<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec. 240.14a-11(c) or sec. 240.14a-12
CHESAPEAKE ENERGY CORPORATION
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(l) and
0-11.
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined):
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5) Total fee paid:
Set forth the amount on which the filing fee is calculated and state how
it was determined.
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
- --------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
- --------------------------------------------------------------------------------
(3) Filing Party:
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(4) Date Filed:
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<PAGE> 2
CHESAPEAKE ENERGY CORPORATION
6100 NORTH WESTERN AVENUE
OKLAHOMA CITY, OKLAHOMA 73118
---------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD DECEMBER 12, 1997
---------------------
TO OUR SHAREHOLDERS:
The 1997 Annual Meeting of Shareholders of Chesapeake Energy Corporation,
an Oklahoma corporation (the "Company"), will be held at the St. Regis Hotel,
Two East 55th Street, Versailles Suite, New York, New York, on Friday, December
12, 1997, at 10:00 a.m., local time, for the following purposes:
1. To elect two directors for terms expiring in 2000;
2. To consider and act upon a proposed amendment to the Company's
Certificate of Incorporation to increase the number of authorized shares of
the Company's Common Stock; and
3. To transact such other business as may properly come before the
meeting or any adjournment thereof.
Shareholders of record at the close of business on October 24, 1997 are
entitled to notice of and to vote at the meeting. A complete list of the
shareholders entitled to vote at the meeting will be available for examination
by any shareholder at the Company's executive offices and at Depository Trust
Company, Transfer Agent Drop, 55 Water Street, First Floor, Jeanette Park
Entrance, New York, New York, during ordinary business hours, for a period of at
least ten days prior to the meeting.
The accompanying Proxy Statement contains information regarding the matters
to be considered at the meeting. For reasons outlined therein, the Board of
Directors recommends a vote "FOR" the matters being voted upon.
YOUR PROXY IS IMPORTANT TO ASSURE A QUORUM AT THE MEETING. WHETHER OR NOT
YOU EXPECT TO ATTEND THE MEETING, PLEASE BE SURE THAT THE ENCLOSED PROXY IS
PROPERLY COMPLETED, DATED, SIGNED AND RETURNED WITHOUT DELAY IN THE ENCLOSED
ENVELOPE. IT REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES.
BY ORDER OF THE BOARD OF DIRECTORS,
Janice A. Dobbs
Corporate Secretary
Oklahoma City, Oklahoma
November , 1997
<PAGE> 3
CHESAPEAKE ENERGY CORPORATION
---------------------
PROXY STATEMENT
---------------------
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON DECEMBER 12, 1997
GENERAL INFORMATION
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of Chesapeake Energy Corporation, an Oklahoma
corporation (the "Company"), for use at the Annual Meeting of Shareholders of
the Company (the "Meeting") to be held on the date, at the time and place and
for the purposes set forth in the accompanying Notice of Annual Meeting of
Shareholders, and any adjournment of the Meeting.
This Proxy Statement and accompanying form of proxy, along with the
Company's Annual Report for its fiscal year ended June 30, 1997, are first being
mailed to shareholders on November , 1997. Shareholders are referred to the
Annual Report for financial information concerning the activities of the
Company.
The Board of Directors has established October 24, 1997 as the record date
(the "Record Date") to determine shareholders entitled to notice of and to vote
at the Meeting. At the close of business on the Record Date, 70,386,127 shares
of $.01 par value common stock of the Company ("Common Stock") were outstanding.
Each share is entitled to one vote. The holders of a majority of the outstanding
Common Stock, present in person or by proxy, will constitute a quorum for the
transaction of business at the Meeting.
Each proxy which is properly signed, dated and returned to the Company in
time for the Meeting, and not revoked, will be voted in accordance with
instructions contained therein. If no contrary instructions are given, proxies
will be voted "FOR" the election of all nominees as directors and "FOR" approval
of all proposals listed on the proxy. Proxies may be revoked at any time prior
to their being exercised by delivering a written notice of revocation or a later
dated proxy to the Corporate Secretary of the Company. In addition, a
shareholder present at the Meeting may revoke his or her proxy and vote in
person.
Election of each director nominee will be by plurality vote. The
affirmative vote of holders of a majority of the Company's outstanding Common
Stock will be required for approval of the proposed amendment to the Company's
Certificate of Incorporation (the "Certificate of Incorporation"). The Company's
Corporate Secretary will appoint an inspector of election to tabulate all votes
and to certify the results of all matters voted upon at the Meeting. It is the
Company's policy (i) to count abstentions and broker non-votes for purposes of
determining the presence of a quorum at the Meeting; (ii) to treat abstentions
as shares represented at the Meeting and voting against a proposal and to
disregard broker non-votes in determining results on proposals requiring a
majority vote; and (iii) to consider neither abstentions nor broker non-votes in
determining results of plurality votes.
The cost of soliciting proxies in the enclosed form will be borne by the
Company. In addition to solicitation by mail, officers, employees or agents of
the Company may solicit proxies personally, or by telephone, telegraph,
facsimile transmission or other means of communication. The Company will request
banks and brokers or other similar agents or fiduciaries to transmit the proxy
material to the beneficial owners for their voting instructions and will
reimburse them for their expenses in so doing.
All share information included herein has been adjusted to reflect the
two-for-one stock split effected in December 1994, the three-for-two stock
splits effected in December 1995 and in June 1996, and the two-for-one stock
split effected in December 1996.
<PAGE> 4
ELECTION OF DIRECTORS
Pursuant to provisions of the Company's Certificate of Incorporation and
Bylaws, the Board of Directors has fixed the number of directors at seven. The
Company's Certificate of Incorporation and Bylaws provide for three classes of
directors serving staggered three-year terms, with each class to be as nearly
equal in number as possible. The Board of Directors has nominated Breene M. Kerr
and Walter C. Wilson for re-election as directors for terms expiring at the 2000
Annual Meeting of Shareholders, and in each case, until their successors are
elected and qualified. Proxies cannot be voted for a greater number of persons
than the number of nominees named. The nominees are presently directors of the
Company whose terms expire at the Meeting. Other directors who are remaining on
the Board will continue in office in accordance with their previous elections
until the expiration of their terms at the 1998 or 1999 Annual Meeting of
Shareholders, as the case may be.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" EACH OF THE NOMINEES FOR
ELECTION TO THE BOARD OF DIRECTORS.
It is the intention of the persons named in the enclosed form of proxy to
vote such proxies for the election of the two nominees. The Board of Directors
expects that each nominee will be available for election but, in the event that
the nominees are not so available, proxies received will be voted for substitute
nominees to be designated by the Board of Directors or, in the event no such
designation is made by the Board, proxies will be voted for a lesser number of
nominees.
INFORMATION REGARDING NOMINEES AND DIRECTORS
The following information is furnished for each person who is nominated for
re-election as a director or who is continuing to serve as a director of the
Company after the Meeting.
NOMINEES FOR RE-ELECTION AS DIRECTORS FOR TERMS EXPIRING IN 2000
Breene M. Kerr, age 68, has been a director of the Company since 1993. In
1969, he founded Kerr Consolidated, Inc. and remains Chairman and President of
this private company with investments in the oil and gas and trucking
industries. Additionally, in 1969, Mr. Kerr co-founded the Resource Analysis and
Management Group and remained its senior partner until 1982. From 1967 to 1969,
he was Vice President of Kerr-McGee Chemical Corporation. From 1951 through
1967, Mr. Kerr worked for Kerr-McGee Corporation as a geologist and land
manager. Mr. Kerr has served as Chairman of the Investment Committee for the
Massachusetts Institute of Technology and is a life member of the Corporation
(Board of Trustees) of that university. He served as a director of Kerr-McGee
Corporation from 1957 to 1981. Mr. Kerr currently is a trustee and serves on the
Investment Committee of the Brookings Institute in Washington, D.C., and has
been an associate director since 1987 of Aven Gas & Oil, Inc., an oil and gas
property management company located in Oklahoma City. Mr. Kerr graduated in 1951
from the Massachusetts Institute of Technology.
Walter C. Wilson, age 62, has been a director of the Company since 1993.
From 1963 to 1974 and from 1978 to 1997, Mr. Wilson was a general agent with
Massachusetts Mutual Life Insurance Company. From 1974 to 1978, he was Senior
Vice President of Massachusetts Mutual Life Insurance Company, and from 1958 to
1963, he was an agent with that company. Mr. Wilson is a member of the Board of
Trustees of Springfield College in Springfield, Massachusetts, and is a director
of Earth Satellite Corporation of Rockville, Maryland and Amerac Energy
Corporation of Houston, Texas. Mr. Wilson graduated in 1958 from Dartmouth
College.
DIRECTORS WHOSE TERMS EXPIRE IN 1998
Tom L. Ward, age 38, has served as President, Chief Operating Officer, and
a director of the Company since its inception in 1989. From 1982 to 1989, Mr.
Ward was an independent producer of oil and gas in affiliation with Aubrey K.
McClendon, the Company's Chairman and Chief Executive Officer. Mr. Ward is a
member of the Board of Trustees of Anderson University in Anderson, Indiana. Mr.
Ward graduated from the University of Oklahoma in 1981.
2
<PAGE> 5
E. F. Heizer, Jr., age 68, has been a director of the Company since 1993.
From 1985 to the present, Mr. Heizer has been a private venture capitalist. He
founded Heizer Corp., an American Stock Exchange-listed business development
company, in 1969 and served as Chairman and Chief Executive Officer from 1969
until 1986, when Heizer Corporation was reorganized into a number of public and
private companies. Mr. Heizer was assistant treasurer of the Allstate Insurance
Company from 1962 to 1969. He was employed by Booz, Allen and Hamilton from 1958
to 1962, Kidder, Peabody & Co. from 1956 to 1958, and Arthur Andersen & Co. from
1954 to 1956. He serves on the advisory board of the Kellogg School of
Management at Northwestern University and the Executive Committee of Yale Law
School. Mr. Heizer is a director of Amdahl Corporation in Santa Clara,
California, Material Science Corporation, Elk Grove, Illinois, and numerous
private companies. Mr. Heizer graduated in 1951 from Northwestern University and
from Yale University Law School in 1954.
Frederick B. Whittemore, age 66, has been a director of the Company since
1993. Mr. Whittemore has been an advisory director of Morgan Stanley & Co. since
1989 and was a managing director of Morgan Stanley & Co. from 1970 to 1989. He
was Vice-Chairman of the American Stock Exchange from 1982 to 1984. Mr.
Whittemore was a partner with Morgan Stanley & Co. from 1967 to 1970 and an
associate from 1958 to 1967. Mr. Whittemore is a director of Integon Insurance
Company in Winston-Salem, North Carolina, Partner Reinsurance Company, Limited
in Bermuda and Southern Pacific Petroleum, N.L. of Sydney, Australia. Mr.
Whittemore graduated in 1953 from Dartmouth College and from the Amos Tuck
School of Business Administration in 1954.
DIRECTORS WHOSE TERMS EXPIRE IN 1999
Aubrey K. McClendon, age 38, has served as Chairman of the Board, Chief
Executive Officer and director of the Company since its inception in 1989. From
1982 to 1989, Mr. McClendon was an independent producer of oil and gas in
affiliation with Tom L. Ward, the Company's President and Chief Operating
Officer. Mr. McClendon is a member of the Board of Visitors of the Fuqua School
of Business at Duke University, an Executive Committee member of the Texas
Independent Producers and Royalty Owners Association, a director of the Oklahoma
Independent Petroleum Association, and a director of the Louisiana Independent
Oil and Gas Association. Mr. McClendon is a 1981 graduate of Duke University.
Shannon T. Self, age 41, has been a director of the Company since 1993. He
is a shareholder of Self, Giddens & Lees, Inc., Attorneys at Law, in Oklahoma
City, which he co-founded in 1991. Mr. Self was an associate and shareholder in
the law firm of Hastie and Kirschner, Oklahoma City, from 1984 to 1991 and was
employed by Arthur Young & Co. from 1979 to 1980. Mr. Self is a certified public
accountant. He graduated from the University of Oklahoma in 1979 and from
Northwestern University Law School in 1984.
THE BOARD OF DIRECTORS AND ITS COMMITTEES
The Board of Directors held four meetings during the Company's fiscal year
ended June 30, 1997, took action by written consent two times, and held one
meeting by telephone conference. The Board of Directors has standing
compensation, stock option and audit committees. It does not have a standing
nominating committee.
The duties of the Compensation Committee are described under "Executive
Compensation -- Compensation Committee Report." Messrs. McClendon, Ward, Heizer
and Whittemore serve on the Compensation Committee. The Compensation Committee
held two meetings during the fiscal year ended June 30, 1997.
The Stock Option Committee, comprised of Messrs. McClendon and Ward,
administers the Company's 1992 Incentive Stock Option Plan. Messrs. McClendon
and Ward also serve on the Regular Option Committee of the 1994 Stock Option
Plan and the Regular Stock Option Committee of the 1996 Stock Option Plan (the
"Plans") with respect to non-director employee participants. Messrs. Heizer and
Whittemore serve on the Plans' Special Stock Option Committee with respect to
employee participants who are executive officers or directors. Each committee
for the Plans held two meetings during fiscal year 1997.
3
<PAGE> 6
The Audit Committee annually recommends the independent accountant to be
appointed by the Board of Directors as auditor of the Company and its
subsidiaries, and reviews the arrangements for and the results of the auditor's
examination of the Company's books and records, internal accounting control
procedures, and the activities and recommendations of the Company's internal
auditors. It reports to the Board of Directors on Audit Committee activities and
makes such investigations as it deems appropriate. Messrs. Kerr, Self and Wilson
serve on the Audit Committee. The Audit Committee held two meetings during the
fiscal year ended June 30, 1997.
Each director attended all of the Board and committee meetings held while
serving as a director or committee member during fiscal year 1997.
INFORMATION REGARDING OFFICERS
EXECUTIVE OFFICERS
In addition to Messrs. McClendon and Ward, the following are also executive
officers of the Company.
Marcus C. Rowland, age 45, was appointed Senior Vice President -- Finance
and Chief Financial Officer in September 1997. He served as Vice
President -- Finance and Chief Financial Officer from 1993 to 1997. From 1990
until his association with the Company, Mr. Rowland was Chief Operating Officer
of Anglo-Suisse, L.P. assigned to the White Nights Russian Enterprise, a joint
venture of Anglo-Suisse, L.P. and Phibro Energy Corporation, a major foreign
operation which was granted the right to engage in oil and gas operations in
Russia. Prior to his association with White Nights Russian Enterprise, Mr.
Rowland owned and managed his own oil and gas company and prior to that was
Chief Financial Officer of a private exploration company in Oklahoma City from
1981 to 1985. Mr. Rowland is a certified public accountant and graduated from
Wichita State University in 1975.
Steven C. Dixon, age 39, has been Senior Vice President -- Operations since
1995 and served as Vice President -- Exploration from 1991 to 1995. Mr. Dixon
was a self-employed geological consultant in Wichita, Kansas from 1983 through
1990. He was employed by Beren Corporation in Wichita, Kansas from 1980 to 1983
as a geologist. Mr. Dixon graduated from the University of Kansas in 1980.
J. Mark Lester, age 44, has been Senior Vice President -- Exploration since
1995 and served as Vice President -- Exploration from 1989 to 1995. From 1986 to
1989, Mr. Lester was employed by Messrs. McClendon and Ward. He was employed by
various independent oil companies in Oklahoma City from 1980 to 1986, and was
employed by Union Oil Company of California from 1977 to 1980 as a geophysicist.
Mr. Lester graduated from Purdue University in 1975 and in 1977.
Henry J. Hood, age 37, was appointed Senior Vice President -- Land and
Legal in September 1997 and served as Vice President -- Land and Legal from
1995. Mr. Hood was retained as a consultant to the Company during the two years
prior to his joining the Company. He was associated with the law firm of Watson
& McKenzie from 1987 to 1992. From 1991 to 1992, Mr. Hood was of counsel with
the Oklahoma City law firm of White, Coffey, Galt & Fite. Mr. Hood is a member
of the Oklahoma and Texas Bar Associations. Mr. Hood graduated from Duke
University in 1982 and from the University of Oklahoma College of Law in 1985.
Ronald A. Lefaive, age 50, has served as Controller and Chief Accounting
Officer since 1993. From 1991 until his association with the Company, Mr.
Lefaive was Controller for Phibro Energy Production, Inc., an international
exploration and production subsidiary of Phibro Energy, whose principal
operations were located in Russia. From 1982 to 1991, Mr. Lefaive served as
Assistant Controller, General Auditor and Manager of Management Information
Systems at Conquest Exploration Company in Houston, Texas. Prior to joining
Conquest, Mr. Lefaive held various financial staff and management positions with
The Superior Oil Company from 1980 to 1982 and Shell Oil Company from 1975 to
1982. Mr. Lefaive is a certified public accountant and graduated from the
University of Houston in 1975.
4
<PAGE> 7
Martha A. Burger, age 44, has served as Treasurer since 1995 and as
Treasurer and Human Resources Manager since 1996. From 1994 to 1995, she served
in various accounting positions with the Company including Assistant
Controller -- Operations. From 1989 to 1993, Ms. Burger was employed by Hadson
Corporation as Assistant Treasurer and from 1994 to 1995, served as Vice
President and Controller of Hadson. Prior to joining Hadson, Ms. Burger was
employed by Phoenix Resource Companies, Inc. as Assistant Treasurer and by
Arthur Andersen & Co. Ms. Burger is a certified public accountant and graduated
from the University of Central Oklahoma in 1982 and from Oklahoma City
University in 1992.
OTHER OFFICERS
Thomas S. Price, Jr., age 45, has served as Vice President -- Corporate
Development since 1992 and was a consultant to the Company during the prior two
years. He was employed by Kerr-McGee Corporation, Oklahoma City, from 1988 to
1990 and by Flag-Redfern Oil Company in Oklahoma City from 1984 to 1988. Mr.
Price graduated from the University of Central Oklahoma in 1983, from the
University of Oklahoma in 1989, and from the American Graduate School of
International Management in 1992.
Dale W. Bossert, age 53, has served as Vice President -- Production since
January 1997. Mr. Bossert was previously employed by Celsius Energy Company as
Consulting General Manager -- Canada in 1996 and by Union Pacific Resources
Company of Fort Worth, Texas from 1978 serving in various capacities, including
Vice President -- Production from 1989 to 1993 and as Vice
President -- Exploration and Production Services from 1993 to 1995. Mr. Bossert
graduated from the University of Alberta in 1966.
Charles W. Imes, age 50, has served as Vice President -- Information
Technology since 1997 and served as Director -- Management Information Systems
since 1993. From 1983 to 1993, Mr. Imes owned Imes Software Systems, Oklahoma
City, and served as a consultant and supplier of software to the Company from
1990 to 1993. Mr. Imes graduated from the University of Oklahoma in 1969.
Terry L. Kite, age 43, has served as Vice President -- Information
Technology since February 1997. From 1981 to 1996, Mr. Kite served in various
positions in information technology at Amerada Hess Corporation in Houston,
Texas, including Manager -- Geoscience and Engineering Systems. Prior to joining
Amerada Hess, Mr. Kite held information systems staff positions with Earth
Science Programming in Tulsa from 1979 to 1980 and with Seismograph Service
Corporation in Tulsa from 1976 to 1979. Mr. Kite graduated from the Colorado
School of Mines in 1976.
Janice A. Dobbs, age 49, has served as Corporate Secretary and Compliance
Manager since 1993. From 1975 until her association with the Company, Ms. Dobbs
was the corporate/securities legal assistant with the law firm of Andrews Davis
Legg Bixler Milsten & Price, Inc. in Oklahoma City. From 1973 to 1975, Ms. Dobbs
was the Administrative Assistant to the President and General Counsel of Texas
International Company, an oil and gas exploration and production company in
Oklahoma City. Ms. Dobbs is a certified legal assistant, an associate member of
the American Bar Association, a member of the American Society of Corporate
Secretaries and the Society of Human Resources Management.
5
<PAGE> 8
SECURITY OWNERSHIP OF MANAGEMENT
AND CERTAIN BENEFICIAL OWNERS
SECURITY OWNERSHIP
The table below sets forth as of the Record Date (i) the name and address
of each person known by management to own beneficially 5% or more of the
Company's outstanding Common Stock, the number of shares beneficially owned by
each such shareholder and the percentage of outstanding shares owned and (ii)
the number and percentage of outstanding shares of Common Stock beneficially
owned by each of the Company's nominees, directors and executive officers listed
in the Summary Compensation Table below and by all directors and executive
officers of the Company as a group. Unless otherwise noted, the persons named
below have sole voting and investment power with respect to such shares.
<TABLE>
<CAPTION>
COMMON STOCK
----------------------------
NUMBER OF PERCENT OF
BENEFICIAL OWNER SHARES CLASS
---------------- ---------- ----------
<S> <C> <C>
Tom L. Ward*+............................................. 11,263,072(a)(b) 16%
6100 North Western Avenue
Oklahoma City, OK 73118
Aubrey K. McClendon*+..................................... 11,005,978(b)(c) 15%
6100 North Western Avenue
Oklahoma City, OK 73118
Pilgrim Baxter & Associates............................... 5,303,008(d) 8%
1255 Drummers Lane
Wayne, PA 19087-1590
Shannon T. Self*.......................................... 2,731,998(e) 4%
E.F. Heizer, Jr.*......................................... 1,054,400(f) 1%
Frederick B. Whittemore*.................................. 919,000(g) 1%
Steven C. Dixon+.......................................... 407,584(b)(h) **
Breene M. Kerr*........................................... 346,250(i) **
Walter C. Wilson*......................................... 248,000(j) **
Marcus C. Rowland+........................................ 165,215(b)(k) **
J. Mark Lester+........................................... 106,105(b)(l) **
Henry J. Hood+............................................ 23,162(b)(m) **
All directors and executive officers as a group........... 30,948,588(n) 42%
</TABLE>
- ---------------
* Director
+ Executive officer of the Company
** Less than 1%
(a) Includes 1,846,860 shares held by TLW Investments, Inc., an Oklahoma
corporation of which Mr. Ward is sole shareholder and chief executive
officer, and 841,500 shares which may be acquired pursuant to currently
exercisable stock options granted by the Company.
(b) Includes shares purchased on behalf of the executive officer in the
Chesapeake Energy Corporation Savings and Incentive Stock Bonus Plan (Tom L.
Ward, 3,522 shares; Aubrey K. McClendon, 1,643 shares; Steven C. Dixon, 937
shares; Marcus C. Rowland, 985 shares; J. Mark Lester, 719 shares and Henry
J. Hood, 776 shares).
(c) Includes 508,560 shares held by Chesapeake Investments, an Oklahoma limited
partnership of which Mr. McClendon is sole general partner, and 526,500
shares which may be acquired pursuant to currently exercisable stock options
granted by the Company.
(d) Based on information provided by Pilgrim Baxter & Associates.
(e) Includes 2,382 shares held by Pearson Street Limited Partnership, an
Oklahoma limited partnership of which Mr. Self is a general partner and the
remaining partners are members of Mr. Self's immediate
6
<PAGE> 9
family sharing the same household; 1,098,600 shares held by Mr. Self as
trustee of the Aubrey K. McClendon Children's Trust, 1,209,100 shares held
by Mr. Self as trustee of the Tom L. Ward Children's Trust and 421,916
shares which Mr. Self has the right to acquire pursuant to currently
exercisable stock options granted by the Company.
(f) Includes 344,750 shares subject to currently exercisable stock options
granted to Mr. Heizer by the Company.
(g) Includes 374,000 shares subject to currently exercisable stock options
granted to Mr. Whittemore by the Company.
(h) Includes 403,647 shares subject to currently exercisable stock options
granted to Mr. Dixon by the Company.
(i) Includes 27,500 shares subject to currently exercisable stock options
granted to Mr. Kerr by the Company.
(j) Includes 248,000 shares subject to currently exercisable stock options
granted to Mr. Wilson by the Company.
(k) Includes 74,250 shares subject to currently exercisable stock options
granted to Mr. Rowland by the Company.
(l) Includes 100,886 shares subject to currently exercisable stock options
granted to Mr. Lester by the Company.
(m) Includes 20,812 shares subject to currently exercisable stock options
granted to Mr. Hood by the Company.
(n) Includes shares subject to options which are currently exercisable.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires the Company's directors and executive officers and persons who
beneficially own more than 10% of the Company's Common Stock to file reports of
ownership and subsequent changes with the Securities and Exchange Commission.
Executive officers of the Company, Marcus C. Rowland, Steven C. Dixon, J.
Mark Lester, Henry J. Hood, Ronald A. Lefaive and Martha A. Burger were late in
filing Form 4's to report the cancelation of stock options and also failed to
timely report on Form 5 options granted to replace such options.
Shannon T. Self, a director of the Company, has advised the Company that
the acquisition of 52,000 shares of Common Stock acquired through the exercise
of a stock option granted by the Company and the disposition of 50,000 of those
shares were reported on a late filed Form 4.
7
<PAGE> 10
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth for the last three fiscal years the cash
compensation of (i) the Company's chief executive officer and (ii) the five
other most highly compensated executive officers:
<TABLE>
<CAPTION>
ANNUAL COMPENSATION SECURITIES
------------------------------------- UNDERLYING
OTHER OPTION ALL
FISCAL ANNUAL AWARDS(B) OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(A) (# OF SHARES) COMPENSATION(C)
--------------------------- ------ -------- -------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Aubrey K. McClendon............... 1997 $250,000 $120,000 $74,450 463,000 $11,050
Chairman of the Board and 1996 $185,000 $ 40,000 $65,408 288,000 $ 8,295
Chief Executive Officer 1995 $180,000 $ 65,400 $57,640 540,000 $ 4,620
Tom L. Ward....................... 1997 $250,000 $120,000 $75,408 463,000 $13,700
President and 1996 $185,000 $ 40,000 $66,850 288,000 $ 8,368
Chief Operating Officer 1995 $180,000 $ 65,400 $57,340 540,000 $ 4,620
Marcus C. Rowland................. 1997 $185,000 $ 50,000 (d) 36,000 $ 9,500
Senior Vice President -- Finance 1996 $165,000 $ 20,000 (d) 171,000 $11,333
and Chief Financial Officer 1995 $155,000 $ 45,400 (d) 324,000 $ 4,620
Steven C. Dixon................... 1997 $145,000 $ 45,000 (d) 30,000 $11,500
Senior Vice President -- 1996 $125,000 $ 12,500 (d) 97,500 $ 9,870
Operations 1995 $112,500 $ 27,900 (d) 184,500 $ 3,510
Henry J. Hood..................... 1997 $135,000 $ 30,000 (d) 19,500 $ 2,920
Senior Vice President -- 1996 $120,000 $ 12,000 (d) 51,000 $ 6,400
Land and Legal 1995 $120,000 $ 6,300 (d) 20,250 --
J. Mark Lester.................... 1997 $132,500 $ 30,000 (d) 19,500 $10,400
Senior Vice President -- 1996 $110,000 $ 11,000 (d) 64,500 $ 7,635
Exploration 1995 $105,000 $ 14,800 81,000 $ 2,063
</TABLE>
- ---------------
(a) Represents the cost of personal benefits provided by the Company, including
for fiscal 1997 personal accounting support ($53,000 for Mr. McClendon and
$53,350 for Mr. Ward), personal vehicle ($18,000 each) and country club
membership dues ($3,450 for Mr. McClendon and $4,058 for Mr. Ward).
(b) No awards of restricted stock or payments under long-term incentive plans
were made by the Company to any of the named executives in any period
covered by the table.
(c) Represents Company matching contributions to the Chesapeake Energy
Corporation Savings and Incentive Stock Bonus Plan.
(d) Other annual compensation did not exceed the lesser of $50,000 or 10% of the
executive officer's salary and bonus during the year.
STOCK OPTIONS GRANTED IN FISCAL 1997
The following table sets forth information concerning options to purchase
Common Stock granted in fiscal 1997 to the executive officers named in the
Summary Compensation Table. Amounts represent stock options granted under the
Company's 1994 and 1996 Plans and include both incentive and non-qualified stock
options. One-fourth of each option becomes exercisable on each of the first four
grant date anniversaries. The
8
<PAGE> 11
exercise price of each option represents the market price of the Common Stock on
the date of grant (110% of such market price with respect to incentive stock
options granted to Messrs. McClendon and Ward).
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------------- POTENTIAL REALIZABLE VALUE
PERCENT OF AT ASSUMED ANNUAL RATES
NUMBER OF TOTAL OPTIONS OF STOCK PRICE APPRECIATION
SECURITIES GRANTED TO EXERCISE FOR OPTION TERM(A)
UNDERLYING EMPLOYEES IN PRICE PER EXPIRATION ----------------------------
NAME OPTIONS GRANTED FISCAL 1997 SHARE DATE 5% 10%
---- --------------- ------------- --------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Aubrey K. McClendon........ 15,456(b) 0.4% $28.47 6/13/97 N/A N/A
184,544(b) 5.3% $25.87 6/13/97 N/A N/A
235,176 6.7% $14.75 6/13/07 $958,379 $2,117,765
27,824 0.8% $16.23 6/13/02 $ 83,824 $ 220,993
Tom L. Ward................ 15,456(b) 0.4% $28.47 6/13/97 N/A N/A
184,544(b) 5.3% $25.87 6/13/97 N/A N/A
235,176 6.7% $14.75 6/13/07 $958,379 $2,117,765
27,824 0.8% $16.23 6/13/02 $ 83,824 $ 220,993
Marcus C. Rowland.......... 36,000 1.0% $14.25 4/25/07 $322,623 $ 817,590
Steven C. Dixon............ 30,000 0.9% $14.25 4/25/07 $268,852 $ 681,325
Henry J. Hood.............. 19,500 0.5% $14.25 4/25/07 $174,754 $ 442,862
J. Mark Lester............. 19,500 0.5% $14.25 4/25/07 $174,754 $ 442,862
</TABLE>
- ---------------
(a) The assumed annual rates of stock price appreciation of 5% and 10% are set
by the Securities and Exchange Commission and are not intended as a forecast
of possible future appreciation in stock prices.
(b) Option was canceled upon grant of replacement option.
9
<PAGE> 12
OPTION REPRICING
The following table sets forth information concerning options to purchase
Common Stock held by executive officers which were repriced since the Company
became a reporting company under the Exchange Act in 1993. Amounts represent new
stock options granted under the Company's 1994 and 1996 Plans and include both
incentive and non-qualified stock options. One fourth of each option becomes
exercisable on each of the first four grant date anniversaries. The exercise
price of each option represents the market price of the Common Stock on the date
of grant (110% of such market price with respect to incentive stock options
granted to Messrs. McClendon and Ward).
<TABLE>
<CAPTION>
LENGTH OF
ORIGINAL
OPTION TERM
MARKET REMAINING
NUMBER OF PRICE OF EXERCISE AT DATE OF
DATE SECURITIES STOCK AT PRICE AT REPRICING
NAME AND OPTIONS UNDERLYING TIME OF TIME OF NEW ------------
PRINCIPAL POSITION REPRICED OPTIONS REPRICED REPRICING REPRICING EXERCISE PRICE YEARS DAYS
------------------ -------- ---------------- --------- --------- -------------- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Aubrey K. McClendon.......... 6/13/97 63,000 $14.75 $17.67 $14.75 8 295
Chairman of the Board and 6/13/97 27,824 $14.75 $28.47 $16.23 4 183
Chief Executive Officer 6/13/97 172,176 $14.75 $25.88 $14.75 9 183
Tom L. Ward.................. 6/13/97 63,000 $14.75 $17.67 $14.75 8 295
President and 6/13/97 27,824 $14.75 $28.47 $16.23 4 183
Chief Operating Officer 6/13/97 172,176 $14.75 $25.88 $14.75 9 183
Marcus C. Rowland............ 9/30/93 81,000 $ 0.71 $ 1.07 $ 0.71 9 92
Senior Vice President -- 4/25/97 36,000 $14.25 $17.67 $14.25 8 344
Finance and Chief Financial
Officer
Steven C. Dixon.............. 9/30/93 45,000 $ 0.71 $ 1.07 $ 0.71 9 92
Senior Vice President -- 4/25/97 30,000 $14.25 $17.67 $14.25 8 344
Operations
Henry J. Hood................ 4/25/97 19,500 $14.25 $17.67 $14.25 8 344
Senior Vice President --
Land and Legal
J. Mark Lester............... 9/30/93 45,000 $ 0.71 $ 1.07 $ 0.71 9 92
Senior Vice President -- 4/25/97 19,500 $14.25 $17.67 $14.25 8 344
Exploration
Ronald A. Lefaive............ 4/25/97 19,500 $14.25 $17.67 $14.25 8 344
Controller
Martha A. Burger............. 4/25/97 13,500 $14.25 $17.67 $14.25 8 344
Treasurer
</TABLE>
10
<PAGE> 13
AGGREGATED OPTION EXERCISES IN FISCAL 1997 AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information about options exercised by the
named executive officers during the fiscal year ended June 30, 1997 and the
unexercised options to purchase Common Stock held by them at June 30, 1997.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES OPTIONS AT 6/30/97 OPTIONS AT 6/30/97(A)
ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE REALIZED(B) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Aubrey K. McClendon.............. 315,000(c) $4,499,496 402,750 701,750 $2,614,777 $2,437,118
Tom L. Ward...................... -- -- 717,750 701,750 $5,520,373 $2,437,118
Marcus C. Rowland................ 249,750 $4,409,183 -- 399,250 $ -- $1,462,271
Steven C. Dixon.................. -- -- 358,273 253,627 $3,006,497 $ 838,860
Henry J. Hood.................... 7,876 $ 162,847 10,687 83,251 $ 47,775 $ 163,812
J. Mark Lester................... 28,128 $ 678,811 96,386 120,514 $ 793,653 $ 391,377
</TABLE>
- ---------------
(a) At June 30, 1997, the closing price of the Common Stock on the New York
Stock Exchange ("NYSE") was $9.94. "In-the-money options" are stock options
with respect to which the market value of the underlying shares of Common
Stock exceeded the exercise price at June 30, 1997. The values shown were
determined by subtracting the aggregate exercise price of such options from
the aggregate market value of the underlying shares of Common Stock on June
30, 1997.
(b) Represents amounts determined by subtracting the aggregate exercise price of
such options from the aggregate market value of the underlying shares of
Common Stock on the exercise date.
(c) Mr. McClendon has not sold any of such shares.
11
<PAGE> 14
PERFORMANCE GRAPH
The following graph compares the performance of the Company's Common Stock
to the S&P 500 Index and to a group of peer issuers selected by the Company for
the periods indicated. The graph assumes the investment of $100 on February 5,
1993 (the day public trading in the Company's Common Stock commenced) and that
all dividends, if any, were reinvested. The value of the investment at the end
of each year is shown in the graph and in the table which follows:
COMPARISON OF CUMULATIVE TOTAL RETURN
ASSUMES INITIAL INVESTMENT OF $100 AND REINVESTMENT OF DIVIDENDS
<TABLE>
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) CHESAPEAKE ENERGY S&P 500 PEER GROUP*
<S> <C> <C> <C>
2/5/93 $ 100.00 $100.00 $100.00
6/30/93 $ 88.66 $104.01 $126.14
6/30/94 $ 63.92 $105.47 $129.21
6/30/95 $ 424.74 $132.97 $121.56
6/30/96 $2,227.40 $167.54 $157.41
6/30/97 $ 737.56 $225.46 $156.53
</TABLE>
* The peer group is comprised of Anadarko Petroleum Corporation, Apache
Corporation, Barrett Resources Corporation, Burlington Resources, Inc., Devon
Energy Corporation, Enron Oil & Gas Company, The Louisiana Land and
Exploration Company, Newfield Exploration Company, Noble Affiliates, Inc.,
Nuevo Energy Company, Ocean Energy, Inc., Pioneer Natural Resources,
TransTexas Gas Corporation, Union Pacific Resources Corporation, United
Meridian Corporation and Vintage Petroleum, Inc.
EMPLOYMENT AGREEMENTS
The Company has employment agreements with Messrs. McClendon and Ward, each
of which provides, among other things, for an annual base salary of not less
than $300,000 commencing July 1, 1997; bonuses at the discretion of the Board of
Directors; eligibility for stock options; and benefits, including an automobile
and aircraft allowance, club membership and personal accounting support. Each
agreement has a term of three years commencing July 1, 1997, which term is
automatically extended for one additional year on each June 30 unless the
Company provides 30 days prior notice of non-extension.
The employment agreements between the Company and Messrs. McClendon and
Ward permit them to participate in each well drilled by the Company on terms no
less favorable to the Company than those agreed to by unaffiliated industry
partners. Messrs. McClendon and Ward have participated in all wells drilled by
the Company since its initial public offering in February 1993 and intend to
continue participating in wells drilled
12
<PAGE> 15
by the Company under the terms of their employment agreements. Thirty days prior
to the beginning of each calendar quarter, Messrs. McClendon and Ward and the
disinterested members of the Compensation Committee of the Board of Directors
agree upon the working interest percentage in all wells spudded during that
quarter to be purchased by Messrs. McClendon and Ward. That percentage may not
be adjusted during such quarter except with the approval of such disinterested
directors. No such adjustments have ever been requested or granted. The
participation election by Messrs. McClendon or Ward may not exceed a 2.5%
working interest in a well. Messrs. McClendon and Ward are obligated to pay
within 150 days after billing all costs and expenses associated with the working
interests they acquire under this arrangement. In addition, for each calendar
year during which the employment agreements are in effect, Messrs. McClendon and
Ward each agree to hold shares of the Company's Common Stock having an aggregate
investment value equal to 500% of his annual base salary and bonus.
The Company has a similar employment agreement with Mr. Rowland. It
provides for an annual base salary of not less than $225,000 commencing July 1,
1997. The agreement has a term of three years beginning July 1, 1997, which term
is automatically extended for one additional year on each June 30 unless the
Company provides 30 days prior notice of non-extension. Mr. Rowland is permitted
to participate in wells drilled by the Company in the same manner as Messrs.
McClendon and Ward, except that Mr. Rowland's working interest participation in
a well may not exceed 1%. Messrs. McClendon, Ward and Rowland may not
participate in any well in which their combined working interests cause the
Company's working interest to be reduced to less than 12.5%. Mr. Rowland agrees
to hold shares of the Company's Common Stock having an aggregate investment
value equal to 100% of his annual base salary and bonus during each calendar
year for the term of the agreement.
Messrs. McClendon, Ward and Rowland have agreed that they will not engage
in oil and gas operations individually except pursuant to the aforementioned
participation in Company wells and as a result of subsequent operations on
properties owned by them or their affiliates as of July 1, 1995 or acquired from
the Company with respect to Messrs. McClendon and Ward and as of March 1, 1993
with respect to Mr. Rowland.
The Company also has employment agreements with Messrs. Dixon, Lester and
Hood. These agreements have a term of three years from July 1, 1997, with annual
base salaries of $175,000 for Mr. Dixon, $160,000 for Mr. Lester and $155,000
for Mr. Hood for the term of their agreements. The agreements require each of
them to acquire and continue to hold shares of the Company's Common Stock having
an annual aggregate investment value equal to 15% for Messrs. Dixon and Lester
and 10% for Mr. Hood of the annual base salary and bonus compensation paid to
them under their respective agreements.
The Company may terminate any of the employment agreements with its
executive officers at any time without cause; however, upon such termination
Messrs. McClendon, Ward and Rowland are entitled to continue to receive salary
and benefits for the balance of the contract term. Messrs. Dixon, Hood and
Lester are entitled to 90 days compensation and benefits. Each of the employment
agreements for Messrs. McClendon, Ward and Rowland further states that if,
during the term of the agreement, there is a change of control and within one
year (i) the agreement expires and is not extended; (ii) the executive officer
is terminated other than for cause, death or incapacity; or (iii) the executive
resigns as a result of a reassignment of duties inconsistent with his position
or a reduction in his compensation, then the executive officer will be entitled
to a severance payment in an amount equal to 36 months of base salary
compensation. Change of control is defined in these agreements to include (x) an
event which results in a person acquiring beneficial ownership of securities
having 35% or more of the voting power of the Company's outstanding voting
securities, or (y) 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, 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.
13
<PAGE> 16
DIRECTORS' COMPENSATION
During fiscal year 1997, each director who was not an officer of the
Company received $2,500 for each regular meeting of the Board attended, up to a
maximum of $10,000 during the year. Beginning in fiscal 1998, directors who are
not officers of the Company will receive an annual retainer of $10,000, payable
quarterly, and $1,250 for each meeting of the Board attended. Directors are
reimbursed for travel and other expenses. Officers who also serve as directors
do not receive fees for serving as directors.
During fiscal year 1997 each director who was not an officer of the Company
was granted an option for 20,000 shares (10,000 shares pre-split) at an exercise
price of $30.63 ($61.25 pre-split) per share under the Company's 1992
Nonstatutory Stock Option Plan (the "1992 NSO Plan"). During fiscal year 1998,
each director who is not an officer will receive ten-year non-qualified options
under the 1992 NSO Plan to purchase 15,000 shares of Common Stock, options for
3,750 shares granted on the first day of each quarter, at an exercise price
equal to the market price on the date of grant.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal 1997, the Compensation Committee was composed of Aubrey K.
McClendon, Tom L. Ward, E.F. Heizer, Jr. and Frederick B. Whittemore. Mr.
McClendon is Chairman of the Board and Chief Executive Officer of the Company.
Mr. Ward is the Company's President and Chief Operating Officer.
Messrs. McClendon and Ward administer the Company's 1992 stock options
plans. The grant of new options under the 1992 Incentive Stock Option Plan (the
"1992 ISO Plan") was terminated in December 1994. The only options issued under
the 1992 NSO Plan during fiscal 1997 were those to the Company's non-employee
directors pursuant to an annual formula award provision. Messrs. McClendon and
Ward also administer the 1994 and 1996 Plans with respect to non-director
employee participants. Messrs. Heizer and Whittemore, administer the 1994 and
1996 Plans with respect to executive officers or employee participants who are
directors.
Messrs. McClendon and Ward participate as working interest owners in the
Company's oil and gas wells pursuant to the terms of their employment agreements
with the Company. See "Employment Agreements." Accounts receivable from Messrs.
McClendon and Ward are generated by joint interest billings relating to such
participation and as a result of miscellaneous expenses paid on their behalf by
the Company. The Company has extended certain registration rights to Messrs.
McClendon and Ward. Mr. Self is a partner in the firm of Self, Giddens & Lees,
Inc., counsel to the Company. See "Certain Transactions."
COMPENSATION COMMITTEE REPORT
The Compensation Committee of the Board of Directors is responsible for
establishing the Company's compensation policies and monitoring the
implementation of the Company's compensation system. The Committee's specific
duties include establishing and periodically reviewing the Company's
compensation policies, overseeing the compensation of the Company's executive
officers, coordinating with the Company's stock option committees in the award
of stock options and annually reviewing the Company's benefit plans. The
compensation of the Company's employees consists of several components, each of
which is determined using different methods and objectives. The components
include: (a) base salary; (b) cash bonuses; (c) stock options; and (d) medical
insurance, life insurance and other non-cash benefits. The Committee has
determined not to grant economic interests in the Company's oil and gas assets
as a form of compensation.
EXECUTIVE OFFICER COMPENSATION. At the time of the Company's initial public
offering, the Company's executive officers consisted of Messrs. McClendon, Ward
and Rowland. Their compensation was developed based on the historical
compensation paid by the Company to Messrs. McClendon and Ward, advice from a
number of the Company's professional advisors and negotiation of employment
agreements with such individuals. Because Messrs. McClendon and Ward had
historically received only nominal compensation from the Company, the executive
officers' compensation was substantially below the compensation paid by the
Company's competitors. The Committee believes the executive officers'
compensation should be competitive with the Company's competitive group and
plans to increase the executive officers' compensation to
14
<PAGE> 17
comparable levels. The individual components of the executive officers'
compensation and the factors considered in connection with each component are as
follows:
Base Salary. The executive officers' base salary is reviewed annually and
is set for each individual. Although the Committee believes that
performance-based pay elements should be a key element in the executive
officers' compensation package, the Company must also maintain base salary
levels commensurate with the Company's competitive group. Thus, the Committee
believes the base salary of the executive officers should be increased to the
mean of the Company's peer group over time. The actual amount of each
executive's base salary will reflect and be adjusted on a subjective basis for
such factors as leadership, commitment, attitude, motivational effect, level of
responsibility, prior experience and extraordinary contributions to the Company.
Cash Bonuses. The Committee believes that cash bonuses should be paid to
the executive officers based on a subjective evaluation of the performance of
the Company and the individual. The amount of cash bonuses was based on a
percentage of the employee's base compensation ranging from 17% to 48% in fiscal
1997. Performance measurements for the Company as a whole include growth in oil
and gas reserves, production, and net income. Performance measurements for each
individual or business segment are dependent on the individual circumstances. It
is anticipated that the bonus percentage will increase as the management level
and responsibility level of the individual increases. The Committee does not
believe bonuses can be awarded based on some predetermined formula so the amount
of each executive officer's cash bonus is based on a subjective evaluation of
many factors such as performance, leadership, commitment, attitude, motivational
effect, level of responsibility, prior experience and extraordinary
contributions to the Company.
Stock Options. The other performance-based compensation provided by the
Company is the issuance of stock options under existing and future stock option
plans. Currently, stock options are granted to a broad range of employees based
on a subjective determination utilizing the factors for base compensation and
cash bonus awards. Because all stock options are issued at the market price of
the Company's Common Stock on the date of issuance and options granted in fiscal
1997 vest at the rate of 25% per year over a period of four years, the options
provide strong incentives for superior long-term performance and continued
retention of the executives by the Company. The Committee coordinates closely
with the Company's stock option committees in issuing the stock options.
1997 Performance. The Company's performance for fiscal year 1997 was
significantly below the expectations of management. Because of difficulties in
the Company's Louisiana drilling program, oil and gas reserves did not increase.
However, the Company's executive compensation is still significantly below that
of the oil and gas companies that compete with the Company for employees and
projects. Thus, despite the Compensation Committee's long term objective of
bringing the Company's executive salary and bonus compensation to a level
competitive with the oil and gas industry, based on the Company's performance
during 1997, base compensation and bonuses paid to executives were not increased
as much as might have otherwise been the case. In determining the compensation
levels during 1997 the Compensation Committee believed it had to balance the
need to retain employees possessing expertise in short supply in the oil and gas
industry while maintaining a relationship between compensation and the Company's
performance.
Repricing of Stock Options. A substantial component of the Company's
compensation has historically been paid in the form of stock options. As a
result of the decline of the Company's common stock since January of 1997
management advised that a number of employees were vulnerable to hiring by the
Company's competitors, especially given the increase in the activity level of
the oil and gas industry and the fact that a significant portion of the
industry's historical employee base has retired or entered other careers. Based
on the foregoing it was determined that it was in the best interest of the
Company to reprice the stock options issued to the employees during calendar
1996. The stock option repricing was approved or ratified by the entire board
other than those board members who are employees and, therefore, participated in
the stock option repricing. The options issued to non-employee directors were
not repriced during the fiscal year.
Suggested Stock Ownership. The Committee believes it is appropriate for
each executive officer to maintain direct ownership in the Company's Common
Stock, as provided in the individual employment agreements. The Committee
believes that compliance with such stock ownership targets is necessary to
ensure
15
<PAGE> 18
that the interests of the executive officers and shareholders are the same.
Failure to meet such objectives will adversely and materially affect the
performance-based compensation for each executive officer who fails to meet the
stock ownership targets. It is the Committee's belief that a large stock
ownership position should not negatively affect an executive officers'
compensation or stock option awards. Except for stock ownership targets
discussed above, the Committee does not consider the number of options or stock
held in determining compensation.
Discretion. Individual circumstances and performance can substantially
affect the amount of compensation or benefits to be received by each executive
officer. In general, measuring the efforts or impact of an individual employee
and converting such concepts on an objective basis to a quantifiable increase in
compensation is not possible. However, given the importance of individual effort
to the success of the Company, the lack of objective measurement standards
should not prohibit performance rewards. Accordingly, from time to time, the
Committee may provide extraordinary compensation to an individual employee or
group of employees based on outstanding performance.
Policy on Deductibility of Compensation. Section 162(m) of the Internal
Revenue Code limits the tax deduction to $1 million for compensation paid by a
publicly held company to its chief executive officer and the company's four
other most highly compensated executive officers, unless certain requirements
are met. The Committee presently intends that all compensation paid to executive
officers will meet the requirements for deductibility under Section 162(m).
However, the Committee may award compensation which is not deductible under
Section 162(m) if it believes that such awards would be in the best interest of
the Company or its shareholders.
COMPENSATION OF CHIEF EXECUTIVE OFFICER AND CHIEF OPERATING OFFICER. Based
on historical operations of the Company, the Chief Executive Officer and Chief
Operating Officer have identical positions with managerial control over
different areas of the Company. Accordingly, the Chief Executive Officer and
Chief Operating Officer have been historically compensated on an equal basis and
the Committee anticipates that such practice will continue in the future. In
each case, the compensation for each of the officers was determined in the same
manner as the compensation for other executive officers of the Company. The base
salary received by each of the officers is substantially below the mean of the
peer group considered by the Compensation Committee. It is anticipated that
additional material raises will be provided in the future. The cash bonuses and
options granted to Messrs. McClendon and Ward were based on the subjective
evaluation of the Company's overall performance, the perceived contributions of
Messrs. McClendon and Ward to that performance and the compensation paid to
other chief executive officers of the Company's peer group.
<TABLE>
<CAPTION>
COMPENSATION COMMITTEE OF THE SPECIAL STOCK OPTION COMMITTEE
BOARD OF DIRECTORS OF THE BOARD OF DIRECTORS
<S> <C>
Aubrey K. McClendon Frederick B. Whittemore
Tom L. Ward Edgar F. Heizer, Jr.
Edgar F. Heizer, Jr.
Frederick B. Whittemore
</TABLE>
CERTAIN TRANSACTIONS
Legal Counsel. Shannon T. Self, a director of the Company, is a shareholder
in the law firm of Self, Giddens & Lees, Inc., which provides legal services to
the Company. During fiscal 1997, the firm billed the Company approximately
$207,000 for such legal services.
Oil and Gas Operations. Prior to 1989, Messrs. McClendon and Ward and their
affiliates, as independent oil producers, acquired various leasehold and working
interests. In 1989, Chesapeake Operating, Inc. ("COI"), a wholly-owned
subsidiary of the Company, was formed to drill and operate wells in which
Messrs. McClendon and Ward or their affiliates owned working interests. COI
entered into joint operating agreements with Messrs. McClendon and Ward and
other working interest owners and billed each for their respective shares of
expenses and fees.
16
<PAGE> 19
COI continues to operate wells in which directors, executive officers and
related parties own working interests. In addition, directors, executive
officers and related parties have acquired working interests directly and
indirectly from the Company and participated in wells drilled by COI on terms no
less favorable to the Company than available to unrelated parties. Other than
interests owned prior to the Company's initial public offering the Company's
directors who are not officers have not acquired from the Company interests in
any new wells drilled by the Company since their election as directors in 1993
and have no present intention to acquire interests in any new wells of the
Company. The table below presents information about drilling, completion,
equipping and operating costs billed to the persons named from July 1, 1996 to
June 30, 1997, the largest amount owed by them during the period and the balance
owed at July 1, 1996 and June 30, 1997. No interest is charged on amounts owing
for such costs, unless such costs are not paid in a timely manner. The amounts
for all other directors were insignificant.
<TABLE>
<CAPTION>
AUBREY K. TOM L. MARCUS C.
MCCLENDON WARD ROWLAND
--------- ------ ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at July 1, 1996.............................. $ 971 $1,288 $ 82
Amount billed (to June 30, 1997)..................... $3,662 $3,534 $171
Largest outstanding balance(month end)............... $3,552 $2,997 $ 79
Balance at June 30, 1997............................. $3,552 $2,997 $ 42
</TABLE>
Miscellaneous. From time to time, the Company pays various expenses
incurred on behalf of Messrs. McClendon and Ward and their affiliates, creating
accounts receivable of the Company. During fiscal 1997 additions to accounts
receivable (excluding joint interest billings, which are described above) from
Messrs. McClendon and Ward and their affiliates were insignificant.
PROPOSAL TO AMEND CERTIFICATE OF INCORPORATION
TO INCREASE AUTHORIZED CAPITAL STOCK
The Board of Directors recommends that the shareholders authorize an
amendment to the Company's Certificate of Incorporation to increase the number
of authorized shares of Common Stock from 100,000,000 to 200,000,000 shares, par
value $.01 per share.
The current authorized capital stock of the Company is 100,000,000 shares
of Common Stock and 10,000,000 shares of Preferred Stock, par value $.01 per
share.
As of November , 1997, there were shares of Common Stock
issued and outstanding and 13,115,153 shares of Common Stock reserved for
issuance upon the exercise of options under the Company's stock option plans. In
addition, the Company has entered into an acquisition agreement which could
result in the issuance of shares, based on the closing price of the
Common Stock on November , 1997. Thus, there were authorized shares
of Common Stock unissued and not reserved for issuance. None of the authorized
shares of the Company's Preferred Stock were outstanding. Neither the Common
Stock nor the Preferred Stock provides preemptive rights to purchase newly
issued shares.
The proposed increase in the authorized Common Stock is recommended by the
Board of Directors first to assure that an adequate supply is available for
general corporate needs, such as future stock dividends, stock splits or
issuance under the Company's incentive savings plan and other employee benefit
plans. The additional authorized shares of Common Stock could also be used for
raising capital for the operations of the Company or financing future
acquisitions without the expense and delay incidental to obtaining shareholder
approval of an amendment to the Certificate of Incorporation increasing the
number of authorized shares at the time of such action.
There are currently no plans or arrangements relating to the issuance of
any of the additional shares of Common Stock proposed to be authorized. Shares
available for issuance may be issued by the Board of Directors without further
action by the shareholders, unless required by Oklahoma law or by the rules of
any stock exchange on which the Company's securities may then be listed.
17
<PAGE> 20
The proposed increase in the Company's authorized capital stock could
enable the Board of Directors to render more difficult or discourage an attempt
by another person or entity to obtain control of the Company. Such additional
shares could be issued by the Board of Directors in a public or a private sale,
merger or similar transactions, increasing the number of outstanding shares and
thereby diluting the equity interest and voting power of a party attempting to
obtain control of the Company. The increase in authorized shares of Common Stock
is not being proposed in response to any known effort to acquire control of the
Company.
If the proposed amendment to the Certificate of Incorporation is approved
by shareholders, it is expected that the amendment will be filed with the
Secretary of State of the State of Oklahoma on December 12, 1997, and the first
sentence of Article IV of the Certificate of Incorporation will be amended as
follows:
"The total number of shares of capital stock which the Corporation
shall have authority to issue is Two Hundred Ten Million (210,000,000)
shares, consisting of Ten Million (10,000,000) shares of Preferred Stock,
par value $0.01 per share, and Two Hundred Million (200,000,000) shares of
Common Stock, par value $0.01 per share."
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSED AMENDMENT TO THE
COMPANY'S CERTIFICATE OF INCORPORATION. The affirmative vote of the holders of a
majority of the outstanding shares of Common Stock will be required for adoption
of the amendment.
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P. served as the Company's independent accountants
for the year ended June 30, 1997 and has been retained for fiscal 1998.
Representatives of Coopers & Lybrand L.L.P. are expected to attend the Meeting.
They will have an opportunity to make a statement if they desire to do so, and
will be available to respond to shareholder questions.
SHAREHOLDER PROPOSALS
At the annual meeting each year, the Board of Directors submits to
shareholders its nominees for election as directors and may submit other matters
to the shareholders for action. Shareholders of the Company also may submit
proposals for inclusion in proxy material. These proposals must meet the
shareholder eligibility and other requirements of the Securities and Exchange
Commission. In order to be included in proxy material for the Company's 1998
annual meeting, a shareholder's proposal must be received not later than July
, 1998 by the Company at 6100 North Western Avenue, Oklahoma City, Oklahoma
73118, Attention: Ms. Janice Dobbs, Corporate Secretary.
In addition, the Bylaws provide that in order for business to be brought
before a shareholders' meeting, a shareholder must deliver written notice to the
Company not less than 60 nor more than 90 days prior to the date of the meeting.
The notice must state the shareholder's name, address and number and class of
shares beneficially owned by the shareholder, and briefly describe the business
to be brought before the meeting, the reasons for conducting such business at
the meeting and any material interest of the shareholder in the proposal.
The Bylaws also provide that if a shareholder intends to nominate a
candidate for election as a director, the shareholder must deliver written
notice of his or her intention to the Company. The notice must be delivered not
less than 60 nor more than 90 days before the date of a meeting of shareholders.
The notice must set forth the name and address and number and class of shares
beneficially owned by the shareholder and the nominee for election as a
director, the age of the nominee, the nominee's business address and experience
during the past five years, any other directorships held by the nominee, the
nominee's involvement in certain legal proceedings during the past five years
and such other information concerning the nominee as would be required to be
included in a proxy statement soliciting proxies for the election of the
nominee. In addition, the notice must include the consent of the nominee to
serve as a director of the Company if elected.
The Bylaws further provide that, notwithstanding the foregoing notice
requirements, in the event that less than 70 days' notice or prior public
disclosure of the date of the meeting is given or made to shareholders,
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notice of a shareholder proposal or nominee to be timely must be received no
later than the tenth day following the day on which notice of the date of the
meeting was mailed or public disclosure thereof was made, whichever occurred
first.
OTHER MATTERS
The Company's management does not know of any matters to be presented at
the Meeting other than those set forth in the Notice of Annual Meeting of
Shareholders. However, if any other matters properly come before the Meeting,
the persons named in the enclosed proxy intend to vote the shares to which the
proxy relates on such matters in accordance with their best judgment unless
otherwise specified in the proxy.
BY ORDER OF THE BOARD OF DIRECTORS
Janice A. Dobbs
Corporate Secretary
November , 1997
19
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PROXY
CHESAPEAKE ENERGY CORPORATION
ANNUAL MEETING OF SHAREHOLDERS
DECEMBER 12, 1997
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Aubrey K. McClendon and Tom L. Ward, or
either of them, with full power of substitution, proxies to represent and vote
all shares of Common Stock of Chesapeake Energy Corporation (the "Company")
which the undersigned would be entitled to vote if personally present at the
Company's Annual Meeting of Shareholders to be held on Friday, December 12,
1997, at 10:00 a.m., local time, and at any adjournment thereof, as follows:
1. Election of Directors
[ ] FOR election of both nominees [ ] WITHHOLD AUTHORITY to vote
listed below Breene M. Kerr for both nominees
and Walter C. Wilson
(INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR AN INDIVIDUAL NOMINEE, CROSS OUT
THE NOMINEE'S NAME.)
2. Approval of proposal to amend the Company's Certificate of Incorporation to
increase the number of authorized capital of the Company to 200,000,000
shares of Common Stock
[ ] FOR [ ] AGAINST [ ] ABSTAIN
PLEASE DATE AND SIGN ON THE REVERSE SIDE AND RETURN PROMPTLY USING THE ENCLOSED
ENVELOPE.
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3. In their discretion, upon any other matters that may properly come before the
meeting or any adjournment thereof.
Unless otherwise directed, this proxy will be voted for both nominees and for
Items 2 and 3.
Date , 1997
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Signature(s) of Shareholder(s)
IMPORTANT: Please date this proxy and
sign exactly as your name appears on
your stock certificate(s). If stock is
held jointly, signature should include
both names. Executors, administrators,
trustees, guardians and others signing
in a representative capacity, please
give your full titles.
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