
EMPLOYMENT AGREEMENT
between
MARTHA A. BURGER
and
CHESAPEAKE OPERATING, INC.
Effective July 1, 1995
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
1. Employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. Employee's Duties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.1 Specific Duties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.2 Supervision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
3. Other Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
4. Employee's Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
4.1 Base Salary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
4.2 Bonus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
4.3 Stock Grants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
4.4 Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
5. Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
6. Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
6.1 Termination by Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
6.1.1 Termination without Cause . . . . . . . . . . . . . . . . . . . . 3
6.1.2 Termination for Cause . . . . . . . . . . . . . . . . . . . . . . 3
6.1.3 Termination in the Event of Sale,
Merger or Takeover . . . . . . . . . . . . . . . . . . . . . . . . 3
6.2 Termination by Employee . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
6.3 Incapacity of Employee . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
6.4 Death of Employee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
6.5 Effect of Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
7. Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
8. Noncompetition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
9. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
9.1 Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
9.2 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
9.3 Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
9.4 Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
9.5 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
9.6 Binding Effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
9.7 Attorneys' Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
9.8 Supersession . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
</TABLE>
<PAGE> 3
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made effective July 1, 1995, between CHESAPEAKE
OPERATING, INC., an Oklahoma corporation (the "Company"), and MARTHA A. BURGER,
an individual (the "Employee").
W I T N E S S E T H:
WHEREAS, the Company desires to retain the services of the Employee
and the Employee desires to make the Employee's services available to the
Company.
NOW, THEREFORE, in consideration of the mutual promises herein
contained, the Company and the Employee agree as follows:
1. Employment. The Company hereby employs the Employee and the Employee
hereby accepts such employment subject to the terms and conditions contained in
this Agreement. The Employee is engaged as an employee of the Company, and the
Employee and the Company do not intend to create a joint venture, partnership
or other relationship which might impose a fiduciary obligation on the Employee
or the Company in the performance of this Agreement.
2. Employee's Duties. The Employee's employment will be on a full-time
basis. Throughout the term of this Agreement, the Employee will use the
Employee's best efforts and due diligence to assist the Company in achieving
the most profitable operation of the Company and the Company's subsidiary
corporations, partnerships and entities consistent with developing and
maintaining a quality business operation.
2.1 Specific Duties. The Employee will serve as Assistant
Controller-Operations for the Company. The Employee will
perform all of the services required to fully and faithfully
execute the office and position to which the Employee is
appointed under this paragraph and such other services as
may be reasonably requested by the Employee's supervisor.
2.2 Supervision. The services of the Employee will be requested
and directed by the Vice President- Finance, Mr. Marcus C.
Rowland.
3. Other Activities. Unless the Employee has obtained the prior written
approval of the President of the Company, the Employee will not: (a) engage in
business independent of the Employee's employment by the Company; (b) serve as
an officer, general partner or member in any corporation, partnership or firm;
(c) directly or indirectly invest in, participate in, acquire an interest in
any oil and gas business including, without limitation, oil and gas
production, drilling, owning or operating oil and gas wells, providing services
or materials to the oil and gas industry, marketing or refining oil and gas,
drilling, owning or drilling oil and gas leases or mineral interests and any
interest in any corporation, partnership, company or entity which conducts any
of the foregoing activities. The limitation in this paragraph 3 will not
prohibit: (i) an investment by the Employee in publicly traded securities; or
(ii) the continued direct ownership and operation of oil and gas interests and
leases to the extent owned by the Employee on July 1, 1995. The Employee
agrees not
<PAGE> 4
to acquire, directly or indirectly, any additional oil and gas interests or
increase, directly or indirectly, ownership of any oil and gas interests owned
by the Employee on July 1, 1995.
4. Employee's Compensation. The Company agrees to compensate the
Employee as follows:
4.1 Base Salary. A base salary (the "Base Salary") will be paid
to the Employee at the annual rate of not less than
Seventy-Five Thousand ($75,000.00) for the two (2) year
period commencing July 1, 1995 and ending June 30, 1997.
The Base Salary will be payable in equal semi-monthly
installments on the fifteenth (15th) and last day of each
month during the term of this Agreement commencing July 15,
1995.
4.2 Bonus. In addition to the Base Salary described at
paragraph 4.1 of this Agreement, it is anticipated that the
Company may pay bonus compensation to the Employee. Any
bonus compensation will be at the absolute discretion of the
Company in such amounts and at such times as the board of
directors of the Company may determine.
4.3 Stock Options. In addition to the compensation set forth in
paragraphs 4.1 and 4.2 of this Agreement, the Employee will
be eligible to participate in grants of stock options from
the Chesapeake Energy Corporation 1994 Incentive Stock
Option Plan subject to the terms and conditions thereof.
4.4 Benefits. The Company will provide the Employee such paid
vacations, retirement benefits, reimbursement of reasonable
expenditures for dues, travel and entertainment and such
other benefits as are customarily provided by the Company,
as set forth in more detail in the Company's Employee
Manual. The Company will also provide the Employee the
opportunity to apply for coverage under the Company's
medical, life and disability plans, if any. If the Employee
is accepted for coverage under such plans, the Company will
provide such coverage on the same terms as is customarily
provided by the Company to the plan participants as modified
from time to time.
5. Term. In the absence of prior termination pursuant to the provisions
of this Agreement, this Agreement will extend for a term of two (2) years
commencing on July 1, 1995, and ending on June 30, 1997 (the "Expiration Date).
6. Termination. This Agreement will continue in effect until the
expiration of the term stated at paragraph 5 of this Agreement unless earlier
terminated pursuant to this paragraph 6.
6.1 Termination by Company. The Company will have the following
rights to terminate this Agreement:
6.1.1 Termination without Cause. The Company may
terminate this Agreement without cause at any
time by the service of written notice of
termination to the Employee specifying an
effective date of such termination not sooner
than thirty (30) days after
<PAGE> 5
the date of such notice (the "Termination
Date"). In the event the Employee is terminated
without cause, or the Company elects not to
renew the contract, the Employee will receive as
termination compensation: (a) sixty (60) days
compensation; (b) any benefits payable by
operation of paragraph 4.4 of this Agreement;
and (c) any vacation pay accrued through the
date of termination.
6.1.2 Termination for Cause. The Company may
terminate this Agreement for cause if the
Employee: (a) misappropriates the property of
the Company or commits any other act of
dishonesty; (b) engages in personal misconduct
which materially injures the Company; (c)
willfully violates any law or regulation
relating to the business of the Company which
results in material injury to the Company; or
(d) willfully and repeatedly fails to perform
the Employee's duties hereunder. In the event
this Agreement is terminated for cause, the
Company will not have any obligation to provide
any further payments or benefits to the Employee
after the effective date of such termination.
6.1.3 Termination After Change in Control. If, during
the term of this Agreement, there is a "Change
of Control" and within one (1) year thereafter:
(a) this Agreement expires and is not extended;
or (b) the Employee is terminated other than
under paragraphs 6.1.2, 6.3 or 6.4 based on
adequate grounds; or (c) the Employee resigns as
a result of a reassignment of duties
inconsistent with the Employee's position or a
reduction in the Employee's compensation under
paragraph 4 of this Agreement, then the Employee
will be entitled to a severance payment (in
addition to any other amounts payable to the
Employee under this Agreement or otherwise) in
an amount equal to twelve (12) months
compensation under paragraph 4.1 of this
Agreement. The term "Change of Control" means
any action of a nature that would be required to
be reported in response to Item 6(e) of Schedule
14A of Regulation 14A under the Securities
Exchange Act of 1934 with respect to the Company
including, without limitation (i) the direct or
indirect acquisition by any person after the
date hereof of beneficial ownership of the right
to vote or securities of the Company
representing the right to vote thirty-five
percent (35%) or more of the combined voting
power of the Company's then outstanding
securities having the right to vote for the
election of directors, or (ii) within two years
of a tender offer or exchange offer for the
voting stock of the Company or as a result of a
merger, consolidation, sale of assets or
contested election (or any combination of the
foregoing), a majority of the members of the
Company's board of directors is replaced by
directors who were not nominated and approved by
the board of directors. For purposes of the
foregoing definition, the term "Company"
includes any corporation, partnership or other
entity which owns or controls the Company.
<PAGE> 6
6.2 Termination by Employee. The Employee may voluntarily
terminate this Agreement with or without cause by the
service of written notice of such termination to the Company
specifying an effective date of such termination thirty (30)
days after the date of such notice, during which time
Employee may use remaining accrued vacation days, or at the
Company's option, be paid for such days. In the event this
Agreement is terminated by the Employee, neither the Company
nor the Employee will have any further obligations hereunder
including, without limitation, any obligation of the Company
to provide any further payments or benefits to the Employee
after the effective date of such termination.
6.3 Incapacity of Employee. If the Employee suffers from a
physical or mental condition which in the reasonable
judgment of the Company's management prevents the Employee
from performing the duties specified herein for a period of
three (3) consecutive weeks, the Employee may be terminated
and the termination shall be treated as a Termination
Without Cause and any benefits payable hereunder will be
continued through the Expiration Date. Notwithstanding the
foregoing, the Employee's compensation under paragraph 4.4
of this Agreement will be reduced by any benefits payable
under any disability plans.
6.4 Death of Employee. If the Employee dies during the term of
this Agreement, the Company may thereafter terminate this
Agreement without compensation to the Employee's estate
except: (a) the obligation to continue the Base Salary
payments under paragraph 4.1 of this Agreement for sixty
(60) days; and (b) the benefits described in paragraph 4.4
of this Agreement accrued through the effective date of such
termination.
6.5 Effect of Termination. The termination of this Agreement
will terminate all obligations of the Employee to render
services on behalf of the Company, provided that the
Employee will maintain the confidentiality of all
information acquired by the Employee during the term of this
Agreement in accordance with paragraph 7 of this Agreement.
Except as otherwise provided in paragraph 6 of this
Agreement, no accrued bonus, severance pay or other form of
compensation will be payable by the Company to the Employee
by reason of the termination of this Agreement. All keys,
credit cards, files, records, financial information,
furniture, furnishings, equipment, supplies and other items
relating to the Company will remain the property of the
Company. The Employee will have the right to retain and
remove all personal property and effects which are owned by
the Employee and located in the offices of the Company. All
such personal items will be removed from such offices no
later than three (3) days after the effective date of
termination, and the Company is hereby authorized to discard
any items remaining and to reassign the Employee's office
space after such date. Prior to the effective date of
termination, the Employee will render such services to the
Company as might be reasonably required to provide for the
orderly termination of the Employee's employment.
7. Confidentiality. The Employee recognizes that the nature of the
Employee's services are such that the Employee will have access to information
which constitutes trade secrets, is of a confidential nature, is of great value
to the Company and is
<PAGE> 7
the foundation on which the business of the Company is predicated. The
Employee agrees not to disclose to any person other than the Company's
employees or the Company's legal counsel nor use for any purpose, other than
the performance of this Agreement, any information, data or material
(regardless of the form) which is: (a) a trade secret; (b) provided, disclosed
or delivered to the Employee by the Company, any officer, director, employee,
agent, attorney, accountant, consultant, or other person or entity employed by
the Company in any capacity, any customer, borrower or business associate of
the Company or any public authority having jurisdiction over the Company or any
business activity conducted by the Company; or (c) produced, developed,
obtained or prepared by or on behalf of the Employee or the Company (whether or
not such information was developed in the performance of this Agreement) with
respect to the Company or any assets, oil and gas prospects, business
activities, officers, directors, employees, borrowers or customers of the
foregoing. On request by the Company, the Company will be entitled to a copy
of any such documents or such information in the possession of the Employee.
The Employee also agrees that the provisions of this paragraph 7 will survive
the termination, expiration or cancellation of this Agreement and that on
termination, expiration or cancellation of this Agreement and that on
termination, expiration or cancellation of this Agreement, the Employee will
deliver to the Company all originals and copies of the information, data and
material containing such information.
8. Noncompetition. For a period of twelve (12) months after Employee is
no longer employed by the Company, Employee will not: (a) procure, solicit, or
aid a "Partner" (as defined below) in the procurement or solicitation of an
investment in oil and gas leases, mineral interests, the development of oil and
gas assets or operation of oil and gas assets in any area in which Employee had
any material responsibility during the Employee's employment by the Company (a
"Partner" is any person or entity who has invested in such activities described
above with the Company or the Company's affiliated corporations, partnerships
or entities during the twelve (12) months preceding the end of Employee's
employment by the Company); and (b) acquire, attempt to acquire or aid another
in the acquisition or attempted acquisition of an interest in oil and gas
assets, oil and gas production, oil and gas leases, mineral interests, oil and
gas wells or other such oil and gas exploration, development or production
activities within ten (10) miles of any operations or ownership interests of
the Company or its affiliated corporations, partnerships or entities in the
twelve (12) months preceding the end of Employee's employment.
9. Miscellaneous. The parties further agree as follows:
9.1 Time. Time is of the essence of each provision of this
Agreement.
9.2 Notices. Any notice, payment, demand or communication
required or permitted to be given by any provision of this
Agreement will be in writing and will be deemed to have been
given when delivered personally or by telefacsimile to the
party designated to receive such notice, or on the date
following the day sent by overnight courier, or on the third
(3rd) business day after the same is sent by certified mail,
postage and charges prepaid, directed to the following
address or to such other or additional addresses as any
party might designate by written notice to the other party:
To the Company: Chesapeake Operating, Inc.
Post Office Box 18496
Oklahoma City, OK 73154
Attn: Mr. Aubrey K. McClendon
To the Employee: Martha A. Burger
3005 Red Oak Road
Oklahoma City, OK 73120
<PAGE> 8
9.3 Assignment. Neither this Agreement nor any of the parties'
rights or obligations hereunder can be transferred or
assigned without the prior written consent of the other
parties to this Agreement.
9.4 Construction. If any provision of this Agreement or the
application thereof to any person or circumstances is
determined, to any extent, to be invalid or unenforceable,
the remainder of this Agreement, or the application of such
provision to persons or circumstances other than those as to
which the same is held invalid or unenforceable, will not be
affected thereby, and each term and provision of this
Agreement will be valid and enforceable to the fullest
extent permitted by law. This Agreement is intended to be
interpreted, construed and enforced in accordance with the
laws of the State of Oklahoma and any litigation relating to
this Agreement will be conducted in a court of competent
jurisdiction sitting in Oklahoma County, Oklahoma.
9.5 Entire Agreement. This Agreement constitutes the entire
agreement between the parties hereto with respect to the
subject matter herein contained, and no modification hereof
will be effective unless made by a supplemental written
agreement executed by all of the parties hereto.
9.6 Binding Effect. This Agreement will be binding on the
parties and their respective successors, legal
representatives and permitted assigns. In the event of a
merger, consolidation, combination, dissolution or
liquidation of the Company, the performance of this
Agreement will be assumed by any entity which succeeds to or
is transferred the business of the Company as a result
thereof.
9.7 Attorneys' Fees. If any party institutes an action or
proceeding against any other party relating to the
provisions of this Agreement or any default hereunder, the
unsuccessful party to such action or proceeding will
reimburse the successful party therein for the reasonable
expenses of attorneys' fees and disbursements and litigation
expenses incurred by the successful party.
9.8 Supersession. This Agreement is the final, complete and
exclusive expression of the agreement between the Company
and the Employee and supersedes and replaces in all respects
any other agreements between the Company and the Employee.
On execution of this agreement by the Company and the
Employee, the relationship between the Company and the
Employee will be governed by the terms of this Agreement and
not by any other agreements, oral or otherwise.
<PAGE> 9
IN WITNESS WHEREOF, the undersigned have executed this Agreement
effective the date first above written.
CHESAPEAKE OPERATING, INC., an
Oklahoma corporation
By /s/ Aubrey K. McClendon
------------------------------
AUBREY K. MCCLENDON, President
(the "Company")
/s/ Martha A. Burger
------------------------------
MARTHA A. BURGER, individually
(the "Employee")
<PAGE> 1
EXHIBIT 11
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
STATEMENT OF NET INCOME PER SHARE
($ IN THOUSANDS, EXCEPT PER SHARE)
<TABLE>
<CAPTION>
Years Ended June 30,
----------------------------------------
1996 1995 1994
-------- -------- ---------
<S> <C> <C> <C>
PRIMARY INCOME PER SHARE
Net income applicable to Common Stock $23,355 $11,661 $ 3,905
======= ======= =======
Weighted average common shares outstanding 27,282 26,312 22,986
Adjustment to weighted average common
shares outstanding:
Add dilutive effect of:
TCW Warrants - - 446
Detachable stock warrants - - 553
Employee Options 1,889 1,624 135
------- ------- -------
Weighted average common shares outstanding,
as adjusted 29,171 27,936 24,120
======= ======= =======
Net income per common share, as adjusted $ .80 $ .42 $ .16
======= ======= =======
FULLY DILUTED INCOME PER SHARE
Net income applicable to Common Stock
as shown in primary computation above $23,355 $11,661 $ 3,905
======= ======= =======
Weighted average common shares outstanding 27,282 26,312 22,986
Adjustment to weighted average common
shares outstanding:
Add fully dilutive effect of:
TCW Warrants - - 486
Detachable Stock Warrants - - 553
Employee Options 2,179 1,991 158
------- ------- -------
Weighted average common shares outstanding,
as adjusted 29,461 28,303 24,183
======= ======= =======
Fully diluted net income per common share $ .79 $ .41 $ .16
======= ======= =======
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Chesapeake Energy Corporation on Form S-8 (File Nos. 33-84256, 33-84258,
33-88196 and 333-07255) and Form S-3 (File Nos. 333-04027 and 333-12533) of our
reports dated September 13, 1996, on our audits of the consolidated financial
statements of Chesapeake Energy Corporation and the financial statements of
Chesapeake Exploration Limited Partnership as of June 30, 1996, and for the
year then ended, which reports are included in this Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
Oklahoma City, Oklahoma
September 25, 1996
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the registration
statements on Form S-8 (File Nos. 33-84256, 33-84258, 33-88196 and 333-07255)
and Form S-3 (File Nos. 333-04027 and 333-12533) of Chesapeake Energy
Corporation of our report dated September 20, 1995 on our audit of the
consolidated financial statements of Chesapeake Energy Corporation appearing on
page 31 of this Form 10-K and our report dated September 20, 1995 on our audit
of the financial statements of Chesapeake Exploration Limited Partnership
appearing on page 63 of the Form 10-K.
/s/ PRICE WATERHOUSE LLP
- ------------------------
PRICE WATERHOUSE LLP
Houston, Texas
September 23, 1996
<PAGE> 1
[WILLIAMSON PETROLEUM CONSULTANTS, INC. LETTERHEAD]
CONSENT OF WILLIAMSON PETROLEUM CONSULTANTS, INC.
As independent oil and gas consultants, Williamson Petroleum Consultants,
Inc. hereby consents to (a) the use of our reserve 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 all references to our firm included in or made a
part of the Chesapeake Energy Corporation Annual Report on Form 10-K to be
filed with the Securities and Exchange Commission on or about September 30,
1996 and (b) to the incorporation by reference of this Form 10-K for the
year ending June 30, 1996 in the Registration Statements on Form S-8 (Nos.
33-84256, 33-84258, 33-88196, and 333-07255) and on Form S-3 (Nos.
333-04027 and 333-12533)
/s/ WILLIAMSON PETROLEUM CONSULTANTS, INC.
WILLIAMSON PETROLEUM CONSULTANTS, INC.
Houston, Texas
September 30, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE
SHEET AS OF JUNE 30, 1996 AND STATEMENT OF INCOME FOR 12 MONTHS ENDED JUNE 30,
1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-K JUNE 30,
1996
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 51,638
<SECURITIES> 0
<RECEIVABLES> 50,554
<ALLOWANCES> 340
<INVENTORY> 5,163
<CURRENT-ASSETS> 109,173
<PP&E> 546,816
<DEPRECIATION> 95,642
<TOTAL-ASSETS> 572,335
<CURRENT-LIABILITIES> 108,834
<BONDS> 268,431
0
0
<COMMON> 3,008
<OTHER-SE> 174,759
<TOTAL-LIABILITY-AND-EQUITY> 572,335
<SALES> 145,591
<TOTAL-REVENUES> 149,422
<CGS> 40,650
<TOTAL-COSTS> 113,213
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,679
<INCOME-PRETAX> 36,209
<INCOME-TAX> 12,854
<INCOME-CONTINUING> 23,355
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,355
<EPS-PRIMARY> .80
<EPS-DILUTED> .79
</TABLE>
