<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 1997
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities Act
of 1934
For the transition period from __________ to __________
COMMISSION FILE NO. 1-13726
CHESAPEAKE ENERGY CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
OKLAHOMA 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)
(405) 848-8000
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
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
--- ---
At October 31, 1997 there were 70,429,017 shares of the registrant's $.01
par value Common Stock outstanding.
<PAGE> 2
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Page
----
<S> <C>
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets at September 30, 1997
and June 30, 1997...............................................................................3
Consolidated Statements of Operations for the Three
Months Ended September 30, 1997 and 1996 .......................................................4
Consolidated Statements of Cash Flows for the
Three Months Ended September 30, 1997 and 1996 .................................................5
Notes to Consolidated Financial Statements .....................................................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................................................14
Item 3. Quantitative and Qualitative Disclosures About
Market Risk....................................................................................18
</TABLE>
Page 2
<PAGE> 3
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
September 30, June 30,
1997 1997
--------- ---------
($ in thousands)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 51,182 $ 124,017
Restricted cash 4,600 --
Short-term investments 85,478 104,485
Accounts receivable:
Oil and gas 24,285 30,845
Joint interest and other, net of allowances
of $346,000 and $387,000, respectively 27,363 25,311
Related parties 7,299 7,401
Note receivable 18,000 --
Inventory 4,625 4,854
Other 941 692
--------- ---------
Total Current Assets 223,773 297,605
--------- ---------
PROPERTY AND EQUIPMENT:
Oil and gas properties, at cost based on full cost accounting:
Evaluated oil and gas properties 960,741 865,516
Unevaluated properties 131,194 128,505
Less: accumulated depreciation, depletion and amortization (460,534) (431,983)
--------- ---------
631,401 562,038
Other property and equipment 63,652 50,379
Less: accumulated depreciation and amortization (5,754) (5,051)
--------- ---------
Total Property and Equipment 689,299 607,366
--------- ---------
OTHER ASSETS 18,597 44,097
--------- ---------
TOTAL ASSETS $ 931,669 $ 949,068
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable and current maturities of long-term debt $ -- $ 1,380
Accounts payable 81,731 86,817
Accrued liabilities and other 18,532 28,701
Revenues and royalties due others 23,686 29,428
--------- ---------
Total Current Liabilities 123,949 146,326
--------- ---------
LONG-TERM DEBT, NET 508,971 508,950
--------- ---------
REVENUES AND ROYALTIES DUE OTHERS 7,541 6,903
--------- ---------
DEFERRED INCOME TAXES -- --
--------- ---------
CONTINGENCIES AND COMMITMENTS -- --
--------- ---------
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value, 10,000,000 shares
authorized; none issued -- --
Common Stock, $.01 par value, 100,000,000 shares authorized; 70,376,462 and
70,276,975 shares issued and outstanding at September 30, 1997
and June 30, 1997, respectively 704 703
Paid-in capital 433,201 432,991
Accumulated earnings (deficit) (142,697) (146,805)
--------- ---------
Total Stockholders' Equity 291,208 286,889
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 931,669 $ 949,068
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
Page 3
<PAGE> 4
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------
1997 1996
------- -------
($ in thousands,
except per share data)
<S> <C> <C>
REVENUES:
Oil and gas sales $45,667 $36,753
Oil and gas marketing sales 26,865 12,184
Interest and other 5,878 848
------- -------
Total Revenues 78,410 49,785
------- -------
COSTS AND EXPENSES:
Production expenses and taxes 5,180 2,530
Oil and gas marketing expenses 26,690 11,866
Oil and gas depreciation,
depletion and amortization 28,550 17,029
Depreciation and amortization
of other assets 1,142 952
General and administrative 2,760 1,671
Interest 8,575 2,817
------- -------
Total Costs and Expenses 72,897 36,865
------- -------
INCOME BEFORE INCOME TAXES 5,513 12,920
INCOME TAX EXPENSE:
Current -- --
Deferred -- 4,716
------- -------
Total Income Tax Expense -- 4,716
------- -------
NET INCOME $ 5,513 $ 8,204
======= =======
NET INCOME PER COMMON SHARE:
PRIMARY $ .08 $ .13
======= =======
FULLY-DILUTED $ .08 $ .13
======= =======
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING:
PRIMARY 72,699 64,258
======= =======
FULLY-DILUTED 73,243 64,338
======= =======
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
Page 4
<PAGE> 5
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
1997 1996
--------- ---------
($ in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 5,513 $ 8,204
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation, depletion and amortization 29,297 17,545
Deferred taxes -- 4,716
Amortization of loan costs 395 436
Amortization of bond discount 20 142
(Gain) loss on sale of assets (2,695) 6
Bad debt expense 25 --
Equity in earnings of investees 140 --
Other adjustments -- (206)
CHANGES IN CURRENT ASSETS AND LIABILITIES 9,929 (4,890)
--------- ---------
Cash provided by operating activities 42,624 25,953
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Exploration, development and acquisition
of oil and gas properties (99,095) (87,350)
Proceeds from sale of assets and other 1,190 8,642
Investment in service operations -- (2,545)
Other investments (3,000) --
Additions to property, equipment and other (13,360) (1,870)
--------- ---------
Cash used in investing activities (114,265) (83,123)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid on common stock (1,405) --
Proceeds from long-term borrowings -- 10,000
Payments on long-term borrowings -- (2,135)
Cash received from exercise of stock options 226 191
Other (15) (80)
--------- ---------
Cash provided by (used in) financing activities (1,194) 7,976
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (72,835) (49,194)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 124,017 51,638
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 51,182 $ 2,444
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
Page 5
<PAGE> 6
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(unaudited)
1. Interim Financial Statements
The accompanying unaudited consolidated financial statements of Chesapeake
Energy Corporation and Subsidiaries (the "Company") have been prepared in
accordance with the instructions to Form 10-Q as prescribed by the Securities
and Exchange Commission. All material adjustments (consisting solely of normal
recurring adjustments) which, in the opinion of management, are necessary for a
fair presentation of the results for the interim periods have been reflected.
The results for the three months ended September 30, 1997, are not necessarily
indicative of the results for the full fiscal year.
2. Recent Events
On October 22, 1997 the Company announced that it had agreed to acquire two
Oklahoma City-based independent oil and gas producers that own total proved
reserves of approximately 160 billion cubic feet of natural gas equivalent
("Bcfe"). In the larger of the two acquisitions, the Company has reached an
agreement to acquire by merger the Mid-Continent operations of DLB Oil & Gas,
Inc. ("DLB"). In its Mid-Continent division, DLB owns approximately 130 Bcfe of
proved reserves, additional probable and possible reserves, nine gas gathering
systems, and a gas marketing subsidiary based in Houston, Texas. The DLB
acquisition is valued at approximately $150 million. The Company also reached an
agreement to acquire AnSon Production Company ("AnSon"), a privately owned oil
and gas producer that owns approximately 30 Bcfe of proved reserves, additional
probable and possible reserves, undeveloped mineral interests, and a gas
marketing subsidiary based in Oklahoma City. The AnSon acquisition is valued at
approximately $43 million.
On November 13, 1997, the Company announced that it had signed a definitive
agreement to merge with Hugoton Energy Corporation ("Hugoton") in a
stock-for-stock transaction. The merger agreement provides for a fixed exchange
ratio of 1.3 shares of the Company's common stock for each share of Hugoton
stock, resulting in Hugoton's shareholders owning approximately 26% of the
Company following the transaction. Based upon the closing price of the Company's
common stock on November 12, 1997, Hugoton's 20.9 million fully-diluted shares
outstanding, and the assumption by the Company of $105 million of Hugoton's
debt, the transaction is valued at approximately $380 million. Hugoton has
approximately 300 Bcfe of proved reserves.
On November 13, 1997, the Company also announced that it had entered into an
agreement to purchase from Pan East Petroleum Corporation, a Canadian
exploration and production company ("Pan East"), 11.9 million treasury shares of
Pan East's common stock at a price per share of $2.50 (Cdn) in a private
placement. Based on Pan East's existing 48 million outstanding shares and the
Company's previous open market purchase of 100,000 Pan East shares, the Company
will own approximately 12 million shares, or 19.9% of Pan East's outstanding
common stock, for an investment of $30 million (Cdn), or $22 million (U.S.). The
purpose of the private placement is to assist Pan East in financing its share of
the exploration, development and acquisition activities under a proposed joint
venture with the Company during the next two years. Both the private placement
and the joint venture are scheduled to close on or before November 30, 1997.
Page 6
<PAGE> 7
In November 1997, the Company received proceeds of approximately $108 million in
connection with the initial public offering of Bayard Drilling Technologies,
Inc. ("Bayard") common stock. After underwriting fees, the Company received
approximately $21.40 per share for the 4,194,000 shares of Bayard it sold in the
offering. In addition, the Company received $18 million as repayment of a loan
made to Bayard during fiscal 1997. The sale of stock is expected to yield a
pre-tax gain of approximately $74 million.
The Company recently announced its decision to change its year-end to December
31. The Company believes this change will make its financial results more easily
comparable to those of its peer group. Accordingly, the Company will file a
transition report on Form 10-K for the six month period between the closing date
of the Company's most recent fiscal year ended June 30, 1997 and the opening
date of the new fiscal year beginning January 1, 1998.
3. Legal Proceedings
On October 15, 1996, Union Pacific Resources Company ("UPRC") filed suit against
the Company in the U.S. District Court for the Northern District of Texas, Fort
Worth Division alleging (a) infringement and inducing infringement of UPRC's
claim to a patent (the "UPRC Patent") for an invention involving a method of
maintaining a borehole in a stratigraphic zone during drilling, and (b) tortious
interference with certain business relations between UPRC and certain of its
former employees. UPRC's claims against the Company are based on services
provided by a third party vendor to the Company. UPRC is seeking injunctive
relief, damages of an unspecified amount, including actual, enhanced,
consequential and punitive damages, interest, costs and attorney's fees. The
Company believes that it has meritorious defenses to UPRC's allegations and has
requested the court to declare the UPRC Patent invalid. The Company has also
filed a motion to limit the scope of UPRC's claims and for summary judgment. No
prediction can be made as to the outcome of the matter.
As previously disclosed, the Company and certain of its officers and directors
are currently involved in various purported class actions alleging violations of
the Securities Exchange Act of 1934. The plaintiffs assert that the defendants
made materially false and misleading statements and failed to disclose material
facts about the success of the Company's exploration efforts, principally in the
Louisiana Trend. As a result, the complaints allege, the price of the Company's
common stock was artificially inflated during periods beginning as early as
January 25, 1996 and ending on June 27, 1997, when the Company issued a press
release announcing disappointing drilling results in the Louisiana Trend and a
full-cost ceiling writedown to be reflected in its June 30, 1997 financial
statements. The plaintiffs further allege that certain of the named individual
defendants sold common stock during the class period when they knew or should
have known adverse nonpublic information. Each case seeks a determination that
the suit is a proper class action, certification of the plaintiff as a class
representative and damages in an unspecified amount, together with costs of
litigation, including attorneys' fees. The Company and the individual defendants
believe that these actions are without merit, and intend to defend against them
vigorously.
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<PAGE> 8
4. Restricted Cash
The Company is required to deposit margin cash with the counterparty to certain
hedging arrangements when commodity futures prices exceed the index-related
fixed price stated in the agreement less the amount of open credit established
by the counterparty. The amount of restricted margin cash on deposit at
September 30, 1997 was $4.6 million.
5. Senior Notes
10 1/2% Notes
The Company has outstanding $90 million in aggregate principal amount of 10 1/2%
Notes which mature June 1, 2002. The 10 1/2% Notes bear interest at an annual
rate of 10 1/2%, payable semiannually on each June 1 and December 1. The 10 1/2%
Notes are senior, unsecured obligations of the Company and are fully and
unconditionally guaranteed, jointly and severally, by certain subsidiaries of
the Company (the "Guarantor Subsidiaries").
9 1/8% Notes
The Company has outstanding $120 million in aggregate principal amount of 9 1/8%
Senior Notes which mature April 15, 2006. The 9 1/8% Notes bear interest at an
annual rate of 9 1/8%, payable semiannually on each April 15 and October 15. The
9 1/8% Notes are senior, unsecured obligations of the Company and are fully and
unconditionally guaranteed, jointly and severally, by the Guarantor
Subsidiaries.
7 7/8% Notes
The Company has outstanding $150 million in aggregate principal amount of 7 7/8%
Senior Notes which mature March 15, 2004. The 7 7/8% Notes bear interest at the
rate of 7 7/8%, payable semiannually on each March 15 and September 15. The
7 7/8% Notes are senior, unsecured obligations of the Company and are fully and
unconditionally guaranteed, jointly and severally, by the Guarantor
Subsidiaries.
8 1/2% Notes
The Company has outstanding $150 million in aggregate principal amount of 8 1/2%
Senior Notes which mature March 15, 2012. The 8 1/2% Notes bear interest at the
rate of 8 1/2%, payable semiannually on each March 15 and September 15. The
8 1/2% Notes are senior, unsecured obligations of the Company and are fully and
unconditionally guaranteed, jointly and severally, by the Guarantor
Subsidiaries.
Set forth below are condensed consolidating financial statements of the
Guarantor Subsidiaries, the Company's subsidiaries which are not guarantors
Page 8
<PAGE> 9
of the Senior Notes (the "Non-Guarantor Subsidiaries") and the Company. Separate
audited financial statements of each Guarantor Subsidiary have not been provided
because management has determined that they are not material to investors. The
Guarantor Subsidiaries are Chesapeake Operating, Inc., Chesapeake Exploration
Limited Partnership, Chesapeake Louisiana Limited Partnership, Chesapeake Energy
Louisiana Corporation and Chesapeake Gas Development Corporation, and the
Non-Guarantor Subsidiaries are Chesapeake Energy Marketing, Inc. and Chesapeake
Canada Corporation. Prior to June 30, 1997 Chesapeake Gas Development
Corporation was a Non-Guarantor Subsidiary.
Page 9
<PAGE> 10
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(unaudited)
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF SEPTEMBER 30, 1997
($ IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR COMPANY
SUBSIDIARIES SUBSIDIARIES (PARENT) ELIMINATIONS CONSOLIDATED
------------ ------------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ (6,345) $ 6,651 $ 50,876 $ -- $ 51,182
Restricted cash 4,600 -- -- -- 4,600
Short-term investments -- 2,026 83,452 -- 85,478
Accounts receivable, net 44,732 17,786 2,058 (5,629) 58,947
Notes receivable -- -- 18,000 -- 18,000
Inventory 4,521 104 -- -- 4,625
Other 904 22 15 -- 941
--------- --------- --------- --------- ---------
Total Current Assets 48,412 26,589 154,401 (5,629) 223,773
--------- --------- --------- --------- ---------
PROPERTY AND EQUIPMENT:
Oil and gas properties 960,690 51 -- -- 960,741
Unevaluated leasehold 131,200 (6) -- -- 131,194
Other property and equipment 48,009 349 15,294 -- 63,652
Less: accumulated depreciation,
depletion and amortization (465,432) -- (856) -- (466,288)
--------- --------- --------- --------- ---------
Total Property & Equipment 674,467 394 14,438 -- 689,299
--------- --------- --------- --------- ---------
INVESTMENTS IN SUBSIDIARIES
AND INTERCOMPANY ADVANCES 81,755 -- 791,374 (873,129) --
--------- --------- --------- --------- ---------
OTHER ASSETS 4,950 653 12,994 -- 18,597
--------- --------- --------- --------- ---------
TOTAL ASSETS $ 809,584 $ 27,636 $ 973,207 $(878,758) $ 931,669
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable and current
maturities of long-term debt $ -- $ -- $ -- $ -- $ --
Accounts payable and other 101,776 16,783 11,023 (5,633) 123,949
--------- --------- --------- --------- ---------
Total Current Liabilities 101,776 16,783 11,023 (5,633) 123,949
--------- --------- --------- --------- ---------
LONG-TERM DEBT -- -- 508,971 -- 508,971
--------- --------- --------- --------- ---------
REVENUES PAYABLE 7,541 -- -- -- 7,541
--------- --------- --------- --------- ---------
DEFERRED INCOME TAXES -- -- -- -- --
--------- --------- --------- --------- ---------
INTERCOMPANY PAYABLES 784,903 (301) -- (784,602) --
--------- --------- --------- --------- ---------
STOCKHOLDERS' EQUITY:
Common Stock 10 1 694 (1) 704
Other (84,646) 11,153 452,519 (88,522) 290,504
--------- --------- --------- --------- ---------
Total Stockholders' Equity (84,636) 11,154 453,213 (88,523) 291,208
--------- --------- --------- --------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 809,584 $ 27,636 $ 973,207 $(878,758) $ 931,669
========= ========= ========= ========= =========
</TABLE>
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<PAGE> 11
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(unaudited)
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF JUNE 30, 1997
($ IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR COMPANY
SUBSIDIARIES SUBSIDIARIES (PARENT) ELIMINATIONS CONSOLIDATED
------------ ------------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ (6,534) $ 4,363 $ 126,188 $ -- $ 124,017
Short-term investments -- 4,324 100,161 -- 104,485
Accounts receivable, net 47,379 19,943 3,022 (6,787) 63,557
Inventory 4,795 59 -- -- 4,854
Other 666 26 -- -- 692
--------- --------- --------- --------- ---------
Total Current Assets 46,306 28,715 229,371 (6,787) 297,605
--------- --------- --------- --------- ---------
PROPERTY AND EQUIPMENT:
Oil and gas properties 865,485 31 -- -- 865,516
Unevaluated leasehold 128,519 (14) -- -- 128,505
Other property and equipment 33,486 1,904 14,989 -- 50,379
Less: accumulated depreciation,
depletion and amortization (436,276) -- (758) -- (437,034)
--------- --------- --------- --------- ---------
Total Property & Equipment 591,214 1,921 14,231 -- 607,366
--------- --------- --------- --------- ---------
INVESTMENTS IN SUBSIDIARIES
AND INTERCOMPANY ADVANCES 817 -- 680,439 (681,256) --
--------- --------- --------- --------- ---------
OTHER ASSETS 4,961 673 38,463 -- 44,097
--------- --------- --------- --------- ---------
TOTAL ASSETS $ 643,298 $ 31,309 $ 962,504 $(688,043) $ 949,068
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable and current
maturities of long-term debt $ 1,380 $ -- $ -- $ -- $ 1,380
Accounts payable and other 122,241 17,527 11,965 (6,787) 144,946
--------- --------- --------- --------- ---------
Total Current Liabilities 123,621 17,527 11,965 (6,787) 146,326
--------- --------- --------- --------- ---------
LONG-TERM DEBT -- -- 508,950 -- 508,950
--------- --------- --------- --------- ---------
REVENUES PAYABLE 6,903 -- -- -- 6,903
--------- --------- --------- --------- ---------
DEFERRED INCOME TAXES -- -- -- -- --
--------- --------- --------- --------- ---------
INTERCOMPANY PAYABLES 589,111 1,492 -- (590,603) --
--------- --------- --------- --------- ---------
STOCKHOLDERS' EQUITY:
Common Stock 11 1 693 (2) 703
Other (76,348) 12,289 440,896 (90,651) 286,186
--------- --------- --------- --------- ---------
Total Stockholders' Equity (76,337) 12,290 441,589 (90,653) 286,889
--------- --------- --------- --------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 643,298 $ 31,309 $ 962,504 $(688,043) $ 949,068
========= ========= ========= ========= =========
</TABLE>
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<PAGE> 12
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(unaudited)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR COMPANY
SUBSIDIARIES SUBSIDIARIES (PARENT) ELIMINATIONS CONSOLIDATED
------------ ------------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997:
REVENUES:
Oil and gas sales $ 45,049 $ -- $ -- $ 618 $ 45,667
Oil and gas marketing sales -- 44,326 -- (17,461) 26,865
Interest and other 135 487 20,118 (14,862) 5,878
-------- -------- -------- -------- --------
Total Revenues 45,184 44,813 20,118 (31,705) 78,410
-------- -------- -------- -------- --------
COSTS AND EXPENSES:
Production expenses and taxes 5,180 -- -- -- 5,180
Oil and gas marketing expenses -- 43,533 -- (16,843) 26,690
Oil and gas depreciation,
depletion and amortization 28,550 -- -- -- 28,550
Other depreciation and amortization 628 21 493 -- 1,142
General and administrative 2,578 265 (83) -- 2,760
Interest 12,246 33 11,158 (14,862) 8,575
-------- -------- -------- -------- --------
Total Costs & Expenses 49,182 43,852 11,568 (31,705) 72,897
-------- -------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES (3,998) 961 8,550 -- 5,513
INCOME TAX EXPENSE (BENEFIT) -- -- -- -- --
-------- -------- -------- -------- --------
NET INCOME (LOSS) $ (3,998) $ 961 $ 8,550 $ -- $ 5,513
======== ======== ======== ======== ========
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996:
REVENUES:
Oil and gas sales $ 34,789 $ 1,691 $ -- $ 273 $ 36,753
Oil and gas marketing sales -- 21,914 -- (9,730) 12,184
Interest and other 115 409 324 -- 848
-------- -------- -------- -------- --------
Total Revenues 34,904 24,014 324 (9,457) 49,785
-------- -------- -------- -------- --------
COSTS AND EXPENSES:
Production expenses and taxes 2,347 183 -- -- 2,530
Oil and gas marketing expenses -- 21,323 -- (9,457) 11,866
Oil and gas depreciation,
depletion and amortization 16,373 656 -- -- 17,029
Other depreciation and amortization 534 31 387 -- 952
General and administrative 1,173 236 262 -- 1,671
Interest 33 105 2,679 -- 2,817
-------- -------- -------- -------- --------
Total Costs & Expenses 20,460 22,534 3,328 (9,457) 36,865
-------- -------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAX 14,444 1,480 (3,004) -- 12,920
INCOME TAX EXPENSE (BENEFIT) 5,272 540 (1,096) -- 4,716
-------- -------- -------- -------- --------
NET INCOME (LOSS) $ 9,172 $ 940 $ (1,908) $ -- $ 8,204
======== ======== ======== ======== ========
</TABLE>
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<PAGE> 13
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(unaudited)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR COMPANY
SUBSIDIARIES SUBSIDIARIES (PARENT) CONSOLIDATED
------------ ------------- -------- ------------
<S> <C> <C> <C> <C>
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997:
CASH FLOWS FROM OPERATING ACTIVITIES: $ 647 $ 6,108 $ 35,869 $ 42,624
--------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Oil and gas properties (99,067) (28) -- (99,095)
Proceeds from sale of assets 1,190 -- -- 1,190
Other investments -- -- (3,000) (3,000)
Other additions (14,590) 1,555 (325) (13,360)
--------- --------- --------- ---------
(112,467) 1,527 (3,325) (114,265)
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash received from exercise
of stock options -- -- 226 226
Dividends paid on common stock -- -- (1,405) (1,405)
Other -- (15) -- (15)
Intercompany advances, net 112,009 (5,332) (106,677) --
--------- --------- --------- ---------
112,009 (5,347) (107,856) (1,194)
--------- --------- --------- ---------
Net increase (decrease) in cash 189 2,288 (75,312) (72,835)
Cash, beginning of period (6,534) 4,363 126,188 124,017
--------- --------- --------- ---------
Cash, end of period $ (6,345) $ 6,651 $ 50,876 $ 51,182
========= ========= ========= =========
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996:
CASH FLOWS FROM OPERATING ACTIVITIES: $ 27,667 $ 222 $ (1,936) $ 25,953
--------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Oil and gas properties (87,341) (9) -- (87,350)
Proceeds from sales 8,642 -- -- 8,642
Investment in service operations (2,545) -- -- (2,545)
Other additions (1,196) (49) (625) (1,870)
--------- --------- --------- ---------
(82,440) (58) (625) (83,123)
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term borrowings 10,000 -- -- 10,000
Payments on borrowings (1,230) (900) (5) (2,135)
Cash received from exercise
of stock options -- -- 191 191
Other -- -- (80) (80)
Intercompany advances, net 29,970 3,984 (33,954) --
--------- --------- --------- ---------
38,740 3,084 (33,848) 7,976
--------- --------- --------- ---------
Net increase (decrease) in cash
and cash equivalents (16,033) 3,248 (36,409) (49,194)
Cash, beginning of period 4,061 2,751 44,826 51,638
--------- --------- --------- ---------
Cash, end of period $ (11,972) $ 5,999 $ 8,417 $ 2,444
========= ========= ========= =========
</TABLE>
Page 13
<PAGE> 14
PART I. FINANCIAL INFORMATION
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RECENT EVENTS
On October 22, 1997, the Company announced that it had agreed to acquire two
Oklahoma City-based independent oil and gas producers that own total proved
reserves of approximately 160 billion cubic feet of natural gas equivalent
("Bcfe"). In the larger of the two acquisitions, the Company has reached an
agreement to acquire by merger the Mid-Continent operations of DLB Oil & Gas,
Inc. ("DLB"). In its Mid-Continent division, DLB owns approximately 130 Bcfe of
proved reserves, additional probable and possible reserves, nine gas gathering
systems, and a gas marketing subsidiary based in Houston, Texas. The DLB
acquisition is valued at approximately $150 million. The Company also reached an
agreement to acquire AnSon Production Company ("AnSon"), a privately owned oil
and gas producer that owns approximately 30 Bcfe of proved reserves, additional
probable and possible reserves, undeveloped mineral interests, and a gas
marketing subsidiary based in Oklahoma City. The AnSon acquisition is valued at
approximately $43 million.
On November 13, 1997, the Company announced that it had signed a definitive
agreement to merge with Hugoton Energy Corporation ("Hugoton") in a
stock-for-stock transaction. The merger agreement provides for a fixed exchange
ratio of 1.3 shares of the Company's common stock for each share of Hugoton
stock, resulting in Hugoton's shareholders owning approximately 26% of the
Company following the transaction. Based upon the closing price of the Company's
common stock on November 12, 1997, Hugoton's 20.9 million fully-diluted shares
outstanding, and the assumption by the Company of $105 million of Hugoton's
debt, the transaction is valued at approximately $380 million. Hugoton has
approximately 300 Bcfe of proved reserves.
On November 13, 1997, the Company also announced that it had entered into an
agreement to purchase from Pan East Petroleum Corporation, a Canadian
exploration and production company ("Pan East"), 11.9 million treasury shares of
Pan East's common stock at a price per share of $2.50 (Cdn) in a private
placement. Based on Pan East's existing 48 million outstanding shares and the
Company's previous open market purchase of 100,000 Pan East shares, the Company
will own approximately 12 million shares, or 19.9% of Pan East's outstanding
common stock, for an investment of $30 million (Cdn), or $22 million (U.S.). The
purpose of the private placement is to assist Pan East in financing its share of
the exploration, development and acquisition activities under a proposed joint
venture with the Company during the next two years. Both the private placement
and the joint venture are scheduled to close on or before November 30, 1997.
In November 1997, the Company received proceeds of approximately $108 million in
connection with the initial public offering of Bayard Drilling Technologies,
Inc. ("Bayard") common stock. After underwriting fees, the Company received
approximately $21.40 per share for the 4,194,000 shares of Bayard it sold in the
offering. In addition, the Company received $18 million as repayment of a loan
made to Bayard during fiscal 1997. The sale of stock is expected to yield a
pre-tax gain of approximately $74 million.
The Company recently announced its decision to change its year-end to December
31. The Company believes this change will make its financial results more easily
comparable to those of its peer group. Accordingly, the Company will file a
transition report on Form 10-K for the six month period between the closing date
of the Company's most recent fiscal year ended June 30, 1997 and the opening
date of the new fiscal year beginning January 1, 1998 (the "Transition Period").
THREE MONTHS ENDED SEPTEMBER 30, 1997 VS. SEPTEMBER 30, 1996
Net income for the three months ended September 30, 1997 (the "Current Quarter")
was $5.5 million, a $2.7 million decrease from net income of $8.2 million for
the quarter ended September 30, 1996 (the "Prior Quarter"). This decrease was
caused primarily by the Company's higher oil and gas production expenses,
depreciation, depletion and amortization of oil and gas properties, and interest
expenses in the Current Quarter, offset by higher oil and gas revenues resulting
from higher production and higher gas prices and increases in interest and other
income.
Revenues from oil and gas sales for the Current Quarter were $45.7 million, an
increase of $8.9 million, or 24%, from the Prior Quarter. Gas production
decreased to 13.9 billion cubic feet ("Bcf"), a decrease of 1.4 Bcf, or 9%,
compared to the Prior Quarter. Oil production increased 372 thousand barrels
("MBbls"), or 75%, from 498 MBbls to 870 MBbls. In the Current Quarter, the
Company received an average oil price of $18.48 per barrel ("Bbl") (net of
hedging losses of $0.2 million), a decrease of $2.71 per Bbl, or 13%, from the
$21.19 per Bbl realized in the Prior Quarter. Gas price realizations increased
to $2.12 per thousand cubic feet (AMcf@) in the Current Quarter inclusive of
hedging gains of $0.6 million, an increase of 24% from the $1.71 per Mcf
realized in the Prior Quarter.
The following table sets forth oil and gas production for the Company's primary
operating areas during the Current Quarter.
Page 14
<PAGE> 15
<TABLE>
<CAPTION>
Producing Oil Gas Total Percent
Operating Areas Wells(a) (MBls) (MMcf) (MMcfe) %
--------------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Giddings 220 114 8,532 9,216 48%
Louisiana Trend 67 460 1,817 4,577 24%
Oklahoma 277 185 3,168 4,278 22%
All Other 100 111 424 1,090 6%
------ ------ ------ ------ ------
Total 664 870 13,941 19,161 100%
====== ====== ====== ====== ======
</TABLE>
(a) Includes wells being drilled at September 30, 1997
Revenues from the Company's oil and gas marketing operations in the Current
Quarter were $26.9 million as compared to $12.2 million in the Prior Quarter.
Oil and gas marketing expenses were $26.7 million and $11.9 million in the
Current Quarter and Prior Quarter, respectively, resulting in a gross profit
margin of $0.2 million and $0.3 million, respectively.
Production expenses and taxes increased to $5.2 million in the Current Quarter
from $2.5 million in the Prior Quarter. This increase was the result of a
significant increase in oil sales volumes during the Current Quarter as well as
significantly higher lifting costs in the Louisiana Trend. On a gas equivalent
production unit ("Mcfe") basis, production expenses and taxes were $0.27 per
Mcfe in the Current Quarter compared to $0.14 per Mcfe in the Prior Quarter. The
Company expects that operating costs during the remainder of the Transition
Period and during 1998 will increase because of the Company's increased drilling
efforts in the Louisiana Trend and the Williston Basin, both of which are oil
prone areas with significant associated water production which results in higher
operating costs than gas prone areas, higher lifting costs associated with
production to be acquired from Hugoton, DLB and AnSon, and reduced severance tax
exemptions as compared to existing exemptions in the Giddings Field.
Depreciation, depletion and amortization ("DD&A") of oil and gas properties for
the Current Quarter was $28.6 million, an increase of $11.6 million from the
Prior Quarter. The increase in DD&A expense for oil and gas properties between
quarters is the result of a 0.8 Bcfe increase in sales volumes and an increase
in the DD&A rate per Mcfe. The average DD&A rate per Mcfe, a function of
capitalized and estimated future development costs and the related proved
reserves, was $1.49 for the Current Quarter and $0.93 for the Prior Quarter. The
Company believes the DD&A rate will continue to increase during the Transition
Period based on projected higher finding costs for wells drilled in the
Louisiana Trend.
Depreciation and amortization of other assets increased to $1.1 million in the
Current Quarter as compared to $1.0 million in the Prior Quarter. This increase
is primarily the result of higher amortization expense related to debt issuance
costs and higher depreciation related to the Company's acquisition of additional
buildings and equipment in its Oklahoma City office complex.
General and administrative expenses increased to $2.8 million during the Current
Quarter, a $1.1 million, or 65%, increase from the Prior Quarter. This increase
is the result of the continued growth of the Company. On an Mcfe basis, general
and administrative expenses were $0.14 per Mcfe in the Current Quarter as
compared to $0.09 per Mcfe in the Prior Quarter. The Company capitalized $1.4
million and $0.7 million of payroll and other internal costs directly related to
oil and gas exploration and development activities, net of partner
reimbursements, in the Current Quarter and Prior Quarter, respectively. The
Company believes general and administrative expenses will increase substantially
as the result of, and upon completion of, the announced acquisitions.
Interest expense increased to $8.6 million during the Current Quarter, a $5.8
million increase from the Prior Quarter, as a result of higher levels of
interest associated with the issuance of $300 million of Senior Notes in March
1997. In addition, during the Current Quarter the Company capitalized $2.6
million of interest costs representing the estimated costs to carry its
unevaluated leasehold inventory, compared to $4.2 million in the Prior Quarter.
This decrease in capitalized interest costs is the result of lower investments
being carried during the Current Quarter in leasehold that has yet to be
evaluated than in the Prior Quarter, as well as a lower capitalization rate
during the Current Quarter. The Company expects interest expense to increase
based upon the Company's assumption of certain liabilities associated with the
announced acquisitions.
Page 15
<PAGE> 16
The Company recorded no net income tax expense during the Current Quarter as
compared to $4.7 million recorded in the Prior Quarter. At June 30, 1997 the
Company recorded a $64.1 million valuation allowance against its net deferred
tax asset. All income taxes recorded during the Current Quarter were offset by a
corresponding reduction to the valuation allowance. The Company does not
anticipate recording any income tax until such time as the Company can
demonstrate that it is more likely than not that it will generate future taxable
income sufficient to utilize its existing net operating loss carryforwards.
HEDGING ACTIVITIES
The Company periodically utilizes various strategies to hedge the price of a
portion of its future oil and gas production. These strategies include (1) swap
arrangements that establish an index-related price above which the Company pays
the counterparty and below which the Company is paid by the counterparty, (2)
collar transactions that establish a defined set price above which the Company
pays the counterparty and a separate defined set price below which the
counterparty pays the Company, with a NYMEX price between the two resulting in
no payment by either party, (3) the purchase of index-related puts that provide
for a floor price below which the counterparty pays the Company the amount by
which the price of the commodity is below the contracted floor, (4) the sale of
index-related calls that provide for a ceiling price above which the Company
pays the counterparty the amount by which the price of the commodity is above
the contracted ceiling, and (5) basis protection swaps. Results from hedging
transactions are reflected in oil and gas sales to the extent related to the
Company's oil and gas production. The Company has not entered into hedging
transactions unrelated to the Company's oil and gas production or physical
purchase or sale commitments.
As of September 30, 1997, the Company had the following oil swap arrangements
for periods after September 1997:
<TABLE>
<CAPTION>
NYMEX-Index
Month Volume(Bbls) Strike Price (per Bbl)
----- ------------ ----------------------
<S> <C> <C>
October 1997 31,000 $18.19
November 1997 30,000 $18.13
December 1997 31,000 $18.08
January through June 1998 724,000 $19.82
</TABLE>
The Company entered into oil swap arrangements to cancel the effect of the swaps
for the months of October through December at an average price of $20.79 per
Bbl.
As of September 30, 1997, the Company had the following gas hedging arrangements
for periods after September 1997:
<TABLE>
<CAPTION>
NYMEX
Months Volume (MMBtu) Index Strike Price (per MMBtu)
------ -------------- ------------------------------
<S> <C> <C>
October 1997 4,340,000 $2.421
November 1997 3,000,000 2.560
December 1997 2,480,000 3.036
January 1998 2,480,000 3.039
February 1998 2,240,000 2.835
</TABLE>
The Company entered into a gas swap arrangement to cancel the effect of
1,240,000 MMBtu of the October hedged volumes at a price of $2.157 per MMBtu.
The December 1997 through February 1998 transactions represent calls sold by the
Company, for which $1.9 million in advance premium was received.
The Company has also entered into the following collar transactions:
<TABLE>
<CAPTION>
NYMEX- NYMEX-
Defined Low Defined High
Months Volume (MMBtu) Strike Price Strike Price
- ----- -------------- ------------ ------------
<S> <C> <C> <C>
March 1998 1,240,000 $ 2.693 $ 2.33
April 1998 1,200,000 2.483 2.11
</TABLE>
Page 16
<PAGE> 17
These transactions require that the Company pay the counterparty if NYMEX
exceeds the defined high strike price and that the counterparty pay the Company
if NYMEX is less than the defined low strike price.
The Company has entered into a curve lock for 4.9 Bcf of gas which gives the
Company the option to hedge April 1999 through November 1999 gas based upon a
negative $0.285 differential to the December 1998 NYMEX gas price any time
between the strike date and December 1998.
Gains or losses on crude oil and natural gas hedging transactions are recognized
as price adjustments in the month of related production. The Company estimates
that had all of the crude oil and natural gas hedging agreements in effect for
production periods beginning October 1, 1997 terminated on September 30, 1997,
based on the closing prices for NYMEX futures contracts as of that date, the
Company would have paid the counterparty approximately $2.9 million, which would
have represented the "fair value" at that date. These agreements were not
terminated.
The Company's oil and gas marketing subsidiary periodically enters into various
hedging transactions designed to hedge against physical purchase commitments
made by it. Gains or losses on these transactions are recorded as adjustments to
Oil and Gas Marketing Sales in the consolidated statements of operations and are
not considered by management to be material.
CAPITAL RESOURCES AND LIQUIDITY
As of September 30, 1997, the Company had working capital of $99.8 million. This
working capital position does not include the $74 million in net proceeds
received from the Bayard transaction in November 1997. The Company has estimated
that its capital expenditures for the Transition Period will be approximately
$175 million, including approximately $150 million for drilling, completion and
production expenditures, and the balance for acreage acquisition, seismic
programs and general corporate purposes, but excluding acquisitions. The Company
has not yet developed capital expenditure budgets in connection with the
announced acquisitions of DLB, AnSon and Hugoton. The capital expenditure budget
is largely discretionary, and can be adjusted by the Company based on operating
results or other factors. The Company believes it has sufficient capital
resources, including expected cash flow from operations and asset sales, to fund
its exploration and development program for the foreseeable future.
During November 1997, the Company announced it had entered into agreements to
acquire DLB, AnSon and Hugoton through stock-for-stock mergers. While the number
of shares to be issued in the DLB and AnSon mergers will be determined by the
market price of the Company's common stock for a stated period prior to closing,
based on the closing price of the Company's common stock on November 13, 1997
the Company would issue 6.8 million and 4.5 million shares to acquire DLB and
AnSon, respectively. The Company will issue approximately 27.2 million shares to
acquire Hugoton. As a result of the mergers, the Company's aggregate liabilities
will increase by approximately $190 million. The AnSon transaction is expected
to close in November 1997. The DLB and Hugoton transactions are expected to
close in the first quarter of 1998. The Company currently maintains no
commercial bank credit facility, but anticipates refinancing the DLB and Hugoton
debt at closing with a new commercial bank credit facility. The Company is
currently negotiating with a lender to arrange this facility.
Also during November 1997, the Company announced its plans to purchase 11.9
million treasury shares from Pan East at a price of $2.50 (Cdn) per share, or an
aggregate purchase price of approximately $21.1 million (U.S.). The Company will
finance this investment using its existing working capital and expects this
transaction to close on or before November 30, 1997.
The Company's cash provided by operating activities increased to $42.6 million
during the Current Quarter, compared to $26.0 million during the Prior Quarter.
The increase of $16.6 million is the result of cash provided by changes in
current assets and current liabilities between the two periods.
Net cash used in investing activities increased to $114.3 million in the Current
Quarter, up from $83.1 million in the Prior Quarter. The $31.2 million increase
is primarily a result of the Company's increased drilling activity and increased
investment in gas gathering and processing facilities during the Current
Quarter.
Consolidated cash used in financing activities was $1.2 million during the
Current Quarter, as compared to consolidated cash provided by financing
activities of $8.0 million during the Prior Quarter. The change resulted
primarily from having no borrowings during the Current Quarter as
Page 17
<PAGE> 18
well as the payment of $1.4 million of dividends on the Company's common stock
during the Current Quarter.
The Company is subject to certain routine legal proceedings, none of which are
expected to have a material adverse effect upon the Company's financial
condition or operations. The Company is also involved in certain litigation for
which the Company is unable to predict the ultimate financial impact (see Part
II, Item 1).
FORWARD LOOKING STATEMENTS
All statements other than statements of historical fact contained in this Form
10-Q, including statements in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" are forward-looking statements. When used
herein, the words "budget", "budgeted", "anticipate", "expects", "estimates",
"believes", "seeks", "goals", "intends", or "projects" and similar expressions
are intended to identify forward-looking statements. It is important to note
that the Company's actual results could differ materially from those projected
by such forward-looking statements. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, no
assurance can be given that such expectations will prove correct. Factors that
could cause the Company's results to differ materially from the results
discussed in such forward-looking statements include 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. All
forward-looking statements in this document are expressly qualified in their
entirety by the cautionary statements in this paragraph.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- Not applicable
Page 18
<PAGE> 19
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On October 15, 1996, Union Pacific Resources Company ("UPRC") filed suit
against the Company in the U.S. District Court for the Northern District of
Texas, Fort Worth Division alleging (a) infringement and inducing infringement
of UPRC's claim to a patent (the "UPRC Patent") for an invention involving a
method of maintaining a borehole in a stratigraphic zone during drilling, and
(b) tortious interference with certain business relations between UPRC and
certain of its former employees. UPRC's claims against the Company are based on
services provided by a third party vendor to the Company. UPRC is seeking
injunctive relief, damages of an unspecified amount, including actual, enhanced,
consequential and punitive damages, interest, costs and attorney's fees. The
Company believes that it has meritorious defenses to UPRC's allegations and has
requested the court to declare the UPRC Patent invalid. The Company has also
filed a motion to limit the scope of UPRC's claims and for summary judgment. No
prediction can be made as to the outcome of the matter.
As previously disclosed in the Company's Form 10-K for the year ended June
30, 1997, the Company and certain of its officers and directors are defendants
in various purported class actions alleging violations of Sections 10b-5 and
20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.
In addition to those previously disclosed, the following additional
purported class actions have been filed:
Nathaniel J. Hirsch v. Aubrey K. McClendon, Thomas L. Ward, Marcus C.
Rowland, Henry J. Hood, Steven C. Dixon, J. Mark Lester, and Chesapeake
Energy Corporation, filed in the U.S. District Court for the Western
District of Oklahoma on October 14, 1997.
Kay Chestnut v. Chesapeake Energy Corporation, Aubrey K. McClendon, Thomas
L. Ward, Marcus C. Rowland, Shannon T. Self, Walter C. Wilson, Henry J.
Hood, Steven C. Dixon and J. Mark Lester, filed in the U.S. District Court
for the Western District of Oklahoma on October 16, 1997.
Of the previously disclosed cases, Leslie Joseph Klein IRA v. Chesapeake
Energy Corporation et al. has been dismissed, and two others, Albion Financial
LLC v. Chesapeake Energy Corporation et al. and Elmo G. Hubble v. Chesapeake
Energy Corporation et al., have been transferred to the U.S. District Court for
the Western District of Oklahoma. The plaintiffs have filed an unopposed motion
to consolidate all the purported class action suits.
The plaintiffs assert that the defendants made materially false and
misleading statements and failed to disclose material facts about the success of
the Company's exploration efforts, principally in the Louisiana Trend. As a
result, the complaints allege, the price of the Company's common stock was
artificially inflated during periods beginning as early as January 25, 1996 and
ending on June 27, 1997, when the Company issued a press release announcing
disappointing drilling results in the Louisiana Trend and a full-
Page 19
<PAGE> 20
cost ceiling writedown to be reflected in its June 30, 1997 financial
statements. The plaintiffs further allege that certain of the named individual
defendants sold common stock during the class period when they knew or should
have known adverse nonpublic information. Each case seeks a determination that
the suit is a proper class action, certification of the plaintiff as a class
representative and damages in an unspecified amount, together with costs of
litigation, including attorneys' fees. The Company and the individual defendants
believe that these actions are without merit, and intend to defend against them
vigorously.
Page 20
<PAGE> 21
ITEM 2. CHANGES IN SECURITIES
- - Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
- - Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- - Not applicable
ITEM 5. OTHER INFORMATION
- - Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed as a part of this report:
Exhibit No.
-----------
10.2.4 Employment Agreement dated as of July 1, 1997 between
Steven C. Dixon and Chesapeake Energy Corporation.
11 Statement regarding computation of earnings per common share
27 Financial Data Schedule
(b) Form 8-K
During the quarter ended September 30, 1997, the Company filed the
following Current Reports on Form 8-K dated:
July 8, 1997 announcing operations updates,
August 28, 1997 announcing fiscal 1997 results, and
September 19, 1997 announcing the declaration of a quarterly cash
dividend.
Page 21
<PAGE> 22
SIGNATURES
Pursuant to the requirements 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
-----------------------------
(Registrant)
November 14, 1997 /s/ AUBREY K. MCCLENDON
- ----------------- ------------------------------
Date Aubrey K. McClendon
Chairman and
Chief Executive Officer
November 14, 1997 /s/ MARCUS C. ROWLAND
- ----------------- ------------------------------
Date Marcus C. Rowland
Senior Vice President and
Chief Financial Officer
Page 22
<PAGE> 23
Index to Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description Page
- ----------- ----------- ----
<S> <C> <C>
10.2.4 Employment Agreement dated as of July 1, 1997 between
Steven C. Dixon and Chesapeake Energy Corporation.
11 Statement regarding computation of earnings per common
share
27 Financial Data Schedule
</TABLE>
Page 23
<PAGE> 1
EXHIBIT 10.2.4
EMPLOYMENT AGREEMENT
between
STEVEN C. DIXON
and
CHESAPEAKE ENERGY CORPORATION
Effective July 1, 1997
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
1. Employment.............................................................. 1
2. Executive's Duties...................................................... 1
2.1 Specific Duties..................................................... 1
2.2 Supervision......................................................... 1
2.3 Rules and Regulations............................................... 1
2.4 Stock Investment.................................................... 2
3. Other Activities........................................................ 2
4. Executive's Compensation................................................ 3
4.1 Base Salary......................................................... 3
4.2 Bonus............................................................... 3
4.3 Stock Options....................................................... 3
4.4 Benefits............................................................ 3
4.4.1 Vacation...................................................... 3
4.4.2 Membership Dues............................................... 3
4.4.3 Compensation Review........................................... 4
5. Term.................................................................... 4
6. Termination............................................................. 4
6.1 Termination by Company.............................................. 4
6.1.1 Termination without Cause..................................... 4
6.1.2 Termination for Cause......................................... 4
6.1.3 Termination After Change in Control........................... 5
6.2 Termination by Executive............................................ 5
6.3 Incapacity of Executive............................................. 6
6.4 Death of Executive.................................................. 6
6.5 Effect of Termination............................................... 6
7. Confidentiality......................................................... 6
8. Noncompetition.......................................................... 7
9. Proprietary Matters..................................................... 8
</TABLE>
<PAGE> 3
TABLE OF CONTENTS (continued)
<TABLE>
<S> <C> <C>
10. Arbitration............................................................. 8
11. Miscellaneous........................................................... 9
11.1 Time............................................................... 9
11.2 Notices............................................................ 9
11.3 Assignment......................................................... 9
11.4 Construction....................................................... 9
11.5 Entire Agreement................................................... 10
11.6 Binding Effect..................................................... 10
11.7 Attorney's Fees.................................................... 10
11.8 Supersession....................................................... 10
</TABLE>
<PAGE> 4
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made effective July 1, 1997, between CHESAPEAKE
ENERGY CORPORATION, an Oklahoma corporation (the "Company"), and STEVEN C.
DIXON, an individual (the "Executive") and replaces and supersedes that certain
Employment Agreement between Company and Executive dated July 1, 1995.
W I T N E S S E T H:
WHEREAS, the Company desires to retain the services of the Executive
and the Executive desires to make the Executive's services available to the
Company.
NOW, THEREFORE, in consideration of the mutual promises herein
contained, the Company and the Executive agree as follows:
1. Employment. The Company hereby employs the Executive and the Executive
hereby accepts such employment subject to the terms and conditions contained in
this Agreement. The Executive is engaged as an employee of the Company, and the
Executive and the Company do not intend to create a joint venture, partnership
or other relationship which might impose a fiduciary obligation on the
Executive or the Company in the performance of this Agreement.
2. Executive's Duties. The Executive is employed on a full-time basis.
Throughout the term of this Agreement, the Executive will use the Executive's
best efforts and due diligence to assist the Company in achieving the most
profitable operation of the Company and the Company's affiliated entities
consistent with developing and maintaining a quality business operation.
2.1 Specific Duties. The Executive will serve as Senior Vice President -
Operations for the Company. The Executive will perform all of the
services required to fully and faithfully execute the office and
position to which the Executive is appointed and such other services
as may be reasonably requested by the Executive's supervisor. During
the term of this Agreement, the Executive may be nominated for
election or appointed to serve as a director or officer of the
Company's subsidiaries as determined in the board of directors' sole
discretion.
2.2 Supervision. The services of the Executive will be requested and
directed by the President and Chief Operating Officer, Mr. Tom L.
Ward, and the Chief Executive Officer, Mr. Aubrey K. McClendon.
2.3 Rules and Regulations. The Company currently has an Employment
Policies Manual which addresses frequently asked questions regarding
the
1
<PAGE> 5
Company. The Executive agrees to comply with the Employment Policies
Manual except to the extent inconsistent with this Agreement. The
Employment Policies Manual is subject to change without notice in the
sole discretion of the Company at any time.
2.4 Stock Investment. For each calendar year during which this Agreement
is in effect, the Executive agrees to hold shares of the Company's
common stock having aggregate Investment Value equal to fifteen
percent (15%) of the compensation paid to the Executive under
paragraphs 4.1 and 4.2 of this Agreement during such calendar year.
For purposes of this section, the "Investment Value" of each share of
stock will be the higher of either (a) the price paid by the
Executive for such share as part of an open market purchase; or (b)
the fair market value on the date of exercise for shares acquired
through the exercise of employee stock options. Any shares of common
stock acquired by the Executive prior to the date of this Agreement
and still owned by the Executive during the term of this Agreement
may be used to satisfy this requirement to acquire common stock. The
Investment Value for previously acquired stock shall be calculated
using the average stock price during the first six months of this
Agreement.
The stock acquired or owned pursuant to this paragraph 2.4 must be
held by the Executive at all times during the Executive's employment
by the Company or the Company's affiliated entities. In order to
administer this provision, the Executive agrees to return to the
Company's Chief Executive Officer a semi-annual report of purchases
and ownership in a form prepared by the Company. This paragraph will
become null and void if the Company's common stock ceases to be
listed on the New York Stock Exchange or on the National Association
of Securities Dealers Automated Quotation System. The Company has no
obligation to sell or to purchase from the Executive any of the
Company's stock in connection with this paragraph 2.4 and has made no
representations or warranties regarding the Company's stock,
operations or financial condition.
3. Other Activities. Unless the Executive has obtained the prior written
approval of the board of directors of the Company, the Executive will not: (a)
engage in business independent of the Executive's employment by the Company;
(b) serve as an officer, general partner or member in any corporation,
partnership, company, or firm; (c) directly or indirectly invest in,
participate in or acquire an interest in any oil and gas business, including,
without limitation, (i) producing oil and gas, (ii) drilling, owning or
operating oil and gas leases or wells, (iii) providing services or materials to
the oil and gas industry, (iv) marketing or refining oil or gas, or (v) owning
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 an investment by the Executive in publicly traded securities; or the
continued direct ownership and operation of oil and gas interests and leases to
the extent such interests were owned by the Executive on July 1, 1995. The
Executive agrees not to directly
2
<PAGE> 6
or indirectly acquire any additional oil and gas interests or increase
ownership of any oil and gas interests owned by the Executive on July 1, 1995.
4. Executive's Compensation. The Company agrees to compensate the Executive as
follows:
4.1 Base Salary. A base salary (the "Base Salary"), at the initial annual
rate of not less than One Hundred Seventy FiveThousand Dollars
($175,000.00), will be paid to the Executive in equal semi-monthly
installments beginning July 15, 1997 during the term of this
Agreement.
4.2 Bonus. In addition to the Base Salary described at paragraph 4.1 of
this Agreement, the Company may periodically pay bonus compensation
to the Executive. 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 Executive may
periodically receive grants of stock options from the Company's
various stock option plans, subject to the terms and conditions
thereof.
4.4 Benefits. The Company will provide the Executive such retirement
benefits, reimbursement of reasonable expenditures for dues, travel
and entertainment and such other benefits as are customarily provided
by the Company and as are set forth in the Company's Employment
Policies Manual. The Company will also provide the Executive the
opportunity to apply for coverage under the Company's medical, life
and disability plans, if any. If the Executive 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. The following specific
benefits will also be provided to the Executive at the expense of the
Company:
4.4.1 Vacation. The Executive will be entitled to take three (3)
weeks of paid vacation each twelve months during the term of
this Agreement. No additional compensation will be paid for
failure to take vacation and no vacation may be carried forward
from one twelve month period to another.
4.4.2 Membership Dues. The Company will reimburse the Executive for:
(a) the monthly dues necessary to maintain a full membership in
a country club in the Oklahoma City area selected by the
Executive in an amount not to exceed Five Hundred Dollars
($500.00) per
3
<PAGE> 7
month; and (b) the reasonable cost of any qualified business
entertainment at such country club. All other costs, including,
without implied limitation, any initiation costs, initial
membership costs, personal use and business entertainment
unrelated to the Company will be the sole obligation of the
Executive and the Company will have no liability with respect
to such amounts.
4.4.3 Compensation Review. The compensation of the Executive will be
reviewed not less frequently than annually by the board of
directors of the Company.
5. Term. The employment relationship evidenced by this Agreement is an "at
will" employment relationship and the Company reserves the right to terminate
the Executive at any time with or without cause. In the absence of such
termination, this Agreement will extend for a term of three (3) years
commencing on July 1, 1997, and ending on June 30, 2000 (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 Executive specifying an effective
date of such termination not sooner than sixty (60) business
days after the date of such notice (the "Termination Date"). In
the event the Executive is terminated without cause, or the
Company elects not to renew the contract, the Executive will
receive as termination compensation: (a) Base Salary for a
period of ninety (90) days; (b) any benefits payable by
operation of paragraph 4.4 of this Agreement; and (c) any
vacation pay accrued through the Termination Date. The
termination compensation in (a) shall be paid only if the
Executive executes the Company's standard Termination Agreement,
a copy of which is attached as Exhibit "A".
6.1.2 Termination for Cause. The Company may terminate this Agreement
for cause if the Executive: (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 injury to the Company;
or (d) willfully and repeatedly fails to perform the Executive's
duties
4
<PAGE> 8
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 Executive 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 Executive is terminated other than under
paragraphs 6.1.2, 6.3 or 6.4 based on adequate grounds; or (c)
the Executive resigns as a result of a reassignment of duties
inconsistent with the Executive's position, a reduction in the
Executive's then current compensation under paragraph 4 of this
Agreement, or a required relocation more than 25 miles from the
Executive's then current place of employment, then the Executive
will be entitled to a severance payment (in addition to any
other amounts payable to the Executive under this Agreement or
otherwise) in an amount equal to twelve (12) months of Base
Salary as set forth in 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.
6.2 Termination by Executive. The Executive 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 Executive 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 Executive, neither the Company nor the
Executive will have any further obligations hereunder including,
without limitation, any obligation of the
5
<PAGE> 9
Company to provide any further payments or benefits to the Executive
after the effective date of such termination.
6.3 Incapacity of Executive. If the Executive suffers from a physical or
mental condition which in the reasonable judgment of the Company's
management prevents the Executive in whole or in part from performing
the duties specified herein for a period of three (3) consecutive
months, the Executive may be terminated. Although the termination
shall be deemed as a termination with cause, any compensation payable
under paragraph 4 of this Agreement will be continued for ninety (90)
days. Notwithstanding the foregoing, the Executive's Base Salary
specified in paragraph 4.1 of this Agreement will be reduced by any
benefits payable under any disability plans.
6.4 Death of Executive. If the Executive dies during the term of this
Agreement, the Company may thereafter terminate this Agreement
without compensation to the Executive's estate except: (a) the
obligation to continue the Base Salary payments under paragraph 4.1
of this Agreement for ninety (90) 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 Executive to render services on
behalf of the Company, provided that the Executive will maintain the
confidentiality of all information acquired by the Executive during
the term of his employment 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 Executive by
reason of the termination of this Agreement. All keys, entry cards,
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 Executive will
have the right to retain and remove all personal property and effects
which are owned by the Executive and located in the offices of the
Company. All such personal items will be removed from such offices no
later than two (2) days after the effective date of termination, and
the Company is hereby authorized to discard any items remaining and
to reassign the Executive's office space after such date. Prior to
the effective date of termination, the Executive will render such
services to the Company as might be reasonably required to provide
for the orderly termination of the Executive's employment.
7. Confidentiality. The Executive recognizes that the nature of the
Executive's services are such that the Executive will have access to
information which constitutes trade secrets,
6
<PAGE> 10
is of a confidential nature, is of great value to the Company or is the
foundation on which the business of the Company is predicated. The Executive
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 confidential information ("Confidential Information").
Confidential Information includes data or material (regardless of form) which
is: (a) a trade secret; (b) provided, disclosed or delivered to Executive 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 of any business activity
conducted by the Company; or (c) produced, developed, obtained or prepared by
or on behalf of Executive 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. However, Confidential
Information shall not include any information, data or material which at the
time of disclosure or use was generally available to the public other than by a
breach of this Agreement, was available to the party to whom disclosed on a
non-confidential basis by disclosure or access provided by the Company or a
third party, or was otherwise developed or obtained independently by the person
to whom disclosed without a breach of this Agreement. On request by the
Company, the Company will be entitled to a copy of any Confidential Information
in the possession of the Executive. The Executive also agrees that the
provisions of this paragraph 7 will survive the termination, expiration or
cancellation of this Agreement for a period of five (5) years. The Executive
will deliver to the Company all originals and copies of the documents or
materials containing Confidential Information. For purposes of paragraphs 7, 8,
and 9 of this Agreement, the Company expressly includes any of the Company's
affiliated corporations, partnerships or entities.
8. Noncompetition. For a period of six (6) months after Executive is no longer
employed by the Company as a result of either the resignation by the Executive
pursuant to paragraph 6.2 above, or Termination for Cause pursuant to paragraph
6.1.2 above, Executive will not: (a) 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 five (5) miles of any operations or ownership interests of
the Company or its affiliated corporations, partnerships or entities, provided,
however, this provision shall not apply to acquisitions within said five (5)
mile radius of assets or activities of a successor entity resulting from a
"Change in Control" as described in paragraph 6.1.3., which assets were owned
or activities were being conducted (1) prior to the date of such Change in
Control, or (2) after such Change in Control but for which the Executive had no
material responsibility; and; (b) for the Executive's own account or for the
benefit of another party solicit, induce, entice or attempt to entice any
employee, contractor, customer, vendor or subcontractor to terminate or breach
any relationship with the Company or the Company's affiliates. The Executive
further agrees that the Executive will not circumvent or attempt to circumvent
the foregoing agreements by any future arrangement or through the actions of a
third party.
7
<PAGE> 11
9. Proprietary Matters. The Executive expressly understands and agrees that
any and all improvements, inventions, discoveries, processes or know-how that
are generated or conceived by the Executive during the term of this Agreement,
whether generated or conceived during the Executive's regular working hours or
otherwise, will be the sole and exclusive property of the Company. Whenever
requested by the Company (either during the term of this Agreement or
thereafter), the Executive will assign or execute any and all applications,
assignments and or other instruments and do all things which the Company deems
necessary or appropriate in order to permit the Company to: (a) assign and
convey or otherwise make available to the Company the sole and exclusive right,
title, and interest in and to said improvements, inventions, discoveries,
processes, know-how, applications, patents, copyrights, trade names or
trademarks; or (b) apply for, obtain, maintain, enforce and defend patents,
copyrights, trade names, or trademarks of the United States or of foreign
countries for said improvements, inventions, discoveries, processes or
know-how. However, the improvements, inventions, discoveries, processes or
know-how generated or conceived by the Executive and referred to above (except
as they may be included in the patents, copyrights or registered trade names or
trademarks of the Company, or corporations, partnerships or other entities
which may be affiliated with the Company) shall not be exclusive property of
the Company at any time after having been disclosed or revealed or have
otherwise become available to the public or to a third party on a
non-confidential basis other than by a breach of this Agreement, or after they
have been independently developed or discussed without a breach of this
Agreement by a third party who has no obligation to the Company or its
affiliates.
10. Arbitration. The parties will attempt to promptly resolve any dispute or
controversy arising out of or relating to this Agreement or termination of the
Executive by the Company. Any negotiations pursuant to this paragraph 10 are
confidential and will be treated as compromise and settlement negotiations for
all purposes. If the parties are unable to reach a settlement amicably, the
dispute will be submitted to binding arbitration before a single arbitrator in
accordance with the Employment Dispute Resolution Rules of the American
Arbitration Association. The arbitrator will be instructed and empowered to
take reasonable steps to expedite the arbitration and the arbitrator's judgment
will be final and binding upon the parties subject solely to challenge on the
grounds of fraud or gross misconduct. Except for damages arising out of a
breach of paragraphs 7, 8 or 9 of this Agreement, the arbitrator is not
empowered to award total damages (including compensatory damages) which exceed
300% of compensatory damages and each party hereby irrevocably waives any
damages in excess of that amount. The arbitration will be held in Oklahoma
County, Oklahoma. Judgment upon any verdict in arbitration may be entered in
any court of competent jurisdiction and the parties hereby consent to the
jurisdiction of, and proper venue in, the federal and state courts located in
Oklahoma County, Oklahoma. Each party will bear its own costs in connection
with the arbitration and the costs of the arbitrator will be borne by the party
who the arbitrator determines did not prevail in the matter. Unless otherwise
8
<PAGE> 12
expressly set forth in this Agreement, the procedures specified in this
paragraph 10 will be the sole and exclusive procedures for the resolution of
disputes and controversies between the parties arising out of or relating to
this Agreement. Notwithstanding the foregoing, a party may seek a preliminary
injunction or other provisional judicial relief if in such party's judgment
such action is necessary to avoid irreparable damage or to preserve the status
quo.
11. Miscellaneous. The parties further agree as follows:
11.1 Time. Time is of the essence of each provision of this Agreement.
11.2 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 Energy Corporation
Post Office Box 18496
Oklahoma City, OK 73154-0496
Attn: Aubrey K. McClendon
To the Executive: Mr. Steven C. Dixon
2505 Rambling Rd.
Edmond, OK 73034
11.3 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.
11.4 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
<PAGE> 13
11.5 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.
11.6 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.
11.7 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.
11.8 Supercession. On execution of this Agreement by the Company and the
Executive, the relationship between the Company and the Executive
will be bound by the terms of this Agreement and the Employment
Policies Manual and not by any other agreements or otherwise. In the
event of a conflict between the Employment Policies Manual and this
Agreement, this Agreement will control in all respects.
IN WITNESS WHEREOF, the undersigned have executed this Agreement effective
the date first above written.
CHESAPEAKE ENERGY CORPORATION, an
Oklahoma corporation
By: /s/ AUBREY K. MCCLENDON
------------------------------------
Aubrey K. McClendon, Chief Executive
Officer (the "Company")
By: /s/ STEVEN C. DIXON
------------------------------------
Steven C. Dixon, Individually
(the "Executive")
10
<PAGE> 14
Exhibit "A"
TERMINATION AGREEMENT
AND WAIVER AND RELEASE OF CLAIMS
This Termination Agreement entered into this ___ day of __________, ____,
by and between Steven C. Dixon ("Executive") and Chesapeake Energy Corporation
("Chesapeake").
WHEREAS, Executive has been employed by Chesapeake in Oklahoma City during
the period from January 28, 1991 to
_______________, _______.
WHEREAS, on ___________________, ____, Executive's employment with
Chesapeake was terminated; and
WHEREAS, the Executive and Chesapeake desire to enter into a mutually
binding termination agreement to settle any and all issues or disputes arising
from Executive's employment with Chesapeake.
NOW, THEREFORE, for and in consideration of ninety (90) days of severance
pay, $_______.__ at Executive's current salary, the payment and receipt of
which is being acknowledged, Executive waives, discharges and releases any and
all claims against Chesapeake arising from or relating to Executive's
employment with Chesapeake or Executive's termination including but not limited
to claims for wrongful discharge, discrimination (including rights and claims
under the Age Discrimination in Employment Act of l967, as amended by the Older
Workers Benefit Protection Act), breach of contract, harassment, back wages and
future pay.
Executive represents and warrants that as of this date, Executive has
suffered no work-related injury during Executive's employment with Chesapeake
and has no intention of filing a claim for worker's compensation benefits
arising from any incident occurring during Executive's employment with the
Chesapeake.
Executive acknowledges and declares that as of this date, Executive has
accounted to Chesapeake for any and all hours worked through _______________,
____, including overtime, and that Chesapeake has paid Executive for such hours
worked at the appropriate rate.
Executive acknowledges and declares that as of date of termination
Executive is due no accrued but unpaid vacation pay nor any accrued yet unpaid
sick pay.
<PAGE> 15
2
Nothing in this Termination Agreement shall constitute a waiver or release
of any rights or claims which may arise after the date hereto.
Executive acknowledges and states that Chesapeake has advised him that he
has the right to consult with an attorney prior to the execution of this
agreement and that Executive is given twenty-one (21) days in which to consider
this agreement before signing it and seven (7) days after signing the agreement
to revoke it by returning the above stated severance pay.
Executive acknowledges that the waiver of claims made herein is in
exchange for consideration in addition to that which Executive would otherwise
be entitled to upon severance of employment.
Executive states that he has carefully read the contents of this
Termination Agreement and understands all terms and conditions thereof.
Executive states that he executed this Termination Agreement freely and
voluntarily and without coercion or undue influence of any kind.
If any term or provision of this Termination Agreement is unenforceable
for any reason, all other provisions shall nonetheless be enforceable and
binding on the parties.
Executive agrees that this Termination Agreement, the terms hereof and
payment hereunder shall be kept confidential and that such terms and payment
shall not be disclosed to anyone (except Executive's spouse and attorney),
including, but not limited to, any past, present or prospective employee or
applicant for employment with Chesapeake.
Signed this ___ day of ______________, ______.
WITNESSED:
- ------------------------------- -------------------------------
Steven C. Dixon
Chesapeake Energy Corporation
By:
------------------------------------
Martha A. Burger
<PAGE> 1
EXHIBIT 11
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
STATEMENT OF NET INCOME PER SHARE
($ in thousands, except per share)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1997 1996
-------- --------
<S> <C> <C>
PRIMARY INCOME PER SHARE
Computation for statement of operations
Net income per statement of operations $ 5,513 $ 8,204
======== ========
Common shares outstanding 70,376 60,252
Adjustment to weighted average common shares outstanding:
Add dilutive effect of:
Employee Options 2,323 4,006
-------- --------
Weighted average common shares and common
equivalent shares outstanding, as adjusted 72,699 64,258
======== ========
Net income per common share,
as adjusted $ .08 $ .13
======== ========
FULLY DILUTED INCOME PER SHARE
Net income applicable to common stock as
shown in primary computation above $ 5,513 $ 8,204
======== ========
Common shares outstanding 70,376 60,252
Adjustment to weighted average common shares outstanding:
Add fully dilutive effect of:
Employee Options 2,867 4,086
-------- --------
Weighted average common shares and common
equivalent shares outstanding, as adjusted 73,243 64,338
======== ========
Fully diluted net income per common share $ .08 $ .13
======== ========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE
SHEET AS OF SEPTEMBER 30, 1997, AND STATEMENT OF INCOME FOR THREE MONTHS ENDED
SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 55,782
<SECURITIES> 85,478
<RECEIVABLES> 77,293
<ALLOWANCES> 346
<INVENTORY> 4,625
<CURRENT-ASSETS> 223,773
<PP&E> 1,155,587
<DEPRECIATION> 466,288
<TOTAL-ASSETS> 931,669
<CURRENT-LIABILITIES> 123,949
<BONDS> 508,971
0
0
<COMMON> 704
<OTHER-SE> 290,504
<TOTAL-LIABILITY-AND-EQUITY> 931,669
<SALES> 72,532
<TOTAL-REVENUES> 78,410
<CGS> 64,322
<TOTAL-COSTS> 72,897
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 25
<INTEREST-EXPENSE> 8,575
<INCOME-PRETAX> 5,513
<INCOME-TAX> 0
<INCOME-CONTINUING> 5,513
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,513
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
