<PAGE> 1
MASTER - MARCH 30 AM
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ ] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
[X] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period from July 1, 1997 to December 31, 1997
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
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
Common Stock, par value $.01 New York Stock Exchange
9.125% Senior Notes due 2006 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of Common Stock held by non-affiliates on March
25, 1998 was $452,116,000. At such date, there were 100,102,000 shares of
Common Stock issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE REGISTRANT'S DEFINITIVE PROXY STATEMENT FOR THE 1998
ANNUAL MEETING OF SHAREHOLDERS ARE INCORPORATED BY REFERENCE IN PART III
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<PAGE> 2
PART I
ITEM 1. BUSINESS
OVERVIEW
Chesapeake Energy Corporation ("Chesapeake" or the "Company") is an
independent oil and gas company engaged in the exploration, production,
development and acquisition of oil and natural gas in major onshore producing
areas of the United States and Canada.
The Company has changed its fiscal year end from June 30 to December 31.
This Transition Report on Form 10-K relates to the six months ended December
31, 1997 (the "Transition Period").
From inception in 1989 through December 31, 1997, Chesapeake drilled and
participated in a total of 824 gross (334 net) wells, of which 768 gross (312
net) wells were completed. From June 30, 1990 to December 31, 1997, the
Company's estimated proved reserves increased to 448 Bcfe from 11 Bcfe and
total assets increased to $953 million from $8 million. Despite this overall
favorable record of growth, in fiscal 1997 and in the Transition Period, the
Company incurred net losses of $183 million and $32 million, respectively,
primarily as a result of $236 million and $110 million, respectively,
impairments of its oil and gas properties. The impairments were the amounts by
which the Company's capitalized costs of oil and gas properties exceeded the
estimated present value of future net revenues from its proved reserves at June
30, 1997 and at December 31, 1997, respectively. See Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Results of Operations -- Impairment of Oil and Gas Properties".
In response to the losses, Chesapeake significantly revised its business
strategy during the Transition Period. These revisions included (i) reducing
the size and risk of its exploratory drilling program, especially in the
Louisiana Trend, (ii) acquiring significant quantities of long-lived natural
gas reserves, particularly in the Mid-Continent region of the U.S., (iii)
building a larger inventory of lower risk drilling opportunities through
acquisitions and joint ventures and (iv) reducing its capital expenditure
budget for exploration and development to more closely match anticipated cash
flow from operations.
The Company has acquired or has agreed to acquire a substantial amount of
proved oil and gas reserves through mergers and acquisitions of oil and gas
properties. Since October 1997, the Company has entered into 10 transactions
to acquire approximately 716 Bcfe of estimated proved reserves (the
"Acquisitions") at an estimated cost of $717 million. Of these transactions,
one was closed in December 1997, three were closed in the first quarter of 1998
and six are pending. These transactions are discussed in more detail under
"Recent and Pending Acquisitions."
Reference is made to the "Glossary" that appears at the end of this Item 1
for definitions of certain terms used in this Form 10-K.
DESCRIPTION OF BUSINESS
Since its inception in 1989 through mid-1997, Chesapeake's primary business
strategy was growth through the drillbit. Using this strategy, the Company
rapidly expanded its reserves and production through an aggressive drilling
program. However, in mid-1997 the Company's drilling disappointments in
Louisiana and the industry's escalating drilling and completion costs caused
management to change the Company's business strategy. The Company is now
focused on acquiring proved developed reserves, primarily in the Mid-Continent
Region of the United States and in Western Canada, and increasing its portfolio
of low to moderate risk drilling opportunities.
Management believes that attractive opportunities exist to consolidate assets
onshore in the U.S., particularly in the Mid-Continent Region. This area is
characterized by long-life natural gas reserves that typically have multiple
producing formations. Management believes that consolidation of reserves in
this area will add significant value through greater operating efficiencies and
the application of horizontal drilling and 3-D seismic to previously
underdeveloped properties. In addition, long-life natural gas reserves provide
a solid foundation for higher-risk
2
<PAGE> 3
exploration activities and provide the opportunity to benefit from potentially
higher natural gas prices in the future. The Company has made substantial
progress in building a long-life reserve base by acquiring or agreeing to
acquire approximately 716 Bcfe of proved reserves for an estimated $717 million
since October 1997.
In pursuing its revised strategy, the Company has better positioned itself to
pursue opportunities that provide the highest risk-adjusted returns, either
through the drillbit or acquisitions. Further, the Company believes its
substantial drilling expertise and strong exploration staff will allow it to
more fully exploit acquired assets. Finally, the long-lived nature of the
assets acquired allows the Company greater capital investment flexibility in
times of low commodity prices without experiencing a significant decline in
production.
The following table sets forth the Company's estimated proved reserves (net
of interests of other working and royalty interest owners and others entitled
to share in production), the related present value (discounted at 10%) of the
proved reserves, and the estimated capital expenditures required to develop the
Company's proved undeveloped reserves at December 31, 1997, and does not
include approximately 690 Bcfe of proven reserves acquired or to be acquired
after December 31, 1997.
<TABLE>
<CAPTION>
ESTIMATED
PERCENT PRESENT CAPEX TO
GAS OF VALUE DEVELOP
OIL GAS EQUIVALENT PROVED (DISC. @ 10%) PUD'S
AREAS (MBBL) (MMCF) (MMCFE) RESERVES ($ IN 000'S) ($ IN 000'S)
----- ------- ------ ---------- --------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Mid-Continent Region............ 5,832 184,313 219,305 49% 186,732 64,626
Austin Chalk Trend.............. 8,694 138,362 190,526 43 233,601 74,351
Other areas..................... 3,700 16,443 38,643 8 46,176 13,944
------ ------- ------- ----- ------- -------
Total................. 18,226 339,118 448,474 100% 466,509 152,921
====== ======= ======= ==== ======= =======
</TABLE>
PRIMARY OPERATING AREAS
The Company's strategy is to focus its acquisition and drilling efforts in
three areas: (i) the Mid-Continent Region (consisting of Oklahoma, southwestern
Kansas and the Texas Panhandle), (ii) the Austin Chalk Trend in Texas and
Louisiana, and (iii) the western Canadian provinces of Alberta and British
Columbia. In addition, the Company will selectively pursue exploration projects
such as the Tuscaloosa Trend in Louisiana, the Deep Wilcox project in Wharton
County, Texas, and the Lovington project in New Mexico.
Mid-Continent Region. The Company's Mid-Continent Region assets represented
49% of the Company's total proved reserves as of December 31, 1997. The
Company has entered into seven transactions involving the acquisition of
Mid-Continent properties during the past six months. Of these acquisitions,
only the AnSon acquisition was included in the Company's
December 31, 1997 proved reserves. Set forth below is a table which summarizes
the Company's announced Mid-Continent transactions:
<TABLE>
<CAPTION>
Estimated
Estimated Proved Proved Reserves
Reserves as of Acquisition
Primary Area December 31, 1997 Cost
Seller Date Announced Status of Operation (in Bcfe) (in millions)
- -------------------- -------------- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AnSon Production October 1997 Closed Deep Anadarko Basin 26 $36(1)
Corporation December 1997
DLB Oil and Gas, October 1997 Pending; Southern and 110 $122(1)
Inc. scheduled to Northwestern Oklahoma
close
April 1998
Hugoton Energy November 1997 Closed Southwestern Kansas, 246 $306(1)
Corporation March 1998 Northwestern
Oklahoma,
Texas Panhandle
EnerVest Management January 1998 Closed Deep Anadarko Basin 43 $ 38
Company, L.L.C. February 1998
MC Panhandle Corp. March 1998 Pending; Texas Panhandle 108 $100(1)
(a wholly-owned scheduled to
subsidiary of close
Occidental Petroleum May 1998
Corporation)
Gothic Energy March 1998 Pending; Arkoma and 52(2) $ 20
Corporation scheduled to Anadarko Basins
close
April 1998
Miscellaneous March 1998 Pending; Arkoma and 35 $ 34
(two transactions) scheduled to Anadarko Basins
close
May 1998
-------- ----
Totals 620 Bcfe $656
======== ====
</TABLE>
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(1) Excludes other assets of $7 million for AnSon, $10 million for DLB, $20
million for Hugoton and $5 million for MC Panhandle. Also excludes
estimated transaction fees and expenses.
(2) Includes an estimated 30 Bcfe of proved undeveloped reserves associated
with a 50% interest in a five-year drilling and acquisitions
participation agreement.
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Pro forma for the Acquisitions, the Company's proved reserves as of December
31, 1997 were approximately 1,138 Bcfe, of which 811 Bcfe, or 71%, are located
in the Mid-Continent.
In the Transition Period, the Company invested approximately $67 million to
drill 18 gross (11.8 net) wells in the Mid-Continent. The Company has budgeted
approximately $88 million for the Mid-Continent during 1998, representing
approximately 38% of the Company's total budget for exploration and development
activities during the year. The Company anticipates the Mid-Continent will
contribute approximately 63 Bcfe of production, pro forma for the Acquisitions,
during 1998, or 47% of expected total production.
Austin Chalk Trend. Chesapeake's second largest concentration of reserves
and its highest concentration of present value (as of December 31, 1997 and
before giving effect to the Acquisitions) is located in the Austin Chalk Trend,
which consists of the Giddings Field in Texas and the central portion of
Louisiana and far southeast Texas (the "Louisiana Trend"). The Company's
activities in the Louisiana Trend are concentrated in the Masters Creek area of
central Louisiana.
The Company initiated its exploration and development efforts in the Giddings
Field in 1992 and peak activity occurred in 1994 and 1995. From 1992 through
December 31, 1997, the Company drilled 226 wells in this area with a 97%
success rate. During the Transition Period, the Giddings Field contributed
approximately 16.6 Bcfe, or 43% of the Company's total production. The Company
expects production to decline in this relatively mature area in 1998. In the
Transition Period, the Company invested approximately $13 million to drill 11
gross (4.2 net) wells in Giddings. The Company has budgeted approximately
$12 million to drill 8 gross (3.9 net) wells in Giddings during 1998.
In late 1994, Occidental Petroleum Corporation ("Occidental") drilled a
significant horizontal Austin Chalk discovery well in the Masters Creek area.
Chesapeake responded to Occidental's announcement by extensively reviewing and
analyzing vertical drilling reports, electric logs, mud logs, seismic data and
production records to arrive at a geological conclusion that the Austin Chalk
could be productive across a large portion of central and southeastern
Louisiana. Accordingly, and in competition with Union Pacific Resources
Company, Sonat, Inc., Occidental, Amoco Production Company, and others,
Chesapeake invested approximately $149 million from fiscal 1995 through December
31, 1997 to acquire over 1.1 million acres of leasehold in the Louisiana Trend.
Beginning in 1995 and continuing through December 31, 1997, Chesapeake expended
an additional $215 million to initiate drilling efforts on 80 gross (37.9 net)
exploratory and developmental wells to evaluate its leasehold position.
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From December 1996 through April 1997, the Company initiated drilling efforts
on 15 of its exploratory wells in the Louisiana Trend. Between April 1997 and
July 1997, the Company completed operations on 10 of these wells, eight of
which were completed after June 1, 1997. Based upon the disappointing results
from these wells, the Company made the determination that a significant amount
of leasehold previously classified as unevaluated had become evaluated. This
determination resulted in a transfer of approximately $91 million of previously
unevaluated leasehold costs to the Company's full cost pool. Combined with
disappointing drilling results, higher drilling costs and lower oil and gas
prices, the Company incurred a $236 million full-cost ceiling writedown in the
fourth quarter of fiscal 1997.
At June 30, 1997, the Company had nine rigs operating in the Louisiana Trend.
As a result of the disappointing results being encountered at that time, the
Company began to reduce its exploration and development activities in
Louisiana, and by March 20, 1998 the Company was operating six rigs in the
Louisiana Trend.
During the Transition Period, the Company completed operations on 11 wells in
the Masters Creek area. Although 10 of the 11 wells were commercially
productive, the $58 million of drilling costs incurred were higher and
developed oil and gas reserves were lower than expected. The lower reserve
quantities were due in part to lower oil prices at December 31, 1997. The
Company incurred approximately $85 million in capital expenditures in the
Louisiana Trend during the Transition Period and transferred approximately $11
million of leasehold costs from all areas of the Louisiana Trend to the
amortization base of its full-cost pool.
The Company intends to focus its Louisiana drilling in 1998 in the Masters
Creek area and to allow others to lead the exploration of areas outside of
Masters Creek. For 1998, the Company has budgeted $64 million to drill
approximately 13 gross (10.7 net) wells targeting the Austin Chalk formation in
the Louisiana Trend. This expenditure, in combination with anticipated seismic
costs, represents approximately 27% of the Company's planned exploration and
development capital expenditures for 1998. Although it has substantially
reduced its budget for the Louisiana Trend, the Company believes there are
significant economic drilling opportunities remaining in the Masters Creek area.
Additionally, the Company is now completing the various 3-D seismic programs
necessary to begin evaluating its Louisiana leasehold for potential Tuscaloosa
exploration opportunities.
Western Canada Region. During fiscal 1996 and 1997, the Company began to
evaluate the possibility of developing a third core area of operations in
western Canada. Management believes the North American gas market is
significantly tightening and as a result, Canadian natural gas prices, which
have significantly lagged U.S. natural gas prices during the past 15 years,
should increase markedly in the next 12 months. Management also believes the
exploration potential of western Canada exceeds the upside potential of most
onshore areas in the U.S. The Company has recently entered into three
transactions which have established a substantial presence in western Canada
and expects to increase its natural gas assets in western Canada in 1998.
A summary of the Company's Canadian transactions to date are summarized below:
<TABLE>
<CAPTION>
Estimated
Estimated Proved Proved Reserves
Reserves as of Acquisition
Primary Area December 31, 1997 Cost
Seller Date Announced Status of Operation (in Bcfe) (in millions)
- ------ -------------- -------------- --------------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
Pan East November 1997 Closed Western Alberta, None; purchased N/A
Petroleum Corp. December 1997 Northeastern British 19.9% of Pan
Columbia East's common
stock and
entered into a
two
year, 50/50
drilling
and acquisitions
participation agreement
Ranger Oil January 1998 Closed Northeastern 54 $28(1)
Limited January 1998 British Columbia
Sunoma Energy March 1998 Pending; Northeastern 42 $33
Corporation scheduled to British Columbia
close
April 1998
------- -----
Totals 96 Bcfe $61
======= =====
</TABLE>
(1) Excludes $20 million related to unevaluated leasehold and other assets.
5
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OTHER OPERATING AREAS
Tuscaloosa Trend. In 1997 Chesapeake initiated two large 3-D seismic projects
to evaluate approximately 90,000 acres of leasehold in the Tuscaloosa Trend
portion of Louisiana. The Tuscaloosa is one of the most prolific deep gas
reservoirs located along the Gulf Coast and 3-D seismic has proven effective in
reducing the risk associated with the exploration for deep gas reserves in the
Tuscaloosa. The Company anticipates initiating its drilling program for the
Tuscaloosa formation during 1998 and has budgeted $25 million to drill 4 wells.
Permian Basin. In 1995 the Company initiated drilling activity in the Permian
Basin in the Lovington area of Lea County, New Mexico. In this project, the
Company is utilizing 3-D seismic technology to search for algal reef buildups
that management believes have been overlooked in this portion of the Permian
Basin because of inconclusive results provided by traditional 2-D seismic
technology. During the Transition Period, the Company initiated 10 wells in
the Lovington area, six of which were successfully completed, one was
unsuccessful and three were drilling. The Company has budgeted approximately
$17 million to drill 15 gross (10.0 net) wells and conduct seismic in this
area during 1998.
Wharton County, Texas. During fiscal 1997, the Company acquired approximately
25,000 net acres at a cost of approximately $29 million in Wharton County,
Texas. This exploration project is seeking gas production from the shallower
Frio and Yegua sands and from the Deep Wilcox at depths of up to 19,000 feet.
The Company intends to participate with a 55% interest in an 85,000 acre 3-D
seismic program with Coastal Oil & Gas Corporation, Seagull Energy Corporation
and other industry partners during 1998 to delineate potential future
drillsites in the vicinity of Coastal's Zeidman Trustee wells.
Williston Basin. During fiscal 1996, Chesapeake began acquiring leasehold in
the Williston Basin, located in eastern Montana and western North Dakota, and
as of December 31, 1997 owned approximately 1.0 million gross (0.6 million net)
acres. During the Transition Period, the Company drilled and successfully
completed six wells targeting the Red River formation on the northern portion
of its leasehold. The Company has budgeted $2 million to drill 2 gross (1.4
net) wells during 1998 in the Williston Basin.
RECENT AND PENDING ACQUISITIONS
In October 1997, Chesapeake agreed to acquire by merger the Mid-Continent
operations of DLB Oil & Gas, Inc. ("DLB"). In its Mid-Continent division, DLB
owns approximately 110 Bcfe of proved reserves, nine gas gathering systems and
a gas marketing subsidiary. Chesapeake will pay $17.5 million in cash and will
issue five million shares of Chesapeake common stock as merger consideration to
the shareholders of DLB and will assume approximately $85 million in debt at
closing. The closing of the DLB acquisition, which is expected to occur in
late April 1998, is subject to approval by DLB shareholders and other customary
conditions. Certain shareholders of DLB, who collectively own approximately
78% of outstanding DLB common stock, have granted Chesapeake an irrevocable
proxy to vote such shares in favor of the merger.
In November 1997, Chesapeake agreed to acquire Hugoton Energy Corporation,
which was closed on March 10, 1998. Each share of Hugoton common stock was
converted into the right to receive 1.3 shares of Chesapeake common stock,
resulting in the issuance of approximately 25.8 million shares of Chesapeake
common stock. Excluding transaction fees, this transaction was valued at
approximately $326 million, including the assumption of $120 million in bank
debt at closing. Hugoton owns approximately 246 Bcfe of proved reserves in
addition to its portfolio of undeveloped mineral interests, gas gathering
systems, probable and possible reserves and other corporate assets.
6
<PAGE> 7
In December 1997, Chesapeake purchased from Pan East Petroleum Corp.
("Pan East"), a publicly-traded Canadian exploration and production company,
19.9% of Pan East's common stock for $22 million. The purpose of Chesapeake's
investment was to assist Pan East in financing its share of the exploration,
development and acquisition activities under a joint venture whereby Chesapeake
has the right to participate as a non-operator with up to a 50% interest in all
drilling activities and acquisitions made by Pan East during the two years
ending December 31, 1999.
In December 1997, Chesapeake acquired AnSon Production Corporation ("AnSon"),
a privately owned oil and gas producer that owned estimated proved reserves of
26 Bcfe, substantial undeveloped mineral interests, and a gas marketing
subsidiary. Consideration for the AnSon acquisition was approximately $43
million, consisting of 3,792,724 shares of Chesapeake common stock and cash
consideration remaining to be paid in accordance with the terms of the merger
agreement.
In January 1998, Chesapeake entered into 40/60 alliance with Ranger Oil
Limited ("Ranger") to jointly develop a 3.2 million acre area of mutual
interest in the Helmet area of northeastern British Columbia. As part of the
transaction, Chesapeake paid Ranger approximately $48 million to acquire 54
Bcfe of estimated proved reserves (100% natural gas), 160,000 net acres of
leasehold, and 40% of Ranger's infrastructure in the area.
In February 1998, Chesapeake purchased the Mid-Continent properties of
privately owned EnerVest Management Company, L.L.C. for $38 million. The
primarily undeveloped properties are located in the Anadarko Basin of Oklahoma,
are 90% natural gas and consist of 43 Bcfe of estimated proved reserves.
In March 1998, Chesapeake agreed to acquire all of the stock of MC Panhandle
Corp., a wholly owned subsidiary of Occidental. Chesapeake has agreed to pay
$105 million in cash for estimated proved reserves of approximately 108 Bcfe in
the West Panhandle Field in Carson, Gray, Hutchinson and Moore Counties of the
Texas Panhandle. The reserves are 100% natural gas, have an estimated
reserve-to-production index of eight years, and are 85% proved developed
producing. During 1997, the wells produced approximately 13 Bcf (36 MMcf of
natural gas per day) net to Occidental's interest from 256 wells, of which all
but two were operated by Occidental. Chesapeake will assume operations of the
acquired wells and will own an average working interest and net revenue
interest of 99.5% and 85.2%, respectively. The effective date of the
transaction is January 1, 1998 with closing scheduled for late May 1998.
In March 1998, Chesapeake agreed to acquire the British Columbia properties
of Sunoma Energy Corporation for $33 million. Virtually all of the 42 Bcfe of
estimated reserves to be acquired are associated with wells operated by Ranger
in the Helmet area. The properties are 98% natural gas, have an estimated
reserves-to-production index of 10 years. The transaction has an effective
date of January 1, 1998, and is scheduled to close in late April 1998.
In March 1998, Chesapeake agreed to acquire from Gothic Energy Corporation an
estimated 22 Bcfe of proved natural gas reserves in the Arkoma Basin of Oklahoma
for $20 million. Additionally, in conjunction with Chesapeake's agreement to
purchase $50 million of Gothic's 12% preferred stock (with ten-year warrants to
purchase 15% of Gothic's currently outstanding common stock for $0.01 per
share), Chesapeake entered into a five year drilling and acquisitions
participation agreement with Gothic. As part of the transactions, Gothic
transferred to Chesapeake approximately 30 Bcfe of proved undeveloped
reserves. The transaction has an effective date of January 1, 1998, and is
scheduled to close in late April 1998.
In March 1998, Chesapeake agreed to acquire approximately 35 Bcfe of
estimated proved reserves in the Mid-Continent Region from two parties for $34
million. The properties are 85% natural gas and have an estimated reserves-
to-production index of 10 years. The transactions have an effective date of
January 1, 1998, and are scheduled to close in May 1998.
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DRILLING ACTIVITY
The following table sets forth the wells drilled by the Company during the
periods indicated. In the table, "gross" refers to the total wells in which the
Company has a working interest and "net" refers to gross wells multiplied by
the Company's working interest therein.
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED JUNE 30,
DECEMBER 31, ----------------------------------------------
1997 1997 1996 1995
---------------- ------------ ------------ -------------
GROSS NET GROSS NET GROSS NET GROSS NET
----- ----- ----- ---- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Development:
Productive ................ 55 24.4 90 55.0 111 49.5 133 42.6
Non-productive ............ 1 .3 2 .2 4 1.6 5 2.8
---- ---- ---- ---- ---- ---- ---- ----
Total ..................... 56 24.7 92 55.2 115 51.1 138 45.4
==== ==== ==== ==== ==== ==== ==== ====
Exploratory:
Productive ................ 28 15.5 71 46.1 29 16.5 11 5.3
Non-productive ............ 2 0.9 8 5.7 4 1.4 1 .7
---- ---- ---- ---- ---- ---- ---- ----
Total ..................... 30 16.4 79 51.8 33 17.9 12 6.0
==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
At December 31, 1997, the Company was drilling 13 gross (10.1 net) wells, of
which one gross (one net) well has been successfully completed and 11 gross
(9.1 net) wells are still being drilled or tested. The Company was also
participating with minority interests in 19 non-operated wells being drilled at
that date.
WELL DATA
At December 31, 1997, the Company had interests in approximately 1,113 (401.0
net) producing wells, of which 152 (68.6 net) were classified as primarily oil
producing wells and 961 (332.4 net) were classified as primarily gas producing
wells.
VOLUMES, REVENUE, PRICES AND PRODUCTION COSTS
The following table sets forth certain information regarding the production
volumes, revenue, average prices received and average production costs
associated with the Company's sale of oil and gas for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED JUNE 30,
DECEMBER 31, -------------------------------------------
1997 1997 1996 1995
---------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET PRODUCTION:
Oil (MBbl) .......................................... 1,857 2,770 1,413 1,139
Gas (MMcf) .......................................... 27,326 62,005 51,710 25,114
Gas equivalent (MMcfe) .............................. 38,468 78,625 60,190 31,947
OIL AND GAS SALES ($ IN 000'S):
Oil ................................................. $ 34,523 $ 57,974 $ 25,224 $ 19,784
Gas ................................................. 61,134 134,946 85,625 37,199
----------- ----------- ----------- -----------
Total oil and gas sales ..................... $ 95,657 $ 192,920 $ 110,849 $ 56,983
=========== =========== =========== ===========
AVERAGE SALES PRICE:
Oil ($ per Bbl) ..................................... $ 18.59 $ 20.93 $ 17.85 $ 17.36
Gas ($ per Mcf) ..................................... $ 2.24 $ 2.18 $ 1.66 $ 1.48
Gas equivalent ($ per Mcfe) ......................... $ 2.49 $ 2.45 $ 1.84 $ 1.78
OIL AND GAS COSTS ($ PER Mcfe):
Production expenses and taxes ....................... $ .27 $ .19 $ .14 $ .13
General and administrative .......................... $ .15 $ .11 $ .08 $ .11
Depreciation, depletion and amortization of oil
and gas properties ............................... $ 1.57 $ 1.31 $ .85 $ .80
</TABLE>
DEVELOPMENT, EXPLORATION AND ACQUISITION EXPENDITURES
The following table sets forth certain information regarding the costs
incurred by the Company in its development, exploration and acquisition
activities during the periods indicated:
8
<PAGE> 9
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED JUNE 30,
DECEMBER 31, --------------------------------------
1997 1997 1996 1995
----------------- --------- --------- --------
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
Development costs ................................. $ 120,628 $ 187,736 $ 138,188 $ 78,679
Exploration costs ................................. 40,534 136,473 39,410 14,129
Acquisition costs:
Unproved properties ............................. 25,516 140,348 138,188 24,437
Proved properties ............................... 39,245 -- 24,560 --
Capitalized internal costs ........................ 2,435 3,905 1,699 586
Proceeds from sale of leasehold, equipment and
other ........................................... (1,861) (3,095) (6,167) (11,953)
--------- --------- --------- ---------
Total ................................... $ 226,497 $ 465,367 $ 335,878 $ 105,878
========= ========= ========= =========
</TABLE>
ACREAGE
The following table sets forth as of December 31, 1997 the gross and net
acres of both developed and undeveloped oil and gas leases which the Company
holds. "Gross" acres are the total number of acres in which the Company owns a
working interest. "Net" acres refer to gross acres multiplied by the Company's
fractional working interest. Acreage numbers are stated in thousands and do not
include options for additional leasehold held by the Company, but not yet
exercised.
<TABLE>
<CAPTION>
TOTAL DEVELOPED
DEVELOPED UNDEVELOPED AND UNDEVELOPED
----------------- ---------------- -----------------
GROSS NET GROSS NET GROSS NET
------- ------- ------- ------ ------- -------
<S> <C> <C> <C> <C> <C> <C>
Mid-Continent Region.......................... 234 75 328 143 562 218
Austin Chalk Trend............................ 183 109 1,576 1,188 1,759 1,297
Other areas .................................. 81 52 1,609 1,005 1,690 1,057
----- ----- ----- ----- ----- -----
Total .............................. 498 236 3,513 2,336 4,011 2,572
===== ===== ===== ===== ===== =====
</TABLE>
MARKETING
The Company's oil production is sold under market sensitive or spot price
contracts. The Company's natural gas production is sold to purchasers under
varying percentage-of-proceeds and percentage-of-index contracts. By the terms
of these contracts, the Company receives a percentage of the resale price
received by the purchaser for sales of residue gas and natural gas liquids
recovered after gathering and processing the Company's gas. The residue gas and
natural gas liquids sold by these purchasers are sold primarily based on spot
market prices. The revenue received by the Company from the sale of natural gas
liquids is included in natural gas sales. During the Transition Period, the
following three customers individually accounted for 10% or more of the
Company's total oil and gas sales:
<TABLE>
<CAPTION>
AMOUNT PERCENT OF OIL
($ IN THOUSANDS AND GAS
THOUSANDS) SALES
-------------- --------------
<S> <C> <C>
Aquila Southwest Pipeline Corporation . . . . . . . . . . . . . . . . $20,138 21%
Koch Oil Company . . . . . . . . . . . . . . . . . . . . . . . . . . 18,594 19
GPM Gas Corporation . . . . . . . . . . . . . . . . . . . . . . . . . 12,610 13
</TABLE>
Management believes that the loss of any of the above customers would not
have a material adverse effect on the Company's results of operations or its
financial position.
Chesapeake Energy Marketing, Inc. ("CEMI") and AnSon Gas Marketing ("AGM")
both wholly-owned subsidiaries, provide oil and natural gas marketing services
including commodity price structuring, contract administration and nomination
services for the Company, its partners and other oil and natural gas producers
in the geographical areas in which the Company is active.
HEDGING ACTIVITIES
Periodically the Company utilizes hedging strategies to hedge the price of a
portion of its future oil and gas production. These strategies include (1) swap
arrangements that establish an index-related price above which the
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<PAGE> 10
Company pays the counterparty and below which the Company is paid by the
counterparty, (2) 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, (3) 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 (4) basis protection swaps, which are arrangements
that guarantee the price differential of oil or gas from a specified delivery
point or points. 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 only enters into hedging transactions related to the Company's oil and
gas production volumes or CEMI and AGM physical purchase or sale commitments.
As of December 31, 1997, the Company had the following oil swap arrangements
for periods after December 1997:
<TABLE>
<CAPTION>
NYMEX-INDEX
VOLUME STRIKE PRICE
MONTHS (BBLS) (PER BBL)
------ ------ -----------
<S> <C> <C>
January through June 1998 . . . . . . . . 724,000 $19.82
</TABLE>
After year-end 1997, the Company entered into oil swap arrangements to cancel
the effect of the swaps at a price of $18.85 per Bbl.
As of December 31, 1997, the Company had the following gas swap arrangements
for periods after December 1997:
<TABLE>
<CAPTION>
HOUSTON SHIP CHANNEL
VOLUME INDEX STRIKE PRICE
MONTHS (MMBTU) (PER MMBTU)
------ ------- --------------------
<S> <C> <C>
April 1998 . . . . . . . . . . . . . 600,000 $2.300
May 1998 . . . . . . . . . . . . . . 620,000 2.215
</TABLE>
The Company received $1.3 million as a premium for calls sold for January and
February 1998 volumes of 2,480,000 MMBtu and 2,240,000 MMBtu, respectively.
The January calls expired on December 31, 1997, the February calls expired on
January 31, 1998, and the associated premiums will be recognized as income
during the corresponding months of production.
The Company has also entered into the following collar transactions:
<TABLE>
<CAPTION>
NYMEX NYMEX
VOLUME DEFINED HIGH DEFINED LOW
MONTHS (MMBTU) STRIKE PRICE STRIKE PRICE
------ ------- ---------------- ---------------
<S> <C> <C> <C>
March 1998 . . . . . . . . . . . . . . . . 1,240,000 $2.69 $2.33
April 1998 . . . . . . . . . . . . . . . . 1,200,000 2.48 2.11
</TABLE>
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 entered into a curve lock for 4.9 Bcf of gas which allows the
Company the option to hedge April 1999 through November 1999 gas based upon a
negative $0.285 differential to December 1998 gas any time between the strike
date and December 1998. A curve lock is a commodity swap arrangement that
establishes, or hedges, a price differential between one commodity contract
period and another. In markets where the forward curve is typically negatively
sloped (near-term prices exceed deferred prices), an upward sloping price curve
allows hedgers to lock in a deferred forward sale at a higher premium to a more
prompt swap by a curve lock. For example, in the crude oil market, which
typically has a negatively sloped price curve, it may be possible for a hedger
to lock in a price relationship in which its deferred crude oil is sold at a
premium to a prompter swap, because the price curve is upwardly sloping in the
future. The expectation of the hedger is that either the market will return to
its historically negatively sloped price curve, or that prices generally will
increase and the curve lock swap will allow it to realize a premium price for
the deferred versus the more prompt price.
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<PAGE> 11
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 swap agreements in
effect for production periods beginning January 1, 1998 terminated on December
31, 1997, based on the closing prices for NYMEX futures contracts as of that
date, the Company would have received a net amount of approximately $1.1
million from the counterparty which would have represented the "fair value" at
that date. These agreements were not terminated.
CEMI periodically enters into various hedging transactions designed to hedge
against physical purchase commitments made by CEMI. 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.
RISK FACTORS
Concentration of Unevaluated Leasehold in Louisiana
Chesapeake's future performance will be affected by the results from the
development of its existing proved undeveloped reserves and unevaluated
leasehold, including the Louisiana Trend and the Tuscaloosa Trend. As of
December 31, 1997, Chesapeake had an investment in total unevaluated and
unproved leasehold of approximately $125 million, of which approximately $66
million was located in the Louisiana Trend and the Tuscaloosa Trend.
Approximately 42%, or $98 million, of Chesapeake's 1998 drilling budget is
associated with drilling, construction of production facilities and seismic
activity in the Louisiana Trend and the Tuscaloosa Trend. Failure of the
Company's drilling activities to achieve anticipated quantities of economically
attractive reserves and production would have an adverse impact on Chesapeake's
operations and financial results and could result in future full-cost ceiling
writedowns.
Impairment of Asset Value
Chesapeake reported full-cost ceiling writedowns of $110 million and $236
million during the Transition Period and the fiscal year ended June 30, 1997,
respectively. Beginning in the quarter ended September 30, 1997, Chesapeake
reduced its drilling budget for the Austin Chalk in the Louisiana Trend overall
and concentrated remaining Austin Chalk drilling activity in the Masters Creek
area. In addition, Chesapeake began to pursue a strategy to replace and expand
its oil and gas reserves through acquisitions as a compliment to its historical
strategy of adding reserves through drilling. Chesapeake has also reduced its
emphasis on acquiring unproved leasehold acreage to be developed through
exploratory drilling. While these actions are intended to mitigate the higher
risks associated with a growth strategy based on significant exploratory
drilling, there can be no assurance that this change in strategy will result in
enhanced future economic results or will prevent additional leasehold
impairment and full-cost ceiling writedowns.
Since December 31, 1997, oil and gas prices have declined, with oil prices
reaching ten-year lows in March 1998. In addition, the Company has completed
several acquisitions based on expectations of higher oil and gas prices than
those currently being received. Based on NYMEX oil prices of $16.50 per Bbl and
NYMEX gas prices of $2.35 per Mcf in effect on March 25, 1998, and estimates of
the Company's proved reserves as of December 31, 1997 (pro forma for the
acquisitions completed during the quarter ended March 31, 1998), the Company
estimates it will incur an additional full cost ceiling writedown of between
$175 million and $200 million as of March 31, 1998. If this occurs, the Company
will incur a substantial loss for the first quarter of 1998 which would further
reduce shareholders' equity and reported earnings.
Following Chesapeake's announcement in late June 1997 of disappointing
drilling results in the Louisiana Trend and a full-cost ceiling writedown, a
number of purported class action lawsuits alleging violation of Sections
10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5
thereunder were filed against the Company and certain of its officers and
directors. See "-Patent and Securities Litigation."
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<PAGE> 12
Risks of Acquisition Strategy
ACQUISITION RISKS
The Company's growth strategy includes the acquisition of oil and gas
properties. There can be no assurance, however, that the Company will be able to
identify attractive acquisition opportunities, obtain financing for acquisitions
on satisfactory terms or successfully acquire identified targets, including the
pending Acquisitions. Future acquisitions may be financed through the incurrence
of additional indebtedness to the extent permitted under the terms of the
Company's then existing indebtedness or through the issuance of capital stock.
Furthermore, there can be no assurance that competition for acquisition
opportunities in the oil and gas industry will not escalate, thereby increasing
the cost to the Company of making further acquisitions or causing the Company to
refrain from making additional acquisitions.
The Company is subject to risks that properties acquired by it and
estimates of value made with respect to the properties acquired (including those
acquired and to be acquired in the Acquisitions) will not perform as expected
and that the returns from such properties will not support the indebtedness
incurred or the other consideration used to acquire, or the capital expenditures
needed to develop, such properties. The addition of the properties acquired and
to be acquired in the Acquisitions may result in additional full cost ceiling
writedowns to the extent the Company's capitalized costs of such properties
exceed the estimated present value of the related proved reserves. In addition,
expansion of the Company's operations may place a significant strain on the
Company's management, financial and other resources. The Company's ability to
manage future growth will depend upon its ability to monitor operations,
maintain effective costs and other controls and significantly expand the
Company's internal management, technical and accounting systems, all of which
will result in higher operating expenses. Any failure to expand these areas and
to implement and improve such systems, procedures and controls in an efficient
manner at a pace consistent with the growth of the Company's business could have
a material adverse effect on the Company's business, financial condition and
results of operations. In addition, the integration of acquired properties with
existing operations will entail considerable expenses in advance of anticipated
revenues and may cause substantial fluctuations in the Company's operating
results. There can be no assurance that the Company will be able to successfully
complete each of the pending Acquisitions, or to successfully integrate the
properties acquired and to be acquired in the Acquisitions or any other
businesses it may acquire.
The Company has also acquired proved reserves in Canada. In addition to the
risks described above, the acquisition of assets in Canada has the additional
risks associated with currency exchange and valuation, foreign regulation and
taxation, and severe climate and operating conditions.
Need to Replace Reserves; Substantial Capital Requirements
As is customary in the oil and gas exploration and production industry,
Chesapeake's future success depends upon its ability to find, develop or
acquire additional oil and gas reserves that are economically recoverable.
Unless Chesapeake successfully replaces the reserves that it produces through
successful development, exploration or acquisition, Chesapeake's proved
reserves will decline. Further, approximately 43% of Chesapeake's estimated
proved reserves at December 31, 1997 (17% pro forma for the Acquisitions)
were located in the Austin Chalk formation in Texas and Louisiana, where wells
are characterized by rapid decline rates. Additionally, approximately 47% of
Chesapeake's total estimated proved reserves at December 31, 1997 were
undeveloped. Recovery of such reserves will require significant capital
expenditures and successful drilling operations. There can be no assurance
that Chesapeake can successfully find and produce reserves economically in the
future.
Chesapeake has made and intends to make substantial capital expenditures in
connection with the exploration and production of its oil and gas properties and
the acquisition of proved reserves. Historically, Chesapeake has funded its
capital expenditure through a combination of internally generated funds, equity
issuance and long-term and short-term debt financing arrangements. Future cash
flows are subject to a number of variables, such as the level of production from
existing wells, prices of oil and gas, and Chesapeake's success in developing,
acquiring and producing new reserves. If revenue were to decrease as a result
of lower oil and gas prices, decreased production or increased costs, and
Chesapeake's access to capital were limited, Chesapeake would have a reduced
ability to replace its reserves or to maintain production at current levels,
resulting in a decrease in production and revenue over time. If Chesapeake's
cash flow from operations is not sufficient to fund its capital expenditure
budget, there can be no assurance that additional debt or equity financing will
be available to meet these requirements.
Substantial Indebtedness
As of December 31, 1997, and as a result of the loss incurred during the
Transition Period, the Company's shareholders' equity was $280 million, versus
long-term indebtedness of $509 million. Long-term indebtedness represented
approximately 65% of total book capitalization. If the Company incurs
additional full-cost ceiling writedowns, as anticipated, shareholders' equity
will be further reduced. Standard & Poor's and Moody's Investors Service have
recently indicated that the Company's credit ratings are under review with
negative implications as a result of the Company's amount of indebtedness and
full-cost ceiling writedowns.
The Company anticipates funding announced acquisitions and potential future
acquisitions with a combination of commercial bank debt, long-term debt or
preferred or common equity. If, as a result of general market conditions,
additional losses, reduced credit ratings or for any other reason, the Company
is unable to issue additional securities or borrow from commercial banks, the
Company's liquidity would be impaired and growth potential reduced resulting in
reduced earnings or losses.
Patent and Securities Litigation
The Company and its officers and directors are defendants in certain
purported class actions based on federal and state securities fraud claims. In
addition, the Company is defending claims of patent infringement, tortious
12
<PAGE> 13
interference with confidentiality contracts and misappropriation of proprietary
information in another pending action. While no prediction can be made as to
the outcome of these matters or the amount of damages that might be awarded, if
any, an adverse result in any of them could be material to the Company. See
Item 3. Legal Proceedings.
Governmental Regulation
Oil and gas operations are subject to various federal, state and local
governmental regulations which may be changed from time to time in response to
economic or political conditions. From time to time, regulatory agencies have
imposed price controls and limitations on production in order to conserve
supplies of oil and gas. In addition, the production, handling, storage,
transportation and disposal of oil and gas, by-products thereof and other
substances and materials produced or used in connection with oil and gas
operations are subject to regulation under federal, state and local laws and
regulations primarily relating to protection of human health and the
environment. To date, expenditures related to complying with these laws and
for remediation of existing environmental contamination have not been
significant in relation to the results of operations of the Company. There can
be no assurance that the trend of more expansive and stricter environmental
legislation and regulations will not continue.
Competition
The Company operates in a highly competitive environment. The Company
competes with major and independent oil and gas companies for the acquisition
of desirable oil and gas properties, as well as for the equipment and labor
required to develop and operate such properties. Many of these competitors
have financial and other resources substantially greater than those of the
Company.
Reliance on Key Personnel; Conflicts of Interest
The Company is dependent upon its Chief Executive Officer, Aubrey K.
McClendon, and its Chief Operating Officer, Tom L. Ward. The unexpected loss
of the services of either of these executive officers could have a detrimental
effect on the Company. The Company maintains $20 million key man life
insurance policies on the life of each of Messrs. McClendon and Ward.
Messrs. McClendon and Ward, together with another executive officer of the
Company, have rights to participate in wells drilled by the Company on a
quarter-by-quarter basis. Messrs. McClendon and Ward have elected to
participate during all periods since the Company went public with individual
interests of between 1.0% and 1.5%. Such participation may create interests
which conflict with those of the Company.
Control by Certain Stockholders
At March 25, 1998, Aubrey K. McClendon, Tom L. Ward, the McClendon Children's
Trust and the Ward Children's Trust beneficially owned an aggregate of
24,707,666 shares (including outstanding vested options), representing
approximately 24% of the Company's outstanding Common Stock, and members of the
Company's Board of Directors and senior management, including Messrs. McClendon
and Ward and their respective children's trusts, beneficially owned an
aggregate of 28,215,486 shares (including outstanding vested options), which
represented approximately 27% of the Company's outstanding Common Stock. As a
result, Messrs. McClendon and Ward, together with other officers and directors
of the Company, are in a position to significantly influence matters requiring
the vote or consent of the Company's shareholders.
REGULATION
General
Numerous departments and agencies, federal, state and local, issue rules and
regulations binding on the oil and gas industry, some of which carry
substantial penalties for failure to comply. The regulatory burden on the oil
and gas industry increases the Company's cost of doing business and,
consequently, affects its profitability.
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<PAGE> 14
Exploration and Production
The Company's operations are subject to various types of regulation at the
federal, state and local levels. Such regulation includes requiring permits for
the drilling of wells, maintaining bonding requirements in order to drill or
operate wells and regulating the location of wells, the method of drilling and
casing wells, the surface use and restoration of properties upon which wells
are drilled, the plugging and abandoning of wells and the disposal of fluids
used or obtained in connection with operations. The Company's operations are
also subject to various conservation regulations. These include the regulation
of the size of drilling and spacing units and the density of wells which may be
drilled and the unitization or pooling of oil and gas properties. In this
regard, some states (such as Oklahoma) allow the forced pooling or integration
of tracts to facilitate exploration while other states (such as Texas) rely on
voluntary pooling of lands and leases. In areas where pooling is voluntary, it
may be more difficult to form units and, therefore, more difficult to develop a
prospect if the operator owns less than 100% of the leasehold. In addition,
state conservation laws establish maximum rates of production from oil and gas
wells, generally prohibit the venting or flaring of gas and impose certain
requirements regarding the ratability of production. The effect of these
regulations is to limit the amount of oil and gas the Company can produce from
its wells and to limit the number of wells or the locations at which the
Company can drill. The extent of any impact on the Company of such restrictions
cannot be predicted.
Environmental and Occupational Regulation
General. The Company's activities are subject to existing federal, state and
local laws and regulations governing environmental quality and pollution
control. It is anticipated that, absent the occurrence of an extraordinary
event, compliance with existing federal, state and local laws, rules and
regulations concerning the protection of the environment and human health will
not have a material effect upon the operations, capital expenditures, earnings
or the competitive position of the Company. The Company cannot predict what
effect additional regulation or legislation, enforcement policies thereunder
and claims for damages for injuries to property, employees, other persons and
the environment resulting from the Company's operations could have on its
activities.
Activities of the Company with respect to the exploration, development and
production of oil and natural gas are subject to stringent environmental
regulation by state and federal authorities including the United States
Environmental Protection Agency ("EPA"). Such regulation has increased the cost
of planning, designing, drilling, operating and in some instances, abandoning
wells. In most instances, the regulatory requirements relate to the handling
and disposal of drilling and production waste products and waste created by
water and air pollution control procedures. Although the Company believes that
compliance with environmental regulations will not have a material adverse
effect on operations or earnings, risks of substantial costs and liabilities
are inherent in oil and gas operations, and there can be no assurance that
significant costs and liabilities, including criminal penalties, will not be
incurred. Moreover, it is possible that other developments, such as stricter
environmental laws and regulations, and claims for damages for injuries to
property or persons resulting from the Company's operations could result in
substantial costs and liabilities.
Waste Disposal. The Company currently owns or leases, and has in the past
owned or leased, numerous properties that for many years have been used for the
exploration and production of oil and gas. Although the Company has utilized
operating and disposal practices that were standard in the industry at the
time, hydrocarbons or other wastes may have been disposed of or released on or
under the properties owned or leased by the Company or on or under other
locations where such wastes have been taken for disposal. In addition, many of
these properties have been operated by third parties whose treatment and
disposal or release of hydrocarbons or other wastes was not under the Company's
control. State and federal laws applicable to oil and natural gas wastes and
properties have gradually become more strict. Under such laws, the Company
could be required to remove or remediate previously disposed wastes (including
wastes disposed of or released by prior owners or operators) or property
contamination (including groundwater contamination) or to perform remedial
plugging operations to prevent future contamination.
The Company generates wastes, including hazardous wastes, that are subject to
the federal Resource Conservation and Recovery Act ("RCRA") and comparable
state statutes. The EPA and various state agencies have limited the disposal
options for certain hazardous and nonhazardous wastes and are considering the
adoption of
14
<PAGE> 15
stricter disposal standards for nonhazardous wastes. Furthermore, certain
wastes generated by the Company's oil and natural gas operations that are
currently exempt from treatment as hazardous wastes may in the future be
designated as hazardous wastes, and therefore be subject to considerably more
rigorous and costly operating and disposal requirements.
Superfund. The Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA"), also known as the "Superfund" law, imposes liability,
without regard to fault or the legality of the original conduct, on certain
classes of persons with respect to the release of a "hazardous substance" into
the environment. These persons include the owner and operator of a site and
persons that disposed of or arranged for the disposal of the hazardous
substances found at a site. CERCLA also authorizes the EPA and, in some cases,
third parties to take actions in response to threats to the public health or
the environment and to seek to recover from responsible classes of persons the
costs of such action. In the course of its operations, the Company may have
generated and may generate wastes that fall within CERCLA's definition of
"hazardous substances." The Company may also be or have been an owner of sites
on which "hazardous substances" have been released. The Company may be
responsible under CERCLA for all or part of the costs to clean up sites at
which such wastes have been released. To date, however, neither the Company
nor, to its knowledge, its predecessors or successors have been named a
potentially responsible party under CERCLA or similar state superfund laws
affecting property owned or leased by the Company.
Air Emissions. The operations of the Company are subject to local, state and
federal regulations for the control of emissions of air pollution. Legal and
regulatory requirements in this area are increasing, and there can be no
assurance that significant costs and liabilities will not be incurred in the
future as a result of new regulatory developments. In particular, regulations
promulgated under the Clean Air Act Amendments of 1990 may impose additional
compliance requirements that could affect the Company's operations. However, it
is impossible to predict accurately the effect, if any, of the Clean Air Act
Amendments on the Company at this time. The Company may in the future be subject
to civil or administrative enforcement actions for failure to comply strictly
with air regulations or permits. These enforcement actions are generally
resolved by payment of monetary fines and correction of any identified
deficiencies. Alternatively, regulatory agencies could require the Company to
forego construction or operation of certain air emission sources.
OSHA. The Company is subject to the requirements of the federal Occupational
Safety and Health Act ("OSHA") and comparable state statutes. The OSHA hazard
communication standard, the EPA community right-to-know regulations under Title
III of the federal Superfund Amendment and Reauthorization Act and similar
state statutes require the Company to organize information about hazardous
materials used, released or produced in its operations. Certain of this
information must be provided to employees, state and local governmental
authorities and local citizens. The Company is also subject to the requirements
and reporting set forth in OSHA workplace standards. The Company provides
safety training and personal protective equipment to its employees.
OPA and Clean Water Act. Federal regulations require certain owners or
operators of facilities that store or otherwise handle oil, such as the
Company, to prepare and implement spill prevention control plans,
countermeasure plans and facilities response plans relating to the possible
discharge of oil into surface waters. The Oil Pollution Act of 1990 ("OPA")
amends certain provisions of the federal Water Pollution Control Act of 1972,
commonly referred to as the Clean Water Act ("CWA"), and other statutes as they
pertain to the prevention of and response to oil spills into navigable waters.
The OPA subjects owners of facilities to strict joint and several liability for
all containment and cleanup costs and certain other damages arising from a
spill, including, but not limited to, the costs of responding to a release of
oil to surface waters. The CWA provides penalties for any discharges of
petroleum product in reportable quantities and imposes substantial liability
for the costs of removing a spill. State laws for the control of water
pollution also provide varying civil and criminal penalties and liabilities in
the case of releases of petroleum or its derivatives into surface waters or
into the ground. Regulations are currently being developed under OPA and state
laws concerning oil pollution prevention and other matters that may impose
additional regulatory burdens on the Company. In addition, the CWA and
analogous state laws require permits to be obtained to authorize discharges
into surface waters or to construct facilities in wetland areas. With respect
to certain of its operations, the Company is required to maintain such permits
or meet general permit requirements. The EPA recently adopted regulations
concerning discharges of storm water runoff. This program requires covered
facilities to obtain individual permits, participate in a group permit or seek
coverage under an EPA general permit. The Company believes that it will be able
to obtain, or be included under, such permits, where necessary, with minor
modifications to existing facilities and operations that would not have a
material effect on the Company.
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<PAGE> 16
NORM. Oil and gas exploration and production activities have been identified
as generators of concentrations of low-level naturally-occurring radioactive
materials ("NORM"). NORM regulations have recently been adopted in several
states. The Company is unable to estimate the effect of these regulations,
although based upon the Company's preliminary analysis to date, the Company
does not believe that its compliance with such regulations will have a material
adverse effect on its operations or financial condition.
Safe Drinking Water Act. The Company's operations involve the disposal of
produced saltwater and other nonhazardous oil-field wastes by reinjection into
the subsurface. Under the Safe Drinking Water Act ("SDWA"), oil and gas
operators, such as the Company, must obtain a permit for the construction and
operation of underground Class II injection wells. To protect against
contamination of drinking water, periodic mechanical integrity tests are often
required to be performed by the well operator. The Company has obtained such
permits for the Class II wells it operates. The Company also has disposed of
wastes in facilities other than those owned by the Company (commercial Class II
injection wells).
Toxic Substances Control Act. The Toxic Substances Control Act ("TSCA") was
enacted to control the adverse effects of newly manufactured and existing
chemical substances. Under the TSCA, the EPA has issued specific rules and
regulations governing the use, labeling, maintenance, removal from service and
disposal of PCB items, such as transformers and capacitors used by oil and gas
companies. The Company may own such PCB items but does not believe compliance
with TSCA has or will have a material adverse effect on the Company's
operations or financial condition.
TITLE TO PROPERTIES
Title to properties is subject to royalty, overriding royalty, carried, net
profits, working and other similar interests and contractual arrangements
customary in the oil and gas industry, to liens for current taxes not yet due
and to other encumbrances. As is customary in the industry in the case of
undeveloped properties, only cursory investigation of record title is made at
the time of acquisition. Drilling title opinions are usually prepared before
commencement of drilling operations. From time to time, the Company's title to
oil and gas properties is challenged through legal proceedings. The Company is
routinely involved in litigation involving title to certain of its oil and gas
properties, none of which management believes will be materially adverse to the
Company, individually or in the aggregate.
OPERATING HAZARDS AND INSURANCE
The oil and gas business involves a variety of operating risks, including the
risk of fire, explosions, blow-outs, pipe failure, abnormally pressured
formations and environmental hazards such as oil spills, gas leaks, ruptures or
discharges of toxic gases, the occurrence of any of which could result in
substantial losses to the Company due to injury or loss of life, severe damage
to or destruction of property, natural resources and equipment, pollution or
other environmental damage, clean-up responsibilities, regulatory investigation
and penalties and suspension of operations. The Company's horizontal drilling
activities involve greater risk of mechanical problems than conventional
vertical drilling operations.
The Company maintains a $50 million oil and gas lease operator policy that
insures the Company against certain sudden and accidental risks associated with
drilling, completing and operating its wells. There can be no assurance that
this insurance will be adequate to cover any losses or exposure to liability.
The Company also carries comprehensive general liability policies and a $60
million umbrella policy. The Company and its subsidiaries carry workers'
compensation insurance in all states in which they operate and a $35 million
employment practice liability policy. While the Company believes these policies
are customary in the industry, they do not provide complete coverage against
all operating risks.
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<PAGE> 17
EMPLOYEES
The Company had 360 full-time employees as of December 31, 1997. No employees
are represented by organized labor unions. The Company considers its employee
relations to be good. The Company estimates that the number of full-time
employees will increase by approximately 100 as the result of the Acquisitions.
FACILITIES
The Company owns 12 buildings totaling approximately 80,000 square feet and
nine acres of land in an office complex in Oklahoma City that comprise its
headquarters' offices. The Company also owns field offices in Lindsay and
Waynoka, Oklahoma and leases office space in Wichita, Kansas, Oklahoma City,
Oklahoma, College Station and Navasota, Texas, Lafayette, Louisiana and Calgary,
Alberta, Canada. The Company plans to increase its office space within its
Oklahoma City complex by constructing two buildings with approximately 90,000
aggregate square feet. This will allow the Company to consolidate the employees
associated with the Acquisitions.
GLOSSARY
The terms defined in this section are used throughout this Form 10-K.
Bcf. Billion cubic feet.
Bcfe. Billion cubic feet of gas equivalent.
Bbl. One stock tank barrel, or 42 U.S. gallons liquid volume, used herein in
reference to crude oil or other liquid hydrocarbons.
Btu. British thermal unit, which is the heat required to raise the
temperature of a one-pound mass of water from 58.5 to 59.5 degrees Fahrenheit.
Commercial Well; Commercially Productive Well. An oil and gas well which
produces oil and gas in sufficient quantities such that proceeds from the sale
of such production exceed production expenses and taxes.
Developed Acreage. The number of acres which are allocated or assignable to
producing wells or wells capable of production.
Development Well. A well drilled within the proved area of an oil or gas
reservoir to the depth of a stratigraphic horizon known to be productive.
Dry Hole; Dry Well. A well found to be incapable of producing either oil or
gas in sufficient quantities to justify completion as an oil or gas well.
Exploratory Well. A well drilled to find and produce oil or gas in an
unproved area, to find a new reservoir in a field previously found to be
productive of oil or gas in another reservoir or to extend a known reservoir.
Farmout. An assignment of an interest in a drilling location and related
acreage conditional upon the drilling of a well on that location.
Formation. A succession of sedimentary beds that were deposited under the
same general geologic conditions.
Gross Acres or Gross Wells. The total acres or wells, as the case may be, in
which a working interest is owned.
Horizontal Wells. Wells which are drilled at angles greater than 70 from
vertical.
MBbl. One thousand barrels of crude oil or other liquid hydrocarbons.
17
<PAGE> 18
MBtu. One thousand Btus.
Mcf. One thousand cubic feet.
Mcfe. One thousand cubic feet of gas equivalent.
MMBbl. One million barrels of crude oil or other liquid hydrocarbons.
MMBtu. One million Btus.
MMcf. One million cubic feet.
MMcfe. One million cubic feet of gas equivalent.
Net Acres or Net Wells. The sum of the fractional working interest owned in
gross acres or gross wells.
Present Value. When used with respect to oil and gas reserves, present value
means the estimated future gross revenue to be generated from the production of
proved reserves, net of estimated production and future development costs,
using prices and costs in effect at the determination date, without giving
effect to non-property related expenses such as general and administrative
expenses, debt service and future income tax expense or to depreciation,
depletion and amortization, discounted using an annual discount rate of 10%.
Productive Well. A well that is producing oil or gas or that is capable of
production.
Proved Developed Reserves. Reserves that can be expected to be recovered
through existing wells with existing equipment and operating methods.
Proved Reserves. The estimated quantities of crude oil, natural gas and
natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions.
Proved Undeveloped Location. A site on which a development well can be
drilled consistent with spacing rules for purposes of recovering proved
undeveloped reserves.
Proved Undeveloped Reserves. Reserves that are expected to be recovered from
new wells drilled to known reservoir on undrilled acreage or from existing
wells where a relatively major expenditure is required for recompletion.
Royalty Interest. An interest in an oil and gas property entitling the owner
to a share of oil or gas production free of costs of production.
Tcf. One trillion cubic feet.
Tcfe. One trillion cubic feet of gas equivalent.
Undeveloped Acreage. Lease acreage on which wells have not been drilled or
completed to a point that would permit the production of commercial quantities
of oil and gas regardless of whether such acreage contains proved reserves.
Working Interest. The operating interest which gives the owner the right to
drill, produce and conduct operating activities on the property and a share of
production.
18
<PAGE> 19
ITEM 2. PROPERTIES
OIL AND GAS RESERVES
The tables below set forth information as of December 31, 1997 with respect
to the Company's estimated net proved reserves, the estimated future net
revenue therefrom and the present value thereof at such date. Williamson
Petroleum Consultants, Inc. evaluated 100% of the Company's Texas and Louisiana
oil and gas reserves, together representing approximately 46% of the Company's
total proved reserves. Excluding the reserves acquired from AnSon, Porter
Engineering Associates evaluated 100% of the Company's oil and gas reserves in
Oklahoma, New Mexico and the Williston area, together representing
approximately 48% of the Company's total proved reserves. Of the oil and gas
reserves acquired from AnSon, 85% were evaluated by Netherland, Sewell &
Associates, Inc. The remaining AnSon properties, which represented
approximately 2% of total proved reserves for the Company at December 31, 1997,
were evaluated internally by the Company's engineers. All estimates were
prepared based upon a review of production histories and other geologic,
economic, ownership and engineering data developed by the Company. The present
value of estimated future net revenue shown is not intended to represent the
current market value of the estimated oil and gas reserves owned by the
Company.
<TABLE>
<CAPTION>
ESTIMATED PROVED RESERVES OIL GAS TOTAL
AS OF DECEMBER 31, 1997 (MBBL) (MMCF) (MMCFE)
----------------------- ------- ------- -------
<S> <C> <C> <C>
Proved developed . . . . . . . . . . . . . . . . . . . . 10,087 178,082 238,604
Proved undeveloped . . . . . . . . . . . . . . . . . . . 8,139 161,036 209,870
----- ------- -------
Total proved . . . . . . . . . . . . . . . . . . . . . . 18,226 339,118 448,474
====== ======= =======
</TABLE>
<TABLE>
<CAPTION>
ESTIMATED FUTURE
NET REVENUE PROVED PROVED TOTAL
AS OF DECEMBER 31, 1997(a) DEVELOPED UNDEVELOPED PROVED
-------------------------- --------- ----------- -------
($ IN THOUSANDS)
<S> <C> <C> <C>
Estimated future net revenue . . . . . . . . . . . . . . . . . . . $440,439 $274,659 $715,098
Present value of future net revenue . . . . . . . . . . . . . . . . $306,368 $160,141 $466,509
</TABLE>
- ----------
(a) Estimated future net revenue represents estimated future gross revenue
to be generated from the production of proved reserves, net of
estimated production and future development costs, using prices and
costs in effect at December 31, 1997. The amounts shown do not give
effect to non-property related expenses, such as general and
administrative expenses, debt service and future income tax expense or
to depreciation, depletion and amortization. The prices used in the
external and internal reports yield average prices of $17.62 per
barrel of oil and $2.29 per Mcf of gas.
The future net revenue attributable to the Company's estimated proved
undeveloped reserves of $275 million at December 31, 1997, and the $160 million
present value thereof, have been calculated assuming that the Company will
expend approximately $153 million to develop these reserves through 2002. The
amount and timing of these expenditures will depend on a number of factors,
including actual drilling results, product prices and the availability of
capital.
No estimates of proved reserves comparable to those included herein have been
included in reports to any federal agency other than the Securities and
Exchange Commission.
The Company's interest used in calculating proved reserves and the estimated
future net revenue therefrom was determined after giving effect to the assumed
maximum participation by other parties to the Company's farmout and
participation agreements. The prices used in calculating the estimated future
net revenue attributable to proved reserves do not reflect market prices for
oil and gas production sold subsequent to December 31, 1997. There can be no
assurance that all of the estimated proved reserves will be produced and sold
at the assumed prices or that existing contracts will be honored or judicially
enforced.
There are numerous uncertainties inherent in estimating quantities of proved
reserves and in projecting future rates of production and timing of development
expenditures, including many factors beyond the control of the Company. The
reserve data set forth herein represent only estimates. Reserve engineering is
a subjective process of estimating underground accumulations of oil and gas
that cannot be measured in an exact way, and the accuracy of any reserve
estimate is a function of the quality of available data and of engineering and
geological interpretation
19
<PAGE> 20
and judgment. As a result, estimates made by different engineers often vary. In
addition, results of drilling, testing and production subsequent to the date of
an estimate may justify revision of such estimates, and such revisions may be
material. Accordingly, reserve estimates are often different from the actual
quantities of oil and gas that are ultimately recovered. Furthermore, the
estimated future net revenue from proved reserves and the present value thereof
are based upon certain assumptions, including prices, future production levels
and cost, that may not prove correct. Predictions about prices and future
production levels are subject to great uncertainty, and the foregoing
uncertainties are particularly true as to proved undeveloped reserves, which
are inherently less certain than proved developed reserves and which comprise a
significant portion of the Company's proved reserves. In the Transition Period
and fiscal 1997, revisions to the Company's proved reserves contributed to a
$110 million and a $236 million impairment of the Company's oil and gas
properties, respectively. The uncertainties inherent in estimating quantities
of proved reserves can also adversely impact acquisitions of proved reserves,
since reserve estimates are used to arrive at acquisition value. See "Results
of Operations -- Impairment of Oil and Gas Properties" in Item 7.
See Item 1 and Note 11 of Notes to Consolidated Financial Statements included
in Item 8 for a description of the Company's primary and other operating areas,
production and other information regarding its oil and gas properties.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to ordinary routine litigation incidental to its
business. In addition, the following matters are pending.
Securities Litigation. On January 13, 1998, a consolidated class action
complaint styled In re Chesapeake Energy Corporation Securities Litigation was
filed in the U.S. District Court for the Western District of Oklahoma. It
consolidated twelve pending purported class actions filed in August and
September 1997. The action is brought on behalf of purchasers of the Company's
common stock and common stock options between January 25, 1996 and June 27,
1997. The defendants are the Company and the following officers and directors:
Aubrey K. McClendon, Tom L. Ward, Marcus C. Rowland, Shannon T. Self, Walter
C. Wilson, Henry J. Hood, Steven C. Dixon, J. Mark Lester and Ronald A.
Lefaive. The complaint alleges violations of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 and Rule 10b-5 thereunder.
The plaintiffs assert that the defendants made material misrepresentations
and failed to disclose material facts about the success of the Company's
exploration and drilling activities in the Louisiana Trend. The complaint
alleges the lack of disclosure artificially inflated the price of the Company's
common stock during the period beginning 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 the Company's
common stock during the class period when they knew or should have known
adverse nonpublic information. The plaintiffs seek a determination that the
suit is a proper class action and damages in an unspecified amount, together
with interest and costs of litigation, including attorneys' fees. The Company
and the individual defendants believe that these claims are without merit and
intend to defend against them vigorously.
Bayard Drilling Technologies, Inc. The following purported class actions
alleging violations of Sections 11, 12(a) (2) and 15 of the Securities Act of
1933 and (with respect to the cases filed in state court) Section 408 of the
Oklahoma Securities Act have been filed against the Company and others on
behalf of investors who purchased common stock of Bayard Drilling Technologies,
Inc. ("Bayard") in its initial public offering on November 4, 1997.
Michael W. Kahn v. Bayard, et al. filed in the District Court for
Oklahoma County, Oklahoma on January 14, 1998.
Diane Burkett, Julian Swadel and Robert T. Greenberg v. Bayard, et
al. filed in the District Court for Oklahoma County, Oklahoma on
February 2, 1998.
Tom Yuan v. Bayard, et al. filed in the U.S. District Court for the
Western District of Oklahoma on February 3, 1998.
20
<PAGE> 21
The defendants in these actions include officers and directors of Bayard who
signed the registration statement, selling shareholders (including the Company)
and underwriters of the offering. Total proceeds of the offering were $254
million, of which the Company received net proceeds of $90 million. Plaintiffs
allege that the Company was a controlling person of Bayard by virtue of its
ownership of 30.1% of Bayard's common stock outstanding prior to the offering,
its prior financing relationship with Bayard involving terms allegedly
favorable to the Company, its position as a customer of Bayard's drilling
services under allegedly below-market terms, and the fact that Messrs.
McClendon, Ward and Rowland, executive officers and directors of the Company,
were formerly directors of Bayard.
Plaintiffs allege that the Bayard prospectus contained material omissions and
misstatements relating to (i) the Company's financial "hardships", which
purportedly caused the Company to coerce Bayard to proceed with the offering so
that the Company could raise cash for itself and which impaired the Company's
ability to continue providing Bayard with substantial drilling contracts, (ii)
rising costs associated with Bayard's growth strategy and (iii) undisclosed
pending related-party transactions between Bayard and third parties other than
the Company. The alleged defective disclosures are claimed to have resulted in
a decline in Bayard's share price following the public offering. Each
plaintiff seeks a determination that the suit is a proper class action and
damages in an unspecified amount or rescission, together with interest and
costs of litigation, including attorneys' fees. The Company believes that
these actions are without merit and intends to defend against them vigorously.
UPRC Patent Suit. 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 claims to a patent for an invention involving a
method of maintaining a borehole in a stratigraphic zone during drilling, (b)
tortious interference with contracts between UPRC and certain of its former
employees regarding the confidentiality of proprietary information of UPRC and
(c) misappropriation of such proprietary information. UPRC's claims against
the Company are based on services provided to the Company by a third party
vendor controlled by former UPRC employees. UPRC is seeking injunctive relief,
damages of an unspecified amount, including actual, enhanced, consequential and
punitive damages, interest, costs and attorneys' 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 construe UPRC's patent claims and various motions for summary judgment.
While no prediction can be made as to the outcome of the matter or the amount
of damages that might be awarded, if any, in reports filed in the proceeding,
experts for UPRC claim that damages could be as much as $18 million while
Company experts state that the amount should not exceed $25,000, in each case
based on the expert's view of a reasonable royalty for use of the patent.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting of shareholders was held on December 12, 1997.
In addition to electing two directors, shareholders voted to amend the
Company's Certificate of Incorporation to increase the authorized Common Stock
to 250,000,000 shares.
In the election of directors, Breene M. Kerr received 62,066,255 votes for
election and 4,630 shares withheld from voting. Walter C. Wilson received
62,047,653 votes for election and 23,232 shares withheld from voting. The
proposal to amend the Company's Certificate of Incorporation to increase the
authorized Common Stock was approved by a vote of 45,368,421 shares for,
representing 64% of the outstanding shares of Common Stock, 5,471,569 shares
voted against the proposal, 81,005 shares abstained from voting and 11,731,261
shares were broker non-votes.
21
<PAGE> 22
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The Common Stock trades on the New York Stock Exchange under the symbol
"CHK". The following table sets forth, for the periods indicated, the high and
low sales prices per share (adjusted for 3-for-2 stock splits on December 15,
1995 and June 28, 1996 and a 2-for-1 stock split on December 31, 1996) of the
Common Stock as reported by the New York Stock Exchange:
<TABLE>
<CAPTION>
COMMON STOCK
---------------
HIGH LOW
------ ------
<S> <C>
Fiscal year ended June 30, 1996:
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7.28 $ 4.53
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.08 6.20
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16.50 10.67
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30.38 15.50
Fiscal year ended June 30, 1997:
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34.00 21.00
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34.13 25.69
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31.50 19.88
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22.38 9.25
Transition Period ended December 31, 1997:
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.50 6.31
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.44 6.81
</TABLE>
At March 25, 1998 there were 745 holders of record of Common Stock and
approximately 27,000 beneficial owners.
DIVIDENDS
Since July 1997, the Company has paid quarterly dividends of $0.02 per common
share. The payment of future cash dividends, if any, will be reviewed
periodically by the Board of Directors and will depend upon, among other
things, the Company's financial condition, funds from operations, the level of
its capital and development expenditures, its future business prospects and any
contractual restrictions.
Certain of the Indentures governing the Company's outstanding Senior Notes
contain certain restrictions on the Company's ability to declare and pay
dividends. Under the Indentures, the Company may not pay any cash dividends in
respect of its Common Stock if (i) a default or an event of default has
occurred and is continuing at the time of or immediately after giving effect to
the dividend payment, (ii) the Company would not be able to incur at least $1
of additional indebtedness under the terms of the Indentures, or (iii)
immediately after giving effect to the dividend payment, the aggregate of all
Restricted Payments (as defined) declared or made after the respective issue
dates of the notes exceeds the sum of specified income, proceeds from the
issuance of stock and debt by the Company and other amounts from the quarter in
which the respective note issuances occurred to the quarter immediately
preceding the date of the dividend payment.
ISSUANCE OF COMMON STOCK
On December 16, 1997, the Company issued 3,792,724 shares of Common Stock to
the shareholder of AnSon as part of the consideration for the Company's
acquisition of all of the outstanding stock of AnSon. See Item 1. "Business --
Recent and Pending Acquisitions". The shares were issued in a private
transaction in reliance upon the exemption from registration afforded by
Section 4 (2) of the Securities Act of 1933.
22
<PAGE> 23
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data of the
Company for each of the five fiscal years ended June 30, 1997 and the
Transition Period ended December 31, 1997. The data is derived from the
Consolidated Financial Statements of the Company, including the Notes thereto,
appearing elsewhere in this report. The data set forth in this table should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements,
including the Notes thereto included elsewhere in this report.
23
<PAGE> 24
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31, YEAR ENDED JUNE 30,
------------------- -------------------------------------------------------------
1997 1996 1997 1996 1995 1994 1993
------- --------- ---------- -------- ------- -------- ---------
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Oil and gas sales ................. $ 95,657 $ 90,167 $ 192,920 $ 110,849 $ 56,983 $ 22,404 $ 11,602
Oil and gas marketing sales ....... 58,241 30,019 76,172 28,428 -- -- --
Oil and gas service operations .... -- -- -- 6,314 8,836 6,439 5,526
Interest and other ................ 78,966 2,516 11,223 3,831 1,524 981 880
--------- --------- --------- --------- --------- --------- ---------
Total revenues ............... 232,864 122,702 280,315 149,422 67,343 29,824 18,008
--------- --------- --------- --------- --------- --------- ---------
Costs and expenses:
Production expenses and taxes ..... 10,094 5,874 15,107 8,303 4,256 3,647 2,890
Oil and gas marketing expenses .... 58,227 29,548 75,140 27,452 -- -- --
Oil and gas service operations .... -- -- -- 4,895 7,747 5,199 3,653
Impairment of oil and
gas properties .................. 110,000 -- 236,000 -- -- -- --
Oil and gas depreciation, depletion
and amortization ................ 60,408 36,243 103,264 50,899 25,410 8,141 4,184
Depreciation and amortization of
other assets .................... 2,414 1,836 3,782 3,157 1,765 1,871 557
General and administrative ........ 5,847 3,739 8,802 4,828 3,578 3,135 3,620
Provision for legal and other
settlements ..................... -- -- -- -- -- -- 1,286
Interest and other ................ 17,448 6,216 18,550 13,679 6,627 2,676 2,282
--------- --------- --------- --------- --------- --------- ---------
Total costs and expenses ..... 264,438 83,456 460,645 113,213 49,383 24,669 18,472
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before income taxes and
extraordinary item ................ (31,574) 39,246 (180,330) 36,209 17,960 5,155 (464)
Provision (benefit) for income taxes . -- 14,325 (3,573) 12,854 6,299 1,250 (99)
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before extraordinary
item ............................ (31,574) 24,921 (176,757) 23,355 11,661 3,905 (365)
Extraordinary item:
Loss on early extinguishment of debt,
net of applicable income taxes .. -- (6,443) (6,620) -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) .................... $ (31,574) $ 18,478 $(183,377) $ 23,355 $ 11,661 $ 3,905 $ (365)
========= ========= ========= ========= ========= ========= =========
Earnings (loss) per common share basic:
Income (loss) before extraordinary
item ............................ $ (0.45) $ 0.40 $ (2.69) $ 0.43 $ 0.22 $ 0.08 $ (0.02)
Extraordinary item ................... -- (0.10) (0.10) -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) .................... $ (0.45) $ 0.30 $ (2.79) $ 0.43 $ 0.22 $ 0.08 $ (0.02)
========= ========= ========= ========= ========= ========= =========
Earnings (loss) per common assuming
dilution:
Income (loss) before extraordinary
item ............................ $ (0.45) $ 0.38 $ (2.69) $ 0.40 $ 0.21 $ 0.08 $ (0.02)
Extraordinary item ................... -- (0.10) (0.10) -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) .................... $ (0.45) $ 0.28 $ (2.79) $ 0.40 $ 0.21 $ 0.08 $ (0.02)
========= ========= ========= ========= ========= ========= =========
Cash dividends declared
per common share ................ $ 0.04 $ -- $ 0.02 $ -- $ -- $ -- $ --
CASH FLOW DATA:
Cash provided by (used in) operating
activities ...................... $ 139,157 $ 41,901 $ 84,089 $ 120,972 $ 54,731 $ 19,423 $ (1,499)
Cash used in investing activities .... 136,504 184,149 523,854 344,389 112,703 29,211 15,142
Cash provided by (used in) financing
activities ...................... (2,810) 231,349 512,144 219,520 97,282 21,162 20,802
BALANCE SHEET DATA (at end of period):
Total assets ......................... $ 952,784 $ 860,597 $ 949,068 $ 572,335 $ 276,693 $ 125,690 $ 78,707
Long-term debt, net of current
maturities ...................... 508,992 220,149 508,950 268,431 145,754 47,878 14,051
Stockholders' equity ................. 280,206 484,062 286,889 177,767 44,975 31,260 31,432
</TABLE>
24
<PAGE> 25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Chesapeake's revenue, operating cash flow (exclusive of changes in working
capital) and production continued to reach record levels during the six months
ended December 31, 1997 (the "Transition Period"). However, continuing
unfavorable exploration and production results, primarily in the Austin Chalk
Trend, together with increases in drilling and equipment costs and declines in
oil prices as of December 31, 1997, resulted in downward revisions in estimates
of Chesapeake's proved oil and gas reserves and the related present value of
the estimated future net revenues from the Company's proved reserves. The
Company recorded a $110.0 million asset writedown and a net loss of $31.6
million during the Transition Period.
In response to the losses recorded in fiscal 1997 and the Transition Period,
Chesapeake significantly revised its business strategy during the Transition
Period. These revisions included (i) reducing the size and risk of its
exploratory drilling program, especially in the Louisiana Trend, (ii) acquiring
significant volumes of long-lived natural gas reserves, particularly in the
Mid-Continent region of the U.S., and (iii) building a larger inventory of
lower risk drilling opportunities through acquisitions and joint ventures.
Further, the Company has reduced its capital expenditure budget for exploration
and development to more closely match anticipated cash flow from operations.
As part of this revised strategy, the Company has acquired or is in the
process of acquiring various proved oil and gas reserves through merger or
through purchases of oil and gas properties. Since October 1997, the Company
has announced 10 transactions totaling approximately 714 Bcfe of proved
reserves (the "Acquisitions"). Of these transactions, one was closed in
December 1997, three were closed in the first quarter of 1998, and six are
pending. These acquisitions will have the effect of increasing oil and gas
production volumes and revenues, decreasing DD&A per Mcfe, and increasing
production expenses and interest expense during 1998.
In November 1997, Chesapeake received net proceeds of approximately $90
million from its sale of Bayard common stock in the initial public offering of
Bayard. Chesapeake recognized a gain on the sale of its Bayard stock of $73.8
million.
During the Transition Period, the Company participated in 86 gross (41.1 net)
wells, of which 49 gross wells were Company operated. A summary of the
Company's drilling activities and capital expenditures by primary operating area
is as follows ($ in thousands):
<TABLE>
<CAPTION>
CAPITAL EXPENDITURES
GROSS NET ------------------------------------
WELLS WELLS DRILLING LEASEHOLD TOTAL
-------- ------ --------- ---------- --------
<S> <C> <C> <C> <C> <C>
Mid-Continent Region....................... 18 11.8 $ 64,247 $ 2,741 $ 66,988
Austin Chalk Trend......................... 45 16.0 92,524 10,465 102,989
All other areas ........................... 23 13.3 44,210 12,310 56,520
-------- -------- -------- -------- --------
Total ........................... 86 41.1 $200,981 $ 25,516 $226,497
======== ======== ======== ======== ========
</TABLE>
The Company's proved reserves increased 11% to an estimated 448 Bcfe at
December 31, 1997, up 45 Bcfe from 403 Bcfe of estimated proved reserves at
June 30, 1997 (see Note 11 of Notes to Consolidated Financial Statements in
Item 8 and "Results of Operations -- Six Months Ended December 31, 1997 and
1996 -- Impairment of Oil and Gas Properties"). Due to the numerous
uncertainties inherent in drilling for oil and gas, in estimating quantities of
proved reserves and in projecting future rates of production and timing of
development expenditures, including many factors beyond the control of the
Company, there can be no assurance that the Company's estimated proved reserves
will not decrease in the future.
The Company's strategy for 1998 is to acquire proved oil and gas reserves,
primarily in the Mid-Continent and in western Canada, and to continue
developing oil and gas assets by drilling. The Company has reduced its capital
expenditure budget for exploration and development drilling activities to
approximately $225 million and has reduced the Austin Chalk Trend drilling
component significantly. Furthermore, the Company has increased its use of 3-D
seismic to assist in reducing exploratory risks and increasing economic returns
from its drilling programs. The Company has conducted, participated in, or is
actively pursuing more than 25 3-D seismic programs to evaluate the Company's
acreage inventory.
25
<PAGE> 26
The following table sets forth certain operating data of the Company for the
periods presented:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER YEAR ENDED JUNE 30,
---------------------------- ---------------------------------------------
1997 1996 1997 1996 1995
------------- -------------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
NET PRODUCTION DATA:
Oil (MBbl) .................................. 1,857 1,116 2,770 1,413 1,139
Gas (MMcf) .................................. 27,326 30,095 62,005 51,710 25,114
Gas equivalent (MMcfe) ...................... 38,468 36,791 78,625 60,190 31,947
OIL AND GAS SALES ($ in 000's):
Oil ......................................... $ 34,523 $ 24,418 $ 57,974 $ 25,224 $ 19,784
Gas ......................................... 61,134 65,749 134,946 85,625 37,199
----------- ----------- ----------- ----------- -----------
Total oil and gas sales ............. $ 95,657 $ 90,167 $ 192,920 $ 110,849 $ 56,983
=========== =========== =========== =========== ===========
AVERAGE SALES PRICE:
Oil ($ per Bbl) ............................. $ 18.59 $ 21.88 $ 20.93 $ 17.85 $ 17.36
Gas ($ per Mcf) ............................. $ 2.24 $ 2.18 $ 2.18 $ 1.66 $ 1.48
Gas equivalent ($ per Mcfe) ................. $ 2.49 $ 2.45 $ 2.45 $ 1.84 $ 1.78
OIL AND GAS COSTS ($ per Mcfe):
Production expenses and taxes ............... $ .27 $ .16 $ .19 $ .14 $ .13
General and administrative .................. $ .15 $ .10 $ .11 $ .08 $ .11
Depreciation, depletion and amortization .... $ 1.57 $ .99 $ 1.31 $ .85 $ .80
NET WELLS DRILLED:
Horizontal wells ............................ 27.2 34.3 75.7 42.0 28.5
Vertical wells .............................. 13.9 13.0 31.3 27.0 23.0
NET WELLS AT END OF PERIOD .................... 401.0 210.3 270.1 187.0 96.4
</TABLE>
RESULTS OF OPERATIONS
Six Months Ended December 31, 1997 and 1996
General. For the Transition Period, the Company realized a net loss of $31.6
million, or $0.45 per common share, on total revenues of $232.9 million. This
compares to net income of $18.5 million, or $0.28 per common share, on total
revenues of $122.7 million in the six months ended December 31, 1996 (the
"Prior Period"). The loss in the Transition Period was caused by a $110.0
million asset writedown recorded under the full cost method of accounting,
partially offset by a gain of $73.8 million from the sale of the Bayard stock.
See "Impairment of Oil and Gas Properties".
Oil and Gas Sales. During the Transition Period, oil and gas sales increased
6% to $95.7 million versus $90.2 million for the Prior Period. The increase in
oil and gas sales resulted primarily from growth in production volumes. For the
Transition Period, the Company produced 38.5 Bcfe at a weighted average price
of $2.49 per Mcfe, compared to 36.8 Bcfe produced in the Prior Period at a
weighted average price of $2.45 per Mcfe.
The following table shows the Company's production by region for the
Transition Period and the Prior Period:
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED DECEMBER 31,
---------------------------------------------
1997 1996
---------------------- -------------------
(MMCFE) PERCENT (MMCFE) PERCENT
-------- ----------- -------- --------
<S> <C> <C> <C> <C>
Mid-Continent Region. . . . . . . . . . . . 8,852 23% 8,980 24%
Austin Chalk Trend . . . . . . . . . . . . 26,220 68 26,243 71
All other fields . . . . . . . . . . . . . 3,396 9 1,568 5
------ --- ------ ---
Total production . . . . . . . . . . . . . 38,468 100% 36,791 100%
====== === ====== ===
</TABLE>
Natural gas production represented approximately 71% of the Company's total
production volume on an equivalent basis in the Transition Period, compared to
82% in the Prior Period. This decrease in gas production as a percentage of
total production was primarily the result of new production in the Louisiana
Trend, which tends to produce more oil than gas.
26
<PAGE> 27
For the Transition Period, the Company realized an average price per barrel
of oil of $18.59, compared to $21.88 in the Prior Period. Gas price
realizations increased slightly from $2.18 per Mcf in the Prior Period to $2.24
per Mcf in the Transition Period. The Company's hedging activities resulted in
decreases in oil and gas revenues of $4.3 million and $7.1 million in the
Transition Period and Prior Period, respectively. Oil prices received in the
first quarter of 1998 are significantly below prices realized in the Transition
Period, which has the effect of reducing oil revenues and decreasing earnings.
Oil and Gas Marketing Sales. The Company realized $58.2 million in oil and
gas marketing sales for third parties in the Transition Period, with
corresponding oil and gas marketing expenses of $58.2 million. This compares
to sales of $30.0 million, expenses of $29.5 million, and a margin of $0.5
million in the Prior Period.
Interest and Other. Interest and other revenues for the Transition Period
were $79.0 million compared to $2.5 million in the Prior Period. During the
Transition Period, the Company realized a gain on the sale of its Bayard common
stock of $73.8 million, the most significant component of interest and other
revenues.
Production Expenses and Taxes. Production expenses and taxes, which include
lifting costs, production taxes and excise taxes, increased to $10.1 million in
the Transition Period, compared to $5.9 million in the Prior Period. These
increases were primarily the result of increased operating costs and increased
production. On a unit of production basis, production expenses and taxes
increased to $0.27 per Mcfe compared to $0.16 per Mcfe in the Prior Period. The
Company expects that production expenses and taxes per Mcfe will increase in
1998, primarily as the result of completed and anticipated acquisitions that
generally have higher associated lifting costs per unit than the Company's
historical production.
Impairment of Oil and Gas Properties. The Company utilizes the full cost
method to account for its investment in oil and gas properties. Under this
method, all costs of acquisition, exploration and development of oil and gas
reserves (including such costs as leasehold acquisition costs, geological and
geophysical expenditures, certain capitalized internal costs, dry hole costs
and tangible and intangible development costs) are capitalized as incurred.
These oil and gas property costs along with the estimated future capital
expenditures to develop proved undeveloped reserves are depleted and charged to
operations using the unit-of-production method based on the ratio of current
production to proved oil and gas reserves as estimated by the Company's
independent engineering consultants and Company engineers. Costs directly
associated with the acquisition and evaluation of unproved properties are
excluded from the amortization computation until it is determined whether or
not proved reserves can be assigned to the property or whether impairment has
occurred. To the extent that capitalized costs of oil and gas properties, net
of accumulated depreciation, depletion and amortization and related deferred
income taxes, exceed the discounted future net revenues of proved oil and gas
properties, such excess costs are charged to operations.
The Company incurred an impairment of oil and gas properties charge of $110
million for the Transition Period. This writedown was caused by several
factors, including oil prices declining from $18.38 at June 30, 1997 to $17.62
at December 31, 1997, and drilling and completion costs continuing to escalate
during the Transition Period. Higher costs caused the Company's capital
spending to exceed budgeted amounts during the Transition Period and also
increased the estimated future capital expenditures to be incurred to develop
the Company's proved undeveloped reserves. The Company's results from wells
completed during the Transition Period in the Louisiana Trend continued to be
inconsistent and production performance from various properties in the Navasota
River and Independence areas were lower than projected at June 30, 1997. As a
result of the above factors, the Company recorded a downward revision to its
proved reserves of 38 net Bcfe in the Austin Chalk Trend as of December 31,
1997.
Excluding the purchase of additional leasehold, the Company incurred
approximately $85 million in capital expenditures in the Louisiana Trend during
the Transition Period, of which approximately $67 million were incurred in the
Masters Creek area. Approximately $16 million of the drilling costs were
incurred on Company operated wells that had not been completed at December 31,
1997.
In the Masters Creek area, the Company completed operations on 11 wells
during the Transition Period. Although 10 of the 11 wells were commercially
productive, the drilling costs incurred through December 31, 1997
27
<PAGE> 28
of approximately $58 million for the 10 wells were higher than anticipated and
assigned reserves were lower than expected. The lower reserve quantities were
due in part to lower oil prices at December 31, 1997. In addition, the Company
transferred approximately $11 million of previously unevaluated leasehold costs
from all areas of the Louisiana Trend to the amortization base of the full cost
pool during the Transition Period.
In connection with the Company's acquisition of AnSon in December 1997, which
was accounted for using the purchase method, the purchase price of
approximately $43 million was allocated to the fair value of assets acquired.
Based upon reserve estimates as of December 31, 1997, the portion of the
purchase price which was allocated to evaluated oil and gas properties exceeded
the associated discounted future net revenues from AnSon's estimated proved
reserves by approximately $14 million.
Since December 31, 1997, oil and gas prices have declined, with oil prices
reaching ten-year lows in March 1998. In addition, the Company has completed
several acquisitions based on expectations of higher oil and gas prices than
those currently being received. Based on NYMEX oil prices of $16.50 per Bbl and
NYMEX gas prices of $2.35 per Mcf in effect on March 25, 1998, and estimates of
the Company's proved reserves as of December 31, 1997 (pro forma for the
acquisitions completed during the quarter ended March 31, 1998), the Company
estimates it will incur an additional full cost ceiling writedown of between
$175 million and $200 million as of March 31, 1998. If this occurs, the
Company will incur a substantial loss for the first quarter of 1998 which
would further reduce shareholders' equity.
Oil and Gas Depreciation, Depletion and Amortization. Depreciation, depletion
and amortization ("DD&A") of oil and gas properties for the Transition Period
was $60.4 million, $24.2 million higher than the Prior Period's expense of
$36.2 million. The expense in the Transition Period was computed prior to the
writedown from the Impairment of oil and gas properties charge. The average
DD&A rate per Mcfe, which is a function of capitalized costs, future
development costs, and the related underlying reserves in the periods
presented, increased to $1.57 in the Transition Period compared to $0.99 in the
Prior Period. The Company's DD&A rate in the future will be a function of the
results of future acquisition, exploration, development and production costs
and results, and asset writedowns, if any. The Company's DD&A rate is expected
to be positively affected as the result of the acquisitions completed and
pending.
Depreciation and Amortization of Other Assets. Depreciation and amortization
("D&A") of other assets increased to $2.4 million in the Transition Period,
compared to $1.8 million in the Prior Period. This increase was caused by
increased investments in depreciable buildings and equipment and increased
amortization of debt issuance costs as a result of the issuance of Senior Notes
in March 1997. The Company anticipates an increase in D&A in 1998 as a result
of higher building depreciation expense on the Company's corporate offices.
General and Administrative. General and administrative ("G&A") expenses,
which are net of capitalized internal payroll and non-payroll expenses (see
Note 11 of Notes to Consolidated Financial Statements), were $5.8 million in
the Transition Period, up 56% from $3.7 million in the Prior Period. The
increase in the Transition Period compared to the Prior Period results
primarily from increased personnel expenses required by the Company's growth
and industry wage inflation. The Company capitalized $2.4 million of internal
costs in the Transition Period directly related to the Company's oil and gas
exploration and development efforts, compared to $1.1 million in the Prior
Period. The Company anticipates that G&A costs for 1998 will continue to
increase as the result of industry wage inflation, legal fees associated with
the UPRC and shareholder litigation, and increases in employment due to the
completed and pending acquisitions.
Interest and Other. Interest and other expense increased to $17.4 million in
the Transition Period, compared to $6.2 million in the Prior Period. The
increase was due primarily to the issuance of $300 million of Senior Notes in
March 1997. In addition to the interest expense reported, the Company
capitalized $5.1 million of interest during the Transition Period, compared to
$7.6 million capitalized in the Prior Period.
Provision (Benefit) for Income Taxes. The Company recorded no income taxes
for the Transition Period, compared to income tax expense of $14.3 million in
the Prior Period, before consideration of the $3.7 million tax benefit
associated with the extraordinary loss from the early extinguishment of debt.
At December 31, 1997, the Company had a net operating loss carryforward of
approximately $337 million for regular federal income taxes which will expire
in future years beginning in 2007. Management believes that it
28
<PAGE> 29
cannot be demonstrated at this time that it is more likely than not that the
deferred income tax assets, comprised primarily of the net operating loss
carryforward, will be realizable in future years, and therefore a valuation
allowance of $77.9 million has been recorded. No deferred tax benefit related
to the exercise of employee stock options was allocated to additional paid-in
capital in the Transition Period. The Company does not expect to record any
net income tax expense in 1998 based on information available at this time.
Fiscal Years Ended June 30, 1997, 1996, 1995
General. For the fiscal year ended June 30, 1997, the Company realized a net
loss of $183.4 million, or $2.79 per common share, on total revenues of $280.3
million. This compares to net income of $23.4 million, or $0.40 per common
share, on total revenues of $149.4 million in 1996, and net income of $11.7
million, or $0.21 per common share, on total revenues of $67.3 million in
fiscal 1995. The loss in fiscal 1997 resulted from a $236 million asset
writedown recorded in the fourth quarter under the full cost method of
accounting. See "--Impairment of Oil and Gas Properties".
Oil and Gas Sales. During fiscal 1997, oil and gas sales increased 74% to
$192.9 million versus $110.8 million for fiscal 1996 and 238% from the fiscal
1995 amount of $57.0 million. The increase in oil and gas sales resulted
primarily from strong growth in production volumes and significantly higher
average oil and gas prices. For fiscal 1997, the Company produced 78.6 Bcfe at
a weighted average price of $2.45 per Mcfe, compared to 60.2 Bcfe produced in
fiscal 1996 at a weighted average price of $1.84 per Mcfe, and 31.9 Bcfe
produced in fiscal 1995 at a weighted average price of $1.78 per Mcfe. This
represents production growth of 31% for fiscal 1997 compared to fiscal 1996 and
146% compared to fiscal 1995.
The following table shows the Company's production by region for fiscal 1997
and fiscal 1996:
<TABLE>
<CAPTION>
For the Year Ended June 30,
-------------------------------------------
1997 1996
------------------- --------------------
(MMcfe) Percent (MMcfe) Percent
------------------- --------------------
<S> <C> <C> <C> <C>
Mid-Continent Region............ 17,370 22% 10,420 17%
Austin Chalk Trend.............. 57,377 73 47,234 78
Other fields ................... 3,878 5 2,536 5
------ --- ------ ---
Total Production.... 78,625 100% 60,190 100%
====== === ====== ===
</TABLE>
Natural gas production represented approximately 79% of the Company's total
production volume on an equivalent basis in fiscal 1997. This compares to 86%
in fiscal 1996 and 79% in fiscal 1995. This decrease in gas production as a
percentage of total production in fiscal 1997 was the result of drilling in the
Louisiana Trend, which tends to produce more oil than gas.
For fiscal 1997, the Company realized an average price per barrel of oil of
$20.93, compared to $17.85 in fiscal 1996 and $17.36 in fiscal 1995. The
Company markets its oil on monthly average equivalent spot price contracts and
typically receives a premium to the price posted for West Texas Intermediate
crude oil.
Gas price realizations increased from fiscal 1996 to 1997 from $1.66 per Mcf
to $2.18 per Mcf, or 31%, generally as the result of market conditions. Gas
prices in fiscal 1995 averaged $1.48 per Mcf. The Company's gas price
realizations in fiscal 1997 were also higher due to the increase in Louisiana
Trend gas production, which generally receives premium prices at least
equivalent to Henry Hub indexes due to the high Btu content and favorable
market location of the production.
The Company's hedging activities resulted in decreases in oil and gas
revenues of $7.4 million, $5.9 million, and none in fiscal 1997, 1996 and 1995,
respectively.
Oil and Gas Marketing Sales. In December 1995, the Company entered into the
oil and gas marketing business by acquiring a subsidiary to provide natural gas
marketing services, including commodity price structuring, contract
administration and nomination services, for the Company, its partners and other
oil and natural gas producers in geographical areas in which the Company is
active. The Company realized $76.2 million in oil and gas marketing
29
<PAGE> 30
sales for third parties in fiscal 1997, with corresponding oil and gas
marketing expenses of $75.1 million, resulting in a gross margin of $1.1
million. This compares to sales of $28.4 million, expenses of $27.5 million,
and a margin of $0.9 million in fiscal 1996. There were no comparable marketing
activities in fiscal 1995.
Oil and Gas Service Operations. On June 30, 1996, Peak USA Energy Services,
Ltd., a limited partnership ("Peak"), was formed by Peak Oilfield Services
Company (a joint venture between Cook Inlet Region, Inc. and Nabors Industries,
Inc.) and Chesapeake for the purpose of purchasing the Company's oilfield
service assets and providing rig moving, transportation and related site
construction services to the Company and others in the industry. The Company
sold its service company assets to Peak for $6.4 million, and simultaneously
invested $2.5 million in exchange for a 33.3% partnership interest in Peak.
This transaction resulted in recognition of a $1.8 million pre-tax gain during
the fourth fiscal quarter of 1996 (reported in Interest and other revenues). A
deferred gain from the sale of service company assets of $0.9 million was
recorded as a reduction in the Company's investment in Peak and is being
amortized to income over the estimated useful lives of the Peak assets. The
Company's investment in Peak is accounted for using the equity method, and
resulted in $0.5 million of income being included in Interest and other
revenues in fiscal 1997.
Revenues from oil and gas service operations were $6.3 million in fiscal
1996, down 28% from $8.8 million in fiscal 1995. The related costs and expenses
of these operations were $4.9 million and $7.7 million for the two years ended
June 30, 1996 and 1995 respectively. The gross profit margin of 22% in fiscal
1996 was up from the 12% margin in fiscal 1995. The gross profit margin
derived from these operations is a function of drilling activities in the
period, costs of materials and supplies and the mix of operations between lower
margin trucking operations versus higher margin labor oriented service
operations.
Interest and Other. Interest and other revenues for fiscal 1997 were $11.2
million compared to $3.8 million in fiscal 1996 and $1.5 million in fiscal
1995. During fiscal 1997, the Company realized $8.7 million in interest, $1.6
million of other investment income, $0.5 million from its investment in Peak,
and $0.4 million in other income. During fiscal 1996, the Company realized $3.7
million of interest and other investment income and a $1.8 million gain related
to the sale of certain service company assets, offset by a $1.7 million loss
due to natural gas basis changes in April 1996 as a result of the Company's
hedging activities. During 1995, the Company did not incur any such gains on
sale of assets or basis losses.
Production Expenses and Taxes. Production expenses and taxes, which include
lifting costs, production taxes and excise taxes, increased to $15.1 million in
fiscal 1997, compared to $8.3 million in fiscal 1996 and $4.3 million in fiscal
1995. These increases on a year-to-year basis were primarily the result of
increased production. On a unit production basis, production expenses and taxes
increased to $0.19 per Mcfe, compared to $0.14 per Mcfe in fiscal 1996 and
$0.13 per Mcfe in fiscal 1995. During fiscal 1996 and 1995, a high proportion
of the Company's production was from the Giddings Field, much of which
qualified for Texas severance tax exemptions.
Impairment of Oil and Gas Properties. Prior to January 1997, the Company had
completed operations on one exploratory well in each of three separate areas
outside Masters Creek in the Louisiana Trend. Between April 1997 and July 1997,
the Company completed operations on 10 Company operated exploratory wells
located outside Masters Creek in the Louisiana Trend that resulted in the
addition of only 0.5 Bcfe of proved reserves. Cumulative well costs on these
non-Masters Creek properties were approximately $43 million as of June 30,
1997. Of the ten wells, one was completed on April 15, 1997, one on May 3, 1997
and eight after June 1, 1997. Based upon this information and similar data
which had become available from outside operated properties in these
non-Masters Creek areas of the Louisiana Trend, management determined that a
significant portion of its leasehold in the Louisiana Trend outside of Masters
Creek was impaired. During the quarters ended March 31, 1997 and June 30,
1997, the Company transferred $7.6 million and $86.3 million, respectively, of
non-Masters Creek Louisiana Trend leasehold costs to the amortization base of
the full cost pool.
Oil and gas prices declined from $20.90 per Bbl and $2.41 per Mcf at June 30,
1996 to $18.38 per Bbl and $2.12 per Mcf at June 30, 1997. Drilling and
equipment costs escalated rapidly in the fourth quarter of fiscal 1997 due
primarily to higher day rates for drilling rigs, thus increasing the estimated
future capital expenditures to be incurred to develop the Company's proved
undeveloped reserves. The oil and gas price declines and the increased costs to
30
<PAGE> 31
drill and equip wells caused the Company to eliminate 35 gross proved
undeveloped locations in the Knox Field which contained an estimated 45 net
Bcfe of proved undeveloped reserves. Similar factors combined with unfavorable
drilling and production results eliminated approximately 93 Bcfe of proved
reserves in the Giddings and Louisiana Trend areas.
In the Independence area of the Giddings Field of Texas, a single well
completed in late March 1997, which the Company had estimated to contain 15.7
Bcfe of Company reserves at March 31, 1997, was significantly and adversely
affected by another operator's offset well which damaged the reservoir and
reduced the Company's estimated ultimate recovery to 8.0 Bcfe of reserves.
In late June 1997, management reviewed its March 31, 1997 internal estimates
of proved reserves and related present value and, after giving effect to the
fourth quarter 1997 drilling and production results, oil and gas prices, higher
drilling and completion costs, and additional leasehold acquisition costs and
delay rentals, determined that the Company had less reserve potential than had
previously been estimated. As a result, management estimated that at June 30,
1997 the Company would have capitalized costs of oil and gas properties which
would exceed its full cost ceiling by approximately $150 million to $200
million. On June 27, 1997, the Company issued a press release which included
this estimate. Subsequently, based on the Company's final year-end estimates of
its proved reserves and related estimated future net revenues, which took into
account additional drilling and production results, management determined that
as of June 30, 1997, its capitalized costs exceeded its full cost ceiling by
approximately $236 million. No such writedown was experienced by the Company
in fiscal 1996 or fiscal 1995.
Oil and Gas Depreciation, Depletion and Amortization. DD&A of oil and gas
properties for fiscal 1997 was $103.3 million, $52.4 million higher than fiscal
1996's expense of $50.9 million, and $77.9 million higher than fiscal 1995's
expense of $25.4 million. The expense in fiscal 1997 excluded the effects of
the asset writedown. The average DD&A rate per Mcfe, which is a function of
capitalized costs, future development costs, and the related underlying
reserves in the periods presented, increased to $1.31 in fiscal 1997 compared
to $0.85 in fiscal 1996 and $0.80 in fiscal 1995.
Depreciation and Amortization of Other Assets. D&A of other assets increased
to $3.8 million in fiscal 1997, compared to $3.2 million in fiscal 1996 and
$1.8 million in fiscal 1995. This increase in fiscal 1997 was caused by an
increase in D&A as a result of increased investments in depreciable buildings
and equipment and increased amortization of debt issuance costs as a result of
the issuance of Senior Notes in May 1995, April 1996 and March 1997.
General and Administrative. G&A expenses, which are net of capitalized
internal payroll and non-payroll expenses (see Note 11 of Notes to Consolidated
Financial Statements), were $8.8 million in fiscal 1997, up 83% from $4.8
million in fiscal 1996 and up from $3.6 million in fiscal 1995. The increases
in fiscal 1997 compared to fiscal 1996 and 1995 result primarily from increased
personnel expenses required by the Company's growth and industry wage
inflation. The Company capitalized $3.9 million of internal costs in fiscal
1997 directly related to the Company's oil and gas exploration and development
efforts, compared to $1.7 million in 1996 and $0.6 million in 1995.
Interest and Other. Interest and other expense increased to $18.6 million in
fiscal 1997 as compared to $13.7 million in 1996 and $6.6 million in fiscal
1995. Interest expense in the fourth quarter of fiscal 1997 was $8.7 million,
reflecting the issuance of $300 million of Senior Notes in March 1997. In
addition to the interest expense reported, the Company capitalized $12.9
million of interest during fiscal 1997, compared to $6.4 million capitalized in
fiscal 1996 and $1.6 million in fiscal 1995.
Provision (Benefit) for Income Taxes. The Company recorded an income tax
benefit of $3.6 million for fiscal 1997, before consideration of the $3.8
million tax benefit associated with the extraordinary loss from the early
extinguishment of debt, compared to income tax expense of $12.9 million in 1996
and $6.3 million in 1995. All of the income tax expense in 1996 and 1995 was
deferred due to tax net operating losses and carryovers resulting from the
Company's drilling program.
31
<PAGE> 32
The Company's loss before income taxes and extraordinary item of $180.3
million created a tax benefit for financial reporting purposes of $67.7
million. However, due to limitations on the recognition of deferred tax assets,
the total tax benefit was reduced to $3.6 million.
At June 30, 1997, the Company had a net operating loss carryforward of
approximately $300 million for regular federal income taxes which will expire
in future years beginning in 2007. Management believed that it could not be
demonstrated at that time that it was more likely than not that the deferred
income tax assets, comprised primarily of the net operating loss carryforward,
would be realizable in future years, and therefore a valuation allowance of
$64.1 million was recorded in fiscal 1997. A deferred tax benefit related to
the exercise of employee stock options of approximately $4.8 million was
allocated directly to additional paid-in capital in 1997, compared to $7.9
million in 1996 and $1.2 million in fiscal 1995.
HEDGING
Periodically the Company utilizes hedging 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)
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, (3) 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 (4) basis protection swaps, which are arrangements that
guarantee the price differential of oil or gas from a specified delivery point
or points. 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 only
enters into hedging transactions related to the Company's oil and gas
production volumes or CEMI and AGM physical purchase or sale commitments.
As of December 31, 1997, the Company had the following oil swap arrangements
for periods after December 1997:
<TABLE>
<CAPTION>
NYMEX-INDEX
VOLUME STRIKE PRICE
MONTH (BBLS) (PER BBL)
----- ------- ---------
<S> <C> <C>
January through June 1998 . . . . . . . . . . . . . . . . . . . . . 724,000 $19.82
</TABLE>
After year-end 1997, the Company entered into oil swap arrangements to cancel
the effect of the swaps at a price of $18.85 per Bbl.
As of December 31, 1997, the Company had the following gas swap arrangements
for periods after December 1997:
<TABLE>
<CAPTION>
HOUSTON SHIP CHANNEL
VOLUME INDEX STRIKE PRICE
MONTHS (MMBTU) (PER MMBTU)
------ -------- ---------------------
<S> <C> <C>
April 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 600,000 $2.300
May 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 620,000 $2.215
</TABLE>
The Company received $1.3 million as a premium for calls sold for January and
February 1998 volumes of 2,480,000 MMBtu and 2,240,000 MMBtu, respectively.
The January calls expired on December 31, 1997, the February calls expired on
January 31, 1998, and the associated premiums will be recognized as income
during the corresponding months of production.
32
<PAGE> 33
The Company has also entered into the following collar transactions:
<TABLE>
<CAPTION>
NYMEX NYMEX
VOLUME DEFINED HIGH DEFINED LOW
MONTHS (MMBTU) STRIKE PRICE STRIKE PRICE
------ ------- ------------ -------------
<S> <C> <C> <C>
March 1998 . . . . . . . . . . . . . . . 1,240,000 $2.69 $2.33
April 1998 . . . . . . . . . . . . . . . 1,200,000 $2.48 $2.11
</TABLE>
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 entered into a curve lock for 4.9 Bcf of gas which allows the
Company the option to hedge April 1999 through November 1999 gas based upon a
negative $0.285 differential to December 1998 gas any time between the strike
date and December 1998. A curve lock is a commodity swap arrangement that
establishes, or hedges, a price differential between one commodity contract
period and another. In markets where the forward curve is typically negatively
sloped (near-term prices exceed deferred prices), an upward sloping price curve
allows hedgers to lock in a deferred forward sale at a higher premium to a more
prompt swap by a curve lock. For example, in the crude oil market, which
typically has a negatively sloped price curve, it may be possible for a hedger
to lock in a price relationship in which its deferred crude oil is sold at a
premium to a prompter swap, because the price curve is upwardly sloping in the
future. The expectation of the hedger is that either the market will return to
its historically negatively sloped price curve, or that prices generally will
increase and the curve lock swap will allow it to realize a premium price for
the deferred versus the more prompt price.
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 swap agreements in
effect for production periods beginning January 1, 1998 terminated on December
31, 1997, based on the closing prices for NYMEX futures contracts as of that
date, the Company would have received a net amount of approximately $1.1
million from the counterparty which would have represented the "fair value" at
that date. These agreements were not terminated.
Periodically, CEMI enters into various hedging transactions designed to hedge
against physical purchase commitments made by CEMI. 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.
LIQUIDITY AND CAPITAL RESOURCES
For the Six Months Ended December 31, 1997 and 1996
Cash Flows from Operating Activities. Cash provided by operating activities
(inclusive of changes in components of working capital) increased to $139.2
million in the Transition Period, compared to $41.9 million in the Prior
Period. The primary reason for the increase was significant changes in the
components of current assets and liabilities, specifically $92 million of
short-term investments which were converted into cash during the Transition
Period. Cash provided by operating activities is expected to be a significant
source for meeting the forecasted cash requirements for 1998.
Cash Flows from Investing Activities. Cash used in investing activities
decreased to $136.5 million in the Transition Period, compared to $184.1
million in the Prior Period. This decrease in cash used in investing
activities was due primarily to the $90.4 million received from the sale of the
Company's investment in Bayard common stock during the Transition Period,
offset by other investments. Approximately $189.8 million was expended by the
Company in the Transition Period for development and exploration of oil and gas
properties, as compared to $186.8 million in the Prior Period. In the
Transition Period, other property and equipment additions were $27.0 million
primarily as a result of its $11.9 million investment in the Louisiana Chalk
Gathering System and Masters Creek Gas Plant as well as additional investments
in its Oklahoma City office complex.
Cash Flows from Financing Activities. Cash used in financing activities was
$2.8 million during the Transition Period, compared to cash provided by
financing activities of $231.3 million during the Prior Period. The decrease
was due primarily to the proceeds received from the issuance of common stock
during the Prior Period of $288.1 million, which was partially offset by the
net payments on long-term borrowings of $56.8 million during the Prior Period.
33
<PAGE> 34
For the Fiscal Years Ended June 30, 1997, 1996 and 1995
Cash Flows from Operating Activities. Cash provided by operating activities
(inclusive of changes in components of working capital) decreased to $84.1
million in fiscal 1997, compared to $121.0 million in fiscal 1996 and $54.7
million in fiscal 1995. The primary reason for the decrease from fiscal 1996 to
1997 was significant changes in the components of current assets and
liabilities, specifically $102.9 million of short-term investments at June 30,
1997.
Cash Flows from Investing Activities. Significantly higher cash was used in
fiscal 1997 for development, exploration and acquisition of oil and gas
properties compared to fiscal 1996 and 1995. Approximately $524 million was
expended by the Company in fiscal 1997 (net of proceeds from sale of leasehold,
equipment and other), compared to $344 million in fiscal 1996. In fiscal 1995
the Company expended $113 million (net of proceeds from sale of leasehold,
equipment and other). Net cash proceeds received by the Company for sales of
oil and gas equipment, leasehold and other decreased to approximately $3.1
million in fiscal 1997, compared to $6.2 million in fiscal 1996 and $12.0
million in fiscal 1995. In fiscal 1997, other property and equipment additions
were $34 million primarily as a result of its $16.8 million investment in the
Louisiana Chalk Gathering System and Masters Creek Gas Plant as well as
additional investments in its Oklahoma City office complex.
Cash Flows from Financing Activities. On December 2, 1996, the Company
completed a public offering of 8,972,000 shares of Common Stock at a price of
$33.63 per share resulting in net proceeds to the Company of approximately
$288.1 million. Approximately $55.0 million of the proceeds was used to
defease the Company's $47.5 million Senior Notes due 2001, and $11.2 million of
the proceeds was used to retire all amounts outstanding under the Company's
commercial bank credit facilities.
On March 17, 1997, the Company concluded the sale of $150 million of 7.875%
Senior Notes due 2004 (the "7.875% Senior Notes"), and $150 million of 8.5%
Senior Notes due 2012 (the "8.5% Senior Notes"), which offering resulted in net
proceeds to the Company of approximately $292.6 million. The 7.875% Senior
Notes were issued at 99.92% of par and the 8.5% Senior Notes were issued at
99.414% of par. The 7.875% Senior Notes and the 8.5% Senior Notes are
redeemable at the option of the Company at any time at the redemption or
make-whole prices set forth in the respective Indentures.
In fiscal 1996, cash flows from financing activities were $219.5 million,
largely as the result of the issuance of 5,989,500 shares of Common Stock (net
proceeds to the Company of approximately $99.4 million) and $120 million of
9.125% Senior Notes due 2006 (the "9.125% Senior Notes"). The Company may, at
its option, redeem prior to April 15, 1999 up to $42 million principal amount
of the 9.125% Senior Notes at 109.125% of the principal amount thereof from
equity offering proceeds. The 9.125% Senior Notes are redeemable at the option
of the Company at any time at the redemption or make- whole prices set forth in
the Indenture.
Financial Flexibility and Liquidity
The Company had working capital of $64.2 million at December 31, 1997.
In January 1998, the Company arranged a $500 million revolving credit facility
with a group of commercial banks. The facility has an initial committed
borrowing base of $200 million ($168 million until the acquisition of DLB Oil &
Gas, Inc. is consummated), of which $120 million was used to pay off bank debt
assumed in the acquisition of Hugoton Energy Corporation on March 10, 1998 and
the remainder is anticipated to be used for other acquisitions. The borrowing
base can be expanded as other acquisitions create collateral value. Borrowings
under the facility are secured by CAC's pledge of its subsidiaries' capital
stock and bear interest currently at a rate equal to the Eurodollar rate plus
1.5%.
The borrower under this facility is Chesapeake Acquisition Corporation
("CAC"), a wholly-owned subsidiary of the Company. CAC is an "unrestricted
subsidiary" under the terms of the Company's Senior Note Indentures and is not
a guarantor of the senior note indebtedness. The Company is not a guarantor of
the revolving credit facility.
The Senior Note Indentures contain various restrictions for the Company and
its restricted subsidiaries to incur additional indebtedness. As of December
31, 1997, the Company estimates that commercial bank indebtedness of $75
million could have been incurred within these restrictions. This restriction
does not apply to borrowings incurred by CAC and other unrestricted
subsidiaries.
34
<PAGE> 35
Debt ratings for the Senior Notes are Ba3 by Moody's Investors Service and
BB- by Standard & Poor's Corporation as of March 25, 1998, although both have
recently placed the Company on review with negative implications. The
Company's long-term debt represented approximately 65% of total capital at
December 31, 1997. There are no scheduled principal payments required on any of
the Senior Notes until June 2002.
The Company believes it has adequate resources, including budgeted cash flow
from operations, to fund its capital expenditure budget for exploration and
development activities during 1998, which is currently estimated to be
approximately $235 million. However, continued low oil prices or unfavorable
drilling results could cause the Company to further reduce its drilling program,
which is largely discretionary. Additional acquisitions, if any, beyond the
announced acquisitions will be funded by a combination of commercial bank debt
and/or the issuance of additional public debt or equity securities. If these
additional resources are not available, the Company may not be able to
successfully pursue its revised 1998 business strategy.
YEAR 2000
Year 2000 issues result from the inability of computer programs or
computerized equipment to accurately calculate, store or use a date subsequent
to December 31, 1999. Although the erroneous date can be interpreted in a
number of different ways typically the year 2000 is interpreted by the computer
as the year 1900. This could result in a system failure or miscalculations
causing disruptions of operations, including, among other things, a temporary
inability to process transactions, send invoices, or engage in similar normal
business.
The Company has completed an assessment of its core financial and operational
software systems and has found them either already in compliance or the
necessary steps to bring them into compliance have been identified. These tasks
are scheduled for completion by December 31, 1998. The Company believes that
the successful completion of these tasks will mitigate any critical Year 2000
issues. However, if these tasks are not completed by year-end 1999, the Year
2000 issue could have a material impact on the Company's ability to meet
financial and reporting requirements. It should not impact the Company's
ability to continue exploration, drilling or production activities.
Assessment of other less critical software systems and various types of
equipment is continuing and should be completed by September 1998. The Company
believes that the potential impact, if any, of these systems not being Year
2000 compliant will at most require employees to manually complete otherwise
automated tasks or calculations.
Following the completion of the aforementioned assessment, the Company will
initiate formal communication with its significant suppliers, business partners
and customers to determine the extent to which the Company is vulnerable to
those third parties' failure to correct their own Year 2000 issues. However,
there can be no guarantee that the systems of other companies on which the
Company's systems rely will be timely converted, or that a failure to convert
by another company, or a conversion that is incompatible with the Company's
systems would not have a material adverse effect on the Company. The Company
has determined it has no exposure to contingencies related to the Year 2000
issue for the products it has sold.
The Company will utilize both internal and external resources to complete
tasks and perform testing necessary to address the Year 2000 issue. Completion
of the Year 2000 project is based on management's best estimates, which were
derived utilizing numerous assumptions of future events including the continued
availability of certain resources, third party modification plans and other
factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those plans. Specific
factors that might cause such material differences include, but are not limited
to, the availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer codes, and similar uncertainties.
FORWARD LOOKING STATEMENTS
The information contained in this Form 10-K includes certain forward-looking
statements. When used in this document, the words budget, budgeted, anticipate,
expects, estimates, believes, goals or projects and similar expressions are
intended to identify forward-looking statements. It is important to note that
Chesapeake's actual
35
<PAGE> 36
results could differ materially from those projected by such forward-looking
statements. Important factors that could cause actual results to differ
materially from those projected in the forward-looking statements include, but
are not limited to, the following: production variances from expectations,
volatility of oil and gas prices, the need to develop and replace its reserves,
the substantial capital expenditures required to fund its operations and
acquisition strategy and the related need to fund such capital requirements
through commercial banks and/or public securities markets, environmental risks,
drilling and operating risks, risks related to exploration and development
drilling, the uncertainty inherent in estimating future oil and gas production
or reserves, uncertainty inherent in litigation, competition, government
regulation, and the ability of the Company to implement its business strategy,
including risks inherent in integrating acquisition operations into the
Company's operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
36
<PAGE> 37
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Consolidated Financial Statements:
Report of Independent Accountants for the Six Months Ended December
31, 1997 and for the Years Ended June 30, 1997 and 1996 . . . . . . . . . . . . . . . . . . . 38
Report of Independent Accountants for the Year Ended June 30, 1995 . . . . . . . . . . . . . . . 39
Consolidated Balance Sheets at December 31, 1997 and at June 30, 1997 and 1996 . . . . . . . . . 40
Consolidated Statements of Operations for the Six Months Ended December 31, 1997 and
for the Years Ended June 30, 1997, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . 41
Consolidated Statements of Cash Flows for the Six Months Ended December 31, 1997 and
for the Years Ended June 30, 1997, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . 42
Consolidated Statements of Stockholders' Equity for the Six Months Ended December 31, 1997
and for the Years Ended June 30, 1997, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . 44
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
</TABLE>
37
<PAGE> 38
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Chesapeake Energy Corporation
We have audited the accompanying consolidated balance sheets of Chesapeake
Energy Corporation and its subsidiaries as of December 31, 1997 and as of June
30, 1997 and 1996, and the related consolidated statements of operations,
stockholders' equity and cash flows for the six months ended December 31, 1997
and the years ended June 30, 1997 and 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Chesapeake Energy
Corporation and its subsidiaries as of December 31, 1997 and as of June 30,
1997 and 1996, and the consolidated results of their operations and their cash
flows for the six months ended December 31, 1997 and the years ended June 30,
1997 and 1996 in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Oklahoma City, Oklahoma
March 20, 1998
38
<PAGE> 39
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Chesapeake Energy Corporation
In our opinion, the consolidated statements of operations, of cash flows and
of stockholders' equity for the year ended June 30, 1995 present fairly, in all
material respects, the results of operations and cash flows of Chesapeake
Energy Corporation and its subsidiaries for the year ended June 30, 1995, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for the
opinion expressed above. We have not audited the consolidated financial
statements of Chesapeake Energy Corporation and its subsidiaries for any period
subsequent to June 30, 1995.
PRICE WATERHOUSE LLP
Houston, Texas
September 20, 1995, except for the fourth paragraph of Note 9
which is as of October 9, 1997 and except for the earnings per share
information as described in Note 1, which is as of March 24, 1998
39
<PAGE> 40
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
----------- -----------------------------
1997 1997 1996
----------- -----------------------------
($ IN THOUSANDS)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ................................................... $ 123,860 $ 124,017 $ 51,638
Short-term investments ...................................................... 12,570 104,485 --
Accounts receivable:
Oil and gas sales ......................................................... 10,654 10,906 12,687
Oil and gas marketing sales ............................................... 20,493 19,939 6,982
Joint interest and other, net of allowances of $691,000, $387,000
and $340,000, respectively .............................................. 38,781 25,311 27,661
Related parties ........................................................... 4,246 7,401 2,884
Inventory ................................................................... 5,493 4,854 5,163
Other ....................................................................... 1,624 692 2,158
----------- ----------- -----------
Total Current Assets ................................................. 217,721 297,605 109,173
----------- ----------- -----------
PROPERTY AND EQUIPMENT:
Oil and gas properties, at cost based on full cost
accounting:
Evaluated oil and gas properties .......................................... 1,095,363 865,516 363,213
Unevaluated properties .................................................... 125,155 128,505 165,441
Less: accumulated depreciation, depletion and
amortization ............................................................ (602,391) (431,983) (92,720)
----------- ----------- -----------
618,127 562,038 435,934
Other property and equipment ................................................ 67,633 50,379 18,162
Less: accumulated depreciation and amortization ............................. (6,573) (5,051) (2,922)
----------- ----------- -----------
Total Property and Equipment ......................................... 679,187 607,366 451,174
----------- ----------- -----------
OTHER ASSETS .................................................................. 55,876 44,097 11,988
----------- ----------- -----------
TOTAL ASSETS .................................................................. $ 952,784 $ 949,068 $ 572,335
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable and current maturities of long-term debt ...................... $ -- $ 1,380 $ 6,755
Accounts payable ............................................................ 81,775 86,817 54,514
Accrued liabilities and other ............................................... 42,733 28,701 14,062
Revenues and royalties due others ........................................... 28,972 29,428 33,503
----------- ----------- -----------
Total Current Liabilities ............................................ 153,480 146,326 108,834
----------- ----------- -----------
LONG-TERM DEBT, NET ........................................................... 508,992 508,950 268,431
----------- ----------- -----------
REVENUES AND ROYALTIES DUE OTHERS ............................................. 10,106 6,903 5,118
----------- ----------- -----------
DEFERRED INCOME TAXES ......................................................... -- -- 12,185
----------- ----------- -----------
CONTINGENCIES AND COMMITMENTS (NOTE 4) ........................................ -- -- --
----------- ----------- -----------
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value, 10,000,000 shares
authorized; none issued ................................................... -- -- --
Common Stock, 250,000,000 shares authorized; par value of $.01,
$.01 and $.05 at December 31, 1997, June 30, 1997 and 1996, respectively;
74,298,061, 70,276,975 and 60,159,826 shares issued and outstanding
at December 31, 1997, June 30, 1997 and 1996, respectively ................ 743 703 3,008
Paid-in capital ............................................................. 460,733 432,991 136,782
Accumulated earnings (deficit) .............................................. (181,270) (146,805) 37,977
----------- ----------- -----------
Total Stockholders' Equity ........................................... 280,206 286,889 177,767
----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .................................... $ 952,784 $ 949,068 $ 572,335
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
40
<PAGE> 41
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31, YEAR ENDED JUNE 30,
---------------- ---------------------------------------
1997 1997 1996 1995
---------------- ---------- --------- ----------
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
REVENUES:
Oil and gas sales ......................................... $ 95,657 $ 192,920 $ 110,849 $ 56,983
Oil and gas marketing sales ............................... 58,241 76,172 28,428 --
Oil and gas service operations ............................ -- -- 6,314 8,836
Interest and other ........................................ 78,966 11,223 3,831 1,524
--------- --------- --------- ---------
Total Revenues .......................................... 232,864 280,315 149,422 67,343
--------- --------- --------- ---------
COSTS AND EXPENSES:
Production expenses and taxes ............................. 10,094 15,107 8,303 4,256
Oil and gas marketing expenses ............................ 58,227 75,140 27,452 --
Oil and gas service operations ............................ -- -- 4,895 7,747
Impairment of oil and gas properties ...................... 110,000 236,000 -- --
Oil and gas depreciation, depletion and amortization ...... 60,408 103,264 50,899 25,410
Depreciation and amortization of other assets ............. 2,414 3,782 3,157 1,765
General and administrative ................................ 5,847 8,802 4,828 3,578
Interest and other ........................................ 17,448 18,550 13,679 6,627
--------- --------- --------- ---------
Total Costs and Expenses ................................ 264,438 460,645 113,213 49,383
--------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY
ITEM ...................................................... (31,574) (180,330) 36,209 17,960
PROVISION (BENEFIT) FOR INCOME TAXES ........................ -- (3,573) 12,854 6,299
--------- --------- --------- ---------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM ..................... (31,574) (176,757) 23,355 11,661
EXTRAORDINARY ITEM:
Loss on early extinguishment of debt,
net of applicable income tax of $3,804 .................. -- (6,620) -- --
--------- --------- --------- ---------
NET INCOME (LOSS) ........................................... $ (31,574) $(183,377) $ 23,355 $ 11,661
========= ========= ========= =========
EARNINGS (LOSS) PER COMMON SHARE:
EARNINGS (LOSS) PER COMMON SHARE-BASIC
Income (loss) before extraordinary item ................. $ (0.45) $ (2.69) $ 0.43 $ 0.22
Extraordinary item ...................................... -- (0.10) -- --
--------- --------- --------- ---------
Net income (loss) ....................................... $ (0.45) $ (2.79) $ 0.43 $ 0.22
========= ========= ========= =========
EARNINGS (LOSS) PER COMMON SHARE-ASSUMING DILUTION
Income (loss) before extraordinary item ................. $ (0.45) $ (2.69) $ 0.40 $ 0.21
Extraordinary item ...................................... -- (0.10) -- --
--------- --------- --------- ---------
Net income (loss) ....................................... $ (0.45) $ (2.79) $ 0.40 $ 0.21
========= ========= ========= =========
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES
OUTSTANDING (IN 000'S)
Basic ................................................... 70,835 65,767 54,564 52,624
========= ========= ========= =========
Assuming Dilution ....................................... 70,835 65,767 58,342 55,872
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
41
<PAGE> 42
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED JUNE 30,
DECEMBER 31, ---------------------------------------
1997 1997 1996 1995
---------------- -------- --------- ---------
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS) .............................................. $ (31,574) $(183,377) $ 23,355 $ 11,661
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Depreciation, depletion and amortization ..................... 62,028 105,591 52,768 26,628
Deferred taxes ............................................... -- (3,573) 12,854 6,299
Amortization of loan costs ................................... 794 1,455 1,288 548
Amortization of bond discount ................................ 41 217 563 567
Bad debt expense ............................................. 40 299 114 308
Gain on sale of Bayard stock ................................. (73,840) -- -- --
Gain on sale of fixed assets ................................. (209) (1,593) (2,511) (108)
Impairment of oil and gas assets ............................. 110,000 236,000 -- --
Extraordinary loss ........................................... -- 6,620 -- --
Equity in (earnings) losses from investments ................. 592 (499) -- --
CHANGES IN ASSETS AND LIABILITIES (NET OF ASSETS AND LIABILITIES
ACQUIRED FROM ANSON PRODUCTION CORPORATION):
(Increase) decrease in short-term investments ................ 92,127 (102,858) 622 --
(Increase) decrease in accounts receivable ................... (7,173) (19,987) (3,524) (22,510)
(Increase) decrease in inventory ............................. (1,584) (1,467) 78 (1,203)
(Increase) decrease in other current assets .................. (1,519) 1,466 (1,525) 614
Increase (decrease) in accounts payable, accrued
liabilities and other ...................................... (11,044) 48,085 25,834 19,387
Increase (decrease) in current and non-current revenues
and royalties due others ................................... 478 (2,290) 11,056 12,540
--------- --------- --------- ---------
Cash provided by operating activities ...................... 139,157 84,089 120,972 54,731
--------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Exploration, development and acquisition of oil and gas
properties ................................................. (189,755) (468,462) (342,045) (117,831)
Proceeds from sale of oil and gas equipment, leasehold and
other ...................................................... 2,503 3,095 6,167 11,953
Net proceeds from sale of Bayard stock ....................... 90,380 -- -- --
Repayment of note receivable ................................. 18,000 -- -- --
Other proceeds from sales .................................... 17 6,428 698 1,104
Long term loans made to third parties ........................ -- (20,000) -- --
Investment in oil field service company ...................... (200) (3,048) -- --
Investment in gas marketing company, net of cash
acquired ................................................... -- -- (363) --
Other investments ............................................ (30,434) (8,000) -- --
Other property and equipment additions ....................... (27,015) (33,867) (8,846) (7,929)
--------- --------- --------- ---------
Cash used in investing activities .......................... (136,504) (523,854) (344,389) (112,703)
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock ....................... -- 288,091 99,498 --
Proceeds from long-term borrowings ........................... -- 342,626 166,667 128,834
Payments on long-term borrowings ............................. -- (119,581) (48,634) (32,370)
Dividends paid on common stock ............................... (2,810) -- -- --
Cash received from exercise of stock options ................. 322 1,387 1,989 818
Other financing .............................................. (322) (379) -- --
--------- --------- --------- ---------
Cash provided by (used in) financing activities ............ (2,810) 512,144 219,520 97,282
--------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents ........... (157) 72,379 (3,897) 39,310
Cash and cash equivalents, beginning of period ................. 124,017 51,638 55,535 16,225
--------- --------- --------- ---------
Cash and cash equivalents, end of period ....................... $ 123,860 $ 124,017 $ 51,638 $ 55,535
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
42
<PAGE> 43
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED JUNE 30,
DECEMBER 31, ---------------------------------
1997 1997 1996 1995
----------------- -------- ------- -------
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
CASH PAYMENTS FOR:
Interest, net of capitalized interest . . . . . . . . . . . $ 17,367 $12,919 $10,751 $4,914
Income taxes . . . . . . . . . . . . . . . . . . . . . . . $ 500 $ -- $ -- $ --
DETAILS OF ACQUISITION OF ANSON PRODUCTION CORPORATION:
Fair value of assets acquired . . . . . . . . . . . . . . . $ 43,000 $ -- $ -- $ --
Accrued liability for estimated cash consideration . . . . $ (15,500) $ -- $ -- $ --
Stock issued . . . . . . . . . . . . . . . . . . . . . . . $ (27,500) $ -- $ -- $ --
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
The Company had a financing arrangement with a vendor to supply certain oil
and gas equipment inventory. The total amounts owed at June 30, 1997, 1996 and
1995 were $1,380,000, $3,156,000 and $6,513,000, respectively. No cash
consideration is exchanged for inventory under this financing arrangement until
actual draws on the inventory are made.
In fiscal 1997, 1996 and 1995, the Company recognized income tax benefits of
$4,808,000, $7,950,000 and $1,229,000, respectively, related to the disposition
of stock options by directors and employees of the Company. The tax benefits
were recorded as an adjustment to deferred income taxes and paid-in capital.
Proceeds from the issuance of $150 million of 7.875% Senior Notes and $150
million of 8.5% Senior Notes in March 1997 are net of $6.4 million in offering
fees and expenses which were deducted from the actual cash received.
Proceeds from the issuances of $90 million of 10.5% Senior Notes in May 1995
and $120 million of 9.125% Senior Notes in April 1996 are net of $2.7 million
and $3.9 million, respectively, in offering fees and expenses which were
deducted from the actual cash received.
On December 22, 1997 the Company declared a dividend of $0.02 per common
share, or $1,486,000, which was paid on January 15, 1998. On June 13, 1997 the
Company declared a dividend of $0.02 per common share, or $1,405,000, which was
paid on July 15, 1997.
43
<PAGE> 44
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED JUNE 30,
DECEMBER 31, -----------------------------------------
1997 1997 1996 1995
---------------- ---------- --------- ----------
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
COMMON STOCK:
Balance, beginning of period .............................. $ 703 $ 3,008 $ 58 $ 51
Issuance of 8,972,000 shares of common stock .............. -- 90 -- --
Issuance of 5,989,500 shares of common stock .............. -- -- 299 --
Exercise of stock options and warrants .................... 2 12 79 7
Issuance of 3,792,724 shares of common stock
to AnSon Production Corporation ..................... 38 -- -- --
Change in par value ....................................... -- (2,407) 2,572 --
--------- --------- --------- ---------
Balance, end of period .................................... 743 703 3,008 58
--------- --------- --------- ---------
COMMON STOCK WARRANTS:
Balance, beginning of period .............................. -- -- -- 5
Exercise of Common Stock Warrants ......................... -- -- -- (5)
--------- --------- --------- ---------
Balance, end of period .................................... -- -- -- --
--------- --------- --------- ---------
PAID-IN CAPITAL:
Balance, beginning of period .............................. 432,991 136,782 30,295 28,243
Exercise of stock options and warrants .................... 320 1,375 1,910 823
Issuance of common stock .................................. 27,459 301,593 105,516 --
Offering expenses and other ............................... -- (13,974) (6,317) --
Cumulative exchange loss .................................. (37) -- -- --
Tax benefit from exercise of stock options ................ -- 4,808 7,950 1,229
Change in par value ....................................... -- 2,407 (2,572) --
--------- --------- --------- ---------
Balance, end of period .................................... 460,733 432,991 136,782 30,295
--------- --------- --------- ---------
ACCUMULATED EARNINGS (DEFICIT):
Balance, beginning of period .............................. (146,805) 37,977 14,622 2,961
Net income (loss) ......................................... (31,574) (183,377) 23,355 11,661
Dividends on common stock of $0.02 per share .............. (2,891) (1,405) -- --
--------- --------- --------- ---------
Balance, end of period .................................... (181,270) (146,805) 37,977 14,622
--------- --------- --------- ---------
TOTAL STOCKHOLDERS' EQUITY .................................. $ 280,206 $ 286,889 $ 177,767 $ 44,975
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
44
<PAGE> 45
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Company
The Company is a petroleum exploration and production company engaged in the
acquisition, exploration, and development of properties for the production of
crude oil and natural gas from underground reservoirs. The Company's properties
are located in Texas, Louisiana, Oklahoma, Montana, North Dakota, New Mexico
and Canada.
The Company has changed its fiscal year end from June 30 to December 31. The
Company's results of operations and cash flows for the six months ended
December 31, 1997 (the "Transition Period") are included in these consolidated
financial statements.
Principles of Consolidation
The accompanying consolidated financial statements of Chesapeake Energy
Corporation (the "Company") include the accounts of its wholly-owned
subsidiaries Chesapeake Operating, Inc. ("COI"), Chesapeake Exploration Limited
Partnership ("CEX"), a limited partnership, Chesapeake Louisiana, L.P.
("CLLP"), a limited partnership, Chesapeake Gas Development Corporation
("CGDC"), Chesapeake Energy Marketing, Inc. ("CEMI"), Chesapeake Canada
Corporation ("CCC"), Chesapeake Energy Louisiana Corporation ("CELC"),
Chesapeake Acquisition Corporation ("CAC"), Lindsay Oil Field Supply,
Inc.("LOF"), Sander Trucking Company, Inc. ("STCO") and subsidiaries of those
entities. As of June 30, 1997, CGDC had been merged into CEX, and LOF and STCO
had been dissolved. All significant intercompany accounts and transactions have
been eliminated. Investments in companies and partnerships which give the
Company significant influence, but not control, over the investee are accounted
for using the equity method.
Accounting Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the dates of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
Cash Equivalents
For purposes of the consolidated financial statements, the Company considers
investments in all highly liquid debt instruments with maturities of three
months or less at date of purchase to be cash equivalents.
Investments in Securities
The Company invests in various equity securities and short-term debt
instruments including corporate bonds and auction preferreds, commercial paper
and government agency notes. The Company has classified all of its short-term
investments in equity and debt instruments as trading securities, which are
carried at fair value with unrealized holding gains and losses included in
earnings. At December 31, 1997, the Company had an unrealized holding loss of
$2.4 million included in interest and other revenue. At June 30, 1997, the
Company had an unrealized holding loss of $0.6 million included in interest and
other revenue. At June 30, 1996 the Company had no trading securities.
Investments in equity securities and limited partnerships that do not have
readily determinable fair values are stated at cost and are included in
noncurrent other assets. In determining realized gains and losses, the cost of
securities sold is based on the average cost method.
45
<PAGE> 46
Inventory
Inventory consists primarily of tubular goods and other lease and well
equipment which the Company plans to utilize in its ongoing exploration and
development activities and is carried at the lower of cost or market using the
specific identification method.
Oil and Gas Properties
The Company follows the full cost method of accounting under which all costs
associated with property acquisition, exploration and development activities
are capitalized. The Company capitalizes internal costs that can be directly
identified with its acquisition, exploration and development activities and
does not include any costs related to production, general corporate overhead or
similar activities (see Note 11). Capitalized costs are amortized on a
composite unit-of-production method based on proved oil and gas reserves. The
Company's oil and gas reserves are estimated at least annually by independent
petroleum engineers and quarterly by the Company's internal engineers. The
average composite rates used for depreciation, depletion and amortization were
$1.57 per equivalent Mcf in the six months ended December 31, 1997 and $1.31,
$0.85 and $0.80 per equivalent Mcf in fiscal 1997, 1996 and 1995, respectively.
Proceeds from the sale of properties are accounted for as reductions to
capitalized costs unless such sales involve a significant change in the
relationship between costs and the value of proved reserves or the underlying
value of unproved properties, in which case a gain or loss is recognized. The
costs of unproved properties are excluded from amortization until the
properties are evaluated. The Company reviews all of its unevaluated properties
quarterly to determine whether or not and to what extent proved reserves have
been assigned to the properties, and otherwise if impairment has occurred.
Unevaluated properties are grouped by major producing area where individual
property costs are not significant, and assessed individually when individual
costs are significant.
The Company reviews the carrying value of its oil and gas properties under
the full cost accounting rules of the Securities and Exchange Commission on a
quarterly basis. Under these rules, capitalized costs, less accumulated
amortization and related deferred income taxes, shall not exceed an amount
equal to the sum of the present value of estimated future net revenues less
estimated future expenditures to be incurred in developing and producing the
proved reserves, less any related income tax effects. At December 31, 1997
capitalized costs of oil and gas properties exceeded the estimated present
value of future net revenues from the Company's proved reserves, net of related
income tax considerations, resulting in a writedown in the carrying value of
oil and gas properties of $110 million. At June 30, 1997, capitalized costs of
oil and gas properties exceeded the estimated present value of future net
revenues from the Company's proved reserves, net of related income tax
considerations, resulting in a fourth quarter writedown in the carrying value
of oil and gas properties of $236 million.
Other Property and Equipment
Other property and equipment consists primarily of gas gathering and
processing facilities, vehicles, land, office buildings and equipment, and
software. Major renewals and betterments are capitalized while the costs of
repairs and maintenance are charged to expense as incurred. The costs of assets
retired or otherwise disposed of and the applicable accumulated depreciation
are removed from the accounts, and the resulting gain or loss is reflected in
operations. Other property and equipment costs are depreciated on both
straight-line and accelerated methods. Buildings are depreciated on a
straight-line basis over 31.5 years. All other property and equipment is
depreciated over the estimated useful lives of the assets, which range from
five to seven years.
Capitalized Interest
During the six months ended December 31, 1997 and fiscal 1997, 1996 and 1995,
interest of approximately $5,087,000, $12,935,000, $6,428,000 and $1,574,000
was capitalized on significant investments in unproved properties that were not
being currently depreciated, depleted, or amortized and on which exploration
activities were in progress.
46
<PAGE> 47
Service Operations
Certain subsidiaries of the Company performed contract services on wells the
Company operated as well as for third parties until June 30, 1996. Oil and gas
service operations revenues and costs and expenses reflected in the
accompanying consolidated statements of operations include amounts derived from
certain of the contractual services provided. The Company's economic interest
in its oil and gas properties was not affected by the performance of these
contractual services and all intercompany profits have been eliminated.
On June 30, 1996, Peak USA Energy Services, Ltd., a limited partnership
("Peak"), was formed by Peak Oilfield Services Company (a joint venture between
Cook Inlet Region, Inc. and Nabors Industries, Inc.) and the Company for the
purpose of purchasing the Company's oilfield service assets and providing rig
moving, transportation and related site construction services. The Company sold
its service company assets to Peak for $6.4 million and simultaneously invested
$2.5 million in exchange for a 33.3% partnership interest in Peak. This
transaction resulted in recognition of a $1.8 million pre-tax gain during the
fourth fiscal quarter of 1996 reported in Interest and other. A deferred gain
from the sale of service company assets of $0.9 million was recorded as a
reduction in the Company's investment in Peak and will be amortized to income
over the estimated useful lives of the Peak assets. The Company's investment in
Peak is accounted for using the equity method.
Income Taxes
The Company has adopted Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes ("SFAS 109"). SFAS 109 requires deferred tax
liabilities or assets to be recognized for the anticipated future tax effects
of temporary differences that arise as a result of the differences in the
carrying amounts and the tax bases of assets and liabilities.
Net Income (Loss) Per Share
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS 128").
SFAS 128 requires presentation of "basic" and "diluted" earnings per share, as
defined, on the face of the statement of operations for all entities with
complex capital structures. SFAS 128 is effective for financial statements
issued for periods ending after December 15, 1997 and requires restatement of
all prior period earnings per share amounts. The Company has adopted SFAS 128
and has restated all prior periods presented.
SFAS 128 requires a reconciliation of the numerators and denominators of the
basic and diluted EPS computations. For the Transition Period and fiscal 1997
there was no difference between actual weighted average shares outstanding,
which are used in computing basic EPS and diluted weighted average shares,
which are used in computing diluted EPS. Options to purchase 8.3 million and
7.9 million shares of common stock at weighted average exercise prices of $5.49
and $7.09 were outstanding during the Transition Period and fiscal 1997 but
were not included in the computation of diluted EPS because the effect of these
outstanding options would be antidilutive. A reconciliation for fiscal 1996
and 1995 is as follows:
47
<PAGE> 48
<TABLE>
<CAPTION>
Income Shares Per-Share
(Numerator) (Denominator) Amount
-------------- -------------- --------------
<S> <C> <C> <C>
FOR THE YEAR ENDED JUNE 30, 1996:
BASIC EPS
Income available to common stockholders . . . . $ 23,355 54,564 $ 0.43
======
EFFECT OF DILUTIVE SECURITIES
Employee stock options . . . . . . . . . . . . -- 3,778
--------- ---------
DILUTED EPS
Income available to common stockholders
and assumed conversions . . . . . . . . . . $ 23,355 58,342 $ 0.40
========= ========= ======
FOR THE YEAR ENDED JUNE 30, 1995:
BASIC EPS
Income available to common stockholders . . . . $ 11,661 52,624 $ 0.22
======
EFFECT OF DILUTIVE SECURITIES
Employee stock options . . . . . . . . . . . . -- 3,248
--------- ---------
DILUTED EPS
Income available to common stockholders
and assumed conversions . . . . . . . . . . $ 11,661 $ 55,872 $ 0.21
========= ========= ======
</TABLE>
Gas Imbalances -- Revenue Recognition
Revenues from the sale of oil and gas production are recognized when title
passes, net of royalties. The Company follows the "sales method" of accounting
for its gas revenue whereby the Company recognizes sales revenue on all gas
sold to its purchasers, regardless of whether the sales are proportionate to
the Company's ownership in the property. A liability is recognized only to the
extent that the Company has a net imbalance in excess of the remaining gas
reserves on the underlying properties. The Company's net imbalance positions at
December 31, 1997 and June 30, 1997 and 1996 were not material.
Hedging
The Company periodically uses certain instruments to hedge its exposure to
price fluctuations on oil and natural gas transactions. Recognized gains and
losses on hedge contracts are reported as a component of the related
transaction. Results for hedging transactions are reflected in oil and gas
sales to the extent related to the Company's oil and gas production, and in oil
and gas marketing sales to the extent related to the Company's marketing
activities (see Note 10).
Debt Issue Costs
Other assets include the costs associated with the issuance of the 10.5%
Senior Notes on May 25, 1995, the 9.125% Senior Notes on April 9, 1996, and the
7.875% and 8.5% Senior Notes on March 17, 1997 (see Note 2). The remaining
unamortized costs on these issuances of Senior Notes at December 31, 1997
totaled $11.6 million and are being amortized over the life of the Senior
Notes.
Stock Options
In October 1995, the Financial Accounting Standards Board issued Statement
No. 123 ("SFAS 123"), "Accounting for Stock Based Compensation". As permitted
by SFAS 123, the Company has continued its previous method of accounting for
stock compensation and adopted the disclosure requirements of this Statement in
fiscal 1997.
Reclassifications
Certain reclassifications have been made to the consolidated financial
statements for the years ended June 30, 1997, 1996 and 1995 to conform to the
presentation used for the December 31, 1997 consolidated financial statements.
2. SENIOR NOTES
On March 17, 1997, the Company issued $150 million principal amount of 7.875%
Senior Notes due 2004 ("7.875% Senior Notes"). The 7.875% Senior Notes are
redeemable at the option of the Company at any time prior to March 15, 2004 at
the make-whole prices determined in accordance with the indenture.
48
<PAGE> 49
On March 17, 1997, the Company issued $150 million principal amount of 8.5%
Senior Notes due 2012 ("8.5% Senior Notes"). The 8.5% Senior Notes are
redeemable at the option of the Company at any time prior to March 15, 2004 at
the make-whole prices determined in accordance with the indenture and, on or
after March 15, 2004 at the redemption price set forth therein.
On April 9, 1996, the Company issued $120 million principal amount of 9.125%
Senior Notes due 2006 ("9.125% Senior Notes"). The 9.125% Senior Notes are
redeemable at the option of the Company at any time prior to April 15, 2001 at
the make-whole prices determined in accordance with the indenture and, on or
after April 15, 2001 at the redemption prices set forth therein. The Company
may also redeem at its option at any time on or prior to April 15, 1999 up to
$42 million of the 9.125% Senior Notes at 109.125% of the principal amount
thereof with the proceeds of an equity offering.
On May 25, 1995, the Company issued $90 million principal amount of 10.5%
Senior Notes due 2002 ("10.5% Senior Notes"). The 10.5% Senior Notes are
redeemable at the option of the Company at any time on or after June 1, 1999.
The Company may also redeem at its option at any time on or prior to June 1,
1998 up to $30 million of the 10.5% Senior Notes at 110% of the principal
amount thereof with the proceeds of an equity offering.
The Company is a holding company and owns no operating assets and has no
significant operations independent of its subsidiaries. The Company's
obligations under the 10.5% Senior Notes, the 9.125% Senior Notes, the 7.875%
Senior Notes and the 8.5% Senior Notes have been fully and unconditionally
guaranteed, on a joint and several basis, by each of the Company's "Restricted
Subsidiaries" (as defined in the respective indentures governing the Senior
Notes) (collectively, the "Guarantor Subsidiaries"). Each of the Guarantor
Subsidiaries is a direct or indirect wholly-owned subsidiary of the Company.
The 10.5%, 9.125%, 7.875% and 8.5% Senior Note Indentures contain certain
covenants, including covenants limiting the Company and the Guarantor
Subsidiaries with respect to asset sales; restricted payments; the incurrence
of additional indebtedness and the issuance of preferred stock; liens; sale and
leaseback transactions; lines of business; dividend and other payment
restrictions affecting Guarantor Subsidiaries; mergers or consolidations; and
transactions with affiliates. The Company is obligated to repurchase the 10.5%
and 9.125% Senior Notes in the event of a change of control or certain asset
sales.
Set forth below are condensed consolidating financial statements of the
Guarantor Subsidiaries, the Company's subsidiaries which are not guarantors 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.
As of and for the six months ended December 31, 1997, the Guarantor
Subsidiaries were COI, CEX, CLLP, CELC and CCC, and the Non-Guarantor
Subsidiaries were CEMI, CAC and subsidiaries of those companies. As of and for
the year ended June 30, 1997, the Guarantor Subsidiaries were COI, CEX, CLLP,
CELC, and CGDC, and the Non-Guarantor Subsidiaries were CEMI and CCC. Prior to
fiscal 1997, the Guarantor Subsidiaries were COI, CEX and two service company
subsidiaries the assets of which were sold effective June 30, 1996, and the
Non-Guarantor Subsidiaries were CGDC and CEMI (which was acquired in December
1995).
49
<PAGE> 50
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 1997
($ IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
NON-
GUARANTOR GUARANTOR
SUBSIDIARIES SUBSIDIARIES COMPANY ELIMINATIONS CONSOLIDATED
----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ................ $ (589) $ 13,999 $ 110,450 $ -- $ 123,860
Short-term investments ................... -- -- 12,570 -- 12,570
Accounts receivable ...................... 57,476 22,882 1,524 (7,708) 74,174
Inventory ................................ 4,918 575 -- -- 5,493
Other .................................... 1,613 1 10 -- 1,624
----------- ----------- ----------- ----------- -----------
Total Current Assets ............. 63,418 37,457 124,554 (7,708) 217,721
----------- ----------- ----------- ----------- -----------
PROPERTY AND EQUIPMENT:
Oil and gas properties ................... 1,056,118 39,245 -- -- 1,095,363
Unevaluated leasehold .................... 125,155 -- -- -- 125,155
Other property and equipment ............. 51,868 343 15,422 -- 67,633
Less: accumulated depreciation,
depletion and amortization ............ (593,359) (14,650) (955) -- (608,964)
----------- ----------- ----------- ----------- -----------
639,782 24,938 14,467 -- 679,187
----------- ----------- ----------- ----------- -----------
INVESTMENTS IN SUBSIDIARIES AND
INTERCOMPANY ADVANCES .................... 81,755 49,958 903,713 (1,035,426) --
----------- ----------- ----------- ----------- -----------
OTHER ASSETS ............................... 10,189 6,918 38,769 -- 55,876
----------- ----------- ----------- ----------- -----------
TOTAL ASSETS ............................... $ 795,144 $ 119,271 $ 1,081,503 $(1,043,134) $ 952,784
=========== =========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable and current
maturities of long-term debt .......... $ -- $ -- $ -- $ -- $ --
Accounts payable and other ............... 104,259 29,649 27,280 (7,708) 153,480
----------- ----------- ----------- ----------- -----------
Total Current Liabilities ........ 104,259 29,649 27,280 (7,708) 153,480
----------- ----------- ----------- ----------- -----------
LONG-TERM DEBT ............................. -- -- 508,992 -- 508,992
----------- ----------- ----------- ----------- -----------
REVENUES AND ROYALTIES DUE
OTHERS ................................... 10,106 -- -- -- 10,106
----------- ----------- ----------- ----------- -----------
DEFERRED INCOME TAXES ...................... -- -- -- -- --
----------- ----------- ----------- ----------- -----------
INTERCOMPANY PAYABLES ...................... 853,958 2,959 -- (856,917) --
----------- ----------- ----------- ----------- -----------
STOCKHOLDERS' EQUITY:
Common Stock ............................... 10 3 733 (3) 743
Other ...................................... (173,189) 86,660 544,498 (178,506) 279,463
----------- ----------- ----------- ----------- -----------
(173,179) 86,663 545,231 (178,509) 280,206
----------- ----------- ----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY . ................................... $ 795,144 $ 119,271 $ 1,081,503 $(1,043,134) $ 952,784
=========== =========== =========== =========== ===========
</TABLE>
50
<PAGE> 51
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF JUNE 30, 1997
($ IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
NON-
GUARANTOR GUARANTOR
SUBSIDIARIES SUBSIDIARIES COMPANY ELIMINATIONS CONSOLIDATED
------------ ------------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
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 ............... 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)
--------- --------- --------- --------- ---------
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 AND ROYALTIES DUE
OTHERS . . . . . . . . . . . . . . 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
--------- --------- --------- --------- ---------
(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>
51
<PAGE> 52
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF JUNE 30, 1996
($ IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
NON-
GUARANTOR GUARANTOR
SUBSIDIARIES SUBSIDIARIES COMPANY ELIMINATIONS CONSOLIDATED
------------ ------------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents .................. $ 4,061 $ 2,751 $ 44,826 $ -- $ 51,638
Accounts receivable ........................ 44,080 7,723 -- (1,589) 50,214
Inventory .................................. 4,947 216 -- -- 5,163
Other ...................................... 2,155 3 -- -- 2,158
----------- ----------- ----------- ----------- -----------
Total Current Assets ............... 55,243 10,693 44,826 (1,589) 109,173
----------- ----------- ----------- ----------- -----------
PROPERTY AND EQUIPMENT:
Oil and gas properties ..................... 338,610 24,603 -- -- 363,213
Unevaluated leasehold ...................... 165,441 -- -- -- 165,441
Other property and equipment ............... 9,608 61 8,493 -- 18,162
Less: accumulated depreciation,
depletion and amortization .............. (87,193) (8,007) (442) -- (95,642)
----------- ----------- ----------- ----------- -----------
426,466 16,657 8,051 -- 451,174
----------- ----------- ----------- ----------- -----------
INVESTMENTS IN SUBSIDIARIES AND
INTERCOMPANY ADVANCES ...................... 519,386 8,132 382,388 (909,906) --
----------- ----------- ----------- ----------- -----------
OTHER ASSETS ................................. 2,310 940 8,738 -- 11,988
----------- ----------- ----------- ----------- -----------
TOTAL ASSETS ................................. $ 1,003,405 $ 36,422 $ 444,003 $ (911,495) $ 572,335
=========== =========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable and current maturities
of long-term debt ....................... $ 3,846 $ 2,880 $ 29 $ -- $ 6,755
Accounts payable and other ................. 91,069 7,339 5,260 (1,589) 102,079
----------- ----------- ----------- ----------- -----------
Total Current Liabilities .......... 94,915 10,219 5,289 (1,589) 108,834
----------- ----------- ----------- ----------- -----------
LONG-TERM DEBT ............................... 2,113 10,020 256,298 -- 268,431
----------- ----------- ----------- ----------- -----------
REVENUES AND ROYALTIES DUE
OTHERS ..................................... 5,118 -- -- -- 5,118
----------- ----------- ----------- ----------- -----------
DEFERRED INCOME TAXES ........................ 23,950 1,335 (13,100) -- 12,185
----------- ----------- ----------- ----------- -----------
INTERCOMPANY PAYABLES ........................ 824,307 8,182 73,647 (906,136) --
----------- ----------- ----------- ----------- -----------
STOCKHOLDERS' EQUITY:
Common Stock ............................... 117 2 2,891 (2) 3,008
Other ...................................... 52,885 6,664 118,978 (3,768) 174,759
----------- ----------- ----------- ----------- -----------
53,002 6,666 121,869 (3,770) 177,767
----------- ----------- ----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY ..................................... $ 1,003,405 $ 36,422 $ 444,003 $ (911,495) $ 572,335
=========== =========== =========== =========== ===========
</TABLE>
52
<PAGE> 53
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR
SUBSIDIARIES SUBSIDIARIES COMPANY ELIMINATIONS CONSOLIDATED
------------ ------------ -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED DECEMBER 31, 1997:
REVENUES:
Oil and gas sales ......................... $ 93,384 $ 1,199 $ -- $ 1,074 $ 95,657
Oil and gas marketing sales ............... -- 101,689 -- (43,448) 58,241
Interest and other ........................ 515 192 110,751 (32,492) 78,966
--------- --------- --------- --------- ---------
Total Revenues ............................ 93,899 103,080 110,751 (74,866) 232,864
--------- --------- --------- --------- ---------
COSTS AND EXPENSES:
Production expenses and taxes ............. 9,905 189 -- -- 10,094
Oil and gas marketing expenses ............ -- 100,601 -- (42,374) 58,227
Impairment of oil and gas properties ...... 96,000 14,000 -- -- 110,000
Oil and gas depreciation, depletion and
amortization .............................. 59,758 650 -- -- 60,408
Other depreciation and amortization ....... 1,383 40 991 -- 2,414
General and administrative ................ 4,598 1,132 117 -- 5,847
Interest .................................. 27,481 39 22,420 (32,492) 17,448
--------- --------- --------- --------- ---------
Total Costs & Expenses .................... 199,125 116,651 23,528 (74,866) 264,438
--------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM ........................ (105,226) (13,571) 87,223 -- (31,574)
INCOME TAX EXPENSE (BENEFIT) .............. -- -- -- -- --
--------- --------- --------- --------- ---------
NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEM $(105,226) $ (13,571) $ 87,223 $ -- $ (31,574)
========= ========= ========= ========= =========
</TABLE>
53
<PAGE> 54
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
($ IN THOUSANDS)
<TABLE>
<CAPTION> NON-
GUARANTOR GUARANTOR
SUBSIDIARIES SUBSIDIARIES COMPANY ELIMINATIONS CONSOLIDATED
------------ ------------ ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED JUNE 30, 1997:
REVENUES:
Oil and gas sales ............................ $ 191,303 $-- $ -- $ 1,617 $ 192,920
Oil and gas marketing sales .................. -- 145,942 -- (69,770) 76,172
Interest and other ........................... 778 749 49,224 (39,528) 11,223
--------- --------- --------- --------- ---------
Total Revenues ............................... 192,081 146,691 49,224 (107,681) 280,315
--------- --------- --------- --------- ---------
COSTS AND EXPENSES:
Production expenses and taxes ................ 15,107 -- -- -- 15,107
Oil and gas marketing expenses ............... -- 143,293 -- (68,153) 75,140
Impairment of oil and gas properties ......... 236,000 -- -- -- 236,000
Oil and gas depreciation, depletion
amortization ................................. 103,264 -- -- -- 103,264
Other depreciation and amortization .......... 2,152 80 1,550 -- 3,782
General and administrative ................... 6,313 921 1,568 -- 8,802
Interest ..................................... 37,644 10 20,424 (39,528) 18,550
--------- --------- --------- --------- ---------
Total Costs & Expenses ....................... 400,480 144,304 23,542 (107,681) 460,645
--------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM ........................... (208,399) 2,387 25,682 -- (180,330)
INCOME TAX EXPENSE (BENEFIT) ................. (4,129) 47 509 -- (3,573)
--------- --------- --------- --------- ---------
NET INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM ........................... (204,270) 2,340 25,173 -- (176,757)
--------- --------- --------- --------- ---------
EXTRAORDINARY ITEM:
Loss on early extinguishment of debt, net of
applicable ................................... (769) -- (5,851) -- (6,620)
--------- --------- --------- --------- ---------
income tax ...............................
NET INCOME (LOSS) ............................ $(205,039) $ 2,340 $ 19,322 $ -- $(183,377)
========= ========= ========= ========= =========
FOR THE YEAR ENDED JUNE 30, 1996:
REVENUES:
Oil and gas sales ............................ $ 103,712 $ 6,884 $ -- $ 253 $ 110,849
Gas marketing sales .......................... -- 34,973 -- (6,545) 28,428
Oil and gas service operations ............... 6,314 -- -- -- 6,314
Interest and other ........................... 1,917 238 1,676 -- 3,831
--------- --------- --------- --------- ---------
Total Revenues................................ 111,943 42,095 1,676 (6,292) 149,422
--------- --------- --------- --------- ---------
COSTS AND EXPENSES:
Production expenses and taxes ................ 7,557 746 -- -- 8,303
Gas marketing expenses ....................... -- 33,744 -- (6,292) 27,452
Oil and gas service operations ............... 4,895 -- -- -- 4,895
Oil and gas depreciation, depletion
amortization ................................. 48,333 2,566 -- -- 50,899
Other depreciation and amortization .......... 1,924 73 1,160 -- 3,157
General and administrative ................... 3,683 496 649 -- 4,828
Interest and other ........................... 508 711 12,460 -- 13,679
--------- --------- --------- --------- ---------
Total Costs & Expenses ....................... 66,900 38,336 14,269 (6,292) 113,213
--------- --------- --------- --------- ---------
Income (loss) before income taxes ............ 45,043 3,759 (12,593) -- 36,209
Income tax expense (benefit) ................. 15,990 1,335 (4,471) -- 12,854
--------- --------- --------- --------- ---------
Net income (loss) ............................ $ 29,053 $ 2,424 $ (8,122) $ -- $ 23,355
========= ========= ========= ========= =========
FOR THE YEAR ENDED JUNE 30, 1995:
REVENUES:
Oil and gas sales ............................ $ 55,417 $ 1,566 $ -- $ -- $ 56,983
Oil and gas service operations ............... 8,836 -- -- -- 8,836
Interest and other ........................... 1,394 -- 130 -- 1,524
--------- --------- --------- --------- ---------
Total Revenues................................ 65,647 1,566 130 -- 67,343
--------- --------- --------- --------- ---------
COSTS AND EXPENSES:
Production expenses and taxes ................ 4,045 211 -- -- 4,256
Oil and gas service operations ............... 7,747 -- -- -- 7,747
Oil and gas depreciation, depletion
amortization ................................. 24,775 635 -- -- 25,410
Other depreciation and amortization .......... 1,245 5 515 -- 1,765
General and administrative ................... 2,620 58 900 -- 3,578
Interest and other ........................... 570 184 5,873 -- 6,627
--------- --------- --------- --------- ---------
Total Costs & Expenses........................ 41,002 1,093 7,288 -- 49,383
--------- --------- --------- --------- ---------
Income (loss) before income taxes ............ 24,645 473 (7,158) -- 17,960
Income tax expense (benefit) ................. 8,639 165 (2,505) -- 6,299
--------- --------- --------- --------- ---------
Net Income (loss) .......................... $ 16,006 $ 308 $ (4,653) $ -- $ 11,661
========= ========= ========= ========= =========
</TABLE>
54
<PAGE> 55
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES COMPANY ELIMINATIONS CONSOLIDATED
------------ ------------- -------- ------------ -----------
<S> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED DECEMBER 31, 1997:
CASH FLOWS FROM OPERATING ACTIVITIES ........ $ 28,598 $ (10,842) $ 121,401 $-- $ 139,157
--------- --------- --------- ---- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Oil and gas properties .................... (189,772) 17 -- -- (189,755)
Proceeds from sale of assets .............. 2,520 -- -- -- 2,520
Investment in service operations .......... (200) -- -- -- (200)
Other investments ......................... (26,472) -- 99,380 -- 72,908
Other additions ........................... (22,864) 1,340 (453) -- (21,977)
--------- --------- --------- ---- ---------
(236,788) 1,357 98,927 -- (136,504)
--------- --------- --------- ---- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid on common stock ............ -- -- (2,810) -- (2,810)
Exercise of stock options ................. -- -- 322 -- 322
Other financing ........................... -- (322) -- -- (322)
Intercompany advances, net ................ 214,135 19,443 (233,578) -- --
--------- --------- --------- ---- ---------
214,135 19,121 (236,066) -- (2,810)
--------- --------- --------- ---- ---------
Net increase (decrease) in cash and cash
equivalents ............................... 5,945 9,636 (15,738) -- (157)
Cash, beginning of period ................... (6,534) 4,363 126,188 -- 124,017
--------- --------- --------- ---- ---------
Cash, end of period ......................... $ (589) $ 13,999 $ 110,450 $-- $ 123,860
========= ========= ========= ==== =========
</TABLE>
55
<PAGE> 56
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES COMPANY ELIMINATIONS CONSOLIDATED
------------ ------------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED JUNE 30, 1997:
CASH FLOWS FROM OPERATING ACTIVITIES ........ $ 165,850 $ (11,008) $ (70,753) $ -- $ 84,089
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Oil and gas properties .................... (468,519) 57 -- -- (468,462)
Proceeds from sale of assets .............. 9,523 -- -- -- 9,523
Investment in service operations .......... (3,048) -- -- -- (3,048)
Long-term loans to third parties .......... (2,000) -- (18,000) -- (20,000)
Other investments ......................... -- -- (8,000) -- (8,000)
Other additions ........................... (24,318) (1,999) (7,550) -- (33,867)
--------- --------- --------- --------- ---------
(488,362) (1,942) (33,550) -- (523,854)
--------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings .................. 50,000 -- 292,626 -- 342,626
Payments on borrowings .................... (118,901) -- (680) -- (119,581)
Exercise of stock options ................. -- -- 1,387 -- 1,387
Issuance of common stock .................. -- -- 288,091 -- 288,091
Other financing ........................... -- -- (379) -- (379)
Intercompany advances, net ................ 380,735 14,645 (395,380) -- --
--------- --------- --------- --------- ---------
311,834 14,645 185,665 -- 512,144
--------- --------- --------- --------- ---------
Net increase (decrease) in cash and cash
equivalents ............................... (10,678) 1,695 81,362 -- 72,379
Cash, beginning of period ................... 4,144 2,668 44,826 -- 51,638
--------- --------- --------- --------- ---------
Cash, end of period ......................... $ (6,534) $ 4,363 $ 126,188 $ -- $ 124,017
========= ========= ========= ========= =========
FOR THE YEAR ENDED JUNE 30, 1996:
CASH FLOWS FROM OPERATING ACTIVITIES ........ $ 126,868 $ 4,204 $ (10,100) $ -- $ 120,972
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Oil and gas properties .................... (341,246) (6,099) -- 5,300 (342,045)
Proceeds from sales ....................... 12,165 -- -- (5,300) 6,865
Investment in gas marketing company ....... -- 266 (629) -- (363)
Other additions ........................... (4,683) (109) (4,054) -- (8,846)
--------- --------- --------- --------- ---------
(333,764) (5,942) (4,683) -- (344,389)
--------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings .................. 40,350 10,300 116,017 -- 166,667
Payments on borrowings .................... (45,397) (3,200) (37) -- (48,634)
Exercise of stock options ................. -- -- 1,989 -- 1,989
Issuance of common stock .................. -- -- 99,498 -- 99,498
Intercompany advances, net ................ 162,777 (2,616) (160,161) -- --
--------- --------- --------- --------- ---------
157,730 4,484 57,306 -- 219,520
--------- --------- --------- --------- ---------
Net increase (decrease) in cash and cash
equivalents ............................... (49,166) 2,746 42,523 -- (3,897)
Cash, beginning of period ................... 53,227 5 2,303 -- 55,535
--------- --------- --------- --------- ---------
Cash, end of period ......................... $ 4,061 $ 2,751 $ 44,826 $ -- $ 51,638
========= ========= ========= ========= =========
FOR THE YEAR ENDED JUNE 30, 1995:
CASH FLOWS FROM OPERATING ACTIVITIES ........ $ 60,049 $ 305 $ (4,692) $ (931) $ 54,731
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Oil and gas properties .................... (113,722) (4,109) -- -- (117,831)
Proceeds from sales ....................... 24,557 -- -- (11,500) 13,057
Purchase of oil and gas properties ........ -- (11,500) -- 11,500 --
Other additions ........................... (7,929) -- -- -- (7,929)
--------- --------- --------- --------- ---------
(97,094) (15,609) -- -- (112,703)
--------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings .................. 30,034 11,500 87,300 -- 128,834
Payments on borrowings .................... (32,032) (700) 362 -- (32,370)
Intercompany advances, net ................ 78,324 4,509 (83,764) 931 --
Other financing ........................... -- -- 818 -- 818
--------- --------- --------- --------- ---------
76,326 15,309 4,716 931 97,282
--------- --------- --------- --------- ---------
Net increase (decrease) in cash and cash
equivalents ............................... 39,281 5 24 -- 39,310
Cash, beginning of period ................... 13,946 -- 2,279 -- 16,225
--------- --------- --------- --------- ---------
Cash, end of period ......................... $ 53,227 $ 5 $ 2,303 $ -- $ 55,535
========= ========= ========= ========= =========
</TABLE>
56
<PAGE> 57
3. NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
DECEMBER 31, -------------------
1997 1997 1996
------------- ---------- --------
($ IN THOUSANDS)
<S> <C> <C> <C>
7.875% Senior Notes (see Note 2) . . . . . . . . . . . . . . . . $ 150,000 $ 150,000 $ --
Discount on 7.875% Senior Notes . . . . . . . . . . . . . . . . . (106) (115) --
8.5% Senior Notes (see Note 2) . . . . . . . . . . . . . . . . . 150,000 150,000 --
Discount on 8.5% Senior Notes . . . . . . . . . . . . . . . . . . (833) (862) --
9.125% Senior Notes (see Note 2) . . . . . . . . . . . . . . . . 120,000 120,000 120,000
Discount on 9.125% Senior Notes . . . . . . . . . . . . . . . . . (69) (73) (81)
10.5% Senior Notes (see Note 2) . . . . . . . . . . . . . . . . . 90,000 90,000 90,000
12% Senior Notes . . . . . . . . . . . . . . . . . . . . . . . . -- -- 47,500
Discount on 12% Senior Notes . . . . . . . . . . . . . . . . . . -- -- (1,772)
Term note payable to Union Bank collateralized by CGDC,
not guaranteed by the Company, variable interest at
Union Bank's base rate (8.25% per annum at June 30,
1996), or at Eurodollar rate +1.875% collateralized by
CGDC's producing oil and gas properties, payable in
monthly installments through November 2002 . . . . . . . . . . -- -- 12,900
Note payable to a vendor, collateralized by oil and gas
tubulars, payments due 60 days from shipment of the
tubulars . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 1,380 3,156
Note payable to a bank, variable interest at a referenced
base rate + 1.75% (10% per annum at June 30, 1996),
collateralized by office buildings, payments due in
monthly installments through May 1998 . . . . . . . . . . . . -- -- 680
Notes payable to various entities to acquire oil service
equipment, interest varies from 7% to 11% per annum,
collateralized by equipment . . . . . . . . . . . . . . . . . -- -- 1,212
Other collateralized . . . . . . . . . . . . . . . . . . . . . . -- -- 1,469
Other unsecured . . . . . . . . . . . . . . . . . . . . . . . . . -- -- 122
--------- --------- ---------
Total notes payable and long-term debt . . . . . . . . . . . . . 508,992 510,330 275,186
Less -- Current maturities . . . . . . . . . . . . . . . . . . . -- (1,380) (6,755)
--------- --------- ---------
Notes payable and long-term debt, net of current
maturities . . . . . . . . . . . . . . . . . . . . . . . . . . $ 508,992 $ 508,950 $ 268,431
========= ========= =========
</TABLE>
The aggregate scheduled maturities of notes payable and long-term debt for
the next five fiscal years ending December 31, 2002 and thereafter were as
follows as of December 31, 1997 (in thousands of dollars):
<TABLE>
<CAPTION>
<S> <C>
1998 . . . . . . . . . . . . . . . . . . . . . . . . . $ --
1999 . . . . . . . . . . . . . . . . . . . . . . . . . --
2000 . . . . . . . . . . . . . . . . . . . . . . . . . --
2001 . . . . . . . . . . . . . . . . . . . . . . . . . --
2002 . . . . . . . . . . . . . . . . . . . . . . . . . 90,000
After 2002 . . . . . . . . . . . . . . . . . . . . . . 418,992
--------
$508,992
========
</TABLE>
In January 1998, the Company arranged a $500 million revolving credit
facility with a group of commercial banks. The facility has an initial
committed borrowing base of $200 million ($168 million until the acquisition of
DLB Oil & Gas, Inc. (see footnote 14) is consummated), of which $120 million
was used to pay off bank debt assumed in the acquisition of Hugoton Energy
Corporation (see footnote 14) on March 10, 1998 and the remainder is
anticipated to be used for other acquisitions. The borrowing base can be
expanded as other acquisitions create collateral value. Borrowings under the
facility are secured by CAC's pledge of its subsidiaries' capital stock and
bear interest currently at a rate equal to the Eurodollar rate plus 1.5%.
During the quarter ended December 31, 1996, the Company exercised its
covenant defeasance rights with respect to all of its outstanding $47.5 million
of 12% Senior Notes due 2001. A combination of cash and non-callable U.S.
Government Securities in the amount of $55.0 million was irrevocably deposited
in trust to satisfy the Company's obligations, including accrued but unpaid
interest through the date of defeasance of $1.3 million.
57
<PAGE> 58
4. CONTINGENCIES AND COMMITMENTS
The Company and certain of its officers and directors are defendants in a
consolidated class action suit alleging violations of the Securities Exchange
Act of 1934. The plaintiffs assert that the defendants made material
misrepresentations and failed to disclose material facts about the success of
the Company's exploration efforts in the Louisiana Trend. As a result, the
complaint alleges the price of the Company's common stock was artificially
inflated from January 25, 1996 until 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. The plaintiffs seek a
determination that the suit is a proper class action and damages in an
unspecified amount, together with interest and costs of litigation, including
attorneys' fees. The Company and the individual defendants believe that these
claims are without merit, and intend to defend against them vigorously. No
estimate of loss or range of estimate of loss, if any, can be made at this
time.
Various purported class actions alleging violations of the Securities Act of
1933 and the Oklahoma Securities Act have been filed against the Company and
others on behalf of investors who purchased common stock of Bayard Drilling
Technologies, Inc. ("Bayard") in its initial public offering in November 1997.
Total proceeds of the offering were $254 million, of which the Company received
net proceeds of $90.2 million. Plaintiffs allege that the Company, a major
customer of Bayard's drilling services and the owner of 30.1% of Bayard's
common stock outstanding prior to the offering, was a controlling person of
Bayard. Plaintiffs assert that the Bayard prospectus contained material
omissions and misstatements relating to (i) the Company's financial "hardships"
and their significance on Bayard's business, (ii) increased costs associated
with Bayard's growth strategy and (iii) undisclosed pending related-party
transactions between Bayard and third parties other than the Company. The
alleged defective disclosures are claimed to have resulted in a decline in
Bayard's share price following the public offering. Each plaintiff seeks a
determination that the suit is a proper class action and damages in an
unspecified amount or rescission, together with interest and costs of
litigation, including attorneys' fees. The Company believes that these actions
are without merit and intends to defend against them vigorously. No estimate
of loss or range of estimate of loss, if any, can be made at this time.
In October 1996, Union Pacific Resources Company ("UPRC") sued the Company
alleging infringement of a patent for a drilling method, tortious interference
with confidentiality contracts between UPRC and certain of its former employees
and misappropriation of proprietary information of UPRC. UPRC's claims against
the Company are based on services provided to the Company by a third party
vendor controlled by former UPRC employees. UPRC is seeking injunctive relief,
damages of an unspecified amount, including actual, enhanced, consequential and
punitive damages, interest, costs and attorneys' 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 construe UPRC's patent claims and various motions for summary judgment. No
estimate of a probable loss or range of estimate of a probable loss, if any,
can be made at this time; however, in reports filed in the proceeding, experts
for UPRC claim that damages could be as much as $18 million while Company
experts state that the amount should not exceed $25,000, in each case based on
a reasonable royalty.
The Company is currently involved in various other routine disputes
incidental to its business operations. While it is not possible to determine
the ultimate disposition of these matters, management, after consultation with
legal counsel, is of the opinion that the final resolution of all such
currently pending or threatened litigation is not likely to have a material
adverse effect on the consolidated financial position or results of operations
of the Company.
The Company has employment contracts with its two principal shareholders and
its chief financial officer and various other senior management personnel which
provide for annual base salaries, bonus compensation and various benefits. The
contracts provide for the continuation of salary and benefits for the
respective terms of the agreements in the event of termination of employment
without cause. These agreements expire at various times from June 30, 1998
through June 30, 2000.
58
<PAGE> 59
Due to the nature of the oil and gas business, the Company and its
subsidiaries are exposed to possible environmental risks. The Company has
implemented various policies and procedures to avoid environmental
contamination and risks from environmental contamination. The Company is not
aware of any potential material environmental issues or claims.
As of December 31, 1997, the Company had guaranteed $1.8 million of debt owed
by Peak.
On December 16, 1997, the Company acquired AnSon Production Corporation
("AnSon"), a privately owned oil and gas producer based in Oklahoma City.
Consideration for this acquisition was approximately $43 million consisting of
the issuance of 3,792,724 shares of Chesapeake's common stock and cash
consideration in accordance with the terms of the merger agreement. The
Company has accrued $15.5 million as the estimated cash payment which will be
made during 1998.
The Company is in the process of acquiring various proved oil and gas
reserves through mergers or through purchases of oil and gas properties. Upon
the closing of each of these acquisitions, the Company will issue either cash
or a combination of cash and Chesapeake common stock as consideration for the
assets and liabilities being acquired. See Note 14 -- Subsequent Events and
Pending Transactions.
5. INCOME TAXES
The components of the income tax provision (benefit) for each of the periods
are as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED JUNE 30,
DECEMBER 31, ------------------------------
1997 1997 1996 1995
---------------- ------- ------- -------
($ IN THOUSANDS)
<S> <C> <C>
Current . . . . . . . . . . . . . . . . . . . . $ -- $ -- $ -- $ --
Deferred . . . . . . . . . . . . . . . . . . . -- (3,573) 12,854 6,299
--------- ------- ------- ------
Total . . . . . . . . . . . . . . . . $ -- $(3,573) $12,854 $6,299
========= ======= ======= ======
</TABLE>
The effective income tax expense (benefit) differed from the computed
"expected" federal income tax expense (benefit) on earnings before income taxes
for the following reasons:
<TABLE>
<CAPTION>
SIX MONTHS ENDIING YEAR ENDED JUNE 30,
DECEMBER 31, ---------------------------------
1997 1997 1996 1995
------------------ ---------- -------- --------
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
Computed "expected" income tax provision (benefit) $ (11,051) $(63,116) $12,673 $6,286
Tax percentage depletion . . . . . . . . . . . (48) (294) (238) (144)
Valuation allowance . . . . . . . . . . . . . . 13,818 64,116 -- --
State income taxes and other . . . . . . . . . (2,719) (4,279) 419 157
--------- ------- ------- ------
$ -- $(3,573) $12,854 $6,299
========= ======= ======= ======
</TABLE>
Deferred income taxes are provided to reflect temporary differences in the
basis of net assets for income tax and financial reporting purposes. The tax
effected temporary differences and tax loss carryforwards which comprise
deferred taxes are as follows:
59
<PAGE> 60
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED JUNE 30,
DECEMBER 31, ----------------------------------------
1997 1997 1996 1995
---------------- ----------- --------- ------------
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
Deferred tax liabilities:
Acquisition, exploration and development costs and
related depreciation, depletion and
amortization .................................. $ (49,657) $ (49,831) $ (63,725) $ (31,220)
Deferred tax assets:
Net operating loss carryforwards ................ 126,485 112,889 50,776 23,414
Percentage depletion carryforward ............... 1,106 1,058 764 526
--------- --------- --------- ---------
127,591 113,947 51,540 23,940
--------- --------- --------- ---------
Net deferred tax asset (liability) .............. 77,934 64,116 (12,185) (7,280)
Less: Valuation allowance ....................... (77,934) (64,116) -- --
--------- --------- --------- ---------
Total deferred tax asset (liability) ............ $ -- $ -- $ (12,185) $ (7,280)
========= ========= ========= =========
</TABLE>
SFAS 109 requires that the Company record a valuation allowance when it is
more likely than not that some portion or all of the deferred tax assets will
not be realized. In the Transition Period and the fourth quarter of fiscal
1997, the Company recorded a $110 million writedown and a $236 million
writedown, respectively, related to the impairment of oil and gas properties.
The writedowns and significant tax net operating loss carryforwards (caused
primarily by expensing intangible drilling costs for tax purposes) resulted in
a net deferred tax asset at December 31, 1997 and June 30, 1997. Management
believes it is more likely than not that the Company will generate future tax
net operating losses for at least the next five years, based in part on the
Company's continued drilling efforts. Therefore, the Company has recorded a
valuation allowance equal to the net deferred tax asset.
At December 31, 1997, the Company had regular tax net operating loss
carryforwards of approximately $337 million and alternative minimum tax net
operating loss carryforwards of approximately $83 million. These loss
carryforward amounts will expire during the years 2007 through 2012. The
Company also had a percentage depletion carryforward of approximately $2.9
million at December 31, 1997, which is available to offset future federal
income taxes payable and has no expiration date.
In accordance with certain provisions of the Tax Reform Act of 1986, a change
of greater than 50% of the beneficial ownership of the Company within a
three-year period (an "Ownership Change") would place an annual limitation on
the Company's ability to utilize its existing tax carryforwards. Under
regulations issued by the Internal Revenue Service, the Company has had an
Ownership Change. However, management believes this will not result in a
significant limitation of the utilization of the tax carryforwards.
6. RELATED PARTY TRANSACTIONS
Certain directors, shareholders and employees of the Company have acquired
working interests in certain of the Company's oil and gas properties. The
owners of such working interests are required to pay their proportionate share
of all costs. As of December 31, 1997 and June 30, 1997, 1996 and 1995, the
Company had accounts receivable from such parties of $4.2 million, $7.4
million, $2.9 million and $4.4 million, respectively.
During the six months ended December 31, 1997 and during fiscal 1997, 1996
and 1995, the Company incurred legal expenses of $388,000, $207,000, $347,000
and $516,000, respectively, for legal services provided by a law firm of which
a director is a member.
7. EMPLOYEE BENEFIT PLANS
The Company maintains the Chesapeake Energy Corporation Savings and Incentive
Stock Bonus Plan, a 401(k) profit sharing plan. Eligible employees may make
voluntary contributions to the plan which are matched by the Company for up to
10% of the employee's annual salary with the Company's common stock. The amount
of employee contribution is limited as specified in the plan. The Company may,
at its discretion, make additional contributions to the plan. The Company
contributed $418,000, $603,000, $187,000 and $95,000 to the plan during the six
months ended December 31, 1997 and the fiscal years ended June 30, 1997, 1996
and 1995, respectively.
60
<PAGE> 61
8. MAJOR CUSTOMERS
Sales to individual customers constituting 10% or more of total oil and gas
sales were as follows:
<TABLE>
<CAPTION>
PERCENT OF
SIX MONTHS ENDED DECEMBER 31, AMOUNT OIL AND GAS SALES
-------------------------------- -------------- ------------------
($ IN THOUSANDS)
<S> <C> <C>
1997 Aquila Southwest Pipeline Corporation $ 20,138 21%
Koch Oil Company $ 18,594 19%
GPM Gas Corporation $ 12,610 13%
FISCAL YEAR ENDED JUNE 30,
--------------------------------
1997 Aquila Southwest Pipeline Corporation $ 53,885 28%
Koch Oil Company $ 29,580 15%
GPM Gas Corporation $ 27,682 14%
1996 Aquila Southwest Pipeline Corporation $ 41,900 38%
GPM Gas Corporation $ 28,700 26%
Wickford Energy Marketing, L.C. $ 18,500 17%
1995 Aquila Southwest Pipeline Corporation $ 18,548 33%
Wickford Energy Marketing, L.C. $ 15,704 28%
GPM Gas Corporation $ 11,686 21%
</TABLE>
Management believes that the loss of any of the above customers would not
have a material impact on the Company's results of operations or its financial
position.
9. STOCKHOLDERS' EQUITY AND STOCK BASED COMPENSATION
On December 16, 1997, Chesapeake acquired AnSon, a privately owned oil and
gas producer based in Oklahoma City. Consideration for this acquisition was
approximately $43 million consisting of the issuance of 3,792,724 shares of
Chesapeake common stock and cash consideration in accordance with the terms of
the merger agreement.
On December 2, 1996, the Company completed a public offering of 8,972,000
shares of Common Stock at a price of $33.63 per share, resulting in net
proceeds to the Company of approximately $288.1 million.
On April 12, 1996, the Company completed a public offering of 5,989,500
shares of Common Stock at a price of $17.67 per share, resulting in net
proceeds to the Company of approximately $99.4 million.
A 2-for-1 stock split of the Common Stock in December 1994, and in December
1996, and a 3-for-2 stock split of the Common Stock in December 1995 and in
June 1996 have been given retroactive effect in these financial statements.
Stock Option Plans
Under the Company's 1992 Incentive Stock Option Plan (the "ISO Plan"),
options to purchase Common Stock may be granted only to employees of the
Company and its subsidiaries. Subject to any adjustment as provided by the ISO
Plan, the aggregate number of shares which may be issued and sold may not
exceed 3,762,000 shares. The maximum period for exercise of an option may not
be more than 10 years (or five years for an optionee who owns more than 10% of
the Common Stock) from the date of grant, and the exercise price may not be
less than the fair market value of the shares underlying the options on the
date of grant (or 110% of such value for an optionee who owns more than 10% of
the Common Stock). Options granted become exercisable at dates determined by
the Stock Option Committee of the Board of Directors. No options could be
granted under the ISO Plan after December 16, 1994.
61
<PAGE> 62
Under the Company's 1992 Nonstatutory Stock Option Plan (the "NSO Plan"),
non-qualified options to purchase Common Stock may be granted only to directors
and consultants of the Company. Subject to any adjustment as provided by the
NSO Plan, the aggregate number of shares which may be issued and sold may not
exceed 3,132,000 shares. The maximum period for exercise of an option may not
be more than 10 years from the date of grant, and the exercise price may not be
less than the fair market value of the shares underlying the options on the
date of grant. Options granted become exercisable at dates determined by the
Stock Option Committee of the Board of Directors. No options can be granted
under the NSO Plan after December 10, 2002.
Under the Company's 1994 Stock Option Plan (the "1994 Plan"), and its 1996
Stock Option Plan (the "1996 Plan"), incentive and nonqualified stock options
to purchase Common Stock may be granted to employees and consultants of the
Company and its subsidiaries. Subject to any adjustment as provided by the
respective plans, the aggregate number of shares which may be issued and sold
may not exceed 4,886,910 shares under the 1994 Plan and 6,000,000 shares under
the 1996 Plan. The maximum period for exercise of an option may not be more
than 10 years from the date of grant and the exercise price may not be less
than 75% of the fair market value of the shares underlying the options on the
date of grant. Options granted become exercisable at dates determined by the
Stock Option Committee of the Board of Directors. No options can be granted
under the 1994 Plan after December 16, 2004 or under the 1996 Plan after
October 14, 2006.
The Company has elected to follow APB No. 25, Accounting for Stock Issued to
Employees and related interpretations in accounting for its employee stock
options. Under APB No. 25, compensation expense is recognized for the
difference between the option price and market value on the measurement date.
No compensation expense has been recognized because the exercise price of the
stock options equaled the market price of the underlying stock on the date of
grant.
Pro forma information regarding net income and earnings per share is required
by SFAS No. 123 and has been determined as if the Company had accounted for its
employee stock options under the fair value method of the statement. The fair
value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for the six months ended December 31, 1997 and fiscal 1997 and
1996, respectively: interest rates (zero-coupon U.S. government issues with a
remaining life equal to the expected term of the options) of 6.45%, 6.74% and
6.21%; dividend yields of 0.9%, 0.9% and 0.9%; volatility factors of the
expected market price of the Company's common stock of .67, .60 and .60; and
weighted-average expected life of the options of four years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
management's opinion the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
The Company's pro forma information follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED JUNE 30,
DECEMBER 31 -----------------------
1997 1997 1996
---------------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net Income (Loss)
As reported . . . . . . . . . . . . . . . . . . . . . . $(31,574) $(183,377) $23,355
Pro forma . . . . . . . . . . . . . . . . . . . . . . . (35,084) (190,160) 22,081
Earnings (Loss) per Share
As reported . . . . . . . . . . . . . . . . . . . . . . $(0.45) $(2.79) $0.40
Pro forma . . . . . . . . . . . . . . . . . . . . . . . (0.50) (2.89) 0.38
</TABLE>
62
<PAGE> 63
For purposes of the pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period, which is four
years. Because the Company's stock options vest over four years and additional
awards are typically made each year, the above pro forma disclosures are not
likely to be representative of the effects on pro forma net income for future
years. A summary of the Company's stock option activity and related information
follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
1997
---------------------------
WEIGHTED-AVG
OPTIONS EXERCISE PRICE
--------- ---------------
<S> <C> <C>
Outstanding Beginning of Period 7,903,659 $ 7.09
Granted 3,362,207 8.29
Exercised (219,349) 3.13
Forfeited (2,716,136) 13.87
---------- ------
Outstanding End of Period 8,330,381 5.49
---------- ------
Exercisable End of Period 3,838,869
----------
Shares Authorized for Future Grants 4,585,973
----------
Fair Value of Options Granted During the Period $ 4.98
------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------------------------------------------------------
1997 1996 1995
-------------------------- -------------------------- ---------------------------
WEIGHTED-AVG WEIGHTED-AVG WEIGHTED-AVG
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
---------- -------------- ---------- -------------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding Beginning of Year 7,602,884 $ 4.66 6,828,592 $1.97 5,033,340 $0.72
Granted 3,564,884 19.35 2,426,850 9.98 3,185,550 3.38
Exercised (1,197,998) 1.95 (1,574,046) 1.31 (1,288,732) 0.67
Forfeited (2,066,111) 22.26 (78,512) 2.61 (101,566) 0.92
---------- ------ ---------- ---- ---------- -----
Outstanding End of Year 7,903,659 7.09 7,602,884 4.66 6,828,592 1.97
---------- ------ ---------- ---- ---------- -----
Exercisable End of Year 3,323,824 2,974,386 2,489,742
---------- ---------- ----------
Shares Authorized for Future Grants 5,212,056 713,826 3,102,982
---------- ---------- ----------
Fair Value of Options Granted During the Year $ 7.51 $4.84 N/A
------ -----
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- ------------------------------
NUMBER WEIGHTED-AVG. NUMBER
RANGE OF OUTSTANDING REMAINING WEIGHTED-AVG. EXERCISABLE WEIGHTED-AVG.
EXERCISE PRICES 12/31/97 CONTRACTUAL LIFE EXERCISE PRICE 12/31/97 EXERCISE PRICE
---------------- ---------- ------------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.56 - $ 0.71 1,010,675 5.04 $ 0.61 1,010,675 $ 0.61
$ 0.78 - $ 1.33 562,500 4.47 $ 1.12 562,500 $ 1.12
$ 2.25 - $ 2.25 1,048,207 6.80 $ 2.25 687,982 $ 2.25
$ 2.43 - $ 4.92 408,689 6.92 $ 3.15 394,159 $ 3.08
$ 4.92 - $ 4.92 963,378 7.32 $ 4.92 382,618 $ 4.92
$ 5.67 - $ 5.67 1,138,724 7.67 $ 5.67 479,061 $ 5.67
$ 6.47 - $ 6.47 180,000 7.78 $ 6.47 180,000 $ 6.47
$ 7.31 - $ 7.31 997,606 9.64 $ 7.31 0 $ 0.00
$ 8.04 - $ 8.04 136,790 4.64 $ 8.04 0 $ 0.00
$ 8.75 - $30.63 1,883,812 9.45 $ 10.67 141,874 $ 24.80
---------- ----- ------- ---------- -------
$ 0.56 - $30.63 8,330,381 7.54 $ 5.49 3,838,869 $ 3.46
---------- ----- ------- ---------- -------
</TABLE>
The exercise of certain stock options results in state and federal income tax
benefits to the Company related to the difference between the market price of
the Common Stock at the date of disposition (or sale) and the option price.
During the six months ended December 31, 1997 and fiscal 1997, 1996 and 1995,
$0, $4,808,000, $7,950,000 and $1,229,000, respectively, were recorded as
adjustments to additional paid-in capital and deferred income taxes with
respect to such tax benefits.
10. FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
The Company has only limited involvement with derivative financial
instruments, as defined in Statement of Financial Accounting Standards No. 119
"Disclosure About Derivative Financial Instruments and Fair Value of Financial
Instruments", and does not use them for trading purposes. The Company's
objective is to hedge a portion of its exposure to price volatility from
producing crude oil and natural gas. These arrangements may expose the Company
to credit risk from its counterparties and to basis risk. The Company does not
expect that the counterparties will fail to meet their obligations given their
high credit ratings.
63
<PAGE> 64
Hedging Activities
Periodically the Company utilizes hedging strategies to hedge the price of a
portion of its future oil and gas production. These strategies include (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)
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, (3) 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 (4) basis protection swaps, which are arrangements that
guarantee the price differential of oil or gas from a specified delivery point
or points. 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 only
enters into hedging transactions related to the Company's oil and gas
production volumes or CEMI physical purchase or sale commitments.
As of December 31, 1997, the Company had the following oil swap arrangements
for periods after December 1997:
<TABLE>
<CAPTION>
NYMEX-INDEX
MONTHS VOLUME (Bbls) STRIKE PRICE (per Bbl)
-------------- -------- ---------------------
<S> <C> <C>
January through June 1998 . . . . . . . . . . . . . . . . . . . . . 724,000 $19.82
</TABLE>
The Company entered into oil swap arrangements to cancel the effect of the
swaps at a price of $18.85 per Bbl.
As of December 31, 1997, the Company had the following gas swap arrangements
for periods after December 1997:
<TABLE>
<CAPTION>
HOUSTON SHIP CHANNEL
MONTHS VOLUME (MMBTU) INDEX STRIKE PRICE (PER MMBTU)
-------------- ---------------- ------------------------------
<S> <C> <C>
April 1998 . . . . . . . . 600,000 $ 2.300
May 1998 . . . . . . . . . 620,000 $ 2.215
</TABLE>
The Company received $1.3 million as a premium for calls sold for January and
February 1998 volumes of 2,480,000 MMBtu and 2,240,000 MMBtu, respectively.
The January calls expired on December 31, 1997, the February calls expired on
January 31, 1998, and the associated premiums will be recognized as income
during the corresponding months of production.
The Company has also entered into the following collar transactions:
<TABLE>
<CAPTION>
NYMEX NYMEX
VOLUME DEFINED HIGH DEFINED LOW
MONTHS (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>
These transactions require that the Company pay the counterparty if the NYMEX
price exceeds the defined high strike price and that the counterparty pay the
Company if the NYMEX price is less than the defined low strike price.
The Company entered into a curve lock for 4.9 Bcf of gas which allows the
Company the option to hedge April 1999 through November 1999 gas based upon a
negative $0.285 differential to December 1998 gas any time between the strike
date and December 1998. A curve lock is a commodity swap arrangement that
establishes, or hedges, a price differential between one commodity contract
period and another. In markets where the forward curve is typically negatively
sloped (prompt prices exceed deferred prices), an upward sloping price curve
allows hedgers to lock in a deferred forward sale at a higher premium to a more
prompt swap by a curve lock.
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 swap agreements
in effect for production periods beginning on or after January 1, 1998
terminated on December 31, 1997, based on
64
<PAGE> 65
the closing prices for NYMEX futures contracts as of that date, the Company
would have received a net amount of approximately $1.1 million from the
counterparty which would have represented the "fair value" at that date. These
agreements were not terminated.
Periodically, CEMI enters into various hedging transactions designed to hedge
against physical purchase commitments made by CEMI. 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.
Concentration of Credit Risk
Other financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash, short-term
investments in debt instruments and trade receivables. The Company's accounts
receivable are primarily from purchasers of oil and natural gas products and
exploration and production companies which own interests in properties operated
by the Company. The industry concentration has the potential to impact the
Company's overall exposure to credit risk, either positively or negatively, in
that the customers may be similarly affected by changes in economic, industry
or other conditions. The Company generally requires letters of credit for
receivables from customers which are judged to have sub-standard credit, unless
the credit risk can otherwise be mitigated. The cash and investments in debt
securities are with major banks or institutions with high credit ratings.
Fair Value of Financial Instruments
The following disclosure of the estimated fair value of financial instruments
is made in accordance with the requirements of Statement of Financial
Accounting Standards No. 107, "Disclosures About Fair Value of Financial
Instruments". The estimated fair value amounts have been determined by the
Company using available market information and valuation methodologies.
Considerable judgment is required in interpreting market data to develop the
estimates of fair value. The use of different market assumptions or valuation
methodologies may have a material effect on the estimated fair value amounts.
The carrying values of items comprising current assets and current
liabilities approximate fair values due to the short-term maturities of these
instruments. See Note 15 for the fair value of financial instruments included
in noncurrent other assets at December 31, 1997. The Company estimates the fair
value of its long-term, fixed-rate debt using quoted market prices. The
Company's carrying amount for such debt at December 31, 1997 and June 30, 1997
and 1996 was $509.0 million, $508.9 million and $255.6 million, respectively,
compared to approximate fair values of $517.0 million, $514.1 million and
$261.2 million, respectively. The carrying value of other long-term debt
approximates its fair value as interest rates are primarily variable, based on
prevailing market rates.
11. DISCLOSURES ABOUT OIL AND GAS PRODUCING ACTIVITIES
Net Capitalized Costs
Evaluated and unevaluated capitalized costs related to the Company's oil and
gas producing activities are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30,
DECEMBER 31, ---------------------
1997 1997 1996
------------- ---------- ---------
($ IN THOUSANDS)
<S> <C> <C> <C>
Oil and gas properties:
Proved . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,095,363 $ 865,516 $ 363,213
Unproved . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125,155 128,505 165,441
--------- ---------- ----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . 1,220,518 994,021 528,654
Less accumulated depreciation, depletion and amortization . . . . . (602,391) (431,983) (92,720)
---------- --------- ---------
Net capitalized costs . . . . . . . . . . . . . . . . . . . . . . . $ 618,127 $ 562,038 $ 435,934
========= ========== ==========
</TABLE>
Unproved properties not subject to amortization at December 31, 1997, June
30, 1997 and 1996 consisted mainly of lease acquisition costs. The Company
capitalized approximately $5,087,000, $12,935,000 and $6,428,000 of interest
during the six months ended December 31, 1997 and the years ended June 30, 1997
and 1996 on significant investments in unproved properties that were not yet
included in the amortization base of the full-cost pool. The Company will
continue to evaluate its unevaluated properties; however, the timing of the
ultimate evaluation and disposition of the properties has not been determined.
65
<PAGE> 66
Costs Incurred in Oil and Gas Acquisition, Exploration and Development
Costs incurred in oil and gas property acquisition, exploration and
development activities which have been capitalized are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED
SIX MONTHS ENDED JUNE 30,
DECEMBER 31, ----------------------------------------
1997 1997 1996 1995
--------------- --------- ------- ----------
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
Development costs ................................... $ 120,628 $ 187,736 $ 138,188 $ 78,679
Exploration costs ................................... 40,534 136,473 39,410 14,129
Acquisition costs:
Unproved properties ............................... 25,516 140,348 138,188 24,437
Proved properties ................................. 39,245 -- 24,560 --
Capitalized internal costs .......................... 2,435 3,905 1,699 586
Proceeds from sale of leasehold, equipment and other (1,861) (3,095) (6,167) (11,953)
--------- --------- --------- ---------
Total ...................................... $ 226,497 $ 465,367 $ 335,878 $ 105,878
========= ========= ========= =========
</TABLE>
Results of Operations from Oil and Gas Producing Activities (unaudited)
The Company's results of operations from oil and gas producing activities are
presented below for the six months ended December 31, 1997 and for the years
ended June 30, 1997, 1996 and 1995, respectively. The following table includes
revenues and expenses associated directly with the Company's oil and gas
producing activities. It does not include any allocation of the Company's
interest costs and, therefore, is not necessarily indicative of the
contribution to consolidated net operating results of the Company's oil and gas
operations.
<TABLE>
<CAPTION>
YEAR ENDED
SIX MONTHS ENDED JUNE 30,
DECEMBER 31, -----------------------------------------
1997 1997 1996 1995
--------------- --------- ---------- ------------
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
Oil and gas sales ................................... $ 95,657 $ 192,920 $ 110,849 $ 56,983
Production costs (a) ................................ (10,094) (15,107) (8,303) (4,256)
Impairment of oil and gas properties ................ (110,000) (236,000) -- --
Depletion and depreciation .......................... (60,408) (103,264) (50,899) (25,410)
Imputed income tax (provision) benefit(b) ........... 31,817 60,544 (18,335) (9,561)
--------- --------- --------- ---------
Results of operations from oil
and gas producing activities ...................... $ (53,028) $(100,907) $ 33,312 $ 17,756
========= ========= ========= =========
</TABLE>
- ----------
(a) Production costs include lease operating expenses and production
taxes.
(b) The imputed income tax provision is hypothetical (at the statutory rate)
and determined without regard to the Company's deduction for general and
administrative expenses, interest costs and other income tax credits and
deductions.
Capitalized costs, less accumulated amortization and related deferred income
taxes, can not exceed an amount equal to the sum of the present value
(discounted at 10%) of estimated future net revenues less estimated future
expenditures to be incurred in developing and producing the proved reserves,
less any related income tax effects. At December 31, 1997, capitalized costs of
oil and gas properties exceeded the estimated present value of future net
revenues for the Company's proved reserves, net of related income tax
considerations, resulting in a writedown in the carrying value of oil and gas
properties of $110 million. At June 30, 1997, capitalized costs of oil and gas
properties also exceeded the estimated present value of future net revenues for
the Company's proved reserves, net of related income tax considerations,
resulting in a writedown in the carrying value of oil and gas properties of
$236 million.
66
<PAGE> 67
Oil and Gas Reserve Quantities (unaudited)
The reserve information presented below is based upon reports prepared by
independent petroleum engineers and the Company's petroleum engineers. As of
December 31, 1997, Williamson Petroleum Consultants ("Williamson"), Porter
Engineering Associates, Netherland, Sewell & Associates, Inc. and internal
reservoir engineers evaluated approximately 46%, 48%, 4% and 2% of total proved
oil and gas reserves, respectively. As of June 30, 1997, 1996 and 1995, the
reserves evaluated by Williamson constituted approximately 50%, 99% and 99% of
total proved reserves, respectively, with the remaining reserves being
evaluated internally. The reserves evaluated internally in fiscal 1997 were
subsequently evaluated by Williamson with a variance of approximately 4% of
total proved reserves. The information is presented in accordance with
regulations prescribed by the Securities and Exchange Commission. The Company
emphasizes that reserve estimates are inherently imprecise. The Company's
reserve estimates were generally based upon extrapolation of historical
production trends, analogy to similar properties and volumetric calculations.
Accordingly, these estimates are expected to change, and such changes could be
material and occur in the near term as future information becomes available.
Proved oil and gas reserves represent the estimated quantities of crude oil,
natural gas, and natural gas liquids which geological and engineering data
demonstrate with reasonable certainty to be recoverable in future years from
known reservoirs under existing economic and operating conditions. Proved
developed oil and gas reserves are those expected to be recovered through
existing wells with existing equipment and operating methods. As of December
31, 1997, all of the Company's oil and gas reserves were located in the United
States.
Presented below is a summary of changes in estimated reserves of the Company
for the six months ended December 31, 1997 and for the years 1997, 1996 and
1995:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
----------------------- --------------------------------------------------
1997 1997 1996
----------------------- --------------------------------------------------
OIL GAS OIL GAS OIL GAS
(MBbl) (MMcf) (MBbl) (MMcf) (MBbl) (MMcf)
<S> <C> <C> <C> <C> <C> <C>
Proved reserves, beginning of
period ............................. 17,373 298,766 12,258 351,224 5,116 211,808
Extensions, discoveries and other
additions .......................... 5,573 68,813 13,874 147,485 8,781 158,052
Revisions of previous estimate ....... (3,428) (24,189) (5,989) (137,938) (669) 12,987
Production ........................... (1,857) (27,327) (2,770) (62,005) (1,413) (51,710)
Sale of reserves-in-place ............ -- -- -- -- -- --
Purchase of reserves-in-place ........ 565 23,055 -- -- 443 20,087
-------- -------- -------- -------- -------- --------
Proved reserves, end of period ....... 18,226 339,118 17,373 298,766 12,258 351,224
======== ======== ======== ======== ======== ========
Proved developed reserves, end
of period ............................ 10,087 178,082 7,324 151,879 3,648 144,721
======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
----------------------
1995
----------------------
OIL GAS
(MBbl) (MMcf)
-------- --------
<S> <C> <C>
Proved reserves, beginning of
period ............................. 4,154 117,066
Extensions, discoveries and other
additions .......................... 2,549 138,372
Revisions of previous estimate ....... (448) (18,516)
Production ........................... (1,139) (25,114)
Sale of reserves-in-place ............ -- --
Purchase of reserves-in-place ........ -- --
-------- --------
Proved reserves, end of period ....... 5,116 211,808
======== ========
Proved developed reserves, end
of period ............................ 1,973 77,764
======== ========
</TABLE>
For the six months ended December 31, 1997 the Company recorded revisions to
the June 30, 1997 reserve estimates of approximately 3,428 MBbl and 24,189
MMcf, or approximately 45 Bcfe. The reserve revisions are primarily
attributable to lower than expected results from development drilling and
production which eliminated certain previously established proven reserves.
On December 16, 1997, Chesapeake acquired AnSon, a privately owned oil and
gas producer, based in Oklahoma City. Consideration for this acquisition was
approximately $43 million. The Company estimates that it acquired
approximately 26.4 Bcfe in connection with this acquisition.
For the fiscal year ended June 30, 1997, the Company recorded revisions to
the previous year's reserve estimates of approximately 5,989 MBbl and 137,938
MMcf, or approximately 174 Bcfe. The reserve revisions are primarily
attributable to the decrease in oil and gas prices between periods, higher
drilling and completion costs, and unfavorable developmental drilling and
production results during fiscal 1997. Specifically, the Company recorded
aggregate downward adjustments to proved reserves of 159 Bcfe for the Knox,
Giddings and Louisiana Trend areas.
67
<PAGE> 68
On April 30, 1996, the Company purchased interests in certain producing and
non-producing oil and gas properties, including approximately 14,000 net acres
of unevaluated leasehold, from Amerada Hess Corporation for $37.8 million. The
properties are located in the Knox and Golden Trend fields of southern
Oklahoma, most of which are operated by the Company. In fiscal 1996 the
reserves acquired from Amerada Hess Corporation were included in both
"Extensions, discoveries and other additions" and "Purchase of reserves
in-place". The fiscal 1996 presentation has been restated in the current year
to remove the acquired reserves from "Extensions, discoveries and other
additions" with a corresponding offset to "Revisions of previous estimate".
This revision resulted in no net change to total oil and gas reserves.
Standardized Measure of Discounted Future Net Cash Flows (unaudited)
Statement of Financial Accounting Standards No. 69 ("SFAS 69") prescribes
guidelines for computing a standardized measure of future net cash flows and
changes therein relating to estimated proved reserves. The Company has followed
these guidelines which are briefly discussed below.
Future cash inflows and future production and development costs are
determined by applying year-end prices and costs to the estimated quantities of
oil and gas to be produced. Estimates are made of quantities of proved reserves
and the future periods during which they are expected to be produced based on
year-end economic conditions. Estimated future income taxes are computed using
current statutory income tax rates including consideration for the current tax
basis of the properties and related carryforwards, giving effect to permanent
differences and tax credits. The resulting future net cash flows are reduced to
present value amounts by applying a 10% annual discount factor.
Since December 31, 1997 oil and gas prices have declined, with oil prices
reaching ten-year lows in March 1998. In addition, the Company has completed
several acquisitions based on expectations of higher oil and gas prices than
those currently being received. Based on NYMEX oil prices of $16.50 per Bbl and
NYMEX gas prices of $2.35 per Mcf in effect on March 25, 1998, and estimates of
the Company's proved reserves as of December 31, 1997 (pro forma for the
acquisitions completed during the quarter ended March 31, 1998), the Company
estimates it will incur an additional full cost ceiling writedown of between
$175 million and $200 million as of March 31, 1998. If this occurs, the Company
will incur a substantial loss for the first quarter of 1998 which would further
reduce shareholders' equity.
The assumptions used to compute the standardized measure are those prescribed
by the Financial Accounting Standards Board and, as such, do not necessarily
reflect the Company's expectations of actual revenue to be derived from those
reserves nor their present worth. The limitations inherent in the reserve
quantity estimation process, as discussed previously, are equally applicable to
the standardized measure computations since these estimates are the basis for
the valuation process.
The following summary sets forth the Company's future net cash flows relating
to proved oil and gas reserves based on the standardized measure prescribed in
SFAS 69:
<TABLE>
<CAPTION>
JUNE 30,
DECEMBER 31, -----------------------------------------------
1997 1997 1996 1995
------------ ---------- ----------- -----------
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
Future cash inflows ............................. 1,100,807 $ 954,839 $ 1,101,642 $ 427,377
Future production costs ......................... (223,030) (190,604) (168,974) (75,927)
Future development costs ........................ (158,387) (152,281) (137,068) (76,543)
Future income tax provision ..................... (108,027) (104,183) (135,543) (51,789)
----------- ----------- ----------- -----------
Future net cash flows ........................... 611,363 507,771 660,057 223,118
Less effect of a 10% discount factor ............ (181,253) (92,273) (198,646) (63,207)
----------- ----------- ----------- -----------
Standardized measure of discounted future net
cash flows .................................... $ 430,110 $ 415,498 $ 461,411 $ 159,911
=========== =========== =========== ===========
</TABLE>
The principal sources of change in the standardized measure of discounted
future net cash flows are as follows:
68
<PAGE> 69
<TABLE>
<CAPTION>
JUNE 30,
DECEMBER 31, ----------------------------------------
1997 1997 1996 1995
------------ --------- -------- ----------
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
Standardized measure, beginning of period ............. $ 415,498 $ 461,411 $ 159,911 $ 118,608
Sales of oil and gas produced, net of production
costs ............................................... (85,563) (177,813) (102,546) (52,727)
Net changes in prices and production costs ............ 26,106 (99,234) 88,729 (24,807)
Extensions and discoveries, net of production and
development costs ................................... 92,597 287,068 275,916 108,644
Changes in future development costs ................... (7,422) (12,831) (11,201) 3,406
Development costs incurred during the period that
reduced future development costs .................... 47,703 46,888 43,409 23,678
Revisions of previous quantity estimates .............. (62,655) (199,738) 12,728 (21,595)
Purchase of reserves-in-place ......................... 25,236 -- 29,641 --
Accretion of discount ................................. 43,739 54,702 18,814 14,126
Net change in income taxes ............................ (14,510) 63,719 (57,382) (5,586)
Changes in production rates and other ................. (50,619) (8,674) 3,392 (3,836)
--------- --------- --------- ---------
Standardized measure, end of period ................... $ 430,110 $ 415,498 $ 461,411 $ 159,911
========= ========= ========= =========
</TABLE>
12. TRANSITION PERIOD COMPARATIVE DATA
The following table presents certain financial information for the six months
ended December 31, 1997 and 1996, respectively:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
-------------------------
1997 1996
----------- ----------
(UNAUDITED)
($ IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
Revenues ............................................ $ 232,864 $ 122,702
=========== ===========
Gross profit (loss) (a) ............................. $ (93,092) $ 42,946
=========== ===========
Income (loss) before income taxes
and extraordinary item ............................ $ (31,574) $ 39,246
Income taxes ........................................ -- 14,325
----------- -----------
Income (loss) before extraordinary item ............. (31,574) 24,921
Extraordinary item .................................. -- (6,443)
----------- -----------
Net income (loss) ................................... $ (31,574) $ 18,478
=========== ===========
Earnings per share - basic
Income (loss) before extraordinary item ........ $ (0.45) $ 0.40
Extraordinary item ............................. -- (0.10)
----------- -----------
Net income (loss) .............................. $ (0.45) $ 0.30
=========== ===========
Earnings per share - assuming dilution
Income (loss) before extraordinary item ........ $ (0.45) $ 0.38
Extraordinary item ............................. -- (0.10)
----------- -----------
Net income (loss) .............................. $ (0.45) $ 0.28
=========== ===========
Weighted average common shares outstanding (in 000's)
Basic .......................................... 70,835 61,985
=========== ===========
Assuming dilution .............................. 70,835 66,300
=========== ===========
</TABLE>
- ----------
(a) Total revenue excluding interest and other income, less total costs and
expenses excluding interest and other expense.
69
<PAGE> 70
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized unaudited quarterly financial data for the six months ended
December 31, 1997 and fiscal 1997 and 1996 are as follows ($ in thousands
except per share data):
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------
SEPTEMBER 30, DECEMBER 31,
1997 1997
------------- ------------
<S> <C> <C>
Net sales . . . . . . . . . . . . . . . . . $ 72,532 $81,366
Gross profit (loss)(a) . . . . . . . . . . 8,210 (101,302)
Net Income (loss) . . . . . . . . . . . . . 5,513 (37,087)
Net Income (loss) per share:
Basic . . . . . . . . . . . . . . . . . . .08 (.52)
Diluted . . . . . . . . . . . . . . . . . .08 (.52)
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1996 1996 1997 1997
------------- ------------ ---------- --------
<S> <C> <C> <C> <C>
Net sales . . . . . . . . . . . . . . . . . $48,937 $71,249 $79,809 $69,097
Gross profit (loss)(a) . . . . . . . . . . 14,889 28,057 25,737 (241,686)
Income (loss) before extraordinary
item . . . . . . . . . . . . . . . . . . 8,204 16,717 16,105 (217,783)
Net income (loss) . . . . . . . . . . . . . 8,204 10,274 15,928 (217,783)
Income (loss) per share before
extraordinary item:
Basic . . . . . . . . . . . . . . . . . . .14 .26 .23 (3.12)
Diluted . . . . . . . . . . . . . . . . . .13 .25 .22 (3.12)
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1996 1996 1997 1997
------------- ------------ ---------- --------
<S> <C> <C> <C> <C>
Net sales ................................. $21,988 $31,766 $44,145 $47,692
Gross profit(a) ........................... 6,368 11,368 14,741 13,580
Net income ................................ 2,915 5,459 7,623 7,358
Net income per share:
Basic ................................... .06 .10 .14 .12
Diluted ................................. .05 .10 .13 .12
</TABLE>
- ----------
(a) Total revenue excluding interest and other income, less total costs and
expenses excluding interest and other expense.
Capitalized costs, less accumulated amortization and related deferred income
taxes, cannot exceed an amount equal to the sum of the present value of
estimated future net revenues less estimated future expenditures to be incurred
in developing and producing the proved reserves, less any related income tax
effects. At December 31, 1997 and at June 30, 1997, capitalized costs of oil
and gas properties exceeded the estimated present value of future net revenues
for the Company's proved reserves, net of related income tax considerations,
resulting in writedowns in the carrying value of oil and gas properties of $110
million and $236 million, respectively.
14. SUBSEQUENT EVENTS AND PENDING TRANSACTIONS
On October 22, 1997, the Company entered into an agreement to acquire by
merger the Mid-Continent operations of DLB Oil & Gas, Inc. The Company will
pay $17.5 million cash and will issue a total of five million shares of the
Company's common stock as merger consideration to the shareholders of DLB. The
closing of the DLB acquisition is expected to occur in late April 1998 and is
subject to approval by DLB shareholders and other customary conditions.
Certain shareholders of DLB, who collectively own approximately 77.7% of
outstanding DLB common stock, have granted the Company an irrevocable proxy to
vote such shares (or have executed a written consent) in favor of the merger.
70
<PAGE> 71
On November 12, 1997, the Company entered into an agreement to acquire
Hugoton Energy Corporation which was consummated on March 10, 1998. Each share
of Hugoton common stock was converted into the right to receive 1.3 shares of
Chesapeake common stock, requiring the Company to issue approximately 25.8
million shares of Chesapeake common stock (based on 19.8 million shares of
Hugoton common stock outstanding as of February 6, 1998, which amount excludes
shares issuable upon exercise of outstanding Hugoton options).
On January 30, 1998, the Company entered into an alliance with Ranger Oil
Limited to jointly develop a 3.2 million acre area of mutual interest in the
Helmet, Midwinter, and Peggo areas of northeastern British Columbia. In
addition, the Company paid Ranger approximately $48 million. The transaction
closed in January 1998 with an effective date of December 1, 1997.
In February 1998, the Company closed the purchase of the Mid-Continent
properties of privately owned Enervest Management Company L.L.C. for $38
million.
On March 5, 1998, the Company entered into a definitive agreement to acquire
100% of the stock of MC Panhandle Corp., a wholly owned subsidiary of
Occidental Petroleum Corporation. The Company has agreed to pay $105 million
in cash for the estimated proved reserves in the West Panhandle Field in
Carson, Gray, Hutchinson and Moore Counties of the Texas Panhandle. The
effective date of the transaction is January 1, 1998 with closing scheduled for
May 29, 1998.
15. ACQUISITIONS
On December 5, 1997, Chesapeake purchased from Pan East Petroleum Corporation
("Pan East"), a publicly-traded Canadian exploration and production company,
19.9% of Pan East's common stock for $22 million. The purpose of Chesapeake's
investment is to assist Pan East in financing its share of the exploration,
development and acquisition activities under a joint venture whereby Chesapeake
has the right to participate as a non-operator with up to a 50% interest in all
drilling activities and acquisitions made by Pan East during the two years
ending December 31, 1999. The Company will account for its investment in Pan
East using the equity method. Based upon the closing price of Pan East's
common stock at December 31, 1997, the market value of Chesapeake's investment
in Pan East was $12.6 million.
On December 16, 1997, the Company acquired AnSon, a privately owned oil and
gas producer based in Oklahoma City. Consideration for this acquisition was
approximately $43 million consisting of the issuance of 3,792,724 shares of
Chesapeake's common stock and cash consideration in accordance with the terms
of the merger agreement. The Company has accrued $15.5 million as the
estimated cash payment which will be made during 1998.
71
<PAGE> 72
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Effective July 1, 1996, Price Waterhouse LLP sold its Oklahoma City practice
to Coopers & Lybrand L.L.P. and resigned as the Company's independent
accountants. The Company's decision to change independent accountants and
retain Coopers & Lybrand L.L.P. was approved by the Audit Committee of the
Board of Directors and by the Board of Directors. During the period Price
Waterhouse LLP was engaged by the Company, Price Waterhouse LLP did not issue
any report on the Company's financial statements containing an adverse opinion,
disclaimer of opinion, or qualification. There were no disagreements between
the Company and Price Waterhouse LLP on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure, nor
were there any reportable events.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for by this Item 10 is incorporated herein by
reference to the definitive Proxy Statement to be filed by the Company pursuant
to Regulation 14A of the General Rules and Regulations under the Securities
Exchange Act of 1934 not later than April 30, 1998.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by this Item 11 is incorporated herein by
reference to the definitive Proxy Statement to be filed by the Company pursuant
to Regulation 14A of the General Rules and Regulations under the Securities
Exchange Act of 1934 not later than April 30, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by this Item 12 is incorporated herein by
reference to the definitive Proxy Statement to be filed by the Company pursuant
to Regulation 14A of the General Rules and Regulations under the Securities
Exchange Act of 1934 not later than April 30, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by this Item 13 is incorporated herein by
reference to the definitive Proxy Statement to be filed by the Company pursuant
to Regulation 14A of the General Rules and Regulations under the Securities
Exchange Act of 1934 not later than April 30, 1998.
72
<PAGE> 73
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements. The Company's Consolidated Financial Statements
are included in Item 8 of this report. Reference is made to the accompanying
Index to Consolidated Financial Statements.
2. Financial Statement Schedules. No financial statement schedules are
filed with this report as no schedules are applicable or required.
3. Exhibits. The following exhibits are filed herewith pursuant to the
requirements of Item 601 of Regulation S-K:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
3.1* -- Registrant's Certificate of Incorporation, as
amended.
3.2 -- Registrant's Bylaws. Incorporated herein by
reference to Exhibit 3.2 to Registrant's registration
statement on Form 8-B (No. 001-13726).
4.1 -- Indenture dated as of March 15, 1997 among the
Registrant, as issuer, its subsidiaries signatory thereto as
Subsidiary Guarantors, and United States Trust Company of
New York, as Trustee, with respect to 7.875% Senior Notes
due 2004. Incorporated herein by reference to Exhibit 4.1
to Registrant registration statement on Form S-4 (No.
333-24995).
4.1.1* -- First Supplemental Indenture dated December 17, 1997 and Second
Supplemental Indenture dated February 16, 1998, to Indenture
filed as Exhibit 4.1.
4.2 -- Indenture dated as of March 15, 1997 among the Registrant,
as issuer, its subsidiaries signatory thereto, as Subsidiary
Guarantors, and United States Trust Company of New York, as
Trustee, with respect to 8.5% Senior Notes due 2012.
Incorporated herein by reference to Exhibit 4.1.3 to Registrant
registration statement on Form S-4 (No. 333-24995).
4.2.1* -- First Supplemental Indenture dated December 17, 1997 and
Second Supplemental Indenture dated February 16, 1998 to
Indenture filed as Exhibit 4.2.
4.3 -- Indenture dated as of May 15, 1995 among Chesapeake Energy
Corporation, its subsidiaries signatory thereto as Subsidiary
Guarantors and United States Trust Company of New York, as
Trustee, with respect to 10.5% Senior Notes due 2002.
Incorporated herein by reference to Exhibit 4.3 to Registrant's
registration statement on Form S-4 (No. 33-93718).
4.3.1* -- First Supplemental Indenture dated December 30, 1996 and Second
Supplemental Indenture dated December 17, 1997 filed as Exhibit 4.3.
4.4 -- Indenture dated April 1, 1996 among Chesapeake Energy
Corporation, its subsidiaries signatory thereto as Subsidiary
Guarantors and United States Trust Company of New York, as
Trustee, with respect to 9.125% Senior Notes due 2006.
Incorporated herein by reference to Exhibit 4.6 to Registrant's
registration statement on Form S-3 Registration Statement (No.
333-1588)
4.4.1* -- First Supplemental Indenture dated December 30, 1996 and Second
Supplemental Indenture dated December 17, 1997, to Indenture filed
as Exhibit 4.4.
4.5 -- Agreement to furnish copies of unfiled long-term debt
instruments.
4.6* -- Credit Agreement dated March 9, 1998 between Chesapeake
Acquisition Corporation and Chesapeake Mid-Continent Corp., as
Borrowers, Chesapeake Merger Corp., Chesapeake Acquisition Corp.,
Chesapeake Columbia Corp., Mid-Continent Gas Pipeline Company,
and AnSon Gas Marketing as Initial Guarantors, Union Bank of
California, N.A., as Agent and Certain Financial Institutions, as
Lenders.
4.8 -- Stock Registration Agreement dated May 21, 1992 between
Chesapeake Energy Corporation and various lenders, as amended by
First Amendment thereto dated May 26, 1992. Incorporated herein
by reference to Exhibits 10.26.1 and 10.26.2 to Registrant's
registration statement on Form S-1 (No. 33-55600).
</TABLE>
73
<PAGE> 74
<TABLE>
<S> <C>
4.9 -- Registration Rights Agreement dated October 22, 1997 as amended
by Amendment No. 1 dated December 22, 1997 between Chesapeake
Energy Corporation and Charles E. Davidson. Incorporated herein
by reference to Exhibits 4.9 and 4.10 to Registrant's registration
statement on Form S-4 (No. 333-48735).
4.10 -- Registration Rights Agreement between Chesapeake Energy
Corporation and certain former shareholders of Hugoton Energy
Corporation. Incorporated herein by reference to Exhibit 4.11 to
Registrant's registration statement on Form S-4 Registration
Statement (No. 333-48735).
10.1.1 -- Registrant's 1992 Incentive Stock Option Plan. Incorporated
herein by reference to Exhibit 10.1.1 to Registrant's
registration statement on Form S-4 (No. 33-93718).
10.1.2 -- Registrant's 1992 Nonstatutory Stock Option Plan, as amended.
Incorporated herein by reference to Exhibit 10.1.2 to
Registrant's quarterly report on Form 10-Q for the quarter
ended December 31, 1996.
10.1.3 -- Registrant's 1994 Stock Option Plan, as amended. Incorporated
herein by reference to Exhibit 10.1.3 to Registrant's quarterly
report on Form 10-Q for the quarter ended December 31, 1996.
10.1.4 -- Registrant's 1996 Stock Option Plan. Incorporated herein by
reference to Registrant's Proxy Statement for its 1996 Annual
Meeting of Shareholders.
10.1.4.1 -- Amendment to the Chesapeake Energy Corporation 1996 Stock
Option Plan. Incorporated herein by reference to Exhibit 10.1.4.1
to Registrant's annual report on Form 10-K for the year ended
June 30, 1997.
10.2.1+ -- Employment Agreement dated as of July 1, 1997 between Aubrey K.
McClendon and Chesapeake Energy Corporation. Incorporated herein
by reference to Exhibit 10.2.1 to Registrant's annual report on
Form 10-K for the year ended June 30, 1997.
10.2.2+ -- Employment Agreement dated as of July 1, 1997 between Tom L.
Ward and Chesapeake Energy Corporation. Incorporated herein by
reference to Exhibit 10.2.2 to Registrant's annual report on Form
10-K for the year ended June 30, 1997.
10.2.3+ -- Employment Agreement dated as of July 1, 1997 between Marcus C.
Rowland and Chesapeake Energy Corporation. Incorporated herein by
reference to Exhibit 10.2.3 to Registrant's annual report on Form 10-K
for the year ended June 30, 1997.
10.2.4+ -- Employment Agreement dated as of July 1, 1997 between Steven C.
Dixon and Chesapeake Energy Corporation. Incorporated herein by
reference to Exhibit 10.2.4 to Registrant's quarterly report on
Form 10-Q for the quarter ended September 30, 1997.
10.2.5+ -- Employment Agreement dated as of July 1, 1997 between J. Mark
Lester and Chesapeake Energy Corporation. Incorporated herein by
reference to Exhibit 10.2.5 to Registrant's annual report on Form 10-K
for the year ended June 30, 1997.
10.2.6+ -- Employment Agreement dated as of July 1, 1997 between Henry J.
Hood and Chesapeake Energy Corporation. Incorporated herein by
reference to Exhibit 10.2.6 to Registrant's annual report on Form 10-K
for the year ended June 30, 1997.
10.2.7+ -- Employment Agreement dated as of July 1, 1997 between Ronald A.
Lefaive and Chesapeake Energy Corporation. Incorporated herein by
reference to Exhibit 10.2.7 to Registrant's annual report on Form 10-K
for the year ended June 30, 1997.
10.2.8+ -- Employment Agreement dated as of July 1, 1997 between Martha A.
Burger and Chesapeake Energy Corporation. Incorporated herein by
reference to Exhibit 10.2.8 to Registrant's annual report on Form 10-K
for the year ended June 30, 1997.
10.3+ -- Form of Indemnity Agreement for officers and directors of
Registrant and its subsidiaries. Incorporated herein by reference
to Exhibit 10.30 to Registrant's registration statement on Form
S-1 (No. 33-55600).
10.9 -- Indemnity and Stock Registration Agreement, as amended by First
Amendment (Revised) thereto, dated as of February 12, 1993, and
as amended by Second Amendment thereto dated as of October 20,
1995, among Chesapeake Energy Corporation, Chesapeake Operating,
Inc., Chesapeake Investments, TLW Investments, Inc., et al.
Incorporated herein by reference to Exhibit 10.35 to Registrant's
annual report on Form 10-K for the year ended June 30, 1993 and
Exhibit 10.4.1 to Registrant's quarterly report on Form 10-Q for
the quarter ended December 31, 1995.
10.10 -- Partnership Agreement of Chesapeake Exploration Limited
Partnership dated December 27, 1994 between Chesapeake Energy
Corporation and Chesapeake Operating, Inc. Incorporated herein by
reference to Exhibit 10.10 to Registrant's registration statement
on Form S-4 (No. 33-93718).
10.11 -- Amended and Restated Limited Partnership Agreement of Chesapeake
Louisiana, L.P. dated June 30, 1997 between Chesapeake Operating,
Inc. and Chesapeake Energy Louisiana Corporation. Incorporated herein by
reference to Exhibit 10.11 to Registrant's annual report on Form 10-K
for the year ended June 30, 1997.
</TABLE>
74
<PAGE> 75
<TABLE>
<S> <C>
21* -- Subsidiaries of Registrant
23.1* -- Consent of Coopers & Lybrand L.L.P.
23.2* -- Consent of Price Waterhouse LLP
23.3* -- Consent of Williamson Petroleum Consultants, Inc.
23.4* -- Consent of Netherland, Sewell & Associates, Inc.
23.5* -- Consent of Porter Engineering Associates
27* -- Financial Data Schedule
</TABLE>
- ----------
* Filed herewith.
+ Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
During the quarter ended December 31, 1997, the Company filed the following
Current Reports on Form 8-K dated
October 1, 1997 announcing the declaration of a quarterly dividend.
October 31, 1997 announcing the acquisition of DLB Oil & Gas, Inc. and AnSon
Production Corporation, and completion of Masters Creek wells.
November 5, 1997 announcing expected proceeds from the initial public
offering of Bayard Drilling Technologies, Inc.
November 6, 1997 reporting fiscal 1998 first quarter results, $74 million
profit from Bayard initial public offering, new Louisiana Trend
completions, and change in fiscal year end.
November 20, 1997 announcing the change of its fiscal year end to December
31 and that a transition report on Form 10-K will be filed.
December 11, 1997 announced the successful completion of a well located in
Pointe Coupee Parish, Louisiana.
December 24, 1997 announcing the declaration of a quarterly cash dividend on
the Company's $0.01 par value common stock.
75
<PAGE> 76
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
CHESAPEAKE ENERGY CORPORATION
Date March 31, 1998 By /s/ AUBREY K. MCCLENDON
---------------------------- ------------------------
Aubrey K. McClendon
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- -----
<S> <C> <C>
/s/ AUBREY K. MCCLENDON Chairman of the Board, Chief March 31, 1998
- ------------------------------ Executive Officer and Director
Aubrey K. McClendon (Principal Executive Officer)
/s/ TOM L. WARD President, Chief Operating Officer March 31, 1998
- ------------------------------ and Director (Principal Executive
Tom L. Ward Officer)
/s/ MARCUS C. ROWLAND Senior Vice President Finance and March 31, 1998
- ------------------------------ Chief Financial Officer (Principal
Marcus C. Rowland Financial Officer)
/s/ RONALD A. LEFAIVE Controller (Principal Accounting March 31, 1998
- ------------------------------ Officer)
Ronald A. Lefaive
/s/ EDGAR F. HEIZER, JR. Director March 31, 1998
- ------------------------------
Edgar F. Heizer, Jr.
/s/ BREENE M. KERR Director March 31, 1998
- ------------------------------
Breene M. Kerr
/s/ SHANNON T. SELF Director March 31, 1998
- ------------------------------
Shannon T. Self
/s/ FREDERICK B. WHITTEMORE Director March 31, 1998
- ------------------------------
Frederick B. Whittemore
/s/ WALTER C. WILSON Director March 31, 1998
- ------------------------------
Walter C. Wilson
</TABLE>
76
<PAGE> 77
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
3.1* -- Registrant's Certificate of Incorporation, as
amended.
3.2 -- Registrant's Bylaws. Incorporated herein by
reference to Exhibit 3.2 to Registrant's registration
statement on Form 8-B (No. 001-13726).
4.1 -- Indenture dated as of March 15, 1997 among the
Registrant, as issuer, its subsidiaries signatory thereto as
Subsidiary Guarantors, and United States Trust Company of
New York, as Trustee, with respect to 7.875% Senior Notes
due 2004. Incorporated herein by reference to Exhibit 4.1
to Registrant registration statement on Form S-4 (No.
333-24995).
4.1.1* -- First Supplemental Indenture dated December 17, 1997 and Second
Supplemental Indenture dated February 16, 1998, to Indenture
filed as Exhibit 4.1.
4.2 -- Indenture dated as of March 15, 1997 among the Registrant,
as issuer, its subsidiaries signatory thereto, as Subsidiary
Guarantors, and United States Trust Company of New York, as
Trustee, with respect to 8.5% Senior Notes due 2012.
Incorporated herein by reference to Exhibit 4.1.3 to Registrant
registration statement on Form S-4 (No. 333-24995).
4.2.1* -- First Supplemental Indenture dated December 17, 1997 and
Second Supplemental Indenture dated February 16, 1998 to
Indenture filed as Exhibit 4.2.
4.3 -- Indenture dated as of May 15, 1995 among Chesapeake Energy
Corporation, its subsidiaries signatory thereto as Subsidiary
Guarantors and United States Trust Company of New York, as
Trustee, with respect to 10.5% Senior Notes due 2002.
Incorporated herein by reference to Exhibit 4.3 to Registrant's
registration statement on Form S-4 (No. 33-93718).
4.3.1* -- First Supplemental Indenture dated December 30, 1996 and Second
Supplemental Indenture dated December 17, 1997 filed as Exhibit
4.3.
4.4 -- Indenture dated April 1, 1996 among Chesapeake Energy
Corporation, its subsidiaries signatory thereto as Subsidiary
Guarantors and United States Trust Company of New York, as
Trustee, with respect to 9.125% Senior Notes due 2006.
Incorporated herein by reference to Exhibit 4.6 to Registrant's
registration statement on Form S-3 Registration Statement (No.
333-1588)
4.4.1* -- First Supplemental Indenture dated December 30, 1996 and Second
Supplemental Indenture dated December 17, 1997, to Indenture
filed as Exhibit 4.4.
4.5 -- Agreement to furnish copies of unfiled long-term debt
instruments.
4.6* -- Credit Agreement dated March 9, 1998 between Chesapeake
Acquisition Corporation and Chesapeake Mid-Continent Corp., as
Borrowers, Chesapeake Merger Corp., Chesapeake Acquisition
Corp., Chesapeake Columbia Corp., Mid-Continent Gas Pipeline
Company, and AnSon Gas Marketing as Initial Guarantors, Union
Bank of California, N.A., as Agent and Certain Financial
Institutions, as Lenders.
4.8 -- Stock Registration Agreement dated May 21, 1992 between
Chesapeake Energy Corporation and various lenders, as amended
by First Amendment thereto dated May 26, 1992. Incorporated
herein by reference to Exhibits 10.26.1 and 10.26.2 to
Registrant's registration statement on Form S-1 (No.
33-55600).
</TABLE>
<PAGE> 78
<TABLE>
<S> <C>
4.9 -- Registration Rights Agreement dated October 22, 1997 as amended
by Amendment No. 1 dated December 22, 1997 between Chesapeake
Energy Corporation and Charles E. Davidson. Incorporated herein
by reference to Exhibits 4.9 and 4.10 to Registrant's
registration statement on Form S-4 (No. 333-48735).
4.10 -- Registration Rights Agreement between Chesapeake Energy
Corporation and certain former shareholders of Hugoton Energy
Corporation. Incorporated herein by reference to Exhibit 4.11 to
Registrant's registration statement on Form S-4 Registration
Statement (No. 333-48735).
10.1.1 -- Registrant's 1992 Incentive Stock Option Plan. Incorporated
herein by reference to Exhibit 10.1.1 to Registrant's
registration statement on Form S-4 (No. 33-93718).
10.1.2 -- Registrant's 1992 Nonstatutory Stock Option Plan, as amended.
Incorporated herein by reference to Exhibit 10.1.2 to
Registrant's quarterly report on Form 10-Q for the quarter
ended December 31, 1996.
10.1.3 -- Registrant's 1994 Stock Option Plan, as amended. Incorporated
herein by reference to Exhibit 10.1.3 to Registrant's quarterly
report on Form 10-Q for the quarter ended December 31, 1996.
10.1.4 -- Registrant's 1996 Stock Option Plan. Incorporated herein by
reference to Registrant's Proxy Statement for its 1996 Annual
Meeting of Shareholders.
10.1.4.1 -- Amendment to the Chesapeake Energy Corporation 1996 Stock
Option Plan. Incorporated herein by reference to Exhibit 10.1.4.1
to Registrant's annual report on Form 10-K for the year ended
June 30, 1997.
10.2.1+ -- Employment Agreement dated as of July 1, 1997 between Aubrey K.
McClendon and Chesapeake Energy Corporation. Incorporated herein
by reference to Exhibit 10.2.1 to Registrant's annual report on
Form 10-K for the year ended June 30, 1997.
10.2.2+ -- Employment Agreement dated as of July 1, 1997 between Tom L.
Ward and Chesapeake Energy Corporation. Incorporated herein by
reference to Exhibit 10.2.2 to Registrant's annual report on Form
10-K for the year ended June 30, 1997.
10.2.3+ -- Employment Agreement dated as of July 1, 1997 between Marcus C.
Rowland and Chesapeake Energy Corporation. Incorporated herein
by reference to Exhibit 10.2.3 to Registrant's annual report on
Form 10-K for the year ended June 30, 1997.
10.2.4+ -- Employment Agreement dated as of July 1, 1997 between Steven C.
Dixon and Chesapeake Energy Corporation. Incorporated herein by
reference to Exhibit 10.2.4 to Registrant's quarterly report on
Form 10-Q for the quarter ended September 30, 1997.
10.2.5+ -- Employment Agreement dated as of July 1, 1997 between J. Mark
Lester and Chesapeake Energy Corporation. Incorporated herein by
reference to Exhibit 10.2.5 to Registrant's annual report on
Form 10-K for the year ended June 30, 1997.
10.2.6+ -- Employment Agreement dated as of July 1, 1997 between Henry J.
Hood and Chesapeake Energy Corporation. Incorporated herein by
reference to Exhibit 10.2.6 to Registrant's annual report on
Form 10-K for the year ended June 30, 1997.
10.2.7+ -- Employment Agreement dated as of July 1, 1997 between Ronald A.
Lefaive and Chesapeake Energy Corporation. Incorporated herein
by reference to Exhibit 10.2.7 to Registrant's annual report on
Form 10-K for the year ended June 30, 1997.
10.2.8+ -- Employment Agreement dated as of July 1, 1997 between Martha A.
Burger and Chesapeake Energy Corporation. Incorporated herein by
reference to Exhibit 10.2.8 to Registrant's annual report on
Form 10-K for the year ended June 30, 1997.
10.3+ -- Form of Indemnity Agreement for officers and directors of
Registrant and its subsidiaries. Incorporated herein by reference
to Exhibit 10.30 to Registrant's registration statement on Form
S-1 (No. 33-55600).
10.9 -- Indemnity and Stock Registration Agreement, as amended by First
Amendment (Revised) thereto, dated as of February 12, 1993, and
as amended by Second Amendment thereto dated as of October 20,
1995, among Chesapeake Energy Corporation, Chesapeake Operating,
Inc., Chesapeake Investments, TLW Investments, Inc., et al.
Incorporated herein by reference to Exhibit 10.35 to Registrant's
annual report on Form 10-K for the year ended June 30, 1993 and
Exhibit 10.4.1 to Registrant's quarterly report on Form 10-Q for
the quarter ended December 31, 1995.
10.10 -- Partnership Agreement of Chesapeake Exploration Limited
Partnership dated December 27, 1994 between Chesapeake Energy
Corporation and Chesapeake Operating, Inc. Incorporated herein by
reference to Exhibit 10.10 to Registrant's registration statement
on Form S-4 (No. 33-93718).
10.11 -- Amended and Restated Limited Partnership Agreement of Chesapeake
Louisiana, L.P. dated June 30, 1997 between Chesapeake Operating,
Inc. and Chesapeake Energy Louisiana Corporation. Incorporated
herein by reference to Exhibit 10.11 to Registrant's annual
report on Form 10-K for the year ended June 30, 1997.
21* -- Subsidiaries of Registrant
23.1* -- Consent of Coopers & Lybrand L.L.P.
23.2* -- Consent of Price Waterhouse LLP
23.3* -- Consent of Williamson Petroleum Consultants, Inc.
23.4* -- Consent of Netherland, Sewell & Associates, Inc.
23.5* -- Consent of Porter Engineering Associates
27* -- Financial Data Schedule
</TABLE>
- ----------
* Filed herewith.
+ Management contract or compensatory plan or arrangement.
<PAGE> 1
EXHIBIT 3.1
AMENDMENT TO
CERTIFICATE OF INCORPORATION
OF
CHESAPEAKE ENERGY CORPORATION
(AFTER RECEIPT OF PAYMENT FOR STOCK)
The undersigned, Aubrey K. McClendon, as Chairman of the Board and Chief
Executive Officer, and Janice A. Dobbs, as Secretary of Chesapeake Energy
Corporation, a corporation organized and existing under the laws of the State of
Oklahoma (the "Corporation"), hereby certify as follows:
A. The name of the Corporation is Chesapeake Energy Corporation.
B. The name under which the Corporation was originally incorporated is
Chesapeake Oklahoma Corporation. The original Certificate of Incorporation
of the Corporation was filed with the Secretary of State of Oklahoma on
November 19, 1996, as amended by that certain Certificate of Ownership and
Merger Merging Chesapeake Energy Corporation into Chesapeake Oklahoma
Corporation filed with the Secretary of State of Oklahoma on December 23,
1996, effective December 31, 1996 (the "Certificate of Incorporation").
C. This Amendment to Certificate of Incorporation was duly adopted in
accordance with the provisions of Section 1077 of the General Corporation
Act of Oklahoma (the "Act") at the Corporation's annual meeting by a
majority of the outstanding capital stock of the Corporation entitled to
vote thereon. Written notice of the Corporation's annual meeting was given
to the stockholders of the Corporation in accordance with the provisions
of Section 1067 of the Act.
D. The Certificate of Incorporation is hereby amended as follows:
1. Amendment to Article IV. The first sentence of Article IV of the
Certificate of Incorporation starting with the words "The total number of shares
of capital stock . . . " is hereby deleted in its entirety and the following
sentence is substituted therefor:
The total number of shares of capital stock which the Corporation
shall have authority to issue is Two Hundred Sixty Million
(260,000,000) shares, consisting of Ten Million (10,000,000) shares
of Preferred Stock, par value $0.01 per share, and Two Hundred Fifty
Million (250,000,000) shares of Common Stock, par value $0.01 per
share.
<PAGE> 2
IN WITNESS WHEREOF, this Amendment to Certificate of Incorporation was duly
adopted by the board of directors and the stockholders of the Corporation in
accordance with Section 1077 of the Act and executed this 9th day of December,
1997, by Aubrey K. McClendon, as Chairman of the Board and Chief Executive
Officer, and attested by Janice A. Dobbs, as Secretary.
/s/ Aubrey K. McClendon
----------------------------------------------
Aubrey K. McClendon, Chairman of the Board and
Chief Executive Officer
Attest:
/s/ Janice A. Dobbs
- -------------------------------
Janice A. Dobbs, Secretary
<PAGE> 3
CERTIFICATE OF OWNERSHIP AND MERGER
MERGING
CHESAPEAKE ENERGY CORPORATION
INTO
CHESAPEAKE OKLAHOMA CORPORATION
CHESAPEAKE ENERGY CORPORATION, a Delaware corporation
(the "Corporation"), DOES HEREBY CERTIFY:
FIRST: That it owns 100% of the issued and outstanding
shares of the capital stock of CHESAPEAKE OKLAHOMA CORPORATION, an
Oklahoma corporation ("Chesapeake Oklahoma").
SECOND: That its board of directors at a meeting held on
the 15th day of October, 1996, determined to merge the Corporation
into CHESAPEAKE OKLAHOMA CORPORATION, and did adopt the following
resolutions:
WHEREAS, the officers of the Corporation recommended that
the Corporation reincorporate under the laws of the State
of Oklahoma and the Board of Directors, after discussing
the issue, has determined that the reincorporation is in
the best interest of the shareholders and the
Corporation; and
WHEREAS, to facilitate the Corporation's reincorporation,
the officers of the Corporation recommended that the
Corporation form Chesapeake Oklahoma Corporation
("Chesapeake Oklahoma") to be organized and exist under
and by virtue of the laws of the State of Oklahoma, with
an authorized capitalization of (i) 100 million shares of
common stock, $.01 par value ("Chesapeake Oklahoma Common
Stock"), 10 shares of which will be issued and
outstanding prior to the reincorporation, and (ii) 10
million shares of preferred stock, $.01 par value, no
shares of which will be issued and outstanding prior to
the reincorporation (all shares of Chesapeake Oklahoma
Common Stock outstanding prior to the reincorporation
will be held of record and beneficially by the
Corporation).
NOW, THEREFORE, BE IT RESOLVED, that the officers of the
Corporation be, and each of them hereby is, authorized
and directed to take any and all actions required to
reincorporate the Corporation under the laws of the State
of Oklahoma, including without limitation, the forming of
Chesapeake Oklahoma as a new transitory subsidiary, in
accordance with the recitations set forth herein, the
listing of the shares of Chesapeake Oklahoma on the New
York Stock Exchange, the registration of such shares with
the Securities and Exchange Commission and any state
securities agency, the assumption by Chesapeake Oklahoma
of all existing plans and registration statements of the
Corporation and such other actions as may be necessary to
the effect that the rights and obligations of Chesapeake
Oklahoma will be virtually identical to the rights and
obligations of the Corporation.
WHEREAS, after the formation of Chesapeake Oklahoma, the
Board of Directors deems it advisable and in the best
interests of the Corporation and its shareholders that
the Corporation merge with and into Chesapeake Oklahoma
pursuant to Section 1083 of the Oklahoma General
Corporation Act and Section 253 of the Delaware General
Corporation Law (the "Merger") and immediately thereafter
for Chesapeake Oklahoma to change its name to Chesapeake
Energy Corporation; and
WHEREAS, the Corporation and Chesapeake Oklahoma will
hereinafter be know as the "Constituent Corporations;"
and
WHEREAS, the Board of Directors deems it advisable and in
the best interests of the Corporation and its
shareholders that the Corporation be merged with and into
Chesapeake Oklahoma in the manner contemplated herein
(the "Plan") and recommend that the Merger and the Plan
be approved and adopted by the shareholders of the
Corporation;
NOW, THEREFORE, BE IT RESOLVED, that the Constituent
Corporations will be merged into a single corporation by
the Corporation merging with and into Chesapeake
Oklahoma, which will survive the Merger, pursuant to the
provisions of Section 1083 of the Oklahoma General
Corporation Act and Section 253 of the Delaware General
Corporation Law. Upon such Merger, the separate
existence of the Corporation will cease, and Chesapeake
Oklahoma will become the owner, without transfer, of all
rights and property of the Constituent Corporations, and
will be subject to all the liabilities of the Constituent
Corporations in the same manner as if Chesapeake Oklahoma
had itself incurred such liabilities all as provided by
the Oklahoma General Corporation Act.
<PAGE> 4
FURTHER RESOLVED, that, on the Effective Date of the
Merger, which will be 5:00 p.m., CST, on December 31,
1996 (the "Effective Date of the Merger"), the
Certificate of Incorporation and Bylaws of Chesapeake
Oklahoma, as currently in effect, will be the Certificate
of Incorporation and Bylaws of Chesapeake Oklahoma until
they are duly amended, except that the name of Chesapeake
Oklahoma will be changed to Chesapeake Energy
Corporation.
FURTHER RESOLVED, that on the Effective Date of the
Merger, the directors and officers of the Corporation
will become the directors and officers of Chesapeake
Oklahoma until their successors are duly elected and
qualified.
FURTHER RESOLVED, that on the Effective Date of the
Merger (i) each share of Chesapeake Common Stock issued
and outstanding immediately prior to the Effective Date
of the Merger, by virtue of the Merger and without any
action on the part of the holder thereof, will be
converted into one share of Chesapeake Oklahoma Common
Stock, (ii) each share of Chesapeake Oklahoma Common
Stock issued and outstanding immediately prior to the
Effective Date of the Merger, by virtue of the Merger and
without any action on the part of the holder thereof,
will be cancelled and no payment will be made in respect
thereof, and (iii) upon surrender of any certificates
representing Chesapeake Common Stock, stock certificates
representing Chesapeake Oklahoma Common Stock will be
reissued to the holder thereof.
FURTHER RESOLVED, that this Plan will be submitted to the
shareholders of the Corporation for approval in the
manner provided by applicable Oklahoma and Delaware law.
After approval by the vote of the holders representing
not less than a majority of the issued and outstanding
shares of Chesapeake Common Stock entitled to vote on the
Merger, the officers are, and each of them hereby is,
authorized and directed to execute and file with the
Secretary of State of the States of Oklahoma and Delaware
a Certificate of Ownership and Merger and to make any
such further filings as may be necessary to effectuate
the Merger.
FURTHER RESOLVED, that the officers of the Corporation
are authorized and directed to execute any and all
agreements, documents or consents, and to take any and
all actions deemed necessary or desirable to permit the
consummation of the Merger as required by: (a) that
certain Indenture dated as of March 31, 1994, as
supplemented, among the Corporation, its subsidiaries
signatory thereto as Subsidiary Guarantors and United
States Trust Company of New York, as trustee; (b) that
certain Indenture dated as of May 15, 1995 among the
Corporation, its subsidiaries signatory thereto as
Subsidiary Guarantors and United States Trust Company of
New York, as trustee; and (c) that certain Indenture
dated as of April 1, 1996 among the Corporation, its
subsidiaries signatory thereto as Subsidiary Guarantors
and United States Trust Company of New York, as trustee.
The execution by the officers, or any one of them, of any
such document or agreement, or the doing by them of any
act in connection with the foregoing matter, will
conclusively establish their authority therefor from this
Board and from the Corporation and the approval,
ratification and adoption of any documents or agreements
executed and any action taken.
FURTHER RESOLVED, that the officers of the Corporation
be, and they hereby are, authorized and directed to
execute and deliver on behalf of the Corporation all
agreements and documents contemplated by the Plan,
together with any and all documents and related
agreements deemed necessary or desirable by said officer
or officers to effectuate the foregoing, each in
accordance with the recitations contained herein, and
containing such further and different terms and
conditions as said officer or officers will deem
necessary or desirable to accomplish the objectives set
forth herein, and further, that the execution by the
officers, or any one of them, of any such document or
agreement, or the doing by them of any act in connection
with the foregoing matter, will conclusively establish
their authority therefor from this Board and from the
Corporation and the approval, ratification and adoption
of any documents or agreements executed and any action
taken.
THIRD: The merger has been approved by a majority of the
outstanding stock of the Corporation entitled to vote thereon at a
meeting duly called and held after twenty days' notice of the
purpose of the meeting mailed to each such stockholder at his
address as it appears in the records of the Corporation.
<PAGE> 5
FOURTH: Chesapeake Oklahoma hereby agrees that it may be
served with process in the state of Delaware in any proceeding for
enforcement of any obligation of any constituent corporation of
Delaware, as well as for enforcement of any obligation of
Chesapeake Oklahoma arising from the merger, including any suit or
other proceeding to enforce the right of any shareholders as
determined in appraisal proceedings pursuant to the provisions of
Section 262 of the Delaware General Corporation Law, and hereby
irrevocably appoints the Secretary of State of the State of
Delaware as its agent to accept service of process in any such suit
or other proceeding. The address to which a copy of such process
shall be mailed by the Secretary of State of Delaware is 6100 N.
Western Avenue, Oklahoma City, OK 73118.
IN WITNESS WHEREOF, the Corporation has caused this
Certificate to be signed by its President and attested to by its
Secretary effective the 13th day of December, 1996.
CHESAPEAKE ENERGY CORPORATION
THOMAS L. WARD
Thomas L. Ward
President
ATTEST:
JANICE DOBBS
Janice Dobbs
Secretary
[Seal]
<PAGE> 6
CERTIFICATE OF INCORPORATION
OF
CHESAPEAKE OKLAHOMA CORPORATION
ARTICLE I
Name
The name of the Corporation is:
CHESAPEAKE OKLAHOMA CORPORATION
ARTICLE II
Registered Office and Agent
The address of the Corporation's registered office in the
State of Oklahoma is 6104 N. Western Avenue, Oklahoma City,
Oklahoma 73118. The Corporation's registered agent at such address
is Janice A. Dobbs.
ARTICLE III
Purposes
The nature of the business and the purpose of the
Corporation shall be to engage in any lawful act or activity and to
pursue any lawful purpose for which a corporation may be formed
under the Oklahoma General Corporation Act (the "Act"). The
Corporation is authorized to exercise and enjoy all powers, rights
and privileges which corporations organized under the Act may have
as in force from time to time, including, without limitation, all
powers, rights and privileges necessary or convenient to carry out
the purposes of the Corporation.
ARTICLE IV
Capital Stock
The total number of shares of capital stock which the
Corporation shall have authority to issue is One Hundred Ten
Million (110,000,000) shares, consisting of Ten Million
(10,000,000) shares of Preferred Stock, par value $0.01 per share
and One Hundred Million (100,000,000) shares of Common Stock, par
value $0.01 per share. The preferences, qualifications,
limitations, restrictions and the special or relative rights in
respect of the shares of each class are as follows:
Section 1. Preferred Stock. The Preferred
Stock may be issued from time to time in one or more series. All
shares of Preferred Stock shall be of equal rank and shall be
identical, except in respect of the matters that may be fixed and
determined by the board of directors as hereinafter provided, and
each share of each series shall be identical with all other shares
of such series, except as to the date from which dividends are
cumulative. The board of directors hereby is authorized to cause
such shares to be issued in one or more series and with respect to
each such series prior to the issuance thereof to fix and determine
the designation, powers, preferences and rights of the shares of
each such series and the qualifications, limitations or
restrictions thereof.
<PAGE> 7
The authority of the board with respect to each series
shall include but not be limited to, determination of the
following:
A. The number of shares
constituting a series, the distinctive designation of a
series and the stated value of the series, if different
from the par value;
B. Whether the shares of a series
are entitled to any fixed or determinable dividends, the
dividend rate (if any) on the shares, whether the
dividends are cumulative and the relative rights of
priority of dividends on shares of that series;
C. Whether a series has voting
rights in addition to the voting rights provided by law
and the terms and conditions of such voting rights;
D. Whether a series will have or
receive conversion or exchange privileges and the terms
and conditions of such conversion or exchange privileges;
E. Whether or not the shares of a
series are redeemable and the terms and conditions of
such redemption, including, without limitation, the
manner of selecting shares for redemption if less than
all shares are to be redeemed, the date or dates on or
after which the shares in the series will be redeemable
and the amount payable in case of redemption;
F. Whether a series will have a
sinking fund for the redemption or purchase of the shares
in the series and the terms and the amount of such
sinking fund;
G. The right of a series to the
benefit of conditions and restrictions on the creation of
indebtedness of the Corporation or any subsidiary, on the
issuance of any additional capital stock (including
additional shares of such series or any other series), on
the payment of dividends or the making of other
distributions on any outstanding stock of the Corporation
and the purchase, redemption or other acquisition by the
Corporation, or any subsidiary, of any outstanding stock
of the Corporation;
H. The rights of a series in the
event of voluntary or involuntary liquidation,
dissolution or winding up of the corporation and the
relative rights of priority of payment of a series; and
I. Any other relative,
participating, optional or other special rights,
qualifications, limitations or restrictions of such
series.
Dividends on outstanding shares of Preferred Stock shall
be paid or set apart for payment before any dividends shall be paid
or declared or set apart for payment on the common shares with
respect to the same dividend period.
<PAGE> 8
If upon any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation the assets available
for distribution to holders of shares of Preferred Stock of all
series shall be insufficient to pay such holders the full
preferential amount to which they are entitled, then such assets
shall be distributed ratably among the shares of all series in
accordance with the respective preferential amounts (including
unpaid cumulative dividends, if any) payable with respect thereto.
Section 2. Common Stock. The Common Stock
shall be subject to the express terms of the Preferred Stock and
any series thereof. Each share of Common Stock shall be equal to
every other share of Common Stock. The holders of shares of Common
Stock shall be entitled to one vote for each share of such stock
upon all matters presented to the shareholders. Shares of Common
Stock authorized hereby shall not be subject to preemptive rights.
The holders of shares of Common Stock now or hereafter outstanding
shall have no preemptive right to purchase or have offered to them
for purchase any of such authorized but unissued shares. The
holders of shares of Common Stock now or hereafter outstanding
shall have no preemptive right to purchase or have offered to them
for purchase any shares of Preferred Stock, Common stock, or other
equity securities issued or to be issued by the Company.
Subject to the preferential and other dividend rights
applicable to Preferred Stock, the holders of shares of Common
Stock shall be entitled to receive such dividends (payable in cash,
stock or otherwise) as may be declared on the Common Stock by the
Board of Directors at any time or from time to time out of any
funds legally available therefor.
In the event of any voluntary or involuntary liquidation,
distribution or winding up of the Corporation, after distribution
in full of the preferential and/or other amounts to be distributed
to the holders of shares of Preferred Stock, the holders of shares
of Common Stock shall be entitled to receive all of the remaining
assets of the Corporation available for distribution to its
shareholders, ratably in proportion to the number of shares of
Common Stock held by them.
ARTICLE V
Limitation of Director Liability
A director of the Corporation shall not be personally
liable to the Corporation or its shareholders for damages for
breach of fiduciary duty as a director, except for personal
liability for (i) acts or omissions by such director not in good
faith or which involve intentional misconduct or a knowing
violation of law; (ii) the payment of dividends or the redemption
or purchase of stock in violation of Section 1053 of the Act; (iii)
any breach of such director's duty of loyalty to the Corporation or
its shareholders; or (iv) any transaction from which such director
derived an improper personal benefit.
<PAGE> 9
ARTICLE VI
Certain Stock Purchases
Section 1. Certain Definitions. For the
purposes of this Article VI:
"Continuing Director" means any member of the Board of
Directors of the Corporation (the "Board") who is unaffiliated with
the Interested Shareholder and was a member of the Board prior to
the time that the Interested Shareholder became an Interested
Shareholder, and any successor of a Continuing Director who is
unaffiliated with the Interested Shareholder and is recommended to
succeed a Continuing Director by a majority of Continuing Directors
then on the Board.
"Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.
"Fair Market Value" means: (1) in the case of stock, the
highest closing sale price during the 30-day period ending on the
date in question of a share of such stock on a principal United
States securities exchange registered under the Exchange Act on
which such stock is listed or in the national market system
maintained by the National Association of Securities Dealers, Inc.,
or, if the stock is not listed on any such exchange or designated
as a national market system security, the highest closing bid
quotation with respect to a share of such stock during the 30-day
period ending on the date in question on the National Association
of Securities Dealers, Inc. Automated Quotations system or any
system then in use, or if no such quotations are available, the
fair market value on the date in question of a share of such stock
as determined by the Board in good faith.
"Interested Shareholder" shall have the meaning ascribed
to such term under Section 1090.3 of the Act.
Section 2. Vote Required for Certain Stock
Purchases.
A. Any direct or indirect purchase by the Corporation, or
any subsidiary of the Corporation, of any capital stock from a
person or persons known by a majority of the Continuing Directors
of the Corporation to be an Interested Shareholder who has
beneficially owned such capital stock for less than three years
prior to the date of such purchase, or any agreement in respect
thereof, at a price in excess of the Fair Market Value shall
require the affirmative vote of no less than 66 2/3% of the votes
cast by the holders, voting together as a single class, of all then
outstanding shares of capital stock, excluding for this purpose the
votes by the Interested Shareholder, unless a greater vote shall be
required by law.
B. Such affirmative vote shall not be required for a
purchase or other acquisition of securities of the same class made
on substantially the same terms to all holders of such securities
and complying with the applicable requirements of the Exchange Act,
and the rules and regulations thereunder (or any subsequent
provisions replacing the Exchange Act, rules or regulations).
Furthermore, such affirmative vote shall not be required for any
purchase effected on the open market and not the result of a
privately-negotiated transaction.
Section 3. Powers of Continuing Directors.
The Continuing Directors of the Corporation shall have the power
and duty to determine for the purposes of this Article VI, on the
basis of information known to them after reasonable inquiry,
whether a person is an Interested Shareholder, and the number of
shares of capital stock owned beneficially by any person.
<PAGE> 10
ARTICLE VII
Board of Directors
Section 1. Management by Board of Directors.
The business and affairs of the Corporation shall be under the
direction of the Board of Directors.
Section 2. Number of Directors. The number
of Directors which shall constitute the whole board shall be not
less than three nor more than fifteen, and shall be determined by
resolution adopted by a vote of two-thirds (2/3) of the entire
board, or at an annual or special meeting of shareholders by the
affirmative vote of sixty-six and two-third percent (66 2/3%) of
the outstanding stock entitled to vote. No reduction in number
shall have the effect of removing any director prior to the
expiration of his term. The number of directors of the Corporation
may, from time to time, be increased or decreased in such manner as
may be provided in the bylaws of the Corporation.
Section 3. Classes of Directors; Election by
Shareholders; Vacancies. The directors shall be divided into three
classes, designated Class I, Class II and Class III. Each class
shall consist, as nearly as may be possible, of one-third of the
total number of directors constituting the entire Board of
Directors. The term of the initial Class I directors shall
terminate on the date of the 1997 annual meeting of shareholders;
the term of the initial Class II directors shall terminate on the
date of the 1998 annual meeting of shareholders and the term of the
initial Class III directors shall terminate on the date of the 1999
annual meeting of shareholders. At each annual meeting of
shareholders beginning in 1997, successors to the class of
directors whose term expires at that annual meeting shall be
elected for a three-year term. If the number of directors is
changed, any increase or decrease shall be apportioned among the
classes so as to maintain the number of directors in each class as
nearly equal as possible, and any additional directors of any class
elected to fill a vacancy resulting from an increase in such class
shall hold office for a term that shall coincide with the remaining
term of that class, but in no case will a decrease in the number of
directors shorten the term of any incumbent director. A director
shall hold office until the annual meeting for the year in which
his term expires and until his successor shall be elected and shall
qualify, subject, however, to prior death, resignation, retirement,
disqualification or removal from office. Any vacancy on the Board
of directors, however resulting, may be filled by a majority of the
directors then in office, even if less than a quorum, or by a sole
remaining director. Any director elected to fill a vacancy shall
hold office for a term that shall coincide with the term of the
class to which such director shall have been elected. No election
of directors need be by written ballot.
Notwithstanding the foregoing,
whenever the holders of any one or more classes or series of
Preferred Stock issued by the Corporation shall have the right,
voting separately by class or series, to elect directors at an
annual or special meeting of shareholders, the election, term of
office, filling of vacancies and other features of such
directorships shall be governed by the terms of the Certificate of
Designation attributable to such Preferred stock or the resolution
or resolutions adopted by the Board of Directors pursuant to
Section 2 of this Article VII applicable thereto, and such
directors so elected shall not be divided into classes pursuant to
this Article VII unless expressly provided by such terms.
<PAGE> 11
ARTICLE VIII
Indemnity
Section 1. Third Party Claims. The
Corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or
completed action, suit or proceeding whether civil, criminal,
administrative or investigative (other than an action by or in the
right of the Corporation) by reason of the fact that he is or was
a director, officer, employee or agent of the Corporation or is or
was serving at the request of the Corporation as a director,
officer, employee or agent of another corporation, partnership,
joint venture or other enterprise against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such
action, suit or proceeding, if he acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best
interest of the Corporation and, with respect to any criminal
action or proceeding, had no reasonable cause to believe that his
conduct was unlawful. The termination of any action, suit or
proceeding by judgment, order, settlement, conviction or upon a
plea of nolo contendere or its equivalent shall not of itself
create a presumption that the person did not act in good faith and
in a manner which he reasonably believed to be in or not opposed to
the best interest of the Corporation and with respect to any
criminal action or proceeding had reasonable cause to believe that
his conduct was unlawful.
Section 2. Derivative Claims. The Corporation
shall indemnify any person who was or is a party or is threatened
to be made a party to any threatened, pending or completed action
or suit by or in the right of the Corporation to procure a judgment
in its favor by reason of the fact that he is or was a director,
officer, employee or agent of the Corporation or is or was serving
at the request of the Corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust
or other enterprise against expenses (including attorney's fees)
actually and reasonably incurred by him in connection with the
defense or settlement of such action or suit, if he acted in good
faith and in a manner he reasonably believed to be in or not
opposed to the best interest of the Corporation; except that no
indemnification shall be made in respect of any claim, issue or
matter as to which such person shall have been adjudged to be
liable to the Corporation unless and only to the extent that the
court in which such action or suit was brought shall determine,
upon application, that despite the adjudication of liability, but
in the view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which
the court shall deem proper.
Section 3. Expenses. Expenses, including fees
and expenses of counsel, incurred in defending a civil, criminal,
administrative or investigative action, suit or proceeding may be
paid by the Corporation in advance of the final disposition of such
action, suit or proceeding upon receipt of an undertaking by or on
behalf of the director, officer, employee or agent to repay such
amount if it shall ultimately be determined that he is not entitled
to be indemnified by the Corporation as authorized herein.
Section 4. Insurance. The Corporation may
purchase (upon resolution duly adopted by the board of directors)
and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the Corporation, or is or
was serving at the request of the Corporation as a director,
officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against any liability
asserted against him and incurred by him in any such capacity, or
arising out of his status as such, whether or not the Corporation
would have the power to indemnify him against such liability.
<PAGE> 12
Section 5. Reimbursement. To the extent that
a director, officer, employee or agent of, or any other person
entitled to indemnity hereunder by, the Corporation has been
successful on the merits or otherwise in defense of any action,
suit, or proceeding referred to herein or in defense of any claim,
issue or matter therein, he shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by him
in connection therewith.
Section 6. Enforcement. Every such person
shall be entitled, without demand by him upon the Corporation or
any action by the Corporation, to enforce his right to such
indemnity in an action at law against the Corporation. The right
of indemnification and advancement of expenses hereinabove provided
shall not be deemed exclusive of any rights to which any such
person may now or hereafter be otherwise entitled and specifically,
without limiting the generality of the foregoing, shall not be
deemed exclusive of any rights pursuant to statute or otherwise, of
any such person in any such action, suit or proceeding to have
assessed or allowed in his favor against the Corporation or
otherwise, his costs and expenses incurred therein or in connection
therewith or any part thereof.
ARTICLE IX
Amendments; Bylaws; Control Shares Act; Written Consent
Section 1. Amendments to Certificate of
Incorporation. Notwithstanding anything contained in this
Certificate of Incorporation to the contrary, the affirmative vote
of the holders of at least sixty-six and two-thirds percent (66
2/3%) of the issued and outstanding stock having voting power,
voting together as a single class, shall be required to amend,
repeal or adopt any provision inconsistent with Articles V, VI,
VII, VIII and this Article IX of this Certificate of Incorporation.
Section 2. Bylaws. Prior to the receipt of
any payment for any of the Corporation's stock, the Bylaws of the
Corporation shall be adopted, amended or repealed by the
Incorporator. Thereafter, in furtherance and not in limitation of
the powers conferred by statute, the Board of Directors is
expressly authorized to adopt, repeal, alter, amend or rescind the
Bylaws of the Corporation. In addition, the Bylaws of the
Corporation may be adopted, repealed, altered, amended, or
rescinded by the affirmative vote of the holders of sixty-six and
two-thirds percent (66 2/3%) of the outstanding stock of the
Corporation entitled to vote thereon.
Section 3. Control Shares Act. The
Corporation shall not be subject to the Oklahoma Control Shares Act
as codified at Sections 1145-1155 of the Act. This election shall
be effective on the date of filing this Certificate.
Section 4. Action By Written Consent. Any
action required or permitted to be taken at a meeting of the
shareholders may be taken without a meeting, without prior notice
and without a vote, if a consent in writing, setting forth the
action so taken, shall be signed by the holders of outstanding
stock having not less than the minimum number of votes which would
be necessary to authorize or take such action at a meeting at which
all shares entitled to vote thereon were present and voted. Prompt
notice of the taking of corporate action without a meeting by less
than unanimous written consent shall be given to those shareholders
who have not consented in writing.
<PAGE> 13
ARTICLE X
Incorporator
The name and mailing address of the Incorporator is as
follows:
W. Chris Coleman Tenth Floor
Two Leadership Square
Oklahoma City, OK 73102
I, the undersigned, for the purpose of forming a corpo-
ration under the laws of the State of Oklahoma, do make, file and
record this Certificate, and do certify that the facts herein
stated are true, and I have accordingly hereunto set my hand this
18th day of October, 1996.
W. CHRIS COLEMAN
W. Chris Coleman
<PAGE> 14
CONSENT TO SIMILAR NAME
TO THE SECRETARY OF STATE OF THE STATE OF OKLAHOMA;
Pursuant to 18 O.S. 1986 Supp. Section 1141 or 54 O.S. Supp.
1984, Section 303, whichever is applicable, the undersigned
corporation or limited partnership hereby consents to the use of
the name or a similar name.
1. The name of the consenting corporation or limited partnership
is:
CHESAPEAKE LIMITED PARTNERSHIP
and is organized under the laws of the State of Oklahoma.
2. The proposed name of the corporation or limited partnership to
which this consent is given is:
CHESAPEAKE OKLAHOMA CORPORATION
and is organized or is to be organized under the laws of the State
of Oklahoma.
3. In the event the proposed corporation name is identical to the
consenting corporation's name the consenting corporation is about
to:
A. Change its name _____.
B. Cease to do business X.
C. Withdraw from Oklahoma _____.
D. Be wound up _____.
IN WITNESS WHEREOF, this corporation or limited partnership
has caused this consent to be executed this 14th day of November,
1996.
CHESAPEAKE OPERATING, INC., General
Partner
By TOM L. WARD
Tom L. Ward, Chief Operating
Officer
ATTEST:
JANICE A. DOBBS
Janice A. Dobbs, Secretary
<PAGE> 1
EXHIBIT 4.1.1
FIRST SUPPLEMENTAL INDENTURE
TO INDENTURE DATED MARCH 15, 1997
(7.875%)
FIRST SUPPLEMENTAL INDENTURE dated as of December 17, 1997, among
CHESAPEAKE ENERGY CORPORATION, an Oklahoma corporation (the "Company"), the
SUBSIDIARY GUARANTORS listed as signatories hereto, UNITED STATES TRUST COMPANY
OF NEW YORK, a New York corporation, as Trustee to the Indenture (as such term
is defined in Article I below) and CHESAPEAKE ENERGY LOUISIANA CORPORATION, an
Oklahoma corporation ("CELC"), CHESAPEAKE CANADA CORPORATION, an Alberta, Canada
corporation ("CCC") and CHESAPEAKE LOUISIANA, L.P., an Oklahoma limited
partnership ("CLLP").
WHEREAS, the Company, the Subsidiary Guarantors and the Trustee have
heretofore entered into the Original Indenture, pursuant to the provisions of
which the Company has heretofore issued $150,000,000 in aggregate principal
amount of the Securities;
WHEREAS, the Company has formed CELC, CCC and CLLP as wholly owned
Subsidiaries of the Company;
WHEREAS, the Board of Directors of the Company has adopted resolutions
designating CELC, CCC and CLLP as Restricted Subsidiaries, as that term is
defined in the Indenture;
WHEREAS, Section 10.3(b) of the Indenture provides, among other things,
that the Company will cause each Subsidiary that shall become a Restricted
Subsidiary after the Issue Date to execute and deliver a supplemental indenture
pursuant to which such Restricted Subsidiary shall guarantee the payment of the
Securities pursuant to the terms of the Indenture;
WHEREAS, Section 10.3(c) of the Indenture provides, among other things,
that a Person may become a Subsidiary Guarantor by executing and delivering to
the Trustee (i) a supplemental indenture which is in form and substance
satisfactory to the Trustee and which subjects such Person to the provisions
(including the representations and warranties) of the Indenture as a Subsidiary
Guarantor and (ii) an Opinion of Counsel and Officer's Certificate that such
supplemental indenture has been duly authorized and executed by such Person and
constitutes the legal, valid, binding and enforceable obligation of such Person;
WHEREAS, the form and substance of this First Supplemental Indenture are
satisfactory to the Trustee;
WHEREAS, contemporaneously herewith, there are being delivered to the
Trustee an executed Opinion of Counsel and Officers' Certificate proper in form
and substance;]
WHEREAS, Section 9.1 of the Indenture provides, among other things, that
the Trustee, the Subsidiary Guarantors and the Company may amend or supplement
the
<PAGE> 2
Indenture without notice to or consent of any Holder to reflect the addition
of any Subsidiary Guarantor, as provided for by the Indenture; and
WHEREAS, the execution and delivery of this First Supplemental Indenture
have been duly authorized by the Company, the Subsidiary Guarantors, CELC, CCC
and CLLP and all actions necessary to make this First Supplemental Indenture a
valid and binding instrument according to its terms and the terms of the
Original Indenture have been performed.
NOW, THEREFORE, BY THIS FIRST SUPPLEMENTAL INDENTURE, for and in
consideration of the premises and of the mutual covenants herein contained and
for other valuable considerations, the receipt whereof is hereby acknowledged,
the Company, the Subsidiary Guarantors, CELC, CCC and CLLP covenant and agree
with the Trustee, for the equal benefit of all present and future Holders of the
Securities, as follows:
ARTICLE I
DEFINITIONS
SECTION 1.1 The definitions set forth in or incorporated by reference in
Article I of the Indenture shall be applicable to this First Supplemental
Indenture, as fully and to the same extent as if set forth herein, except as
otherwise expressly provided herein. As used in this First Supplemental
Indenture, the following terms shall have the following meanings:
"Indenture" means the Original Indenture, as amended by this First
Supplemental Indenture, relating to the Securities.
"Original Indenture" means the Indenture dated as of March 15, 1997, among
the Company, the Subsidiary Guarantors listed as signatories thereto and the
Trustee, relating to the Securities.
ARTICLE II
ADDITION OF SUBSIDIARY GUARANTOR
SECTION 2.1 As a Subsidiary Guarantor, each of CELC, CCC and CLLP hereby:
(a) jointly and severally, unconditionally guarantees to each Holder and to the
Trustee the due and punctual payment of the principal of, premium, if any, and
interest on the Securities and all other amounts due and payable under the
Indenture and the Securities by the Company, whether at maturity, by
acceleration, redemption, repurchase or otherwise including, without limitation,
interest on the overdue principal of, premium, if any, and interest on the
Securities to the extent lawful, all in accordance with the terms and subject to
the limitations of the Indenture as if each of CELC, CCC and CLLP had been an
original party thereto; and (b)
-2-
<PAGE> 3
subjects each of CELC, CCC and CLLP to the provisions (including the
representations and warranties) of the Indenture as a Subsidiary Guarantor.
ARTICLE III
MISCELLANEOUS
SECTION 3.1 This First Supplemental Indenture is a supplemental indenture
pursuant to Section 9.1 of the Indenture. Upon execution and delivery of this
First Supplemental Indenture, the terms and conditions of this First
Supplemental Indenture will be part of the terms and conditions of the Indenture
for any and all purposes, and all the terms and conditions of both shall be read
together as though they constitute one instrument, except that in case of
conflict, the provisions of this First Supplemental Indenture will control.
SECTION 3.2 Except as they have been modified in this First Supplemental
Indenture, each and every term and provision of the Indenture shall remain in
full force and effect.
SECTION 3.3 This First Supplemental Indenture may be executed in any number
of counterparts, each of which when so executed and delivered shall be an
original, but such counterparts shall together constitute but one and the same
instrument.
SECTION 3.4 This First Supplemental Indenture shall be governed by and
construed in accordance with the laws of the State of New York without giving
effect to applicable principals of conflicts of law to the extent that the
application of the law of another jurisdiction would be required thereby.
SIGNATURES
IN WITNESS WHEREOF, the parties hereto have caused this First Supplemental
Indenture to be duly executed as of the date first written above.
CHESAPEAKE ENERGY CORPORATION, an
Oklahoma corporation
By /s/ AUBREY K. McCLENDON
------------------------------------
Aubrey K. McClendon, Chief Executive
Officer
CHESAPEAKE ENERGY LOUISIANA
CORPORATION, an Oklahoma corporation
By /s/ AUBREY K. McCLENDON
-------------------------------------
Aubrey K. McClendon, Chief Executive
Officer
-3-
<PAGE> 4
CHESAPEAKE CANADA CORPORATION, an
Alberta, Canada corporation
By /s/ AUBREY K. McCLENDON
--------------------------------------
Aubrey K. McClendon, Chief Executive
Officer
CHESAPEAKE LOUISIANA, L.P., an Oklahoma
limited partnership
By Chesapeake Operating, Inc., an
Oklahoma corporation, Sole General
Partner
By /s/ AUBREY K. McCLENDON
-------------------------------
Aubrey K. McClendon,
Chief Executive Officer
UNITED STATES TRUST COMPANY OF NEW YORK,
a New York corporation, as Trustee
By
--------------------------------------
Name:
---------------------------------
Title:
--------------------------------
SUBSIDIARY GUARANTORS
CHESAPEAKE OPERATING, INC., an Oklahoma
corporation
By /s/ AUBREY K. McCLENDON
----------------------------------------
Aubrey K. McClendon, Chief Executive
Officer
CHESAPEAKE EXPLORATION LIMITED PARTNERSHIP,
an Oklahoma limited partnership
By Chesapeake Operating, Inc.,
an Oklahoma corporation, Sole
General Partner
By /s/ AUBREY K. McCLENDON
-------------------------------
Aubrey K. McClendon,
Chief Executive Officer
-4-
<PAGE> 5
SECOND SUPPLEMENTAL INDENTURE
TO INDENTURE DATED MARCH 15, 1997
7 7/8% SERIES A AND SERIES B SENIOR NOTES DUE 2004
SECOND SUPPLEMENTAL INDENTURE dated as of February 16, 1998,
among CHESAPEAKE ENERGY CORPORATION, an Oklahoma corporation (the "Company"),
the SUBSIDIARY GUARANTORS listed as signatories hereto and UNITED STATES TRUST
COMPANY OF NEW YORK, a New York corporation, as Trustee to the Indenture (as
such term is defined in Article I below).
WHEREAS, the Company, the Subsidiary Guarantors and the
Trustee have heretofore entered into the Original Indenture, pursuant to the
provisions of which the Company has heretofore issued $150,000,000 in aggregate
principal amount of the Securities;
WHEREAS, Section 9.1(1) of the Indenture provides that the
Company, the Subsidiary Guarantors and the Trustee may amend or supplement the
Indenture without notice to or consent of any Holder to cure any ambiguity,
defect or inconsistency therein; and
WHEREAS, the execution and delivery of this Second
Supplemental Indenture have been duly authorized by the Company and the
Subsidiary Guarantors and all actions necessary to make this Second
Supplemental Indenture a valid and binding instrument according to its terms
and the terms of the Original Indenture have been performed.
NOW, THEREFORE, BY THIS SECOND SUPPLEMENTAL INDENTURE, for and
in consideration of the premises and of the mutual covenants herein contained
and for other valuable considerations, the receipt whereof is hereby
acknowledged, the Company and the Subsidiary Guarantors covenant and agree with
the Trustee, for the equal benefit of all present and future Holders of the
Securities, as follows:
ARTICLE I
DEFINITIONS
SECTION 1.1 The definitions set forth in or incorporated
by reference in Article I of the Indenture shall be applicable to this Second
Supplemental Indenture, as fully and to the same extent as if set forth herein,
except as otherwise expressly provided herein. As used in this Second
Supplemental Indenture, the following terms shall have the following meanings:
"Indenture" means the Original Indenture, as amended by this
Second Supplemental Indenture, relating to the Securities.
"Original Indenture" means the Indenture dated as of March 15,
1997, among the Company, the Subsidiary Guarantors listed as signatories
thereto and the Trustee, relating
<PAGE> 6
to the Securities, as amended by that certain First Supplemental Indenture
dated as of December 17, 1997.
ARTICLE II
AMENDMENT OF SECTION 10.4
SECTION 2.1 The first sentence of Section 10.4(a) is
hereby amended to read in its entirety as follows:
"If, at any time while the Securities remain outstanding, none
of the Company's then outstanding Pari Passu Indebtedness
(other than the Securities) is guaranteed by a Restricted
Subsidiary, such Restricted Subsidiary shall be released and
relieved of its obligations under: (a) its Guarantee (which
shall be terminated and cease to have any force and effect);
and (b) Section 10.3(b) to provide any such Guarantee."
ARTICLE III
MISCELLANEOUS
SECTION 3.1 This Second Supplemental Indenture is a
supplemental indenture pursuant to Section 9.1 of the Indenture. Upon
execution and delivery of this Second Supplemental Indenture, the terms and
conditions of this Second Supplemental Indenture will be part of the terms and
conditions of the Indenture for any and all purposes, and all the terms and
conditions of both shall be read together as though they constitute one
instrument, except that in case of conflict, the provisions of this Second
Supplemental Indenture will control.
SECTION 3.2 Except as they have been modified in this
Second Supplemental Indenture, each and every term and provision of the
Indenture shall remain in full force and effect.
SECTION 3.3 This Second Supplemental Indenture may be
executed in any number of counterparts, each of which when so executed and
delivered shall be an original, but such counterparts shall together constitute
but one and the same instrument.
SECTION 3.4 This Second Supplemental Indenture shall be
governed by and construed in accordance with the laws of the State of New York
without giving effect to applicable principals of conflicts of law to the
extent that the application of the law of another jurisdiction would be
required thereby.
- 2 -
<PAGE> 7
SIGNATURES
IN WITNESS WHEREOF, the parties hereto have caused this Second
Supplemental Indenture to be duly executed as of the date first written above.
CHESAPEAKE ENERGY CORPORATION, an
Oklahoma corporation
By /s/ AUBREY K. MCCLENDON
--------------------------------------------
Aubrey K. McClendon, Chief Executive Officer
UNITED STATES TRUST COMPANY OF NEW
YORK, a New York corporation, as Trustee
By /s/ PATRICIA STERMER
---------------------------------------------
Name: Patricia Stermer
---------------------------------------------
Title:Assistant Vice President
---------------------------------------------
SUBSIDIARY GUARANTORS
CHESAPEAKE OPERATING, INC., an Oklahoma
corporation
By /s/ AUBREY K. MCCLENDON
---------------------------------------------
Aubrey K. McClendon, Chief Executive Officer
CHESAPEAKE EXPLORATION LIMITED
PARTNERSHIP, an Oklahoma limited partnership
By Chesapeake Operating, Inc., an Oklahoma
corporation, Sole General Partner
By /s/ AUBREY K. MCCLENDON
----------------------------------------
Aubrey K. McClendon,
Chief Executive Officer
- 3 -
<PAGE> 8
CHESAPEAKE ENERGY LOUISIANA
CORPORATION, an Oklahoma corporation
By /s/ AUBREY K. MCCLENDON
---------------------------------------------
Aubrey K. McClendon, Chief Executive Officer
CHESAPEAKE CANADA CORPORATION, an
Alberta, Canada corporation
By /s/ AUBREY K. MCCLENDON
---------------------------------------------
Aubrey K. McClendon, Chief Executive Officer
CHESAPEAKE LOUISIANA, L.P., an
Oklahoma limited partnership
By Chesapeake Operating, Inc., an
Oklahoma corporation, Sole General Partner
By /s/ AUBREY K. MCCLENDON
----------------------------------------
Aubrey K. McClendon,
Chief Executive Officer
- 4 -
<PAGE> 1
EXHIBIT 4.2.1
FIRST SUPPLEMENTAL INDENTURE
TO INDENTURE DATED MARCH 15, 1997
(8.5%)
FIRST SUPPLEMENTAL INDENTURE dated as of December 17th, 1997,
among CHESAPEAKE ENERGY CORPORATION, an Oklahoma corporation (the "Company"),
the SUBSIDIARY GUARANTORS listed as signatories hereto, UNITED STATES TRUST
COMPANY OF NEW YORK, a New York corporation, as Trustee to the Indenture (as
such term is defined in Article I below) and CHESAPEAKE ENERGY LOUISIANA
CORPORATION, an Oklahoma corporation ("CELC"), CHESAPEAKE CANADA CORPORATION,
an Alberta, Canada corporation ("CCC") and CHESAPEAKE LOUISIANA, L.P., an
Oklahoma limited partnership ("CLLP").
WHEREAS, the Company, the Subsidiary Guarantors and the
Trustee have heretofore entered into the Original Indenture, pursuant to the
provisions of which the Company has heretofore issued $150,000,000 in aggregate
principal amount of the Securities;
WHEREAS, the Company has formed CELC, CCC and CLLP as wholly
owned Subsidiaries of the Company;
WHEREAS, the Board of Directors of the Company has adopted
resolutions designating CELC, CCC and CLLP as Restricted Subsidiaries, as that
term is defined in the Indenture;
WHEREAS, Section 10.3(b) of the Indenture provides, among
other things, that the Company will cause each Subsidiary that shall become a
Restricted Subsidiary after the Issue Date to execute and deliver a
supplemental indenture pursuant to which such Restricted Subsidiary shall
guarantee the payment of the Securities pursuant to the terms of the Indenture;
WHEREAS, Section 10.3(c) of the Indenture provides, among
other things, that a Person may become a Subsidiary Guarantor by executing and
delivering to the Trustee (i) a supplemental indenture which is in form and
substance satisfactory to the Trustee and which subjects such Person to the
provisions (including the representations and warranties) of the Indenture as a
Subsidiary Guarantor and (ii) an Opinion of Counsel and Officer's Certificate
that such supplemental indenture has been duly authorized and executed by such
Person and constitutes the legal, valid, binding and enforceable obligation of
such Person;
WHEREAS, the form and substance of this First Supplemental
Indenture are satisfactory to the Trustee;
WHEREAS, contemporaneously herewith, there are being delivered
to the Trustee an executed Opinion of Counsel and Officers' Certificate proper
in form and substance;]
WHEREAS, Section 9.1 of the Indenture provides, among other
things, that the Trustee, the Subsidiary Guarantors and the Company may amend
or supplement the
<PAGE> 2
Indenture without notice to or consent of any Holder to reflect the addition of
any Subsidiary Guarantor, as provided for by the Indenture; and
WHEREAS, the execution and delivery of this First Supplemental
Indenture have been duly authorized by the Company, the Subsidiary Guarantors,
CELC, CCC and CLLP and all actions necessary to make this First Supplemental
Indenture a valid and binding instrument according to its terms and the terms
of the Original Indenture have been performed.
NOW, THEREFORE, BY THIS FIRST SUPPLEMENTAL INDENTURE, for and
in consideration of the premises and of the mutual covenants herein contained
and for other valuable considerations, the receipt whereof is hereby
acknowledged, the Company, the Subsidiary Guarantors, CELC, CCC and CLLP
covenant and agree with the Trustee, for the equal benefit of all present and
future Holders of the Securities, as follows:
ARTICLE I
DEFINITIONS
SECTION 1.1 The definitions set forth in or incorporated
by reference in Article I of the Indenture shall be applicable to this First
Supplemental Indenture, as fully and to the same extent as if set forth herein,
except as otherwise expressly provided herein. As used in this First
Supplemental Indenture, the following terms shall have the following meanings:
"Indenture" means the Original Indenture, as amended by this
First Supplemental Indenture, relating to the Securities.
"Original Indenture" means the Indenture dated as of March 15,
1997, among the Company, the Subsidiary Guarantors listed as signatories
thereto and the Trustee, relating to the Securities.
ARTICLE II
ADDITION OF SUBSIDIARY GUARANTOR
SECTION 2.1 As a Subsidiary Guarantor, each of CELC, CCC
and CLLP hereby: (a) jointly and severally, unconditionally guarantees to each
Holder and to the Trustee the due and punctual payment of the principal of,
premium, if any, and interest on the Securities and all other amounts due and
payable under the Indenture and the Securities by the Company, whether at
maturity, by acceleration, redemption, repurchase or otherwise including,
without limitation, interest on the overdue principal of, premium, if any, and
interest on the Securities to the extent lawful, all in accordance with the
terms and subject to the limitations of the Indenture as if each of CELC, CCC
and CLLP had been an original party thereto; and (b)
- 2 -
<PAGE> 3
subjects each of CELC, CCC and CLLP to the provisions (including the
representations and warranties) of the Indenture as a Subsidiary Guarantor.
ARTICLE III
MISCELLANEOUS
SECTION 3.1 This First Supplemental Indenture is a
supplemental indenture pursuant to Section 9.1 of the Indenture. Upon
execution and delivery of this First Supplemental Indenture, the terms and
conditions of this First Supplemental Indenture will be part of the terms and
conditions of the Indenture for any and all purposes, and all the terms and
conditions of both shall be read together as though they constitute one
instrument, except that in case of conflict, the provisions of this First
Supplemental Indenture will control.
SECTION 3.2 Except as they have been modified in this
First Supplemental Indenture, each and every term and provision of the
Indenture shall remain in full force and effect.
SECTION 3.3 This First Supplemental Indenture may be
executed in any number of counterparts, each of which when so executed and
delivered shall be an original, but such counterparts shall together constitute
but one and the same instrument.
SECTION 3.4 This First Supplemental Indenture shall be
governed by and construed in accordance with the laws of the State of New York
without giving effect to applicable principals of conflicts of law to the
extent that the application of the law of another jurisdiction would be
required thereby.
SIGNATURES
IN WITNESS WHEREOF, the parties hereto have caused this First
Supplemental Indenture to be duly executed as of the date first written above.
CHESAPEAKE ENERGY CORPORATION, an
Oklahoma corporation
By /s/ AUBREY K. MCCLENDON
-----------------------------------
Aubrey K. McClendon,
Chief Executive Officer
CHESAPEAKE ENERGY LOUISIANA
CORPORATION, an Oklahoma corporation
By /s/ AUBREY K. MCCLENDON
-----------------------------------
Aubrey K. McClendon,
Chief Executive Officer
- 3 -
<PAGE> 4
CHESAPEAKE CANADA CORPORATION, an
Alberta, Canada corporation
By /s/ AUBREY K. MCCLENDON
-----------------------------------
Aubrey K. McClendon,
Chief Executive Officer
CHESAPEAKE LOUISIANA, L.P., an
Oklahoma limited partnership
By Chesapeake Operating, Inc., an
Oklahoma corporation, Sole
General Partner
By /s/ AUBREY K. MCCLENDON
-----------------------------------
Aubrey K. McClendon,
Chief Executive Officer
UNITED STATES TRUST COMPANY OF NEW
YORK, a New York corporation, as Trustee
By
-----------------------------------
Name:
------------------------------
Title:
-----------------------------
SUBSIDIARY GUARANTORS
CHESAPEAKE OPERATING, INC., an Oklahoma
corporation
By /s/ AUBREY K. MCCLENDON
-----------------------------------
Aubrey K. McClendon,
Chief Executive Officer
CHESAPEAKE EXPLORATION LIMITED
PARTNERSHIP, an Oklahoma limited
partnership
By Chesapeake Operating, Inc., an
Oklahoma corporation, Sole
General Partner
By /s/ AUBREY K. MCCLENDON
---------------------------
Aubrey K. McClendon,
Chief Executive Officer
- 4 -
<PAGE> 5
SECOND SUPPLEMENTAL INDENTURE
TO INDENTURE DATED MARCH 15, 1997
8 1/2% SERIES A AND SERIES B SENIOR NOTES DUE 2012
SECOND SUPPLEMENTAL INDENTURE dated as of February 16, 1998,
among CHESAPEAKE ENERGY CORPORATION, an Oklahoma corporation (the "Company"),
the SUBSIDIARY GUARANTORS listed as signatories hereto and UNITED STATES TRUST
COMPANY OF NEW YORK, a New York corporation, as Trustee to the Indenture (as
such term is defined in Article I below).
WHEREAS, the Company, the Subsidiary Guarantors and the
Trustee have heretofore entered into the Original Indenture, pursuant to the
provisions of which the Company has heretofore issued $150,000,000 in aggregate
principal amount of the Securities;
WHEREAS, Section 9.1(1) of the Indenture provides that the
Company, the Subsidiary Guarantors and the Trustee may amend or supplement the
Indenture without notice to or consent of any Holder to cure any ambiguity,
defect or inconsistency therein; and
WHEREAS, the execution and delivery of this Second
Supplemental Indenture have been duly authorized by the Company and the
Subsidiary Guarantors and all actions necessary to make this Second
Supplemental Indenture a valid and binding instrument according to its terms
and the terms of the Original Indenture have been performed.
NOW, THEREFORE, BY THIS SECOND SUPPLEMENTAL INDENTURE, for and
in consideration of the premises and of the mutual covenants herein contained
and for other valuable considerations, the receipt whereof is hereby
acknowledged, the Company and the Subsidiary Guarantors covenant and agree with
the Trustee, for the equal benefit of all present and future Holders of the
Securities, as follows:
ARTICLE I
DEFINITIONS
SECTION 1.1 The definitions set forth in or incorporated
by reference in Article I of the Indenture shall be applicable to this Second
Supplemental Indenture, as fully and to the same extent as if set forth herein,
except as otherwise expressly provided herein. As used in this Second
Supplemental Indenture, the following terms shall have the following meanings:
"Indenture" means the Original Indenture, as amended by this
Second Supplemental Indenture, relating to the Securities.
"Original Indenture" means the Indenture dated as of March 15,
1997, among the Company, the Subsidiary Guarantors listed as signatories
thereto and the Trustee, relating
<PAGE> 6
to the Securities, as amended by that certain First Supplemental Indenture
dated as of December 17, 1997.
ARTICLE II
AMENDMENT OF SECTION 10.4
SECTION 2.1 The first sentence of Section 10.4(a) is
hereby amended to read in its entirety as follows:
"If, at any time while the Securities remain outstanding, none
of the Company's then outstanding Pari Passu Indebtedness
(other than the Securities) is guaranteed by a Restricted
Subsidiary, such Restricted Subsidiary shall be released and
relieved of its obligations under: (a) its Guarantee (which
shall be terminated and cease to have any force and effect);
and (b) Section 10.3(b) to provide any such Guarantee."
ARTICLE III
MISCELLANEOUS
SECTION 3.1 This Second Supplemental Indenture is a
supplemental indenture pursuant to Section 9.1 of the Indenture. Upon
execution and delivery of this Second Supplemental Indenture, the terms and
conditions of this Second Supplemental Indenture will be part of the terms and
conditions of the Indenture for any and all purposes, and all the terms and
conditions of both shall be read together as though they constitute one
instrument, except that in case of conflict, the provisions of this Second
Supplemental Indenture will control.
SECTION 3.2 Except as they have been modified in this
Second Supplemental Indenture, each and every term and provision of the
Indenture shall remain in full force and effect.
SECTION 3.3 This Second Supplemental Indenture may be
executed in any number of counterparts, each of which when so executed and
delivered shall be an original, but such counterparts shall together constitute
but one and the same instrument.
SECTION 3.4 This Second Supplemental Indenture shall be
governed by and construed in accordance with the laws of the State of New York
without giving effect to applicable principals of conflicts of law to the
extent that the application of the law of another jurisdiction would be
required thereby.
- 2 -
<PAGE> 7
SIGNATURES
IN WITNESS WHEREOF, the parties hereto have caused this Second
Supplemental Indenture to be duly executed as of the date first written above.
CHESAPEAKE ENERGY CORPORATION, an
Oklahoma corporation
By /s/ AUBREY K. MCCLENDON
--------------------------------------------
Aubrey K. McClendon, Chief Executive Officer
UNITED STATES TRUST COMPANY OF NEW YORK, a New
York corporation, as Trustee
By /s/ PATRICIA STERMER
--------------------------------------------
Name: PATRICIA STERMER
--------------------------------------
Title: ASSISTAND VICE PRESIDENT
-------------------------------------
SUBSIDIARY GUARANTORS
CHESAPEAKE OPERATING, INC., an Oklahoma
corporation
By /s/ AUBREY K. MCCLENDON
--------------------------------------------
Aubrey K. McClendon, Chief Executive Officer
CHESAPEAKE EXPLORATION LIMITED PARTNERSHIP, an
Oklahoma limited partnership
By Chesapeake Operating, Inc., an
Oklahoma corporation, Sole General
Partner
By /s/ AUBREY K. MCCLENDON
-----------------------------------
Aubrey K. McClendon,
Chief Executive Officer
-3-
<PAGE> 8
CHESAPEAKE ENERGY LOUISIANA
CORPORATION, an Oklahoma corporation
By /s/ AUBREY K. MCCLENDON
--------------------------------------------
Aubrey K. McClendon, Chief Executive Officer
CHESAPEAKE CANADA CORPORATION, an
Alberta, Canada corporation
By /s/ AUBREY K. MCCLENDON
--------------------------------------------
Aubrey K. McClendon, Chief Executive Officer
CHESAPEAKE LOUISIANA, L.P., an
Oklahoma limited partnership
By Chesapeake Operating, Inc., an
Oklahoma corporation, Sole General
Partner
By /s/ AUBREY K. MCCLENDON
-----------------------------------
Aubrey K. McClendon,
Chief Executive Officer
- 4 -
<PAGE> 1
EXHIBIT 4.3.1
FIRST SUPPLEMENTAL INDENTURE
TO INDENTURE DATED MAY 15, 1995
FIRST SUPPLEMENTAL INDENTURE, dated as of December 30, 1996,
among CHESAPEAKE ENERGY CORPORATION, a Delaware corporation (the "Company"),
the SUBSIDIARY GUARANTORS listed as signatories hereto, UNITED STATES TRUST
COMPANY OF NEW YORK, a New York corporation, as Trustee, to the Indenture (as
such term is defined in Article I below) and CHESAPEAKE OKLAHOMA CORPORATION,
an Oklahoma corporation ("Chesapeake Oklahoma").
WHEREAS, the Company, the Subsidiary Guarantors and the
Trustee have heretofore entered into the Original Indenture, pursuant to the
provisions of which the Company has heretofore issued $90,000,000 in aggregate
principal amount of the Securities; and
WHEREAS, in order to realize a significant annual savings in
franchise taxes, the Company and its shareholders have approved the change of
the Company's state of incorporation from Delaware to Oklahoma, with such
reincorporation to be accomplished by the merger effective December 31, 1996 of
the Company with and into its wholly- owned subsidiary, Chesapeake Oklahoma
(the "Merger");
WHEREAS, immediately following the Merger, Chesapeake Oklahoma
will be renamed Chesapeake Energy Corporation and continue conducting business
as the successor to business, management, assets, and liabilities of the
Company;
WHEREAS, Section 5.01 of the Indenture provides, among other
things, that the Company may merge with any Person provided the Company
delivers to the Trustee prior to the consummation of the transaction, an
Officers' Certificate and Opinion of Counsel stating that the transaction and
related supplemental indenture comply with the Indenture;
WHEREAS, Section 9.01 of the Indenture provides, among other
things, that the Trustee, the Subsidiary Guarantors and the Company may amend
or supplement the Indenture without notice to or consent of any Holders to
reflect a merger complying with Section 5.01; and
WHEREAS, the execution and delivery of this First Supplemental
Indenture have been duly authorized by the Company, the Subsidiary Guarantors,
and Chesapeake Oklahoma and all actions necessary to make this First
Supplemental Indenture a valid and binding instrument according to its terms
and the terms of the Original Indenture have been performed.
NOW, THEREFORE, THIS FIRST SUPPLEMENTAL INDENTURE WITNESSETH
that, for and in consideration of the premises and of the mutual covenants
herein contained and for other valuable considerations, the receipt whereof is
hereby acknowledged, the Company, the Subsidiary Guarantors, and Chesapeake
Oklahoma covenant and agree with the Trustee, for the equal benefit of all
present and future Holders of the Securities, as follows:
<PAGE> 2
ARTICLE I
DEFINITIONS
SECTION 1.1 The definitions set forth in or incorporated
by reference in Article I of the Indenture shall be applicable to this First
Supplemental Indenture, as fully and to the same extent as if set forth herein,
except as otherwise expressly provided herein. As used in this First
Supplemental Indenture, the following terms shall have the following meanings:
"Indenture" means the Original Indenture, as amended by this
First Supplemental Indenture, relating to the Securities.
"Original Indenture" means the Indenture dated as of May 15,
1995, among the Company, the Subsidiary Guarantors listed as signatories
thereto and the Trustee, relating to the Securities.
ARTICLE II
ASSUMPTION OF COMPANY OBLIGATIONS
SECTION 2.1 As the surviving entity in the Merger with
the Company, effective upon the consummation of the Merger, Chesapeake Oklahoma
hereby assumes the due and punctual payment of the principal of, premium, if
any, and interest on, all the Securities and the performance of every other
covenant and obligation of the Company under the Indenture.
SECTION 2.2 Pursuant to Section 5.02 of the Indenture,
upon consummation of the Merger, Chesapeake Oklahoma succeeds to, and is
substituted for, and may exercise every right and power of, the Company under
the Indenture with the same effect as if Chesapeake Oklahoma had been named as
the Company therein and thereafter, the Company will be relieved of all further
obligations and covenants under the Indenture and the Securities.
ARTICLE III
MISCELLANEOUS
SECTION 3.1 This First Supplemental Indenture is a
supplemental indenture pursuant to Section 9.01 of the Indenture. Upon
execution and delivery of this First Supplemental Indenture, the terms and
conditions of this First Supplemental Indenture will be part of the terms and
conditions of the Indenture for any and all purposes, and all the terms and
conditions of both shall be read together as though they constitute one
instrument, except that in case of conflict, the provisions of this First
Supplemental Indenture will control.
- 2 -
<PAGE> 3
SECTION 3.2 Except as they have been modified in this
First Supplemental Indenture, each and every term and provision of the
Indenture shall remain in full force and effect.
SECTION 3.3 This First Supplemental Indenture may be
executed in any number of counterparts, each of which when so executed and
delivered shall be an original, but such counterparts shall together constitute
but one and the same instrument.
SECTION 3.4 This First Supplemental Indenture shall be
governed by and construed in accordance with the laws of the State of New York
without giving effect to applicable principals of conflicts of law to the
extent that the application of the law of another jurisdiction would be
required thereby.
SIGNATURES
IN WITNESS WHEREOF, the parties hereto have caused this First
Supplemental Indenture to be duly executed as of the date first written above.
CHESAPEAKE ENERGY CORPORATION
By /s/ AUBREY K. MCCLENDON
--------------------------------
Aubrey K. McClendon
Chief Executive Officer
CHESAPEAKE OKLAHOMA CORPORATION
By /s/ AUBREY K. MCCLENDON
--------------------------------
Aubrey K. McClendon
Chief Executive Officer
UNITED STATES TRUST COMPANY OF NEW
YORK, as Trustee
By /s/ PATRICIA STERMER
-------------------------------
Patricia Stermer
Assistant Vice President
- 3 -
<PAGE> 4
SUBSIDIARY GUARANTORS
CHESAPEAKE OPERATING, INC.
LINDSAY OIL FIELD SUPPLY, INC.
SANDER TRUCKING COMPANY, INC.
WHITMIRE DOZER SERVICE, INC.
For each of the above:
By /s/ AUBREY K. MCCLENDON
--------------------------------------------
Aubrey K. McClendon
President
CHESAPEAKE EXPLORATION LIMITED
PARTNERSHIP, an Oklahoma limited partnership
By: Chesapeake Operating, Inc., an Oklahoma
General Partner
By /s/ AUBREY K. MCCLENDON
------------------------------------------
Aubrey K. McClendon
President
-4-
<PAGE> 5
SECOND SUPPLEMENTAL INDENTURE
TO INDENTURE DATED MAY 15, 1995
SECOND SUPPLEMENTAL INDENTURE dated as of December 17, 1997, among
CHESAPEAKE ENERGY CORPORATION, an Oklahoma corporation (the "Company"), the
SUBSIDIARY GUARANTORS listed as signatories hereto, UNITED STATES TRUST COMPANY
OF NEW YORK, a New York corporation, as Trustee to the Indenture (as such term
is defined in Article I below) and CHESAPEAKE ENERGY LOUISIANA CORPORATION, an
Oklahoma corporation ("CELC"), CHESAPEAKE CANADA CORPORATION, an Alberta, Canada
corporation("CCC") and CHESAPEAKE LOUISIANA, L.P., an Oklahoma limited
partnership ("CLLP").
WHEREAS, the Company, the Subsidiary Guarantors and the Trustee have
heretofore entered into the Original Indenture, pursuant to the provisions of
which the Company has heretofore issued $90,000,000 in aggregate principal
amount of the Securities;
WHEREAS, the Company has formed CELC, CCC and CLLP as wholly owned
Subsidiaries of the Company;
WHEREAS, the Board of Directors of the Company has adopted resolutions
designating CELC, CCC and CLLP as Restricted Subsidiaries, as that term is
defined in the Indenture;
WHEREAS, Section 10.03(a) of the Indenture provides, among other things,
that the Company will cause each Subsidiary that shall become a Restricted
Subsidiary after the Issue Date to execute and deliver a supplemental indenture
pursuant to which such Restricted Subsidiary shall guarantee the payment of the
Securities pursuant to the terms of the Indenture;
WHEREAS, Section 10.03(b) of the Indenture provides, among other things,
that a Person may become a Subsidiary Guarantor by executing and delivering to
the Trustee (i) a supplemental indenture which is in form and substance
satisfactory to the Trustee and which subjects such Person to the provisions
(including the representations and warranties) of the Indenture as a Subsidiary
Guarantor and (ii) an Opinion of Counsel and Officer's Certificate that such
supplemental indenture has been duly authorized and executed by such Person and
constitutes the legal, valid, binding and enforceable obligation of such Person;
WHEREAS, the form and substance of this Second Supplemental Indenture are
satisfactory to the Trustee;
WHEREAS, contemporaneously herewith, there are being delivered to the
Trustee an executed Opinion of Counsel and Officers' Certificate proper in form
and substance;
WHEREAS, Section 9.01 of the Indenture provides, among other things, that
the Trustee, the Subsidiary Guarantors and the Company may amend or supplement
the
<PAGE> 6
Indenture without notice to or consent of any Holder to reflect the addition
of any Subsidiary Guarantor, as provided for by the Indenture; and
WHEREAS, the execution and delivery of this Second Supplemental Indenture
have been duly authorized by the Company, the Subsidiary Guarantors, CELC, CCC
and CLLP and all actions necessary to make this Second Supplemental Indenture a
valid and binding instrument according to its terms and the terms of the
Original Indenture have been performed.
NOW, THEREFORE, BY THIS SECOND SUPPLEMENTAL INDENTURE, for and in
consideration of the premises and of the mutual covenants herein contained and
for other valuable considerations, the receipt whereof is hereby acknowledged,
the Company, the Subsidiary Guarantors, CELC, CCC and CLLP covenant and agree
with the Trustee, for the equal benefit of all present and future Holders of the
Securities, as follows:
ARTICLE I
DEFINITIONS
SECTION 1.1 The definitions set forth in or incorporated by reference in
Article I of the Indenture shall be applicable to this Second Supplemental
Indenture, as fully and to the same extent as if set forth herein, except as
otherwise expressly provided herein. As used in this Second Supplemental
Indenture, the following terms shall have the following meanings:
"Indenture" means the Original Indenture, as amended by this Second
Supplemental Indenture, relating to the Securities.
"Original Indenture" means the Indenture dated as of May 15, 1995, among
the Company, the Subsidiary Guarantors listed as signatories thereto and the
Trustee, relating to the Securities, as amended by that certain First
Supplemental Indenture dated as of December 30, 1996.
ARTICLE II
ADDITION OF SUBSIDIARY GUARANTOR
SECTION 2.1 As a Subsidiary Guarantor, each of CELC, CCC and CLLP hereby:
(a) jointly and severally, unconditionally guarantees to each Holder and to the
Trustee the due and punctual payment of the principal of, premium, if any, and
interest on the Securities and all other amounts due and payable under the
Indenture and the Securities by the Company, whether at maturity, by
acceleration, redemption, repurchase or otherwise including, without limitation,
interest on the overdue principal of, premium, if any, and interest on the
Securities to the extent lawful, all in accordance with the terms and subject to
the limitations of the Indenture as if each of CELC, CCC and CLLP had been an
original party thereto; and (b)
-2-
<PAGE> 7
subjects each of CELC, CCC and CLLP to the provisions (including the
representations and warranties) of the Indenture as a Subsidiary Guarantor.
ARTICLE III
MISCELLANEOUS
SECTION 3.1 This Second Supplemental Indenture is a supplemental indenture
pursuant to Section 9.01 of the Indenture. Upon execution and delivery of this
Second Supplemental Indenture, the terms and conditions of this Second
Supplemental Indenture will be part of the terms and conditions of the Indenture
for any and all purposes, and all the terms and conditions of both shall be read
together as though they constitute one instrument, except that in case of
conflict, the provisions of this Second Supplemental Indenture will control.
SECTION 3.2 Except as they have been modified in this Second Supplemental
Indenture, each and every term and provision of the Indenture shall remain in
full force and effect.
SECTION 3.3 This Second Supplemental Indenture may be executed in any
number of counterparts, each of which when so executed and delivered shall be an
original, but such counterparts shall together constitute but one and the same
instrument.
SECTION 3.4 This Second Supplemental Indenture shall be governed by and
construed in accordance with the laws of the State of New York without giving
effect to applicable principals of conflicts of law to the extent that the
application of the law of another jurisdiction would be required thereby.
SIGNATURES
IN WITNESS WHEREOF, the parties hereto have caused this Second Supplemental
Indenture to be duly executed as of the date first written above.
CHESAPEAKE ENERGY CORPORATION, an
Oklahoma corporation
By /s/ AUBREY K. McCLENDON
---------------------------------
Aubrey K. McClendon, Chief Executive Officer
CHESAPEAKE ENERGY LOUISIANA
CORPORATION, an Oklahoma corporation
By /s/ AUBREY K. McCLENDON
---------------------------------------------
Aubrey K. McClendon, Chief Executive Officer
-3-
<PAGE> 8
CHESAPEAKE CANADA CORPORATION, an
Alberta, Canada corporation
By /s/ AUBREY K. McCLENDON
---------------------------------------------
Aubrey K. McClendon, Chief Executive Officer
CHESAPEAKE LOUISIANA, L.P., an
Oklahoma limited partnership
By Chesapeake Operating, Inc., an
Oklahoma corporation, Sole General
Partner
By /s/ AUBREY K. McCLENDON
------------------------------------
Aubrey K. McClendon,
Chief Executive Officer
UNITED STATES TRUST COMPANY OF NEW YORK,
a New York corporation, as Trustee
By
---------------------------------------------
Name:
------------------------------------------
Title:
-----------------------------------------
SUBSIDIARY GUARANTORS
CHESAPEAKE OPERATING, INC., an Oklahoma
corporation
By /s/ AUBREY K. McCLENDON
----------------------------------------------
Aubrey K. McClendon, Chief Executive Officer
CHESAPEAKE EXPLORATION LIMITED PARTNERSHIP,
an Oklahoma limited partnership
By Chesapeake Operating, Inc., an Oklahoma
corporation, Sole General Partner
By /s/ AUBREY K. McCLENDON
---------------------------------------
Aubrey K. McClendon,
Chief Executive Officer
-4-
<PAGE> 1
EXHIBIT 4.4.1
FIRST SUPPLEMENTAL INDENTURE
TO INDENTURE DATED APRIL 1, 1996
FIRST SUPPLEMENTAL INDENTURE, dated as of December 30, 1996, among
CHESAPEAKE ENERGY CORPORATION, a Delaware corporation (the "Company"), the
SUBSIDIARY GUARANTORS listed as signatories hereto, UNITED STATES TRUST COMPANY
OF NEW YORK, a New York corporation, as Trustee, to the Indenture (as such term
is defined in Article I below) and CHESAPEAKE OKLAHOMA CORPORATION, an Oklahoma
corporation ("Chesapeake Oklahoma").
WHEREAS, the Company, the Subsidiary Guarantors and the Trustee have
heretofore entered into the Original Indenture, pursuant to the provisions of
which the Company has heretofore issued $120,000,000 in aggregate principal
amount of the Securities; and
WHEREAS, in order to realize a significant annual savings in franchise
taxes, the Company and its shareholders have approved the change of the
Company's state of incorporation from Delaware to Oklahoma, with such
reincorporation to be accomplished by the merger effective December 31, 1996 of
the Company with and into its wholly-owned subsidiary, Chesapeake Oklahoma (the
"Merger");
WHEREAS, immediately following the Merger, Chesapeake Oklahoma will be
renamed Chesapeake Energy Corporation and continue conducting business as the
successor to business, management, assets, and liabilities of the Company;
WHEREAS, Section 5.01 of the Indenture provides, among other things, that
the Company may merge with any Person provided the Company delivers to the
Trustee prior to the consummation of the transaction, an Officers' Certificate
and Opinion of Counsel stating that the transaction and related supplemental
indenture comply with the Indenture;
WHEREAS, Section 9.01 of the Indenture provides, among other things, that
the Trustee, the Subsidiary Guarantors and the Company may amend or supplement
the Indenture without notice to or consent of any Holders to reflect a merger
complying with Section 5.01; and
WHEREAS, the execution and delivery of this First Supplemental Indenture
have been duly authorized by the Company, the Subsidiary Guarantors, and
Chesapeake Oklahoma and all actions necessary to make this First Supplemental
Indenture a valid and binding instrument according to its terms and the terms of
the Original Indenture have been performed.
NOW, THEREFORE, THIS FIRST SUPPLEMENTAL INDENTURE WITNESSETH that, for and
in consideration of the premises and of the mutual covenants herein contained
and for other valuable considerations, the receipt whereof is hereby
acknowledged, the Company, the Subsidiary Guarantors, and Chesapeake Oklahoma
covenant and agree with the Trustee, for the equal benefit of all present and
future Holders of the Securities, as follows:
<PAGE> 2
ARTICLE I
DEFINITIONS
SECTION 1.1 The definitions set forth in or incorporated by reference in
Article I of the Indenture shall be applicable to this First Supplemental
Indenture, as fully and to the same extent as if set forth herein, except as
otherwise expressly provided herein. As used in this First Supplemental
Indenture, the following terms shall have the following meanings:
"Indenture" means the Original Indenture, as amended by this First
Supplemental Indenture, relating to the Securities.
"Original Indenture" means the Indenture dated as of April 1, 1996 among
the Company, the Subsidiary Guarantors listed as signatories thereto and the
Trustee, relating to the Securities.
ARTICLE II
ASSUMPTION OF COMPANY OBLIGATIONS
SECTION 2.1 As the surviving entity in the Merger with the Company,
effective upon the consummation of the Merger, Chesapeake Oklahoma hereby
assumes the due and punctual payment of the principal of, premium, if any, and
interest on, all the Securities and the performance of every other covenant and
obligation of the Company under the Indenture.
SECTION 2.2 Pursuant to Section 5.02 of the Indenture, upon consummation of
the Merger, Chesapeake Oklahoma succeeds to, and is substituted for, and may
exercise every right and power of, the Company under the Indenture with the same
effect as if Chesapeake Oklahoma had been named as the Company therein and
thereafter, the Company will be relieved of all further obligations and
covenants under the Indenture and the Securities.
ARTICLE III
MISCELLANEOUS
SECTION 3.1 This First Supplemental Indenture is a supplemental indenture
pursuant to Section 9.01 of the Indenture. Upon execution and delivery of this
First Supplemental Indenture, the terms and conditions of this First
Supplemental Indenture will be part of the terms and conditions of the Indenture
for any and all purposes, and all the terms and conditions of both shall be read
together as though they constitute one instrument, except that in case of
conflict, the provisions of this First Supplemental Indenture will control.
- 2 -
<PAGE> 3
SECTION 3.2 Except as they have been modified in this First Supplemental
Indenture, each and every term and provision of the Indenture shall remain in
full force and effect.
SECTION 3.3 This First Supplemental Indenture may be executed in any number
of counterparts, each of which when so executed and delivered shall be an
original, but such counterparts shall together constitute but one and the same
instrument.
SECTION 3.4 This First Supplemental Indenture shall be governed by and
construed in accordance with the laws of the State of New York without giving
effect to applicable principals of conflicts of law to the extent that the
application of the law of another jurisdiction would be required thereby.
SIGNATURES
IN WITNESS WHEREOF, the parties hereto have caused this First Supplemental
Indenture to be duly executed as of the date first written above.
CHESAPEAKE ENERGY CORPORATION, an
Oklahoma corporation
By /s/ AUBREY K. MCCLENDON
------------------------------------
Aubrey K. McClendon, Chief Executive
Officer
CHESAPEAKE ENERGY CORPORATION, an
Oklahoma corporation
By /s/ AUBREY K. MCCLENDON
------------------------------------
Aubrey K. McClendon, Chief Executive
Officer
UNITED STATES TRUST COMPANY OF NEW YORK,
as Trustee
By /s/ PATRICIA STERMER
-------------------------------------
PATRICIA STERMER
Assistant Vice President
- 3 -
<PAGE> 4
SUBSIDIARY GUARANTORS
CHESAPEAKE OPERATING, INC.
LINDSAY OIL FIELD SUPPLY, INC.
SANDER TRUCKING COMPANY, INC.
WHITMIRE DOZER SERVICE, INC.
For each of the above:
By /s/ AUBREY K. McCLENDON
-------------------------------------
Aubrey K. McClendon
President
CHESAPEAKE EXPLORATION LIMITED PARTNERSHIP,
an Oklahoma limited partnership
By: Chesapeake Operating, Inc., an
Oklahoma corporation, Sole General
Partner
By /s/ AUBREY K. McCLENDON
-----------------------------------------
Aubrey K. McClendon
President
- 4 -
<PAGE> 5
SECOND SUPPLEMENTAL INDENTURE
TO INDENTURE DATED APRIL 1, 1996
SECOND SUPPLEMENTAL INDENTURE dated as of December 17th, 1997,
among CHESAPEAKE ENERGY CORPORATION, an Oklahoma corporation (the "Company"),
the SUBSIDIARY GUARANTORS listed as signatories hereto, UNITED STATES TRUST
COMPANY OF NEW YORK, a New York corporation, as Trustee to the Indenture (as
such term is defined in Article I below) and CHESAPEAKE ENERGY LOUISIANA
CORPORATION, an Oklahoma corporation ("CELC"), CHESAPEAKE CANADA CORPORATION,
an Alberta, Canada corporation ("CCC") and CHESAPEAKE LOUISIANA, L.P., an
Oklahoma limited partnership ("CLLP").
WHEREAS, the Company, the Subsidiary Guarantors and the
Trustee have heretofore entered into the Original Indenture, pursuant to the
provisions of which the Company has heretofore issued $120,000,000 in aggregate
principal amount of the Securities;
WHEREAS, the Company has formed CELC, CCC and CLLP as wholly
owned Subsidiaries of the Company;
WHEREAS, the Board of Directors of the Company has adopted
resolutions designating CELC, CCC and CLLP as Restricted Subsidiaries, as that
term is defined in the Indenture;
WHEREAS, Section 10.03(a) of the Indenture provides, among
other things, that the Company will cause each Subsidiary that shall become a
Restricted Subsidiary after the Issue Date to execute and deliver a
supplemental indenture pursuant to which such Restricted Subsidiary shall
guarantee the payment of the Securities pursuant to the terms of the Indenture;
WHEREAS, Section 10.03(b) of the Indenture provides, among
other things, that a Person may become a Subsidiary Guarantor by executing and
delivering to the Trustee (i) a supplemental indenture which is in form and
substance satisfactory to the Trustee and which subjects such Person to the
provisions (including the representations and warranties) of the Indenture as a
Subsidiary Guarantor and (ii) an Opinion of Counsel and Officer's Certificate
that such supplemental indenture has been duly authorized and executed by such
Person and constitutes the legal, valid, binding and enforceable obligation of
such Person;
WHEREAS, the form and substance of this Second Supplemental
Indenture are satisfactory to the Trustee;
WHEREAS, contemporaneously herewith, there are being delivered
to the Trustee an executed Opinion of Counsel and Officers' Certificate proper
in form and substance;]
WHEREAS, Section 9.01 of the Indenture provides, among other
things, that the Trustee, the Subsidiary Guarantors and the Company may amend
or supplement the
<PAGE> 6
Indenture without notice to or consent of any Holder to reflect the addition of
any Subsidiary Guarantor, as provided for by the Indenture; and
WHEREAS, the execution and delivery of this Second
Supplemental Indenture have been duly authorized by the Company, the Subsidiary
Guarantors, CELC, CCC and CLLP and all actions necessary to make this Second
Supplemental Indenture a valid and binding instrument according to its terms
and the terms of the Original Indenture have been performed.
NOW, THEREFORE, BY THIS SECOND SUPPLEMENTAL INDENTURE, for and
in consideration of the premises and of the mutual covenants herein contained
and for other valuable considerations, the receipt whereof is hereby
acknowledged, the Company, the Subsidiary Guarantors, CELC, CCC and CLLP
covenant and agree with the Trustee, for the equal benefit of all present and
future Holders of the Securities, as follows:
ARTICLE I
DEFINITIONS
SECTION 1.1 The definitions set forth in or incorporated
by reference in Article I of the Indenture shall be applicable to this Second
Supplemental Indenture, as fully and to the same extent as if set forth herein,
except as otherwise expressly provided herein. As used in this Second
Supplemental Indenture, the following terms shall have the following meanings:
"Indenture" means the Original Indenture, as amended by this
Second Supplemental Indenture, relating to the Securities.
"Original Indenture" means the Indenture dated as of April 1,
1996, among the Company, the Subsidiary Guarantors listed as signatories
thereto and the Trustee, relating to the Securities, as amended by that certain
First Supplemental Indenture dated as of December 30, 1996.
ARTICLE II
ADDITION OF SUBSIDIARY GUARANTOR
SECTION 2.1 As a Subsidiary Guarantor, each of CELC, CCC
and CLLP hereby: (a) jointly and severally, unconditionally guarantees to each
Holder and to the Trustee the due and punctual payment of the principal of,
premium, if any, and interest on the Securities and all other amounts due and
payable under the Indenture and the Securities by the Company, whether at
maturity, by acceleration, redemption, repurchase or otherwise including,
without limitation, interest on the overdue principal of, premium, if any, and
interest on the Securities to the extent lawful, all in accordance with the
terms and subject to the limitations of the Indenture as if each of CELC, CCC
and CLLP had been an original party thereto; and (b)
- 2 -
<PAGE> 7
subjects each of CELC, CCC and CLLP to the provisions (including the
representations and warranties) of the Indenture as a Subsidiary Guarantor.
ARTICLE III
MISCELLANEOUS
SECTION 3.1 This Second Supplemental Indenture is a
supplemental indenture pursuant to Section 9.01 of the Indenture. Upon
execution and delivery of this Second Supplemental Indenture, the terms and
conditions of this Second Supplemental Indenture will be part of the terms and
conditions of the Indenture for any and all purposes, and all the terms and
conditions of both shall be read together as though they constitute one
instrument, except that in case of conflict, the provisions of this Second
Supplemental Indenture will control.
SECTION 3.2 Except as they have been modified in this
Second Supplemental Indenture, each and every term and provision of the
Indenture shall remain in full force and effect.
SECTION 3.3 This Second Supplemental Indenture may be
executed in any number of counterparts, each of which when so executed and
delivered shall be an original, but such counterparts shall together constitute
but one and the same instrument.
SECTION 3.4 This Second Supplemental Indenture shall be
governed by and construed in accordance with the laws of the State of New York
without giving effect to applicable principals of conflicts of law to the
extent that the application of the law of another jurisdiction would be
required thereby.
SIGNATURES
IN WITNESS WHEREOF, the parties hereto have caused this Second
Supplemental Indenture to be duly executed as of the date first written above.
CHESAPEAKE ENERGY CORPORATION, an
Oklahoma corporation
By /s/ AUBREY K. MCCLENDON
---------------------------------------------
Aubrey K. McClendon, Chief Executive Officer
CHESAPEAKE ENERGY LOUISIANA
CORPORATION, an Oklahoma corporation
By /s/ AUBREY K. MCCLENDON
---------------------------------------------
Aubrey K. McClendon, Chief Executive Officer
- 3 -
<PAGE> 8
CHESAPEAKE CANADA CORPORATION, an
Alberta, Canada corporation
By /s/ AUBREY K. MCCLENDON
-----------------------------------------
Aubrey K. McClendon, Chief Executive Officer
CHESAPEAKE LOUISIANA, L.P., an
Oklahoma limited partnership
By Chesapeake Operating, Inc., an
Oklahoma corporation, Sole General
Partner
By /s/ AUBREY K. MCCLENDON
------------------------------------
Aubrey K. McClendon,
Chief Executive Officer
UNITED STATES TRUST COMPANY OF NEW YORK,
a New York corporation, as Trustee
By /s/ PATRICIA STERMER
-------------------------------------------
Name: PATRICIA STERMER
---------------------------------------
Title: ASSISTANT VICE PRESIDENT
--------------------------------------
SUBSIDIARY GUARANTORS
CHESAPEAKE OPERATING, INC., an Oklahoma
corporation
By /s/ AUBREY K. MCCLENDON
------------------------------------------
Aubrey K. McClendon, Chief Executive
Officer
CHESAPEAKE EXPLORATION LIMITED PARTNERSHIP,
an Oklahoma limited partnership
By Chesapeake Operating, Inc., an
Oklahoma corporation, Sole
General Partner
By /s/ AUBREY K. MCCLENDON
-------------------------------------
Aubrey K. McClendon,
Chief Executive Officer
- 4 -
<PAGE> 1
================================================================================
CREDIT AGREEMENT
-------------------------------------------------------
CHESAPEAKE ACQUISITION CORPORATION
and
CHESAPEAKE MID-CONTINENT CORP.,
as Borrowers,
CHESAPEAKE MERGER CORP.,
CHESAPEAKE ACQUISITION CORP.
CHESAPEAKE COLUMBIA CORP.,
MID-CONTINENT GAS PIPELINE COMPANY, and
ANSON GAS MARKETING
as Initial Guarantors,
UNION BANK OF CALIFORNIA, N.A.
as Agent
and CERTAIN FINANCIAL INSTITUTIONS
as Lenders
-------------------------------------------------------
March 9, 1998
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
CREDIT AGREEMENT ......................................................................... 1
ARTICLE I - Definitions and References ................................................... 1
Section 1.1. Defined Terms ...................................................... 1
Section 1.2. Exhibits and Schedules; Additional Definitions ..................... 15
Section 1.3. Amendment of Defined Instruments ................................... 15
Section 1.4. References and Titles .............................................. 15
Section 1.5. Calculations and Determinations .................................... 16
ARTICLE II - The Loans ................................................................... 16
Section 2.1. Commitments to Lend; Notes ......................................... 16
Section 2.2. Requests for New Loans ............................................. 16
Section 2.3. Interest Rates; Continuations and Conversions of Existing Loans .... 17
Section 2.4. Use of Proceeds .................................................... 18
Section 2.5. Fees ............................................................... 19
Section 2.6. Optional Prepayments ............................................... 19
Section 2.7. Mandatory Prepayments .............................................. 19
Section 2.8. Initial Borrowing Base ............................................. 20
Section 2.9. Subsequent Determinations of Borrowing Base ........................ 20
Section 2.10. Borrower's Reduction of the Borrowing Base ........................ 21
Section 2.11. Letters of Credit ................................................. 22
Section 2.12. Requesting Letters of Credit ...................................... 22
Section 2.13. Reimbursement and Participations .................................. 22
Section 2.14. Letter of Credit Fees ............................................. 24
Section 2.15. No Duty to Inquire ................................................ 24
Section 2.16. LC Collateral ..................................................... 25
ARTICLE III - Payments to Lenders ........................................................ 26
Section 3.1. General Procedures ................................................. 26
Section 3.2. Increased Cost and Reduced Return .................................. 27
Section 3.3. Limitation on Types of Loans ....................................... 28
Section 3.4. Illegality ......................................................... 28
Section 3.5. Treatment of Affected Loans ........................................ 29
Section 3.6. Compensation ....................................................... 29
Section 3.7. Taxes .............................................................. 30
Section 3.8. Compensation Procedure ............................................. 31
Section 3.9. Change of Applicable Lending Office ................................ 31
ARTICLE IV - Conditions Precedent to Lending ............................................. 32
Section 4.1. Documents to be Delivered .......................................... 32
Section 4.2. Closing of Mergers ................................................. 34
Section 4.3. Designated Affiliate Contracts/Structure ........................... 34
Section 4.4. Additional Conditions Precedent .................................... 34
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
ARTICLE V - Representations and Warranties ............................................... 35
Section 5.1. No Default ......................................................... 35
Section 5.2. Organization and Good Standing ..................................... 35
Section 5.3. Authorization ...................................................... 36
Section 5.4. No Conflicts or Consents ........................................... 36
Section 5.5. Enforceable Obligations ............................................ 36
Section 5.6. Initial Financial Statements ....................................... 36
Section 5.7. Other Obligations and Restrictions ................................. 36
Section 5.8. Full Disclosure .................................................... 37
Section 5.9. Litigation ......................................................... 37
Section 5.10. Labor Disputes and Acts of God .................................... 37
Section 5.11. ERISA Plans and Liabilities ....................................... 37
Section 5.12. Environmental and Other Laws ...................................... 38
Section 5.13. Names and Places of Business ...................................... 38
Section 5.14. Borrower's Subsidiaries ........................................... 38
Section 5.15. Title to Properties; Licenses ..................................... 38
Section 5.16. Government Regulation ............................................. 39
Section 5.17. Insider ........................................................... 39
Section 5.18. Mergers ........................................................... 39
ARTICLE VI - Affirmative Covenants of Borrower ........................................... 40
Section 6.1. Payment and Performance ............................................ 40
Section 6.2. Books, Financial Statements and Reports ............................ 40
Section 6.3. Other Information and Inspections .................................. 42
Section 6.4. Notice of Material Events and Change of Address .................... 42
Section 6.5. Maintenance of Properties .......................................... 43
Section 6.6. Maintenance of Existence and Qualifications ........................ 43
Section 6.7. Payment of Trade Liabilities, Taxes, etc. .......................... 44
Section 6.8. Insurance .......................................................... 44
Section 6.9. Performance on Borrower's Behalf ................................... 44
Section 6.10. Interest .......................................................... 44
Section 6.11. Compliance with Agreements and Law ................................ 44
Section 6.12. Environmental Matters; Environmental Reviews ...................... 44
Section 6.13. Evidence of Compliance ............................................ 45
Section 6.14. Solvency .......................................................... 45
Section 6.15. Guaranties of Borrower's Subsidiaries ............................. 45
Section 6.16. Mergers ........................................................... 45
ARTICLE VII - Negative Covenants of Borrower ............................................. 45
Section 7.1. Indebtedness ....................................................... 46
Section 7.2. Limitation on Liens ................................................ 46
Section 7.3. Hedging Contracts .................................................. 46
Section 7.4. Limitation on Mergers, Issuances of Securities ..................... 47
Section 7.5. Limitation on Sales of Property .................................... 47
Section 7.6. Limitation on Dividends and Redemptions ............................ 48
Section 7.7. Limitation on Investments and New Businesses ....................... 48
Section 7.8. Limitation on Credit Extensions .................................... 48
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C> <C>
Section 7.9. Transactions with Affiliates ....................................... 48
Section 7.10. Certain Contracts; Multiemployer ERISA Plans; Designated
Affiliate Contracts ............................................. 48
Section 7.11. Corporate Requirements ............................................ 49
Section 7.12. Indenture Requirements ............................................ 49
Section 7.13. Interest Coverage ................................................. 49
Section 7.14. EBITDA Coverage ................................................... 49
Section 7.15. Tangible Net Worth ................................................ 49
Section 7.16. Current Ratio ..................................................... 50
ARTICLE VIII - Events of Default and Remedies ............................................ 50
Section 8.1. Events of Default .................................................. 50
Section 8.2. Remedies ........................................................... 52
ARTICLE IX - Agent ....................................................................... 52
Section 9.1. Appointment and Authority .......................................... 52
Section 9.2. Exculpation, Agent's Reliance, Etc. ................................ 53
Section 9.3. Credit Decisions ................................................... 53
Section 9.4. Indemnification .................................................... 53
Section 9.5. Rights as Lender ................................................... 54
Section 9.6. Sharing of Set-Offs and Other Payments ............................. 54
Section 9.7. Investments ........................................................ 55
Section 9.8. Benefit of Article IX .............................................. 55
Section 9.9. Resignation ........................................................ 55
ARTICLE X - Miscellaneous ................................................................ 55
Section 10.1. Waivers and Amendments; Acknowledgements .......................... 55
Section 10.2. Survival of Agreements; Cumulative Nature ......................... 57
Section 10.3. Notices ........................................................... 57
Section 10.4. Payment of Expenses; Indemnity .................................... 58
Section 10.5. Joint and Several Liability; Parties in Interest; Assignments ..... 59
Section 10.6. Confidentiality ................................................... 60
Section 10.7. Governing Law; Submission to Process .............................. 61
Section 10.8. Usury ............................................................. 61
Section 10.9. Termination; Limited Survival ..................................... 62
Section 10.10. Severability ..................................................... 62
Section 10.11. Counterparts ..................................................... 62
Section 10.12. Waiver of Jury Trial, Punitive Damages, etc. ..................... 62
</TABLE>
iii
<PAGE> 5
Schedules and Exhibits:
Lender Schedule
Schedule 1 - Disclosure Schedule
Schedule 2 - Security Schedule
Schedule 3 - Insurance Schedule
Exhibit A - Promissory Note
Exhibit B - Borrowing Notice
Exhibit C - Continuation/Conversion Notice
Exhibit D - Certificate Accompanying Financial Statements
Exhibit E - Letter of Credit Application and Agreement
Exhibit F - Agreement of Parent Regarding Representations, Warranties and
Covenants
Exhibit G-1 - Opinion of Self, Giddens & Lees, Inc.
Exhibit G-2 - Opinion of Andrews & Kurth L.L.P.
Exhibit H - Assignment and Assumption Agreement
Exhibit I-1 - Restated Certificate of Incorporation - CAC
Exhibit I-2 - Restated Certificates of Incorporation - Subsidiaries
iv
<PAGE> 6
CREDIT AGREEMENT
THIS CREDIT AGREEMENT is made as of March 9, 1998, by and among
CHESAPEAKE ACQUISITION CORPORATION, an Oklahoma corporation (herein called
"CAC"), CHESAPEAKE MID-CONTINENT CORP., an Oklahoma corporation (herein called
"CMC"), and a wholly owned subsidiary of CAC ("CAC and CMC collectively called
"Borrower"), CHESAPEAKE MERGER CORP., an Oklahoma corporation (herein called
"Chesapeake Merger"), CHESAPEAKE ACQUISITION CORP., a Kansas corporation (herein
called "Chesapeake Acquisition"), CHESAPEAKE COLUMBIA CORP., an Oklahoma
corporation, MID-CONTINENT GAS PIPELINE COMPANY, an Oklahoma general
partnership, and ANSON GAS MARKETING, an Oklahoma general partnership, UNION
BANK OF CALIFORNIA, N.A., individually and as administrative agent (herein
called "Agent"), certain Co-Agents named on the signature pages hereto and the
Lenders referred to below. In consideration of the mutual covenants and
agreements contained herein the parties hereto agree as follows:
ARTICLE I - Definitions and References
Section 1.1. Defined Terms. As used in this Agreement, each of the
following terms has the meaning given it in this Section 1.1 or in the sections
and subsections referred to below:
"Acquisition Documents" means (i) the Agreement and Plan of Merger
among Parent, Chesapeake Merger and DLB Oil & Gas, Inc. dated October 22, 1997,
as amended, and (ii) the Agreement and Plan of Merger among Parent, Chesapeake
Acquisition and Hugoton Energy Corporation dated as of November 12, 1997, as
amended.
"Affiliate" means, as to any Person, each other Person that directly or
indirectly (through one or more intermediaries or otherwise) controls, is
controlled by, or is under common control with, such Person. A Person shall be
deemed to be "controlled by" any other Person if such other Person possesses,
directly or indirectly, power
(a) to vote 20% or more of the securities (on a fully diluted
basis) having ordinary voting power for the election of directors or
managing general partners; or
(b) to direct or cause the direction of the management and
policies of such Person whether by contract or otherwise.
"Agent" means Union Bank of California, N.A., as Agent hereunder, and
its successors in such capacity.
"Agreement" means this Credit Agreement.
"Applicable Initial Borrowing Base" means (i) at any time that the DLB
Merger, but not the Hugoton Merger, has occurred, $86,813,000, (ii) at any time
that the Hugoton Merger, but not the DLB Merger, has occurred, $167,774,000,
(iii) at any time after both the DLB Merger and the Hugoton Merger have
occurred, $200,000,000.
1
<PAGE> 7
"Applicable Lending Office" means, with respect to each Lender, such
Lender's Domestic Lending Office in the case of Base Rate Loans and such
Lender's Eurodollar Lending Office in the case of Eurodollar Loans.
"Applicable Utilization Level" means on any date the level set forth
below that corresponds to the percentage, at the close of business on such day,
equivalent to the (i) Facility Usage divided by (ii) the Borrowing Base (the
"Utilization Percent"):
<TABLE>
<CAPTION>
======================================================================
Applicable
Utilization Level Utilization Percent
- -----------------------------------------------------------------------
<S> <C>
Level I less than or equal to 33%
- -----------------------------------------------------------------------
Level II greater than 33% but less
than or equal to 60%
- -----------------------------------------------------------------------
Level III greater than 60% but less
than or equal to 85%
- -----------------------------------------------------------------------
Level IV greater than 85%
======================================================================
</TABLE>
"Bank Parties" means Agent and all Lenders.
"Base Rate" means the higher of (a) Agent's Reference Rate and (b) the
Federal Funds Rate plus one-half percent (0.5%) per annum. As used in this
paragraph, Agent's "Reference Rate" means that variable rate of interest per
annum established by Agent from time to time as its "reference rate" (which rate
of interest may not be the lowest rate charged on similar loans). Each change in
the Base Rate shall become effective without prior notice to Borrower
automatically as of the opening of business on the date of such change in the
Base Rate. The Base Rate shall in no event, however, exceed the Highest Lawful
Rate.
"Base Rate Loan" means a Loan which bears interest at the Base Rate.
"Base Rate Margin" means, on any date, with respect to each Base Rate
portion of a Loan, the number of basis points per annum set forth below based on
the Applicable Utilization Level on such date:
<TABLE>
<CAPTION>
======================================================================
Applicable Base Rate
Utilization Level Margin
- -----------------------------------------------------------------------
<S> <C>
Level I 0 b.p.
- -----------------------------------------------------------------------
Level II 0 b.p.
- -----------------------------------------------------------------------
Level III 12.5 b.p.
- -----------------------------------------------------------------------
Level IV 25.0 b.p.
======================================================================
</TABLE>
2
<PAGE> 8
Changes in the applicable Base Rate Margin will occur automatically without
prior notice as changes in the Applicable Utilization Level occur. Agent will
give notice promptly to Borrower and the Lenders of changes in the Base Rate
Margin.
"Borrower" means Chesapeake Acquisition Corporation and Chesapeake
Mid-Continent Corp., jointly and severally.
"Borrowing" means a borrowing of new Loans of a single Type pursuant to
Section 2.2 or a continuation or conversion of existing Loans into a single Type
(and, in the case of Eurodollar Loans, with the same Interest Period) pursuant
to Section 2.3.
"Borrowing Base" means, at the particular time in question, either the
amount provided for in Section 2.8 or the amount determined by Agent and
Required Lenders in accordance with the provisions of Section 2.9, as reduced by
Borrower pursuant to Section 2.10.
"Borrowing Base Fee Rate" means, on any date, the number of basis
points per annum set forth below, based on the Applicable Utilization Level on
such date:
<TABLE>
<CAPTION>
==============================================================
Applicable Borrowing Base
Utilization Level Fee Rate
- --------------------------------------------------------------
<S> <C>
Level I 15.0 b.p.
- --------------------------------------------------------------
Level II 20.0 b.p.
- --------------------------------------------------------------
Level III 25.0 b.p.
- --------------------------------------------------------------
Level IV 30.0 b.p.
==============================================================
</TABLE>
"Borrowing Notice" means a written or telephonic request, or a written
confirmation, made by Borrower which meets the requirements of Section 2.2.
"Business Day" means a day, other than a Saturday or Sunday, on which
commercial banks are open for business with the public in Los Angeles,
California. Any Business Day in any way relating to Eurodollar Loans (such as
the day on which an Interest Period begins or ends) must also be a day on which,
in the judgment of Agent, significant transactions in dollars are carried out in
the interbank eurocurrency market.
"Cash Equivalents" means investments in:
(a) marketable obligations, maturing within 12 months after acquisition
thereof, issued or unconditionally guaranteed by the United States of America or
an instrumentality or agency thereof and entitled to the full faith and credit
of the United States of America;
(b) demand deposits, and time deposits (including certificates of
deposit) maturing within 12 months from the date of deposit thereof, with any
office of any Lender or with a domestic office of any national or state bank or
trust company which is organized under the Laws of the United States of
3
<PAGE> 9
America or any state therein, which has capital, surplus and undivided profits
of at least $500,000,000, and whose certificates of deposit have at least the
third highest credit rating given by either Rating Agency;
(c) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clause (a) above entered into
with any commercial bank meeting the specifications of clause (b) above;
(d) open market commercial paper, maturing within 270 days after
acquisition thereof, which has the highest or second highest credit rating given
by either Rating Agency.
(e) investments in money market or other mutual funds substantially all
of whose assets comprise securities of the types described in clauses (a)
through (d) above.
"Change of Control" means the occurrence of any of the following
events: (i) any Person other than Parent shall acquire any beneficial ownership
of CAC, or any Person other than CAC shall acquire any beneficial ownership of
any Restricted Person (other than beneficial interests held by another
Restricted Person), (ii) any Person or two or more Persons acting as a group
shall acquire beneficial ownership (within the meaning of Rule 13d-3 of the
Securities and Exchange Commission under the Securities Act of 1934, as amended,
and including holding proxies to vote for the election of directors other than
proxies held by Parent's management or their designees to be voted in favor of
Persons nominated by Parent's Board of Directors) of 35% or more of the
outstanding voting securities of Parent, measured by voting power (including
both common stock and any preferred stock or other equity securities entitling
the holders thereof to vote with the holders of common stock in elections for
directors of Parent), (iii) one-third or more of the directors of Parent shall
consist of Persons not nominated by Parent's Board of Directors (not including
as Board nominees any directors which the Board is obligated to nominate
pursuant to shareholders agreements, voting trust arrangements or similar
arrangements) or (iv) neither Aubrey K. McClendon nor Tom Ward shall be
executive officers and directors of Parent.
"Chesapeake Acquisition" means Chesapeake Acquisition Corp., a Kansas
corporation and a wholly owned subsidiary of CAC.
"Chesapeake Merger" means Chesapeake Merger Corp., an Oklahoma
corporation, and a wholly owned Subsidiary of CAC.
"CMC" means Chesapeake Mid-Continent Corp., an Oklahoma corporation,
and a wholly owned subsidiary of CAC.
"Commitment Fee Rate" means, on any date, the number of basis points
per annum set forth below based on the Applicable Utilization Level on such
date:
4
<PAGE> 10
<TABLE>
<CAPTION>
===============================================================
Applicable Commitment Fee
Utilization Level Rate
- ----------------------------------------------------------------
<S> <C>
Level I 20 b.p.
- ----------------------------------------------------------------
Level II 25 b.p.
- ----------------------------------------------------------------
Level III 30 b.p.
- ----------------------------------------------------------------
Level IV 37.5 b.p.
===============================================================
</TABLE>
Changes in the applicable Commitment Fee Rate will occur automatically without
prior notice as changes in the Applicable Utilization Level occur. Agent will
give notice promptly to Borrower and the Lenders of changes in the Commitment
Fee Rate.
"Commitment Period" means the period from and including the date hereof
until and including March 9, 2002 (or, if earlier, the day on which the
commitments of the Lenders are terminated pursuant to Section 8.1, or the day
the Notes first become due and payable in full).
"Consolidated" refers to the consolidation of any Person, in accordance
with GAAP, with its properly consolidated subsidiaries. References herein to a
Person's Consolidated financial statements, financial position, financial
condition, liabilities, etc. refer to the consolidated financial statements,
financial position, financial condition, liabilities, etc. of such Person and
its properly consolidated subsidiaries.
"Consolidated EBITDA" means, for any four-Fiscal Quarter period, the
sum of (1) the Consolidated net income of Borrower during such period, plus (2)
Consolidated Interest Expense of Borrower during such period, plus (3) all
income taxes which were deducted in determining such Consolidated net income,
plus (4) all depreciation, amortization (including amortization of good will and
debt issue costs) and other non-cash charges (including any provision for the
reduction in the carrying value of assets recorded in accordance with GAAP)
which were deducted in determining such Consolidated net income, minus (5) all
non-cash items of income which were included in determining such Consolidated
net income.
"Consolidated Interest Expense" means, for any four-Fiscal Quarter
period, all interest paid or accrued during such period on Indebtedness
(including, but not limited to, accrued capitalized interest, amortization of
original issue discount and the interest component of any deferred payment
obligations and capital lease obligations) which was deducted in determining
Consolidated net income of Borrower for such period.
"Consolidated Tangible Net Worth" means the remainder of all
Consolidated assets of Borrower, other than intangible assets (including without
limitation as intangible assets such assets as patents, copyrights, licenses,
franchises, goodwill, trade names, trade secrets and leases other than oil, gas
or mineral leases or leases required to be capitalized under GAAP), minus
Borrower's Consolidated Liabilities.
"Continue", "Continuation", and "Continued" shall refer to the
continuation pursuant to Section 2.3 hereof of a Eurodollar Loan from one
Interest Period to the next Interest Period.
5
<PAGE> 11
"Continuation/Conversion Notice" means a written or telephonic request,
or a written confirmation, made by Borrower which meets the requirements of
Section 2.3.
"Convert", "Conversion", and "Converted" shall refer to a conversion
pursuant to Section 2.3 or Article X of one Type of Loan into another Type of
Loan.
"Default" means any Event of Default and any default, event or
condition which would, with the giving of any requisite notices and the passage
of any requisite periods of time, constitute an Event of Default.
"Default Rate" means, at the time in question, three percent (3.0%) per
annum plus the Base Rate (plus the Base Rate Margin) then in effect; provided
that, with respect to any Eurodollar Loan with an Interest Period extending
beyond the date such Eurodollar Loan becomes due and payable, "Default Rate"
shall mean three percent (3.0%) per annum plus the related Eurodollar Rate (plus
the Eurodollar Margin). The Default Rate shall never exceed the Highest Lawful
Rate.
"Determination Date" has the meaning given it in Section 2.9.
"Disclosure Report" means either a notice given by Borrower under
Section 6.4 or a certificate given by Borrower's chief financial officer under
Section 6.2(b).
"Disclosure Schedule" means Schedule 1 hereto.
"Distribution" means (a) any dividend or other distribution made by a
Restricted Person on or in respect of any stock, partnership interest, or other
equity interest in such Restricted Person (including any option or warrant to
buy such an equity interest), or (b) any payment made by a Restricted Person to
purchase, redeem, acquire or retire any stock, partnership interest, or other
equity interest in such Restricted Person (including any such option or
warrant).
"DLB Merger" means the merger of Chesapeake Merger and DLB Oil & Gas,
Inc. contemplated by the Acquisition Documents.
"Designated Affiliate Contracts" has the meaning given it in Section
4.3.
"Domestic Lending Office" means, with respect to any Lender, the office
of such Lender specified as its "Domestic Lending Office" below its name on the
Lender Schedule attached hereto, or such other office as such Lender may from
time to time specify to Borrower and Agent.
"Eligible Transferee" means a Person which either (a) is a Lender or an
Affiliate of a Lender, or (b) is consented to as an Eligible Transferee by Agent
and, so long as no Event of Default is continuing by Borrower, which consents in
each case will not be unreasonably withheld (provided that no Person organized
outside the United States may be an Eligible Transferee if Borrower would be
required to pay withholding taxes on interest or principal owed to such Person).
"Engineering Report" means the Initial Engineering Report and each
engineering report delivered pursuant to Section 6.2(f) and (g).
6
<PAGE> 12
"Environmental Laws" means any and all Laws relating to the environment
or to emissions, discharges, releases or threatened releases of pollutants,
contaminants, chemicals, or industrial, toxic or hazardous substances or wastes
into the environment including ambient air, surface water, ground water, or
land, or otherwise relating to the manufacture, processing, distribution use,
treatment, storage, disposal, transport, or handling of pollutants,
contaminants, chemicals, or industrial, toxic or hazardous substances or wastes.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, together with all rules and regulations promulgated
with respect thereto.
"ERISA Affiliate" means Borrower and all members of a controlled group
of corporations and all trades or businesses (whether or not incorporated) under
common control that, together with Borrower, are treated as a single employer
under Section 414 of the Internal Revenue Code of 1986, as amended.
"ERISA Plan" means any employee pension benefit plan subject to Title
IV of ERISA maintained by any ERISA Affiliate with respect to which any
Restricted Person has a fixed or contingent liability.
"Eurodollar Loan" means a Loan which is properly designated as a
Eurodollar Loan pursuant to Section 2.2 or 2.3.
"Eurodollar Margin" means, on any date, with respect to each Eurodollar
portion of a Loan, the number of basis points per annum set forth below based on
the Applicable Utilization Level on such date:
<TABLE>
<CAPTION>
======================================================
Applicable Eurodollar
Utilization Level Margin
- ------------------------------------------------------
<S> <C>
Level I 75 b.p.
- ------------------------------------------------------
Level II 100 b.p.
- ------------------------------------------------------
Level III 125 b.p.
- ------------------------------------------------------
Level IV 150 b.p.
======================================================
</TABLE>
Changes in the applicable Eurodollar Margin will occur automatically without
prior notice as changes in the Applicable Utilization Level occur. Agent will
give notice promptly to Borrower and the Lenders of changes in the Eurodollar
Margin
"Eurodollar Lending Office" means, with respect to any Lender, the
office of such Lender specified as its "Eurodollar Lending Office" below its
name on the Lender Schedule attached hereto (or, if no such office is specified,
its Domestic Lending Office), or such other office of such Lender as such Lender
may from time to time specify to Borrower and Agent.
7
<PAGE> 13
"Eurodollar Rate" means, with respect to each particular Eurodollar
Loan and the associated LIBOR Rate and Reserve Percentage, the rate per annum
calculated by Agent (rounded upwards, if necessary, to the next higher 0.01%)
determined on a daily basis pursuant to the following formula:
Eurodollar Rate =
LIBOR Rate
-------------------------
100.0% - Reserve Percentage
The Eurodollar Rate for any Eurodollar Loan shall change whenever the Reserve
Percentage changes. No Eurodollar Rate shall ever exceed the Highest Lawful
Rate.
"Event of Default" has the meaning given it in Section 8.1.
"Facility Usage" means, at the time in question, the aggregate amount
of outstanding Loans and existing LC Obligations at such time.
"Federal Funds Rate" shall mean, for any day, the rate per annum
(rounded upwards, if necessary, to the nearest 1/100th of one percent) equal to
the weighted average of the rates on overnight Federal funds transactions with
members of the Federal Reserve System arranged by Federal funds brokers on such
day, as published by the Federal Reserve Bank of New York on the Business Day
next succeeding such day, provided that (i) if the day for which such rate is to
be determined is not a Business Day, the Federal Funds Rate for such day shall
be such rate on such transactions on the next preceding Business Day as so
published on the next succeeding Business Day, and (ii) if such rate is not so
published for any day, the Federal Funds Rate for such day shall be the average
rate quoted to Agent on such day on such transactions as determined by Agent.
"Fiscal Quarter" means a three-month period ending on March 31, June
30, September 30 or December 31 of any year.
"Fiscal Year" means a twelve-month period ending on December 31 of any
year.
"GAAP" means those generally accepted accounting principles and
practices which are recognized as such by the Financial Accounting Standards
Board (or any generally recognized successor) and which, in the case of Borrower
and its Consolidated subsidiaries, are applied for all periods after the date
hereof in a manner consistent with the manner in which such principles and
practices were applied to the Parent Initial Financial Statements. If any change
in any accounting principle or practice is required by the Financial Accounting
Standards Board (or any such successor) in order for such principle or practice
to continue as a generally accepted accounting principle or practice, all
reports and financial statements required hereunder with respect to Borrower or
with respect to Borrower and its Consolidated subsidiaries may be prepared in
accordance with such change, but all calculations and determinations to be made
hereunder may be made in accordance with such change only after notice of such
change is given to each Lender and Majority Lenders agree to such change insofar
as it affects the accounting of Borrower or of Borrower and its Consolidated
subsidiaries.
8
<PAGE> 14
"Guarantor" means Chesapeake Merger, Chesapeake Acquisition and each
other Subsidiary of CAC which now or hereafter executes and delivers a guaranty
to Agent pursuant to Section 6.15 and any other Person who has guaranteed some
or all of the Obligations and who has been accepted by Majority Lenders as a
Guarantor.
"Hazardous Materials" means any substances regulated under any
Environmental Law, whether as pollutants, contaminants, or chemicals, or as
industrial, toxic or hazardous substances or wastes, or otherwise.
"Hedging Contract" means (a) any agreement providing for options,
swaps, floors, caps, collars, forward sales or forward purchases involving
interest rates, commodities or commodity prices, equities, currencies, bonds, or
indexes based on any of the foregoing, (b) any option, futures or forward
contract traded on an exchange, and (c) any other derivative agreement or other
similar agreement or arrangement.
"Highest Lawful Rate" means, with respect to each Lender, the maximum
nonusurious rate of interest that such Lender is permitted under applicable Law
to contract for, take, charge, or receive with respect to its Loan. All
determinations herein of the Highest Lawful Rate, or of any interest rate
determined by reference to the Highest Lawful Rate, shall be made separately for
each Lender as appropriate to assure that the Loan Documents are not construed
to obligate any Person to pay interest to any Lender at a rate in excess of the
Highest Lawful Rate applicable to such Lender.
"Hugoton Merger" means the merger of Chesapeake Acquisition and Hugoton
Energy Corporation contemplated by the Acquisition Documents.
"Indebtedness" of any Person means Liabilities (without duplication) in
any of the following categories:
(a) Liabilities for borrowed money,
(b) Liabilities constituting an obligation to pay the deferred purchase
price of property or services,
(c) Liabilities evidenced by a bond, debenture, note or similar
instrument,
(d) Liabilities which (i) would under GAAP be shown on such Person's
balance sheet as a liability, and (ii) are payable more than one year from the
date of creation thereof (other than reserves for taxes and reserves for
contingent obligations),
(e) Liabilities arising under futures contracts, forward contracts,
swap, cap or collar contracts, option contracts, hedging contracts, other
derivative contracts, or similar agreements,
(f) Liabilities constituting principal under leases capitalized in
accordance with GAAP,
(g) Liabilities arising under conditional sales or other title
retention agreements,
9
<PAGE> 15
(h) Liabilities owing under direct or indirect guaranties of
Liabilities of any other Person or constituting obligations to purchase or
acquire or to otherwise protect or insure a creditor against loss in respect of
Liabilities of any other Person (such as obligations under working capital
maintenance agreements, agreements to keep-well, or agreements to purchase
Liabilities, assets, goods, securities or services), but excluding endorsements
in the ordinary course of business of negotiable instruments in the course of
collection,
(i) Liabilities (for example, repurchase agreements) consisting of an
obligation to purchase securities or other property, if such Liabilities arises
out of or in connection with the sale of the same or similar securities or
property,
(j) Liabilities with respect to letters of credit or applications or
reimbursement agreements therefor,
(k) Liabilities with respect to payments received in consideration of
oil, gas, or other minerals yet to be acquired or produced at the time of
payment (including obligations under "take-or-pay" contracts to deliver gas in
return for payments already received and the undischarged balance of any
production payment created by such Person or for the creation of which such
Person directly or indirectly received payment), or
(l) Liabilities with respect to other obligations to deliver goods or
services in consideration of advance payments therefor;
provided, however, that the "Indebtedness" of any Person shall not include
Liabilities that were incurred by such Person on ordinary trade terms to
vendors, suppliers, or other Persons providing goods and services for use by
such Person in the ordinary course of its business, unless and until such
Liabilities are outstanding more than 120 days past the original invoice or
billing date therefor.
"Indentures" means the Indenture of Parent dated May 15, 1995 (the
"1995 Indenture"), the Indenture of Parent dated April 1, 1996 (the "1996
Indenture") and the two Indentures of Parent dated March 15, 1997 (the "1997
Indentures").
"Initial Engineering Report" means, collectively, the engineering
reports concerning oil and gas properties to be acquired pursuant to the Mergers
dated June 30, 1997, prepared by Ryder Scott Company (with respect to the
Hugoton Energy Corporation properties), dated January 1, 1998, prepared by
Parent (with respect to the AnSon Production Corporation properties) and dated
_______________, 1996, prepared by DeGolyer & MacNaughton and H.J. Gudy and
Associates, Inc. (with respect to the DLB Oil & Gas, Inc. properties).
"Initial Financial Statements" means (i) the audited annual
Consolidated financial statements of Parent dated as of June 30, 1997, and (ii)
the unaudited quarterly Consolidated financial statements of Parent dated as of
September 30, 1997, and (iii) the pro-forma consolidated and consolidating
financial statements of CAC, CMC (giving effect to its merger with AnSon
Production Corporation, Chesapeake Merger (giving effect to the DLB Merger) and
Chesapeake Acquisition (giving effect to the Hugoton Merger) using financial
information for AnSon Production Corporation, DLB Oil & Gas, Inc. and Hugoton
Energy Corporation as of September 30, 1997.
10
<PAGE> 16
"Insurance Schedule" means Schedule 2 attached hereto.
"Interest Period" with respect to each Eurodollar Loan, the period
commencing on the date of borrowing specified in the applicable Borrowing Notice
or on the date specified in an applicable Notice of Interest Rate Election and
ending one week or one, two, three, or six months thereafter, as the Borrower
may elect in such notice; provided that: (a) any Interest Period (except an
Interest Period determined pursuant to clause (c) below) which would otherwise
end on a day which is not a Business Day shall be extended to the next
succeeding Business Day unless such Business Day falls in another calendar
month, in which case such Interest Period shall end on the next preceding
Business Day; (b) any Interest Period which begins on the last Business Day in a
calendar month (or on a day for which there is no numerically corresponding day
in the calendar month at the end of such Interest Period) shall, subject to
clause (c) below, end on the last Business Day in a calendar month; and (c) any
Interest Period which would otherwise end after the last day of the Commitment
Period shall end on the last day of the Commitment Period (or, if the last day
of the Commitment Period is not a Business Day the next preceding Business Day).
"Investment" means any investment, in cash or by delivery of property
made, directly or indirectly in any Person, whether by acquisition of shares of
capital stock, indebtedness or other obligations or securities or by loan,
advance, capital contribution or otherwise.
"Law" means any statute, law, regulation, ordinance, rule, treaty,
judgment, order, decree, permit, concession, franchise, license, agreement or
other governmental restriction of the United States or any state or political
subdivision thereof or of any foreign country or any department, province or
other political subdivision thereof.
"LC Application" means any application for a Letter of Credit hereafter
made by Borrower to LC Issuer.
"LC Collateral" has the meaning given it in Section 2.16(a).
"LC Issuer" means Union Bank of California, N.A. in its capacity as the
issuer of Letters of Credit hereunder, and its successors in such capacity.
Agent may, with the consent of Borrower and the Lender in question, appoint any
Lender hereunder as the LC Issuer in place of or in addition to Union Bank of
California, N.A.
"LC Obligations" means, at the time in question, the sum of all Matured
LC Obligations plus the maximum amounts which LC Issuer might then or thereafter
be called upon to advance under all Letters of Credit then outstanding.
"Lenders" means each signatory hereto (other than Borrower and
Restricted Persons a party hereto), including Union Bank of California, N.A. in
its capacity as a lender hereunder rather than as Agent or LC Issuer, and the
successors of each such party as holder of a Note.
"Lending Office" means, with respect to any Lender, the office, branch,
or agency through which it funds its Eurodollar Loans; with respect to LC
Issuer, the office, branch, or agency through which it issues Letters of Credit;
and, with respect to Agent, the office, branch, or agency through which it
administers this Agreement.
11
<PAGE> 17
"Letter of Credit" means any letter of credit issued by LC Issuer
hereunder at the application of Borrower.
"Letter of Credit Fee Rate" means, on any date the number of basis
points per annum set forth below based on the Applicable Utilization Level on
such date:
<TABLE>
<CAPTION>
==============================================================
Applicable Commitment Fee
Utilization Level Rate
- --------------------------------------------------------------
<S> <C>
Level I 75 b.p.
- --------------------------------------------------------------
Level II 100 b.p.
- --------------------------------------------------------------
Level III 125 b.p.
- --------------------------------------------------------------
Level IV 150 b.p.
==============================================================
</TABLE>
"Liabilities" means, as to any Person, all indebtedness, liabilities
and obligations of such Person, whether matured or unmatured, liquidated or
unliquidated, primary or secondary, direct or indirect, absolute, fixed or
contingent, and whether or not required to be considered pursuant to GAAP.
"LIBOR Rate" means, with respect to each particular Eurodollar Loan and
the related Interest Period, the rate of interest per annum determined by Agent
in accordance with its customary general practices to be representative of the
rates at which deposits of dollars are offered to Agent at approximately 9:00
a.m. New York, New York time two Business Days prior to the first day of such
Interest Period (by prime banks in the interbank eurocurrency market which have
been selected by Agent in accordance with its customary general practices) for
delivery on the first day of such Interest Period in an amount equal or
comparable to the amount of the applicable Eurodollar Loan and for a period of
time equal or comparable to the length of such Interest Period. The Eurodollar
Rate determined by Agent with respect to a particular Eurodollar Loan shall be
fixed at such rate for the duration of the associated Interest Period. If Agent
is unable so to determine the Eurodollar Rate for any Eurodollar Loan, Borrower
shall be deemed not to have elected such Eurodollar Loan.
"Lien" means, with respect to any property or assets, any right or
interest therein of a creditor to secure Liabilities owed to him or any other
arrangement with such creditor which provides for the payment of such
Liabilities out of such property or assets or which allows him to have such
Liabilities satisfied out of such property or assets prior to the general
creditors of any owner thereof, including any lien, mortgage, security interest,
pledge, deposit, production payment, rights of a vendor under any title
retention or conditional sale agreement or lease substantially equivalent
thereto, tax lien, mechanic's or materialman's lien, or any other charge or
encumbrance for security purposes, whether arising by Law or agreement or
otherwise, but excluding any right of offset which arises without agreement in
the ordinary course of business. "Lien" also means any filed financing
statement, any registration of a pledge (such as with an issuer of
uncertificated securities), or any other arrangement or action which would serve
to perfect a Lien described in the preceding sentence, regardless of whether
such financing statement is filed, such registration is made, or such
arrangement or action is undertaken before or after such Lien exists.
12
<PAGE> 18
"Loan" has the meaning given it in Section 2.1.
"Loan Documents" means this Agreement, the Notes, guaranties of the
Obligations by each Subsidiary of Borrower, as listed on the Security Schedule,
the Agreement of Representations, Warranties and Covenants of Parent, the stock
pledge agreement of CAC as listed on the Security Schedule, the Letters of
Credit, the LC Applications, and all other agreements, certificates, documents,
instruments and writings at any time delivered in connection herewith or
therewith (exclusive of term sheets, commitment letters, correspondence and
similar documents used in the negotiation hereof, except to the extent the same
contain information about Borrower or its Affiliates, properties, business or
prospects).
"Majority Lenders" means Agent and Lenders whose aggregate Percentage
Shares equal or exceed sixty-six and two-thirds percent (662/3%).
"Material Adverse Change" means a material and adverse change, from the
state of affairs presented in the Borrower's pro-forma Initial Financial
Statements or as represented or warranted in any Loan Document, to (a)
Restricted Persons' Consolidated financial condition, (b) the operations or
properties of Restricted Persons, considered as a whole, (c) Borrower's ability
to timely pay the Obligations, or (d) the enforceability of the material terms
of any Loan Documents.
"Matured LC Obligations" means all amounts paid by LC Issuer on drafts
or demands for payment drawn or made under or purported to be under any Letter
of Credit and all other amounts due and owing to LC Issuer under any LC
Application for any Letter of Credit, to the extent the same have not been
repaid to LC Issuer (with the proceeds of Loans or otherwise).
"Maximum Drawing Amount" means at the time in question the sum of the
maximum amounts which LC Issuer might then or thereafter be called upon to
advance under all Letters of Credit then outstanding.
"Mergers" means the mergers contemplated by the Acquisition Documents.
"Note" has the meaning given it in Section 2.1.
"Obligations" means all Liabilities from time to time owing by any
Restricted Person to any Bank Party under or pursuant to any of the Loan
Documents, including all LC Obligations.
"Obligation" means any part of the Obligations.
"Parent" means Chesapeake Energy Corporation, an Oklahoma corporation.
"Parent Affiliate" means Parent and each of Parent's Subsidiaries
(other than the Restricted Persons).
"Percentage Share" means, with respect to any Lender (a) when used in
Sections 2.1 or 2.5, in any Borrowing Notice or when no Loans are outstanding
hereunder, the percentage set forth opposite such Lender's name on Lender
Schedule attached hereto, and (b) when used otherwise, the percentage obtained
by dividing (i) the sum of the unpaid principal balance of such Lender's Loans
at the time in question plus the Matured LC Obligations which such Lender has
funded pursuant to Section 2.13(c)
13
<PAGE> 19
plus the portion of the Maximum Drawing Amount which such Lender might be
obligated to fund under Section 2.13(c), by (ii) the sum of the aggregate unpaid
principal balance of all Loans at such time plus the aggregate amount of LC
Obligations outstanding at such time.
"Permitted Investments" means (i) Cash Equivalents and (ii) investments
by Borrower in its wholly owned Subsidiaries provided that such Subsidiary is a
Guarantor.
"Permitted Lien" has the meaning given to such term in Section 7.2.
"Person" means an individual, corporation, partnership, limited
liability company, association, joint stock company, trust or trustee thereof,
estate or executor thereof, unincorporated organization or joint venture,
Tribunal, or any other legally recognizable entity.
"Rating Agency" means either Standard & Poor's Ratings Group (a
division of McGraw Hill, Inc.) or Moody's Investors Service, Inc., or their
respective successors.
"Regulation D" means Regulation D of the Board of Governors of the
Federal Reserve System as from time to time in effect.
"Required Lenders" means Agent and Lenders whose aggregate Percentage
Shares equal or exceed seventy-five percent (75%).
"Restricted Person" means any of Borrower and each Subsidiary of
Borrower.
"Reserve Percentage" means, on any day with respect to each particular
Eurodollar Loan, the maximum reserve requirement, as determined by Agent
(including without limitation any basic, supplemental, marginal, emergency or
similar reserves), expressed as a percentage and rounded to the next higher
0.01%, which would then apply under Regulation D with respect to "Eurocurrency
liabilities", as such term is defined in Regulation D, of $1,000,000 or more. If
such reserve requirement shall change after the date hereof, the Reserve
Percentage shall be automatically increased or decreased, as the case may be,
from time to time as of the effective time of each such change in such reserve
requirement.
"Security Schedule" means Schedule 3 attached hereto.
"Subsidiary" means, with respect to any Person, any corporation,
association, partnership, joint venture, or other business or corporate entity,
enterprise or organization which is directly or indirectly (through one or more
intermediaries) controlled by or owned fifty percent or more by such Person.
"Termination Event" means (a) the occurrence with respect to any ERISA
Plan of (i) a reportable event described in Sections 4043(b)(5) or (6) of ERISA
or (ii) any other reportable event described in Section 4043(b) of ERISA other
than a reportable event not subject to the provision for 30-day notice to the
Pension Benefit Guaranty Corporation pursuant to a waiver by such corporation
under Section 4043(a) of ERISA, or (b) the withdrawal of any ERISA Affiliate
from an ERISA Plan during a plan year in which it was a "substantial employer"
as defined in Section 4001(a)(2) of ERISA, or (c) the filing of a notice of
intent to terminate any ERISA Plan or the treatment of any ERISA Plan amendment
as a termination under Section 4041 of ERISA, or (d) the institution of
proceedings to
14
<PAGE> 20
terminate any ERISA Plan by the Pension Benefit Guaranty Corporation under
Section 4042 of ERISA, or (e) any other event or condition which might
constitute grounds under Section 4042 of ERISA for the termination of, or the
appointment of a trustee to administer, any ERISA Plan.
"Tribunal" means any government, any arbitration panel, any court or
any governmental department, commission, board, bureau, agency or
instrumentality of the United States of America or any state, province,
commonwealth, nation, territory, possession, county, parish, town, township,
village or municipality, whether now or hereafter constituted and/or existing.
"Type" means, with respect to any Loans, the characterization of such
Loans as either Base Rate Loans or Eurodollar Loans.
Section 1.2. Exhibits and Schedules; Additional Definitions. All
Exhibits and Schedules attached to this Agreement are a part hereof for all
purposes. Reference is hereby made to the Security Schedule for the meaning of
certain terms defined therein and used but not defined herein, which definitions
are incorporated herein by reference.
Section 1.3. Amendment of Defined Instruments. Unless the context
otherwise requires or unless otherwise provided herein the terms defined in this
Agreement which refer to a particular agreement, instrument or document also
refer to and include all renewals, extensions, modifications, amendments and
restatements of such agreement, instrument or document, provided that nothing
contained in this section shall be construed to authorize any such renewal,
extension, modification, amendment or restatement.
Section 1.4. References and Titles. All references in this Agreement to
Exhibits, Schedules, articles, sections, subsections and other subdivisions
refer to the Exhibits, Schedules, articles, sections, subsections and other
subdivisions of this Agreement unless expressly provided otherwise. Titles
appearing at the beginning of any subdivisions are for convenience only and do
not constitute any part of such subdivisions and shall be disregarded in
construing the language contained in such subdivisions. The words "this
Agreement", "this instrument", "herein", "hereof", "hereby", "hereunder" and
words of similar import refer to this Agreement as a whole and not to any
particular subdivision unless expressly so limited. The phrases "this section"
and "this subsection" and similar phrases refer only to the sections or
subsections hereof in which such phrases occur. The word "or" is not exclusive,
and the word "including" (in its various forms) means "including without
limitation". Pronouns in masculine, feminine and neuter genders shall be
construed to include any other gender, and words in the singular form shall be
construed to include the plural and vice versa, unless the context otherwise
requires.
Section 1.5. Calculations and Determinations. All calculations under
the Loan Documents of interest chargeable with respect to Eurodollar Loans and
of fees shall be made on the basis of actual days elapsed (including the first
day but excluding the last) and a year of 360 days. All other calculations of
interest made under the Loan Documents shall be made on the basis of actual days
elapsed (including the first day but excluding the last) and a year of 365 or
366 days, as appropriate. Each determination by a Bank Party of amounts to be
paid under Sections 3.2 through 3.8 or any other matters which are to be
determined hereunder by a Bank Party (such as any Eurodollar Rate, LIBOR Rate,
Business Day, Interest Period, or Reserve Percentage) shall, in the absence of
manifest error, be conclusive and binding. Unless otherwise expressly provided
herein or unless Majority Lenders
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otherwise consent all financial statements and reports furnished to any Bank
Party hereunder shall be prepared and all financial computations and
determinations pursuant hereto shall be made in accordance with GAAP.
ARTICLE II - The Loans and Letters of Credit
Section 2.1. Commitments to Lend; Notes. Subject to the terms and
conditions hereof, each Lender agrees to make loans to Borrower (herein called
such Lender's "Loans") upon Borrower's request from time to time during the
Commitment Period, provided that (a) subject to Sections 3.3, 3.4 and 3.6, all
Lenders are requested to make Loans of the same Type in accordance with their
respective Percentage Shares and as part of the same Borrowing, (b) after giving
effect to such Loans, the Facility Usage does not exceed the Borrowing Base in
effect as of the date on which the requested Loans are to be made and (c) after
giving effect to such Loans, the outstanding principal amount of each Lender's
Loans, plus such Lender's Percentage Share of LC Obligations does not exceed
such Lender's Percentage Share of the Borrowing Base in effect as of the date on
which the requested Loans are to be made. The aggregate amount of all Loans in
any Borrowing must be greater than or equal to $2,500,000 or must equal the
remaining availability under the Borrowing Base. Borrower may have no more than
five Borrowings of Eurodollar Loans outstanding at any time. The obligation of
Borrower to repay to each Lender the aggregate amount of all Loans made by such
Lender, together with interest accruing in connection therewith, shall be
evidenced by a single promissory note (herein called such Lender's "Note") made
by Borrower payable to the order of such Lender in the form of Exhibit A with
appropriate insertions. The amount of principal owing on any Lender's Note at
any given time shall be the aggregate amount of all Loans theretofore made by
such Lender minus all payments of principal theretofore received by such Lender
on such Note. Interest on each Note shall accrue and be due and payable as
provided herein and therein, with Eurodollar Loans bearing interest at the
Eurodollar Rate plus the Eurodollar Margin and Base Rate Loans bearing interest
at the Base Rate plus the Base Rate Margin (subject to the applicability of the
Default Rate and limited by the provisions of Section 10.8). Subject to the
terms and conditions hereof, Borrower may borrow, repay, and reborrow hereunder,
provided that on the last day of the Commitment Period, unless sooner paid as
provided herein, all Loans shall be repaid in full.
Section 2.2. Requests for New Loans. Borrower must give to Agent
written notice (or telephonic notice promptly confirmed in writing) of any
requested Borrowing of new Loans to be advanced by Lenders. Each such notice
constitutes a "Borrowing Notice" hereunder and must:
(a) specify (i) the aggregate amount of any such Borrowing of new
Base Rate Loans and the date on which such Base Rate Loans are to be
advanced, or (ii) the aggregate amount of any such Borrowing of new
Eurodollar Loans, the date on which such Eurodollar Loans are to be
advanced (which shall be the first day of the Interest Period which is
to apply thereto), and the length of the applicable Interest Period;
and
(b) be received by Agent not later than 8:00 a.m., Los Angeles,
California time, on (i) the day on which any such Base Rate Loans are
to be made, or (ii) the third Business Day preceding the day on which
any such Eurodollar Loans are to be made.
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Each such written request or confirmation must be made in the form and substance
of the "Borrowing Notice" attached hereto as Exhibit B, duly completed. Each
such telephonic request shall be deemed a representation, warranty,
acknowledgment and agreement by Borrower as to the matters which are required to
be set out in such written confirmation. Upon receipt of any such Borrowing
Notice, Agent shall give each Lender prompt notice of the terms thereof. If all
conditions precedent to such new Loans have been met, each Lender will on the
date requested promptly remit to Agent at Agent's office in Los Angeles,
California the amount of such Lender's new Loan in immediately available funds,
and upon receipt of such funds, unless to its actual knowledge any conditions
precedent to such Loans have been neither met nor waived as provided herein,
Agent shall promptly make such Loans available to Borrower. Unless Agent shall
have received prompt notice from a Lender that such Lender will not make
available to Agent such Lender's new Loan, Agent may in its discretion assume
that such Lender has made such Loan available to Agent in accordance with this
section, and Agent may if it chooses, in reliance upon such assumption, make
such Loan available to Borrower. If and to the extent such Lender shall not so
make its new Loan available to Agent, such Lender and Borrower severally agree
to pay or repay to Agent within three days after demand the amount of such Loan
together with interest thereon, for each day from the date such amount was made
available to Borrower until the date such amount is paid or repaid to Agent,
with interest at (i) the Federal Funds Rate, if such Lender is making such
payment and (ii) the interest rate applicable at the time to the other new Loans
made on such date, if Borrower is making such repayment. If neither such Lender
nor Borrower pay or repay to Agent such amount within such three-day period,
Agent shall in addition to such amount be entitled to recover from such Lender
and from Borrower, on demand, interest thereon at the Default Rate, calculated
from the date such amount was made available to Borrower. The failure of any
Lender to make any new Loan to be made by it hereunder shall not relieve any
other Lender of its obligation hereunder, if any, to make its new Loan, but no
Lender shall be responsible for the failure of any other Lender to make any new
Loan to be made by such other Lender.
Section 2.3. Interest Rates; Continuations and Conversions of Existing
Loans.
(a) Interest Rates. Base Rate Loans (exclusive of any past due
principal or interest) from time to time outstanding shall bear interest on each
day outstanding at the sum of the Base Rate in effect on such day plus the Base
Rate Margin in effect on such day, but in no event in excess of the Highest
Lawful Rate. Each Eurodollar Loan (exclusive of any past due principal or
interest) shall bear interest on each day during the related Interest Period at
the related Eurodollar Rate in effect on such day plus the Eurodollar Margin in
effect on such day, but in no event in excess of the Highest Lawful Rate. Such
interest shall be payable on the dates specified in the Note. All past due
principal of and past due interest on the Loan shall bear interest on each day
outstanding at the Default Rate in effect on such day, and such interest shall
be due and payable daily as it accrues.
(b) Continuations and Conversions. Borrower may make the following
elections with respect to Loans already outstanding: to convert Base Rate Loans
to Eurodollar Loans, to convert Eurodollar Loans to Base Rate Loans on the last
day of the Interest Period applicable thereto, or to continue Eurodollar Loans
beyond the expiration of such Interest Period by designating a new Interest
Period to take effect at the time of such expiration. In making such elections,
Borrower may combine existing Loans made pursuant to separate Borrowings into
one new Borrowing or divide existing Loans made pursuant to one Borrowing into
separate new Borrowings, provided that Borrower may have no more than five
Borrowings of Eurodollar Loans outstanding at any time. To make any such
election, Borrower must give to Agent written notice (or telephonic notice
promptly confirmed in writing) of any
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such conversion or continuation of existing Loans, with a separate notice given
for each new Borrowing. Each such notice constitutes a "Continuation/Conversion
Notice" hereunder and must:
(i) specify the existing Loans which are to be continued or
converted;
(ii) specify (A) the aggregate amount of any Borrowing of Base
Rate Loans into which such existing Loans are to be continued or
converted and the date on which such continuation or conversion is to
occur, or (B) the aggregate amount of any Borrowing of Eurodollar Loans
into which such existing Loans are to be continued or converted, the
date on which such continuation or conversion is to occur (which shall
be the first day of the Interest Period which is to apply to such
Eurodollar Loans), and the length of the applicable Interest Period;
and
(iii) be received by Agent not later than 8:00 a.m., Los Angeles,
California time, on (A) the day on which any such continuation or
conversion to Base Rate Loans is to occur, or (B) the third Business
Day preceding the day on which any such continuation or conversion to
Eurodollar Loans is to occur.
Each such written request or confirmation must be made in the form and substance
of the "Continuation/Conversion Notice" attached hereto as Exhibit C, duly
completed. Each such telephonic request shall be deemed a representation,
warranty, acknowledgment and agreement by Borrower as to the matters which are
required to be set out in such written confirmation. Upon receipt of any such
Continuation/Conversion Notice, Agent shall give each Lender prompt notice of
the terms thereof. Each Continuation/Conversion Notice shall be irrevocable and
binding on Borrower. During the continuance of any Default, Borrower may not
make any election to convert existing Loans into Eurodollar Loans or continue
existing Loans as Eurodollar Loans. If (due to the existence of a Default or for
any other reason) Borrower fails to timely and properly give any notice of
continuation or conversion with respect to a Borrowing of existing Eurodollar
Loans at least three days prior to the end of the Interest Period applicable
thereto, such Eurodollar Loans shall automatically be converted into Base Rate
Loans at the end of such Interest Period. No new funds shall be repaid by
Borrower or advanced by any Lender in connection with any continuation or
conversion of existing Loans pursuant to this section, and no such continuation
or conversion shall be deemed to be a new advance of funds for any purpose; such
continuations and conversions merely constitute a change in the interest rate
applicable to already outstanding Loans.
Section 2.4. Use of Proceeds. Borrower shall use all Loans: (i) to
repay existing indebtedness of Hugoton Energy Corporation contemporaneously with
the Hugoton Merger up to the amount of $105,000,000.00 plus accrued and unpaid
interest, (ii) to repay existing indebtedness of DLB Oil & Gas, Inc.
contemporaneously with the DLB Merger up to the amount of $85,000,000.00, (iii)
to pay the purchase price for other acquisitions approved by Majority Lenders,
(iv) to finance developmental drilling, (v) to finance capital expenditures,
(vi) to refinance Matured LC Obligations, (vii) provide working capital for its
operations and (viii) for other general business purposes, provided, that until
both Mergers have been consummated, no Loans may be requested for the purposes
under clauses (iii) through (viii) which cause the Applicable Initial Borrowing
Base, minus the Facility Usage, to be less than the amounts to be available for
the purposes under clauses (i) and (ii), as applicable. Borrower shall not use
any Loans for the purpose of financing an acquisition of a Person which is
opposed by the Board of Directors of the Person being acquired. Borrower shall
use all Letters of Credit to assure the payment or performance of obligations or
commitments arising the ordinary course of business and for
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other general business purposes, but it shall not use Letters of Credit directly
or indirectly to secure the payment of Indebtedness. In no event shall the funds
from any Loan or any Letter of Credit be used directly or indirectly by any
Person for personal, family, household or agricultural purposes or for the
purpose, whether immediate, incidental or ultimate, of purchasing, acquiring or
carrying any "margin stock" or any "margin securities" (as such terms are
defined respectively in Regulation U and Regulation G promulgated by the Board
of Governors of the Federal Reserve System) or to extend credit to others
directly or indirectly for the purpose of purchasing or carrying any such margin
stock or margin securities. Borrower represents and warrants that Borrower is
not engaged principally, or as one of Borrower's important activities, in the
business of extending credit to others for the purpose of purchasing or carrying
such margin stock or margin securities.
Section 2.5. Fees.
(a) Commitment Fees. In consideration of each Lender's commitment to
make Loans, Borrower will pay to Agent for the account of each Lender a
commitment fee determined on a daily basis by applying the Commitment Fee Rate
to such Lender's Percentage Share of the unused portion of the Borrowing Base on
each day during the Commitment Period, determined for each such day by deducting
from the amount of the Borrowing Base at the end of such day the Facility Usage.
This commitment fee shall be due and payable in arrears on the last day of each
March, June, September and December and at the end of the Commitment Period.
(c) Agent's Fees. In addition to all other amounts due to Agent under
the Loan Documents, Borrower will pay fees to Agent as described in a letter
agreement of even date herewith between Agent and Borrower.
Section 2.6. Optional Prepayments. Borrower may, upon five Business
Days' notice to each Lender, from time to time and without premium or penalty
prepay the Notes, in whole or in part, so long as the aggregate amounts of all
partial prepayments of principal on the Notes equals $1,000,000 or any higher
integral multiple of $1,000,000, so long as Borrower does not prepay any
Eurodollar Loan. Each prepayment of principal under this section shall be
accompanied by all interest then accrued and unpaid on the principal so prepaid.
Any principal or interest prepaid pursuant to this section shall be in addition
to, and not in lieu of, all payments otherwise required to be paid under the
Loan Documents at the time of such prepayment
Section 2.7. Mandatory Prepayments.
(a) If at any time the Facility Usage is in excess of the Borrowing
Base (such excess being herein called a "Borrowing Base Deficiency"), Borrower
shall, after Agent gives notice of such fact to Borrower (a "Deficiency
Notice"):
(i) within thirty (30) days after the Deficiency Notice give
notice to Agent electing to prepay the principal of the Loans in a
single payment, in which event Borrower shall prepay the principal of
the Loans in an aggregate amount at least equal to such Borrowing Base
Deficiency (or, if the Loans have been paid in full, pay to LC Issuer
LC Collateral as required under Section 2.16(a)) on or before the date
which is sixty (60) days after the Deficiency Notice, or
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(ii) within 30 days after the Deficiency Notice give notice to
Agent electing to prepay the principal of the Loans in installments, in
which event Borrower shall prepay the principal of the Loans in six
consecutive monthly installments, in an aggregate amount at least equal
to such Borrowing Base Deficiency (or, if the Loans have been paid in
full, pay to LC Issuer LC Collateral as required under Section
2.16(a)), with the first such installment due 30 days after the
Deficiency Notice, the next five such installments due on the same day
of each consecutive month, each such installment being in the amount of
one-sixth of such Borrowing Base Deficiency, or
(iii) within 30 days after the Deficiency Notice, certify to
Agent that Borrower has marketable title, free of any Liens, to oil and
gas properties not included in such existing Borrowing Base, which
properties were not acquired with Indebtedness, in an amount which
eliminates such Borrowing Base Deficiency, and provide to each Lender
the same information regarding such property as would be required for
an evaluation by Required Lenders under Section 2.9. If Required
Lenders determine that such properties will not serve to eliminate such
Borrowing Base Deficiency, then, within five Business Days after
receiving notice of such determination, Borrower will elect to make,
and thereafter make, the prepayments specified in either of the
preceding subsections (i) or (ii) of this subsection (a).
(b) Each prepayment of principal under this section shall be
accompanied by all interest then accrued and unpaid on the principal so prepaid.
Any principal or interest prepaid pursuant to this section shall be in addition
to, and not in lieu of, all payments otherwise required to be paid under the
Loan Documents at the time of such prepayment.
(c) During the pendency of a Borrowing Base Deficiency, or at any time
after the occurrence and during the continuance of an Event of Default, all net
proceeds of any securities issued by any Restricted Person or of any asset sale
shall be applied to prepay the obligations.
Section 2.8. Initial Borrowing Base. During the period from the date
hereof to the first Determination Date the Borrowing Base shall be the
Applicable Initial Borrowing Base.
Section 2.9. Subsequent Determinations of Borrowing Base.
(a) By March 15 and September 15 of each year, Borrower shall furnish
to each Lender all information, reports and data which Agent has then requested
concerning Restricted Persons' businesses and properties (including their oil
and gas properties and interests and the reserves and production relating
thereto), together with the Engineering Reports described in Section 6.2(f) and
(g). Borrower or Required Lenders shall each have the right to request
additional redeterminations of the Borrowing Base by notice to the other,
whereupon to the extent requested by any Lender, Borrower shall promptly, and in
any event within forty-five (45) days after such notice, furnish to each Lender
the same information required by the preceding sentence together with the
Engineering Report described in Section 6.2(g). Within forty-five (45) days
after receiving such information, reports and data, or as promptly thereafter as
practicable, Required Lenders shall agree upon an amount for the Borrowing Base
and Agent shall by notice to Borrower designate such amount as the new Borrowing
Base available to Borrower hereunder, which designation shall take effect
immediately on the date such notice is sent (herein called a "Determination
Date") and shall remain in effect until but not including the next date as of
which the Borrowing Base is redetermined. If Borrower does not furnish all such
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information, reports and data by the date specified above in this section, Agent
may nonetheless designate the Borrowing Base at any amount which Required
Lenders determine and may redesignate the Borrowing Base from time to time
thereafter until each Lender receives all such information, reports and data,
whereupon Required Lenders shall designate a new Borrowing Base as described
above. Required Lenders shall determine the amount of the Borrowing Base based
upon (i) the loan value which they in their discretion assign to the various oil
and gas properties of Restricted Persons at the time in question and (ii) upon
such other factors (including without limitation the assets, liabilities, cash
flow, hedged and unhedged exposure to price, foreign exchange rate, and interest
rate changes, business, properties, prospects, management and ownership of
Borrower and its Affiliates) as they in their discretion deem significant. It is
expressly understood that Lenders and Agent have no obligation to agree upon or
designate the Borrowing Base at any particular amount, whether in relation to
the aggregate face amounts of the Notes or otherwise, and that Lenders'
commitments to advance funds hereunder is determined by reference to the
Borrowing Base from time to time in effect, which Borrowing Base shall be used
for calculating commitment fees under Section 2.5 and, to the extent permitted
by Law and regulatory authorities, for the purposes of capital adequacy
determination and reimbursements under Section 3.2. Any determination of the
Borrowing Base at an amount in excess of the lesser of (i) $300,000,000 or (ii)
150% of the Applicable Initial Borrowing Base shall require the determination
and agreement of all Lenders.
(b) Borrowing Base Fees. In consideration of each increase of the
Borrowing Base over the highest Borrowing Base previously in effect (but
specifically excluding any increase to an amount less than or equal to
$220,000,000, such increase being governed by the fees specified in the letter
agreement of even date herewith between Agent and Borrower), Borrower will pay
to Agent for the account of each Lender a fee determined by applying the
applicable Borrowing Base Fee Rate to such Lender's portion of such Borrowing
Base increase. This fee shall be due and payable no later than 15 days after the
date of the Determination Date.
Section 2.10. Borrower's Reduction of the Borrowing Base. Borrower may,
during the fifteen-day period beginning on each Determination Date (each such
period being called in this section an "Option Period"), reduce the Borrowing
Base from the amount designated by Agent to any lesser amount. To exercise such
option Borrower must within an Option Period send notice to Agent of the amount
of the Borrowing Base chosen by Borrower. If Borrower does not affirmatively
exercise this option during an Option Period, the Borrowing Base shall be the
amount designated by Agent. Any choice by Borrower of a Borrowing Base shall be
effective as of the first day of the Option Period during which such choice was
made and shall continue in effect until the next date as of which the Borrowing
Base is redetermined.
Section 2.11. Letters of Credit. Subject to the terms and conditions
hereof, Borrower may during the Commitment Period request LC Issuer to issue one
or more Letters of Credit, provided that, after taking such Letter of Credit
into account:
(a) the Facility Usage does not exceed the Borrowing Base at such
time; and
(b) the aggregate amount of LC Obligations at such time does not
exceed $15,000,000; and
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(c) the expiration date of such Letter of Credit is prior to the
end of the Commitment Period;
(d) such Letter of Credit is to be used for general corporate
purposes of Borrower;
(e) such Letter of Credit is not directly or indirectly used to
assure payment of or otherwise support any Indebtedness of any Person;
(f) the issuance of such Letter of Credit will be in compliance
with all applicable governmental restrictions, policies, and guidelines
and will not subject LC Issuer to any cost which is not reimbursable
under Article III;
(g) the form and terms of such Letter of Credit are acceptable to
LC Issuer in its sole discretion; and
(h) all other conditions in this Agreement to the issuance of
such Letter of Credit have been satisfied.
LC Issuer will honor any such request if the foregoing conditions (a) through
(h) (in the following Section 2.12 called the "LC Conditions") have been met as
of the date of issuance of such Letter of Credit. LC Issuer may choose to honor
any such request for any other Letter of Credit but has no obligation to do so
and may refuse to issue any other requested Letter of Credit for any reason
which LC Issuer in its sole discretion deems relevant.
Section 2.12. Requesting Letters of Credit. Borrower must make written
application for any Letter of Credit at least five Business Days before the date
on which Borrower desires for LC Issuer to issue such Letter of Credit. By
making any such written application Borrower shall be deemed to have represented
and warranted that the LC Conditions described in Section 2.11 will be met as of
the date of issuance of such Letter of Credit. Each such written application for
a Letter of Credit must be made in writing in the form and substance of Exhibit
E, the terms and provisions of which are hereby incorporated herein by reference
(or in such other form as may mutually be agreed upon by LC Issuer and
Borrower). Two Business Days after the LC Conditions for a Letter of Credit have
been met as described in Section 2.11 (or if LC Issuer otherwise desires to
issue such Letter of Credit), LC Issuer will issue such Letter of Credit at LC
Issuer's office in Los Angeles, California. If any provisions of any LC
Application conflict with any provisions of this Agreement, the provisions of
this Agreement shall govern and control.
Section 2.13. Reimbursement and Participations.
(a) Reimbursement by Borrower. Each Matured LC Obligation shall
constitute a loan by LC Issuer to Borrower. Borrower promises to pay to LC
Issuer, or to LC Issuer's order, on demand, the full amount of each Matured LC
Obligation, together with interest thereon at the Base Rate plus the Base Rate
Margin from the date such matured LC obligation accrues until the third Business
Day after demand, and thereafter at the Default Rate until paid, but in no event
in excess of the Highest Lawful Rate.
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(b) Letter of Credit Advances. If the beneficiary of any Letter of
Credit makes a draft or other demand for payment thereunder then Borrower may,
during the interval between the making thereof and the honoring thereof by LC
Issuer, request Lenders to make Loans to Borrower in the amount of such draft or
demand, which Loans shall be made concurrently with LC Issuer's payment of such
draft or demand and shall be immediately used by LC Issuer to repay the amount
of the resulting Matured LC Obligation. Such a request by Borrower shall be made
in compliance with all of the provisions hereof, provided that for the purposes
of the first sentence of Section 2.1 the amount of such Loans shall be
considered but the amount of the Matured LC Obligation to be concurrently paid
by such Loans shall not be considered.
(c) Participation by Lenders. LC Issuer irrevocably agrees to grant and
hereby grants to each Lender, and -- to induce LC Issuer to issue Letters of
Credit hereunder -- each Lender irrevocably agrees to accept and purchase and
hereby accepts and purchases from LC Issuer, on the terms and conditions
hereinafter stated and for such Lender's own account and risk an undivided
interest equal to such Lender's Percentage Share of LC Issuer's obligations and
rights under each Letter of Credit issued hereunder and the amount of each
Matured LC Obligation paid by LC Issuer thereunder. Each Lender unconditionally
and irrevocably agrees with LC Issuer that, if a Matured LC Obligation is paid
under any Letter of Credit for which LC Issuer is not reimbursed in full by
Borrower in accordance with the terms of this Agreement and the related LC
Application (including any reimbursement by means of concurrent Loans or by the
application of LC Collateral), such Lender shall (in all circumstances and
without set-off or counterclaim) pay to LC Issuer on demand, in immediately
available funds at LC Issuer's address for notices hereunder, such Lender's
Percentage Share of such Matured LC Obligation (or any portion thereof which has
not been reimbursed by Borrower). Each Lender's obligation to pay LC Issuer
pursuant to the terms of this subsection is irrevocable and unconditional. If
any amount required to be paid by any Lender to LC Issuer pursuant to this
subsection is not paid by such Lender to LC Issuer within three Business Days
after the date such payment is due, LC Issuer shall in addition to such amount
be entitled to recover from such Lender, on demand, interest thereon calculated
from such due date at the Default Rate.
(d) Distributions to Participants. Whenever LC Issuer has in accordance
with this section received from any Lender payment of such Lender's Percentage
Share of any Matured LC Obligation, if LC Issuer thereafter receives any payment
of such Matured LC Obligation or any payment of interest thereon (whether
directly from Borrower or by application of LC Collateral or otherwise, and
excluding only interest for any period prior to LC Issuer's demand that such
Lender make such payment of its Percentage Share), LC Issuer will distribute to
such Lender its Percentage Share of the amounts so received by LC Issuer;
provided, however, that if any such payment received by LC Issuer must
thereafter be returned by LC Issuer, such Lender shall return to LC Issuer the
portion thereof which LC Issuer has previously distributed to it.
(e) Calculations. A written advice setting forth in reasonable detail
the amounts owing under this section, submitted by LC Issuer to Borrower or any
Lender from time to time, shall be conclusive, absent manifest error, as to the
amounts thereof.
Section 2.14. Letter of Credit Fees. In consideration of LC Issuer's
issuance of any Letter of Credit, Borrower agrees to pay (a) to Agent, for the
account of all Lenders, a letter of credit fee determined on a daily basis by
applying the Letter of Credit Fee Rate to such Lender's Percentage Share of the
face amount of the Letter of Credit (but in no event less than $500 per annum),
and (b) to
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such LC Issuer for its own account, a letter of credit fronting fee at a rate
specified in a separate letter agreement between Borrower and such LC Issuer
(but in no event less than $250 per annum). The letter of credit fee and the
letter of credit fronting fee with respect to each Letter of Credit shall be due
and payable in arrears on the last day of each March, June, September and
December for the period that such Letter of Credit is outstanding.
Section 2.15. No Duty to Inquire.
(a) Drafts and Demands. LC Issuer is authorized and instructed to
accept and pay drafts and demands for payment under any Letter of Credit without
requiring, and without responsibility for, any determination as to the existence
of any event giving rise to said draft, either at the time of acceptance or
payment or thereafter. LC Issuer is under no duty to determine the proper
identity of anyone presenting such a draft or making such a demand (whether by
tested telex or otherwise) as the officer, representative or agent of any
beneficiary under any Letter of Credit, and payment by LC Issuer to any such
beneficiary when requested by any such purported officer, representative or
agent is hereby authorized and approved. Borrower agrees to hold LC Issuer and
each other Bank Party harmless and indemnified against any liability or claim in
connection with or arising out of the subject matter of this section, WHICH
INDEMNITY SHALL APPLY WHETHER OR NOT ANY SUCH LIABILITY OR CLAIM IS IN ANY WAY
OR TO ANY EXTENT CAUSED, IN WHOLE OR IN PART, BY ANY NEGLIGENT ACT OR OMISSION
OF ANY KIND BY ANY BANK PARTY, provided only that no Bank Party shall be
entitled to indemnification for that portion, if any, of any liability or claim
which is proximately caused by its own individual gross negligence or willful
misconduct, as determined in a final judgment.
(b) Extension of Maturity. If the maturity of any Letter of Credit is
extended by its terms or by Law or governmental action, if any extension of the
maturity or time for presentation of drafts or any other modification of the
terms of any Letter of Credit is made at the request of any Restricted Person,
or if the amount of any Letter of Credit is increased at the request of any
Restricted Person, this Agreement shall be binding upon all Restricted Persons
with respect to such Letter of Credit as so extended, increased or otherwise
modified, with respect to drafts and property covered thereby, and with respect
to any action taken by LC Issuer, LC Issuer's correspondents, or any Bank Party
in accordance with such extension, increase or other modification.
(c) Transferees of Letters of Credit. If any Letter of Credit provides
that it is transferable, LC Issuer shall have no duty to determine the proper
identity of anyone appearing as transferee of such Letter of Credit, nor shall
LC Issuer be charged with responsibility of any nature or character for the
validity or correctness of any transfer or successive transfers, and payment by
LC Issuer to any purported transferee or transferees as determined by LC Issuer
is hereby authorized and approved, and Borrower further agrees to hold LC Issuer
and each other Bank Party harmless and indemnified against any liability or
claim in connection with or arising out of the foregoing, WHICH INDEMNITY SHALL
APPLY WHETHER OR NOT ANY SUCH LIABILITY OR CLAIM IS IN ANY WAY OR TO ANY EXTENT
CAUSED, IN WHOLE OR IN PART, BY ANY NEGLIGENT ACT OR OMISSION OF ANY KIND BY ANY
BANK PARTY, provided only that no Bank Party shall be entitled to
indemnification for that portion, if any, of any liability or claim which is
proximately caused by its own individual gross negligence or willful misconduct,
as determined in a final judgment.
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Section 2.16. LC Collateral.
(a) LC Obligations in Excess of Borrowing Base. If, after the making of
all mandatory prepayments required under Section 2.7, the principal balance of
the Loans is zero, but outstanding LC Obligations will exceed the Borrowing
Base, then in addition to such prepayment Borrower will immediately pay to LC
Issuer an amount equal to such excess. LC Issuer will hold such amount as
security for the remaining LC Obligations (all such amounts held as security for
LC Obligations being herein collectively called "LC Collateral") until such LC
Obligations become Matured LC Obligations, at which time such LC Collateral may
be applied to such Matured LC Obligations. Neither this subsection nor the
following subsection shall, however, limit or impair any rights which LC Issuer
may have under any other document or agreement relating to any Letter of Credit
or LC Obligation, including any LC Application, or any rights which any Bank
Party may have to otherwise apply any payments by Borrower and any LC Collateral
under Section 3.1.
(b) Acceleration of LC Obligations. If the Obligations or any part
thereof become immediately due and payable pursuant to Section 8.1 then, unless
Majority Lenders otherwise specifically elect to the contrary (which election
may thereafter by retracted by Majority Lenders at any time), all LC Obligations
shall become immediately due and payable without regard to whether or not actual
drawings or payments on the Letters of Credit have occurred, and Borrower shall
be obligated to pay to LC Issuer immediately an amount equal to the aggregate LC
Obligations which are then outstanding. All amounts so paid shall first be
applied to Matured LC Obligations and then held by LC Issuer as LC Collateral
until such LC Obligations become Matured LC Obligations, at which time such LC
Collateral shall be applied to such Matured LC Obligations.
(c) Investment of LC Collateral. Pending application thereof, all LC
Collateral shall be invested by LC Issuer in such investments as LC Issuer may
choose in its sole discretion. All interest on such investments shall be
reinvested or applied to Matured LC Obligations. When all Obligations have been
satisfied in full, including all LC Obligations, all Letters of Credit have
expired or been terminated, and all of Borrower's reimbursement obligations in
connection therewith have been satisfied in full, LC Issuer shall release any
remaining LC Collateral. Borrower hereby assigns and grants to LC Issuer a
continuing security interest in all LC Collateral paid by it to LC Issuer, all
investments purchased with such LC Collateral, and all proceeds thereof to
secure its Matured LC Obligations and its Obligations under this Agreement, the
Notes, and the other Loan Documents. Borrower further agrees that LC Issuer
shall have all of the rights and remedies of a secured party under the Uniform
Commercial Code as adopted in the State of Texas with respect to such security
interest and that an Event of Default under this Agreement shall constitute a
default for purposes of such security interest.
(d) Payment of LC Collateral. When Borrower is required to provide LC
Collateral for any reason and fails to do so on the day when required, LC Issuer
may without notice to Borrower or any other Restricted Person provide such LC
Collateral (whether by application of proceeds of other Collateral, by transfers
from other accounts maintained with LC Issuer, or otherwise) using any available
funds of Borrower or any other Person also liable to make such payments. Any
such amounts which are required to be provided as LC Collateral and which are
not provided on the date required shall, for purposes of each Security Document,
be considered past due Obligations owing hereunder, and LC Issuer is hereby
authorized to exercise its respective rights under each Security Document to
obtain such amounts.
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ARTICLE III - Payments to Lenders
Section 3.1. General Procedures. Borrower will make each payment which
it owes under the Loan Documents to Agent for the account of the Bank Party to
whom such payment is owed. Each such payment must be received by Agent not later
than 9:00 a.m., Los Angeles, California time, on the date such payment becomes
due and payable, in lawful money of the United States of America, without
set-off, deduction or counterclaim, and in immediately available funds. Any
payment received by Agent after such time will be deemed to have been made on
the next following Business Day. Should any such payment become due and payable
on a day other than a Business Day, the maturity of such payment shall be
extended to the next succeeding Business Day, and, in the case of a payment of
principal or past due interest, interest shall accrue and be payable thereon for
the period of such extension as provided in the Loan Document under which such
payment is due. Each payment under a Loan Document shall be due and payable at
the place provided therein and, if no specific place of payment is provided,
shall be due and payable at the place of payment of Agent's Note. When Agent
collects or receives money on account of the Obligations, Agent shall distribute
all money so collected or received, and each Bank Party shall apply all such
money so distributed, as follows:
(a) first, for the payment of all Obligations which are then due
(and if such money is insufficient to pay all such Obligations, first
to any reimbursements due Agent under Section 6.9 or 10.4 and then to
the partial payment of all other Obligations then due in proportion to
the amounts thereof, or as Bank Parties shall otherwise agree);
(b) then for the prepayment of amounts owing under the Loan
Documents (other than principal on the Notes) if so specified by
Borrower;
(c) then for the prepayment of principal on the Notes, together
with accrued and unpaid interest on the principal so prepaid; and
(d) last, for the payment or prepayment of any other Obligations.
All payments applied to principal or interest on any Note shall be applied first
to any interest then due and payable, then to principal then due and payable,
and last to any prepayment of principal and interest in compliance with Section
2.6. All distributions of amounts described in any of subsections (b), (c) or
(d) above shall be made by Agent pro rata to each Bank Party then owed
Obligations described in such subsection in proportion to all amounts owed to
all Bank Parties which are described in such subsection; provided that if any
Lender then owes payments to LC Issuer for the purchase of a participation under
Section 2.13(c) hereof, any amounts otherwise distributable under this section
to such Lender shall be deemed to belong to LC Issuer, to the extent of such
unpaid payments, and Agent shall apply such amounts to make such unpaid payments
rather than distribute such amounts to such Lender.
Section 3.2. Increased Cost and Reduced Return.
(a) If, after the date hereof, the adoption of any applicable
law, rule, or regulation, or any change in any applicable law, rule, or
regulation, or any change in the interpretation or administration
thereof by any governmental authority, central bank, or comparable
agency
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charged with the interpretation or administration thereof, or
compliance by any Lender (or its Applicable Lending Office) with any
request or directive (whether or not having the force of law) of any
such governmental authority, central bank, or comparable agency:
(i) shall subject such Lender (or its Applicable Lending
Office) to any tax, duty, or other charge with respect to any
Eurodollar Loans, its Notes, or its obligation to make Eurodollar
Loans, or change the basis of taxation of any amounts payable to
such Lender (or its Applicable Lending Office) under this
Agreement or its Notes in respect of any Eurodollar Loans (other
than taxes imposed on the overall net income of such Lender by
the jurisdiction in which such Lender has its principal office or
such Applicable Lending Office);
(ii) shall impose, modify, or deem applicable any reserve,
special deposit, assessment, or similar requirement (other than
the Reserve Requirement utilized in the determination of the
Eurodollar Rate) relating to any extensions of credit or other
assets of, or any deposits with or other liabilities or
commitments of, such Lender (or its Applicable Lending Office),
including the Commitment of such Lender hereunder; or
(iii) shall impose on such Lender (or its Applicable Lending
Office) or the London interbank market any other condition
affecting this Agreement or its Notes or any of such extensions
of credit or liabilities or commitments;
and the result of any of the foregoing is to increase the cost to such
Lender (or its Applicable Lending Office) of making, Converting into,
continuing, or maintaining any Eurodollar Loans or to reduce any sum
received or receivable by such Lender (or its Applicable Lending
Office) under this Agreement or its Notes with respect to any
Eurodollar Loans, then Borrower shall pay to such Lender on demand such
amount or amounts as will compensate such Lender for such increased
cost or reduction. If any Lender requests compensation by Borrower
under this Section 3.2(a), Borrower may, by notice to such Lender (with
a copy to Agent), suspend the obligation of such Lender to make or
continue Loans of the Type with respect to which such compensation is
requested, or to Convert Loans of any other Type into Loans of such
Type, until the event or condition giving rise to such request ceases
to be in effect (in which case the provisions of Section 3.5 shall be
applicable); provided that such suspension shall not affect the right
of such Lender to receive the compensation so requested.
(b) If, after the date hereof, any Lender shall have determined
that the adoption of any applicable law, rule, or regulation regarding
capital adequacy or any change therein or in the interpretation or
administration thereof by any governmental authority, central bank, or
comparable agency charged with the interpretation or administration
thereof, or any request or directive regarding capital adequacy
(whether or not having the force of law) of any such governmental
authority, central bank, or comparable agency, has or would have the
effect of reducing the rate of return on the capital of such Lender or
any corporation controlling such Lender as a consequence of such
Lender's obligations hereunder to a level below that which such Lender
or such corporation could have achieved but for such adoption, change,
request, or directive (taking into consideration its policies with
respect to capital adequacy), then from time to time upon demand
Borrower shall pay to such Lender such additional amount or
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amounts as will compensate such Lender for such reduction but only to
the extent that such Lender has not been compensated therefor by an
increase in the Eurodollar Rate.
(c) Each Lender shall promptly notify Borrower and Agent of any
event of which it has knowledge, occurring after the date hereof, which
will entitle such Lender to compensation pursuant to this Section and
will designate a different Applicable Lending Office if such
designation will avoid the need for, or reduce the amount of, such
compensation and will not, in the judgment of such Lender, be otherwise
disadvantageous to it. Any Lender claiming compensation under this
Section shall furnish to Borrower and Agent a statement setting forth
the additional amount or amounts to be paid to it hereunder which shall
be conclusive in the absence of manifest error. In determining such
amount, such Lender shall act in good faith and may use any reasonable
averaging and attribution methods.
Section 3.3. Limitation on Types of Loans. If on or prior to the first
day of any Interest Period for any Eurodollar Loan:
(a) Agent determines (which determination shall be conclusive)
that by reason of circumstances affecting the relevant market, adequate
and reasonable means do not exist for ascertaining the Eurodollar Rate
for such Interest Period; or
(b) the Majority Lenders determine (which determination shall be
conclusive) and notify Agent that the Eurodollar Rate will not
adequately and fairly reflect the cost to Lenders of funding Eurodollar
Loans for such Interest Period;
then Agent shall give Borrower prompt notice thereof specifying the relevant
Type of Loans and the relevant amounts or periods, and so long as such condition
remains in effect, Lenders shall be under no obligation to make additional Loans
of such Type, continue Loans of such Type, or to Convert Loans of any other Type
into Loans of such Type and Borrower shall, on the last day(s) of the then
current Interest Period(s) for the outstanding Loans of the affected Type,
either prepay such Loans or Convert such Loans into another Type of Loan in
accordance with the terms of this Agreement.
Section 3.4. Illegality. Notwithstanding any other provision of this
Agreement, in the event that it becomes unlawful for any Lender or its
Applicable Lending Office to make, maintain, or fund Eurodollar Loans hereunder,
then such Lender shall promptly notify Borrower thereof and such Lender's
obligation to make or continue Eurodollar Loans and to Convert other Types of
Loans into Eurodollar Loans shall be suspended until such time as such Lender
may again make, maintain, and fund Eurodollar Loans (in which case the
provisions of Section 3.5 shall be applicable).
Section 3.5. Treatment of Affected Loans. If the obligation of any
Lender to make a particular Type of Eurodollar Loan or to continue, or to
Convert Loans of any other Type into, Loans of a particular Type shall be
suspended pursuant to Section 3.2 or 3.4 hereof (Loans of such Type being herein
called "Affected Loans" and such Type being herein called the "Affected Type"),
such Lender's Affected Loans shall be automatically Converted into Base Rate
Loans on the last day(s) of the then current Interest Period(s) for Affected
Loans (or, in the case of a Conversion required by Section 3.4 hereof, on such
earlier date as such Lender may specify to Borrower with a copy to Agent) and,
unless and until such Lender gives notice as provided below that the
circumstances specified in Section 3.2 or 3.4 hereof that gave rise to such
Conversion no longer exist:
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(a) to the extent that such Lender's Affected Loans have been so
Converted, all payments and prepayments of principal that would
otherwise be applied to such Lender's Affected Loans shall be applied
instead to its Base Rate Loans; and
(b) all Loans that would otherwise be made or continued by such
Lender as Loans of the Affected Type shall be made or continued instead
as Base Rate Loans, and all Loans of such Lender that would otherwise
be Converted into Loans of the Affected Type shall be Converted instead
into (or shall remain as) Base Rate Loans.
If such Lender gives notice to Borrower (with a copy to Agent) that the
circumstances specified in Section 3.2 or 3.4 hereof that gave rise to the
Conversion of such Lender's Affected Loans pursuant to this Section 3.5 no
longer exist (which such Lender agrees to do promptly upon such circumstances
ceasing to exist) at a time when Loans of the Affected Type made by other
Lenders are outstanding, such Lender's Base Rate Loans shall be automatically
Converted, on the first day(s) of the next succeeding Interest Period(s) for
such outstanding Loans of the Affected Type, to the extent necessary so that,
after giving effect thereto, all Loans held by Lenders holding Loans of the
Affected Type and by such Lender are held pro rata (as to principal amounts,
Types, and Interest Periods) in accordance with their Percentage Shares of the
Commitment.
Section 3.6. Compensation. Upon the request of any Lender, Borrower
shall pay to such Lender such amount or amounts as shall be sufficient (in the
reasonable opinion of such Lender) to compensate it for any loss, cost, or
expense (including loss of anticipated profits) incurred by it as a result of:
(a) any payment, prepayment, or Conversion of a Eurodollar Loan
for any reason (including, without limitation, the acceleration of the
Loans pursuant to Section 8.1) on a date other than the last day of the
Interest Period for such Loan; or
(b) any failure by Borrower for any reason (including, without
limitation, the failure of any condition precedent specified in Article
IV to be satisfied) to borrow, Convert, continue, or prepay a
Eurodollar Loan on the date for such borrowing, Conversion,
continuation, or prepayment specified in the relevant notice of
borrowing, prepayment, continuation, or Conversion under this
Agreement.
Section 3.7. Taxes.
(a) Any and all payments by Borrower to or for the account of any
Lender or Agent hereunder or under any other Loan Document shall be
made free and clear of and without deduction for any and all present or
future taxes, duties, levies, imposts, deductions, charges or
withholdings, and all liabilities with respect thereto, excluding, in
the case of each Lender and Agent, taxes imposed on its income, and
franchise taxes imposed on it, by the jurisdiction under the laws of
which such Lender (or its Applicable Lending Office) or Agent (as the
case may be) is organized or any political subdivision thereof (all
such non-excluded taxes, duties, levies, imposts, deductions, charges,
withholdings, and liabilities being hereinafter referred to as
"Taxes"). If Borrower shall be required by law to deduct any Taxes from
or in respect of any sum payable under this Agreement or any other Loan
Document to any Lender or Agent, (i) the sum payable shall be increased
as necessary so that after making
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all required deductions (including deductions applicable to additional
sums payable under this Section 3.7) such Lender or Agent receives an
amount equal to the sum it would have received had no such deductions
been made, (ii) Borrower shall make such deductions, and (iii) Borrower
shall pay the full amount deducted to the relevant taxation authority
or other authority in accordance with applicable law.
(b) In addition, Borrower agrees to pay any and all present or
future stamp or documentary taxes and any other excise or property
taxes or charges or similar levies which arise from any payment made
under this Agreement or any other Loan Document or from the execution
or delivery of, or otherwise with respect to, this Agreement or any
other Loan Document (hereinafter referred to as "Other Taxes").
(c) Borrower agrees to indemnify each Lender and Agent for the
full amount of Taxes and Other Taxes (including, without limitation,
any Taxes or Other Taxes imposed or asserted by any jurisdiction on
amounts payable under this Section 3.7) paid by such Lender or Agent
(as the case may be) and any liability (including penalties, interest,
and expenses) arising therefrom or with respect thereto.
(d) Each Lender organized under the laws of a jurisdiction
outside the United States, on or prior to the date of its execution and
delivery of this Agreement in the case of each Lender listed on the
signature pages hereof and on or prior to the date on which it becomes
a Lender in the case of each other Lender, and from time to time
thereafter if requested in writing by Borrower or Agent (but only so
long as such Lender remains lawfully able to do so), shall provide
Borrower and Agent with (i) Internal Revenue Service Form 1001 or 4224,
as appropriate, or any successor form prescribed by the Internal
Revenue Service, certifying that such Lender is entitled to benefits
under an income tax treaty to which the United States is a party which
reduces the rate of withholding tax on payments of interest or
certifying that the income receivable pursuant to this Agreement is
effectively connected with the conduct of a trade or business in the
United States, (ii) Internal Revenue Service Form W-8 or W-9, as
appropriate, or any successor form prescribed by the Internal Revenue
Service, and (iii) any other form or certificate required by any taxing
authority (including any certificate required by Sections 871(h) and
881(c) of the Internal Revenue Code), certifying that such Lender is
entitled to an exemption from or a reduced rate of tax on payments
pursuant to this Agreement or any of the other Loan Documents.
(e) For any period with respect to which a Lender has failed to
provide Borrower and Agent with the appropriate form pursuant to
Section 3.7(d) (unless such failure is due to a change in treaty, law,
or regulation occurring subsequent to the date on which a form
originally was required to be provided), such Lender shall not be
entitled to indemnification under Section 3.7(a) or 3.7(b) with respect
to Taxes imposed by the United States; provided, however, that should a
Lender, which is otherwise exempt from or subject to a reduced rate of
withholding tax, become subject to Taxes because of its failure to
deliver a form required hereunder, Borrower shall take such steps as
such Lender shall reasonably request to assist such Lender to recover
such Taxes.
(f) If Borrower is required to pay additional amounts to or for
the account of any Lender pursuant to this Section 3.7, then such
Lender will agree to use reasonable efforts to
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change the jurisdiction of its Applicable Lending Office so as to
eliminate or reduce any such additional payment which may thereafter
accrue if such change, in the judgment of such Lender, is not otherwise
disadvantageous to such Lender and in the event Lender is reimbursed
for an amount paid by Borrower pursuant to this Section 3.7, it shall
promptly return such amount to Borrower.
(g) Within thirty (30) days after the date of any payment of
Taxes, Borrower shall furnish to Agent the original or a certified copy
of a receipt evidencing such payment.
(h) Without prejudice to the survival of any other agreement of
Borrower hereunder, the agreements and obligations of Borrower
contained in this Section 3.7 shall survive the termination of the
Commitment and the payment in full of the Notes.
Section 3.8. Compensation Procedure. Any Lender or LC Issuer notifying
Borrower of the incurrence of additional costs under Sections 3.2 through 3.7
shall in such notice to Borrower and Agent set forth in reasonable detail the
basis and amount of its request for compensation. Determinations and allocations
by each Lender or LC Issuer for purposes of Sections 3.2 through 3.7 of the
effect of any change in applicable laws, treaties, rules or regulations or in
the interpretation or administration thereof, any losses or expenses incurred by
reason of the liquidation or reemployment of deposits or other funds, any taxes,
levies, costs and charges imposed, or the effect of capital maintained on its
costs or rate of return of maintaining Loans or its obligation to make Loans, or
on amounts receivable by it in respect of Loans, and of the amounts required to
compensate such Lender under Sections 3.2 through 3.7, shall be conclusive and
binding for all purposes, absent manifest error. Any request for compensation
under this Section 3.8 shall be paid by Borrower within thirty (30) Business
Days of the receipt by Borrower of the notice described in this Section 3.8.
Section 3.9. Change of Applicable Lending Office. Each Bank Party
agrees that, upon the occurrence of any event giving rise to the operation of
Sections 3.2 through 3.6 with respect to such Bank Party, it will, if requested
by Borrower, use reasonable efforts (subject to overall policy considerations of
such Bank Party) to designate another Lending Office, provided that such
designation is made on such terms that such Bank Party and its Lending Office
suffer no economic, legal or regulatory disadvantage, with the object of
avoiding the consequence of the event giving rise to the operation of any such
section. Nothing in this section shall affect or postpone any of the obligations
of Borrower or the rights of any Bank Party provided in Sections 3.2 through
3.6.
ARTICLE IV - Conditions Precedent to Lending
Section 4.1. Documents to be Delivered. No Lender has any obligation to
make its first Loan, and LC Issuer has no obligation to issue the first Letter
of Credit, unless Agent shall have received all of the following, at Agent's
office in Los Angeles, California, duly executed and delivered and in form,
substance and date satisfactory to Agent:
(a) This Agreement and any other documents that Lenders are to
execute in connection herewith.
(b) Each Note.
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(c) The guaranties, stock pledge agreements and financing
statements listed on the Security Schedule.
(d) The Agreement of Representations, Warranties and Covenant of
Parent in the form attached hereto as Exhibit F.
(e) Certain certificates of each Borrower including:
(i) An "Omnibus Certificate" of the Secretary and of the
Chairman of the Board or President of Borrower, which shall
contain the names and signatures of the officers of Borrower
authorized to execute Loan Documents and which shall certify to
the truth, correctness and completeness of the following exhibits
attached thereto: (1) a copy of resolutions duly adopted by the
Board of Directors of Borrower and in full force and effect at
the time this Agreement is entered into, authorizing the
execution of this Agreement and the other Loan Documents
delivered or to be delivered in connection herewith and the
consummation of the transactions contemplated herein and therein,
(2) a copy of the charter documents of Borrower and all
amendments thereto, certified by the appropriate official of
Borrower's state of organization, and (3) a copy of any bylaws of
Borrower; and
(ii) A "Compliance Certificate" of the Chairman of the Board
or President and of the chief financial officer of Borrower, of
even date with such Loan or such Letter of Credit, in which such
officers certify to the satisfaction of the conditions set out in
subsections (a), (b), (c) and (d) of Section 4.4.
(f) A certificate (or certificates) of the due formation, valid
existence and good standing of Borrower in its state of organization,
issued by the appropriate authorities of such jurisdiction, and
certificates of Borrower's good standing and due qualification to do
business, issued by appropriate officials in any states in which
Borrower owns property.
(g) Documents similar to those specified in subsections (e)(i)
and (f) of this section with respect to each other Restricted Person
and the execution by it of its guaranty and the other Loan Documents to
which it is a party.
(h) Documents similar to those specified in subsections (e)(i)
and (f) of this section with respect to Parent.
(i) A favorable opinion of Messrs. Self, Giddens and Lees counsel
for Restricted Persons, substantially in the form set forth in Exhibit
G-1.
(j) A favorable opinion of Andrews & Kurth L.L.P., counsel for
Restricted Persons in the form of Exhibit G-2, and other evidence
requested by Agent that (i) each Restricted Person is an "Unrestricted
Subsidiary," as that term is used in the 1995 Indenture and the 1996
Indenture and no Restricted Person is required to be or become a
Guarantor under the 1997 Indentures, (ii) no Restricted Person is
otherwise subject to the covenants contained in the Indentures,
including but not limited to any covenant requiring the granting of any
guaranty or Lien to the holders of any notes subject to the Indentures
or any covenant prohibiting any of the covenants
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made herein by the Restricted Persons, and (iii) that the
representations and warranties contained in Section 5.4 are true and
correct insofar as they relate to the Indentures.
(k) The Initial Engineering Report and the Initial Financial
Statements.
(l) Certificates or binders evidencing Restricted Persons'
insurance in effect on the date hereof.
(m) An environmental report issued by a consultant acceptable to
the Agent regarding their environmental assessment of a selected number
of the properties part of the Mergers and their environmental review of
the companies that are party to the Mergers, in scope and results
acceptable to Agent.
(n) A certificate signed by the chief executive officer of
Borrower in form and detail acceptable to Agent confirming the
insurance that is in effect as of the date hereof and certifying that
such insurance is customary for the businesses conducted by Restricted
Persons and is in compliance with the requirements of this Agreement.
(o) Payment of all commitment, facility, agency and other fees
required to be paid to any Bank Party pursuant to any Loan Documents or
any commitment agreement heretofore entered into.
(p) A copy of each Acquisition Document, duly executed and
delivered by each party thereto.
(q) Evidence that Borrower has obtained approvals or applicable
waiting periods have expired as required pursuant to the
Hart-Scott-Rodino Antitrust Improvement Act of 1976, as amended.
Section 4.2. Closing of Mergers. (a) Prior to or contemporaneously with
the first Loan hereunder, Borrower shall have consummated either the DLB Merger
or the Hugoton Merger. Prior to the funding of any Loan to refinance
indebtedness in connection with either of the Mergers, (i) such Merger shall
have been consummated, in form and substance satisfactory to Agent, (ii) after
giving effect to such Merger, all representations and warranties made by any
Restricted Person in any Loan Document shall be true (including, but not limited
to, the contemporaneous payment and release of any Liens and Indebtedness not
permitted by Sections 7.1 or 7.2), and (iii) Agent shall have received all
documents and instruments which Agent has then requested, including, but not
limited to, supplements or restatements of the opinions and certificates set
forth in Section 4.1. Each Restricted Person hereby acknowledges and agrees that
each Restricted Person shall be deemed to have executed and delivered each Loan
Document as set forth in Section 4.1 above, including without limitation each
guaranty, immediately prior to or simultaneously with the making of the Loans
hereunder.
(b) If the DLB Merger shall occur prior to the Hugoton Merger and the
existing indebtedness of DLB exceeds the Borrowing Base, prior to or
contemporaneously with the consummation of the DLB Merger, Borrower shall have
received a cash equity contribution from Parent in the amount of such excess and
shall have applied such contribution to such existing indebtedness of DLB.
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Section 4.3. Designated Affiliate Contracts/Structure.
Contemporaneously with the first Loan hereunder, Restricted Persons shall have
satisfied the following additional conditions:
(a) Restricted Persons shall have entered into contracts, in
form, scope, and substance satisfactory to Lenders with Chesapeake
Operating Inc. regarding management services, leasehold operating
services and other operating services and compensation for such
services (the "Designated Affiliate Contracts"), and
(b) Each Restricted Person shall have adopted Restated
Certificates of Incorporation in the form attached hereto as Exhibit
I-1 or Exhibit I-2 and shall have delivered to Agent a certificate in
form satisfactory to Agent that each Restricted Person is in compliance
with the requirements of such Restated Certificates of Incorporation.
Section 4.4. Additional Conditions Precedent. No Lender has any
obligation to make any Loan (including its first), and LC Issuer has no
obligation to issue any Letter of Credit (including its first), unless the
following conditions precedent have been satisfied:
(a) All representations and warranties made by Parent or any
Restricted Person in any Loan Document shall be true on and as of the
date of such Loan or the date of issuance of such Letter of Credit
(except to the extent that the facts upon which such representations
are based have been changed by the extension of credit hereunder) as if
such representations and warranties had been made as of the date of
such Loan or the date of issuance of such Letter of Credit.
(b) No Default shall exist at the date of such Loan or the date
of issuance of such Letter of Credit.
(c) No Material Adverse Change shall have occurred to, and no
event or circumstance shall have occurred that could cause a Material
Adverse Change to, Borrower's Consolidated financial condition or
businesses since the date of this Agreement.
(d) Parent and each Restricted Person shall have performed and
complied with all agreements and conditions required in the Loan
Documents to be performed or complied with by it on or prior to the
date of such Loan or the date of issuance of such Letter of Credit.
(e) The making of such Loan or the issuance of such Letter of
Credit shall not be prohibited by any Law and shall not subject any
Lender or any LC Issuer to any penalty or other onerous condition under
or pursuant to any such Law.
(f) Agent shall have received all documents and instruments which
Agent has then requested, in addition to those described in Section 4.1
(including opinions of legal counsel for Restricted Persons and Agent;
corporate documents and records; documents evidencing governmental
authorizations, consents, approvals, licenses and exemptions; and
certificates of public officials and of officers and representatives of
Borrower and other Persons), as to (i) the accuracy and validity of or
compliance with all representations, warranties and covenants made by
any Restricted Person in this Agreement and the other Loan Documents,
(ii) the satisfaction of all conditions contained herein or therein,
and (iii) all other matters pertaining hereto and
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thereto. All such additional documents and instruments shall be
satisfactory to Agent in form, substance and date.
ARTICLE V - Representations and Warranties
To confirm each Bank Party's understanding concerning Restricted
Persons and Restricted Persons' businesses, properties and obligations and to
induce each Bank Party to enter into this Agreement and to extend credit
hereunder, each Restricted Person represents and warrants to each Bank Party
that:
Section 5.1. No Default. No Restricted Person is in default in the
performance of any of the covenants and agreements contained in any Loan
Document. No event has occurred and is continuing which constitutes a Default.
Section 5.2. Organization and Good Standing. Each Restricted Person is
duly organized, validly existing and in good standing under the Laws of its
jurisdiction of organization, having all powers required to carry on its
business and enter into and carry out the transactions contemplated hereby. Each
Restricted Person is duly qualified, in good standing, and authorized to do
business in all other jurisdictions within the United States wherein the
character of the properties owned or held by it or the nature of the business
transacted by it makes such qualification necessary. Each Restricted Person has
taken all actions and procedures customarily taken in order to enter, for the
purpose of conducting business or owning property, each jurisdiction outside the
United States wherein the character of the properties owned or held by it or the
nature of the business transacted by it makes such actions and procedures
desirable.
Section 5.3. Authorization. Each Restricted Person has duly taken all
action necessary to authorize the execution and delivery by it of the Loan
Documents to which it is a party and to authorize the consummation of the
transactions contemplated thereby and the performance of its obligations
thereunder. Borrower is duly authorized to borrow funds hereunder.
Section 5.4. No Conflicts or Consents. The execution and delivery by
Parent and the various Restricted Persons of the Loan Documents to which each is
a party, the performance by each of its obligations under such Loan Documents,
and the consummation of the transactions contemplated by the various Loan
Documents, do not and will not (i) conflict with any provision of (1) any Law,
(2) the organizational documents of Parent or any Restricted Person, or (3) any
agreement, judgment, license, order or permit applicable to or binding upon
Parent or any Restricted Person, (ii) result in the acceleration of any
Indebtedness owed by Parent or any or Restricted Person, (iii) result in or
require the creation of any Lien upon any assets or properties of Parent or any
Restricted Person, or (iv) result in or require the creation of any guaranty by
any Restricted Person of any Indebtedness of any other Person except for the
guaranties listed on the Security Schedule. Except as expressly contemplated in
the Loan Documents no consent, approval, authorization or order of, and no
notice to or filing with, any Tribunal or third party is required in connection
with the execution, delivery or performance by Parent or any Restricted Person
of any Loan Document or to consummate any transactions contemplated by the Loan
Documents.
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Section 5.5. Enforceable Obligations. This Agreement is, and the other
Loan Documents when duly executed and delivered will be, legal, valid and
binding obligations of each Restricted Person which is a party hereto or
thereto, enforceable in accordance with their terms except as such enforcement
may be limited by bankruptcy, insolvency or similar Laws of general application
relating to the enforcement of creditors' rights.
Section 5.6. Initial Financial Statements. Borrower has heretofore
delivered to each Bank Party true, correct and complete copies of the Initial
Financial Statements. The Initial Financial Statements fairly present (i)
Parent's Consolidated financial position at the dates thereof and the
Consolidated results of Parent's operations and Parent's Consolidated cash flows
for the respective periods thereof, (ii) Borrower's pro forma financial position
at the date thereof after giving effect to the merger of AnSon Production
Corporation with and into CMC, (iii) Borrower's pro forma financial condition as
of the date thereof after giving effect to the Hugoton Merger, (iv) Borrower's
Consolidated pro forma financial condition as of the date thereof after giving
effect to the DLB Merger and (v) Borrower's Consolidated pro forma financial
condition as of the date thereof after giving effect to both Mergers. Since the
date of the annual Initial Financial Statements no Material Adverse Change has
occurred from the financial condition reflected in the Initial Financial
Statements, except as reflected in Parent's quarterly Initial Financial
Statements or in the Disclosure Schedule. All Initial Financial Statements were
prepared in accordance with GAAP.
Section 5.7. Other Obligations and Restrictions. No Restricted Person
has any outstanding Liabilities of any kind (including contingent obligations,
tax assessments, and unusual forward or long-term commitments) which are, in the
aggregate, material to such Restricted Person or material with respect to
Restricted Persons' Consolidated financial condition and not shown in the
Initial pro forma Financial Statements of Borrower or disclosed in the
Disclosure Schedule or a Disclosure Report. Except as shown in the Initial
Financial Statements or disclosed in the Disclosure Schedule or a Disclosure
Report, no Restricted Person is subject to or restricted by any franchise,
contract, deed, charter restriction, or other instrument or restriction which
could cause a Material Adverse Change.
Section 5.8. Full Disclosure. No certificate, statement or other
information delivered herewith or heretofore by any Restricted Person to any
Bank Party in connection with the negotiation of this Agreement or in connection
with any transaction contemplated hereby (including, but not limited to, the
final Proxy Statements for each of the Mergers) contains any untrue statement of
a material fact or omits to state any material fact known to any Restricted
Person (other than industry-wide risks normally associated with the types of
businesses conducted by Restricted Persons) necessary to make the statements
contained herein or therein not misleading as of the date made or deemed made.
There is no fact known to any Restricted Person (other than industry-wide risks
normally associated with the types of businesses conducted by Restricted
Persons) that has not been disclosed to each Bank Party in writing which could
cause a Material Adverse Change. There are no statements or conclusions in any
Engineering Report which are based upon or include misleading information or
fail to take into account material information regarding the matters reported
therein, it being understood that each Engineering Report is necessarily based
upon professional opinions, estimates and projections and that no Related Person
warrants that such opinions, estimates and projections will ultimately prove to
have been accurate. Parent and Borrower have heretofore delivered to each Bank
Party true, correct and complete copies of the Initial Engineering Report.
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Section 5.9. Litigation. Except as disclosed in the Initial Financial
Statements or in the Disclosure Schedule: (i) there are no actions, suits or
legal, equitable, arbitrative or administrative proceedings pending, or to the
knowledge of any Restricted Person threatened, against any Restricted Person
before any Tribunal which could cause a Material Adverse Change, and (ii) there
are no outstanding judgments, injunctions, writs, rulings or orders by any such
Tribunal against any Restricted Person or any Restricted Person's stockholders,
partners, directors or officers which could cause a Material Adverse Change.
Section 5.10. Labor Disputes and Acts of God. Except as disclosed in
the Disclosure Schedule or a Disclosure Report, neither the business nor the
properties of Parent or any Restricted Person has been affected by any fire,
explosion, accident, strike, lockout or other labor dispute, drought, storm,
hail, earthquake, embargo, act of God or of the public enemy or other casualty
(whether or not covered by insurance), which could cause a Material Adverse
Change.
Section 5.11. ERISA Plans and Liabilities. All currently existing ERISA
Plans are listed in the Disclosure Schedule or a Disclosure Report. Except as
disclosed in the Initial Financial Statements or in the Disclosure Schedule or a
Disclosure Report, no Termination Event has occurred with respect to any ERISA
Plan and all ERISA Affiliates are in compliance with ERISA in all material
respects. No ERISA Affiliate is required to contribute to, or has any other
absolute or contingent liability in respect of, any "multiemployer plan" as
defined in Section 4001 of ERISA. Except as set forth in the Disclosure Schedule
or a Disclosure Report: (i) no "accumulated funding deficiency" (as defined in
Section 412(a) of the Internal Revenue Code of 1986, as amended) exists with
respect to any ERISA Plan, whether or not waived by the Secretary of the
Treasury or his delegate, and (ii) the current value of each ERISA Plan's
benefits does not exceed the current value of such ERISA Plan's assets available
for the payment of such benefits by more than $500,000.
Section 5.12. Environmental and Other Laws. Except as disclosed in the
Disclosure Schedule or a Disclosure Report: (a) Restricted Persons are
conducting their businesses in material compliance with all applicable Laws,
including Environmental Laws, and have and are in compliance with all licenses
and permits required under any such Laws; (b) none of the operations or
properties of any Restricted Person is the subject of federal, state or local
investigation evaluating whether any material remedial action is needed to
respond to a release of any Hazardous Materials into the environment or to the
improper storage or disposal (including storage or disposal at offsite
locations) of any Hazardous Materials; (c) no Restricted Person (and to the best
knowledge of Borrower, no other Person) has filed any notice under any Law
indicating that any Restricted Person is responsible for the improper release
into the environment, or the improper storage or disposal, of any material
amount of any Hazardous Materials or that any Hazardous Materials have been
improperly released, or are improperly stored or disposed of, upon any property
of any Restricted Person; (d) no Restricted Person has transported or arranged
for the transportation of any Hazardous Material to any location which is (i)
listed on the National Priorities List under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended, listed for
possible inclusion on such National Priorities List by the Environmental
Protection Agency in its Comprehensive Environmental Response, Compensation and
Liability Information System List, or listed on any similar state list or (ii)
the subject of federal, state or local enforcement actions or other
investigations which may lead to claims against any Restricted Person for
clean-up costs, remedial work, damages to natural resources or for personal
injury claims (whether under Environmental Laws or otherwise); and (e) no
Restricted Person otherwise has any
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known material contingent liability under any Environmental Laws or in
connection with the release into the environment, or the storage or disposal, of
any Hazardous Materials.
Section 5.13. Names and Places of Business. No Restricted Person has,
during the preceding five years, had, been known by, or used any other trade or
fictitious name, except as disclosed in the Disclosure Schedule. Except as
otherwise indicated in the Disclosure Schedule or a Disclosure Report, the chief
executive office and principal place of business of each Restricted Person are
(and for the preceding five years have been) located at the address of Borrower
set out in Section 10.3. Except as indicated in the Disclosure Schedule or a
Disclosure Report, no Restricted Person has any other office or place of
business.
Section 5.14. Borrower's Subsidiaries. All of the outstanding stock of
any class of CAC is owned by Parent. All of the outstanding stock of any class
of CMC, Chesapeake Merger, Chesapeake Acquisition and Chesapeake Columbia Corp.,
Inc. is owned by CAC. All of the partnership interests of Mid-Continent Gas
Pipeline Company and AnSon Gas Marketing are owned by CAC and CMC. Neither CAC
nor CMC has any Subsidiary or own any stock in any other corporation or
association except those listed in the Disclosure Schedule or a Disclosure
Report. Neither Borrower nor any Restricted Person is a member of any general or
limited partnership, joint venture or association of any type whatsoever. Except
as otherwise revealed in a Disclosure Report, Borrower owns, directly or
indirectly, the equity interest in each of its Subsidiaries which is indicated
in the Disclosure Schedule.
Section 5.15. Title to Properties; Licenses. Each Restricted Person has
good and defensible title to all of its material properties and assets, free and
clear of all Liens other than Permitted Liens and of all impediments to the use
of such properties and assets in such Restricted Person's business, except that
no representation or warranty is made with respect to any oil, gas or mineral
property or interest to which no proved oil or gas reserves are properly
attributed. Other than Liens permitted under Section 7.02, each Restricted
Person will respectively own in the aggregate, in all material respects, the net
interests in production attributable to the wells and units evaluated in the
Initial Reserve Reports. The ownership of such Properties shall not in the
aggregate in any material respect obligate such Restricted Person to bear the
costs and expenses relating to the maintenance, development and operations of
such Properties in an amount materially in excess of the working interest of
such Properties set forth in the Initial Engineering Reports. Each Restricted
Person has paid all royalties payable under the oil and gas leases to which it
is operator, except those contested in accordance with the terms of the
applicable joint operating agreement or otherwise contested in good faith by
appropriate proceedings. Upon delivery of each Engineering Report furnished to
the Lenders pursuant to Sections 6.02(f) and (g), the statements made in the
preceding sentences of this Section 5.15 shall be true with respect to such
Engineering Reports. All information contained in the Initial Engineering
Reports is true and correct in all material respects as of the date thereof and
as of the date of the first Loan hereunder. Each Restricted Person possesses all
licenses, permits, franchises, patents, copyrights, trademarks and trade names,
and other intellectual property (or otherwise possesses the right to use such
intellectual property without violation of the rights of any other Person) which
are necessary to carry out its business as presently conducted and as presently
proposed to be conducted hereafter, and no Restricted Person is in violation in
any material respect of the terms under which it possesses such intellectual
property or the right to use such intellectual property.
Section 5.16. Government Regulation. Neither Parent nor Borrower nor
any other Restricted Person owing Obligations is subject to regulation under the
Public Utility Holding Company Act of
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1935, the Federal Power Act, the Investment Company Act of 1940 (as any of the
preceding acts have been amended) or any other Law which regulates the incurring
by such Person of Indebtedness, including Laws relating to common contract
carriers or the sale of electricity, gas, steam, water or other public utility
services.
Section 5.17. Insider. Neither Parent nor any Restricted Person, nor
any Person having "control" (as that term is defined in 12 U.S.C. ss. 375b(9) or
in regulations promulgated pursuant thereto) of any Restricted Person, is a
"director" or an "executive officer" or "principal shareholder" (as those terms
are defined in 12 U.S.C. ss. 375b(8) or (9) or in regulations promulgated
pursuant thereto) of any Bank Party, of a bank holding company of which any Bank
Party is a Subsidiary or of any Subsidiary of a bank holding company of which
any Bank Party is a Subsidiary.
Section 5.18. Mergers. The merger of AnSon Production Company with and
into CMC has been duly consummated in compliance with the agreement therefor and
all requirements of Law. The Hugoton Merger and the DLB Merger, when required to
be consummated under Section 4.2, will have been duly consummated in compliance
with the terms of the respective Acquisition Documents and requirements of Law,
including, but not limited to, the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, the Securities Act of 1933 and the Securities Exchange Act of 1934,
each as amended, and the applicable corporation act of each applicable state. As
of the date of each of the Acquisition Documents and as of the date of
consummation of each of the Mergers, each of the representations and warranties
of each parties to such Acquisition Document was and will be true, complete and
correct in all material respects.
ARTICLE VI - Affirmative Covenants of Borrower
To conform with the terms and conditions under which each Bank Party is
willing to have credit outstanding to Borrower, and to induce each Bank Party to
enter into this Agreement and extend credit hereunder, each Restricted Person
warrants, covenants and agrees that until the full and final payment of the
Obligations and the termination of this Agreement, unless Majority Lenders have
previously agreed otherwise:
Section 6.1. Payment and Performance. Each Restricted Person will pay
all amounts due under the Loan Documents in accordance with the terms thereof
and will observe, perform and comply with every covenant, term and condition
expressed or implied in the Loan Documents.
Section 6.2. Books, Financial Statements and Reports. Each Restricted
Person will at all times maintain full and accurate books of account and
records. Each Restricted Person will maintain a standard system of accounting,
will maintain its Fiscal Year, and will furnish the following statements and
reports to each Bank Party at Borrower's expense:
(a) As soon as available, and in any event within ninety (90)
days after the end of each Fiscal Year, complete Consolidated and
consolidating financial statements of the Restricted Persons together
with all notes thereto, prepared in reasonable detail in accordance
with
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GAAP, together with an unqualified opinion, based on an audit using
generally accepted auditing standards, by one of the six nationally
recognized firms of independent certified public accountants selected
by Borrower, stating that such Consolidated financial statements have
been so prepared. These financial statements shall contain a
Consolidated and consolidating balance sheet as of the end of such
Fiscal Year and Consolidated and consolidating statements of earnings,
of cash flows, and of changes in owners' equity for such Fiscal Year,
each setting forth in comparative form the corresponding figures for
the preceding Fiscal Year. In addition, within ninety (90) days after
the end of each Fiscal Year, Borrower will furnish a report signed by
such accountants (i) stating that they have read this Agreement, (ii)
containing calculations showing compliance (or non-compliance) at the
end of such Fiscal Year with the requirements of Sections 7.13, 7.14,
7.15 and 7.16, and (iii) further stating that in making their
examination and reporting on the Consolidated financial statements
described above they did not conclude that any Default existed at the
end of such Fiscal Year or at the time of their report, or, if they did
conclude that a Default existed, specifying its nature and period of
existence.
(b) As soon as available, and in any event within forty-five (45)
days after the end of each Fiscal Quarter, the Restricted Persons'
Consolidated and consolidating balance sheet as of the end of such
Fiscal Quarter and Consolidated and consolidating statements of the
Restricted Persons' earnings and cash flows for the period from the
beginning of the then current Fiscal Year to the end of such Fiscal
Quarter, all in reasonable detail and prepared in accordance with GAAP,
subject to changes resulting from normal year-end adjustments. In
addition, Borrower will, together with each such set of financial
statements and each set of financial statements furnished under
subsection (a) of this section, furnish a certificate in the form of
Exhibit D signed by the chief financial officer of each Borrower
stating that such financial statements are accurate and complete
(subject to normal year-end adjustments), stating that he has reviewed
the Loan Documents, containing calculations showing compliance (or
non-compliance) at the end of such Fiscal Quarter with the requirements
of Sections 7.13, 7.14, 7.15 and 7.16 and stating that no Default
exists at the end of such Fiscal Quarter or at the time of such
certificate or specifying the nature and period of existence of any
such Default.
(c) As soon as available, and in any event within ninety (90)
days after the end of each Fiscal Year, complete Consolidated and
consolidating financial statements of Parent with all notes thereto,
prepared in reasonable detail in accordance with GAAP, together with an
unqualified opinion, based on an audit using generally accepted
auditing standards, by one of the six nationally recognized firms of
independent certified public accountants as may be selected by Parent,
stating that such Consolidated financial statements have been so
prepared. These financial statements shall contain a Consolidated and
consolidating balance sheet as of the end of such Fiscal Year and
Consolidated and consolidating statements of earnings, of cash flows,
and of changes in owners' equity for such Fiscal Year, each setting
forth in comparative form the corresponding figures for the preceding
Fiscal Year.
(d) As soon as available, and in any event within forty-five (45)
days after the end of each Fiscal Quarter, Parent's Consolidated
balance sheet as of the end of such Fiscal Quarter and Consolidated and
consolidating statements of Parent's earnings and cash flows for the
period from the beginning of the then current Fiscal Year to the end of
such Fiscal Quarter, all in reasonable detail and prepared in
accordance with GAAP, subject to changes resulting from normal year-end
adjustments.
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(e) Promptly upon their becoming available, copies of all
financial statements, reports, notices and proxy statements sent by
Parent or any Restricted Person to its stockholders and all
registration statements, periodic reports and other statements and
schedules filed by any Restricted Person with any securities exchange,
the Securities and Exchange Commission or any similar governmental
authority.
(f) By March 15 of each year, beginning March 15, 1998, an
engineering report prepared as of the preceding January 1 by
independent petroleum engineers chosen by Borrower and acceptable to
Majority Lenders, concerning all oil and gas properties and interests
owned by any Restricted Person which are located in or offshore of the
United States and which have attributable to them proved oil or gas
reserves. This report shall be satisfactory to Agent, shall contain
sufficient information to enable Borrower to meet the reporting
requirements concerning oil and gas reserves contained in Regulations
S-K and S-X promulgated by the Securities and Exchange Commission,
shall take into account any "over-produced" status under gas balancing
arrangements, and shall contain information and analysis comparable in
scope to that contained in the Initial Engineering Report. Accompanying
such report, the Borrower shall deliver a report reflecting, since the
date reflected in the most recent report delivered pursuant to this
clause (f) or pursuant to the following clause (g), the following: (i)
all property sales and pending property sales identifying the property
and the sale price therefor, (ii) all property purchases and pending
property purchases identifying the property and the purchase price
therefor, and (iii) additional and changes in properties in each
category from such previous report (i.e.: proven undeveloped, proven
developed non-producing, or proven producing). The report delivered as
of March 15, 1998 shall reflect all oil and gas properties and
interests that will be owned by the Restricted Persons on a pro forma
basis after giving effect to the Mergers.
(g) By September 15 of each year, and promptly following notice
of an additional Borrowing Base redetermination under Section 2.9, an
engineering report prepared as of the preceding July 1 (or the first
day of the preceding calendar month in the case of an additional
redetermination) by petroleum engineers who are employees of Borrower
(or Chesapeake Operating Inc. under the management services agreement),
together with an accompanying report on property sales, property
purchases and changes in categories, both in the same form and scope as
the reports in (f) above.
(h) As soon as available, and in any event within ninety (90)
days after the end of each Fiscal Year, a business and financial plan
for Borrower (in form reasonably satisfactory to Agent), prepared by
the chief financial officer thereof, setting forth for the first year
thereof, quarterly financial projections and budgets for Borrower, and
thereafter yearly financial projections and budgets during the
Commitment Period.
(i) As soon as available, and in any event within sixty (60) days
after the end of each month, a report describing by lease or unit the
gross volume of production and sales attributable to production during
such month from the properties described in subsection (g) above and
describing the related severance taxes, other taxes, leasehold
operating expenses and capital costs attributable thereto and incurred
during such month.
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(j) As soon as available, and in any event within sixty (60) days
after the end of each Fiscal Quarter, a report setting forth volumes,
prices and margins for all marketing activities of Borrower and the
other Restricted Persons and a report of all forward, future, swap or
hedging contracts in such detail as Agent may request.
Section 6.3. Other Information and Inspections. Each Restricted Person
will furnish to each Bank Party any information which Agent may from time to
time request in writing concerning any covenant, provision or condition of the
Loan Documents or any matter in connection with Parent's or Restricted Persons'
businesses and operations. Each Restricted Person will permit representatives
appointed by Agent (including independent accountants, auditors, agents,
attorneys, appraisers and any other Persons) to visit and inspect during normal
business hours any of such Restricted Person's property, including its books of
account, other books and records, and any facilities or other business assets,
and to make extra copies therefrom and photocopies and photographs thereof, and
to write down and record any information such representatives obtain, and each
Restricted Person shall permit Agent or its representatives to investigate and
verify the accuracy of the information furnished to Agent or any Lender in
connection with the Loan Documents and to discuss all such matters with its
officers, employees and representatives.
Section 6.4. Notice of Material Events and Change of Address. Borrower
will promptly notify each Bank Party in writing, stating that such notice is
being given pursuant to this Agreement, of:
(a) the occurrence of any Material Adverse Change,
(b) the occurrence of any Default,
(c) the acceleration of the maturity of any Indebtedness owed by
any Restricted Person or of any default by any Restricted Person under
any indenture, mortgage, agreement, contract or other instrument to
which any of them is a party or by which any of them or any of their
properties is bound, if such acceleration or default could cause a
Material Adverse Change,
(d) the occurrence of any Termination Event,
(e) any claim of $500,000 or more, any notice of potential
liability under any Environmental Laws which might exceed such amount,
or any other material adverse claim asserted against any Restricted
Person or with respect to any Restricted Person's properties, and
(f) the filing of any suit or proceeding against any Restricted
Person in which an adverse decision could cause a Material Adverse
Change.
Upon the occurrence of any of the foregoing, Restricted Persons will take all
necessary or appropriate steps to remedy promptly any such Material Adverse
Change, Default, acceleration, default or Termination Event, to protect against
any such adverse claim, to defend any such suit or proceeding, and to resolve
all controversies on account of any of the foregoing. Borrower will also notify
Agent and Agent's counsel in writing at least twenty Business Days prior to the
date that any Restricted Person changes its name or the location of its chief
executive office or principal place of business or the place where it keeps its
books and records.
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Section 6.5. Maintenance of Properties.
(a) Each Restricted Person will: (i) do or cause to be done all things
reasonably necessary to preserve and keep in good repair, working order and
efficiency (ordinary wear and tear excepted) all of the properties owned by each
Restricted Person, including, without limitation, all equipment, machinery and
facilities, and (ii) make all the reasonably necessary repairs, renewals and
replacements so that at all times the state and condition of the properties
owned by each Restricted Person will be fully preserved and maintained, except
to the extent a portion of such properties are oil and gas properties no longer
capable of producing hydrocarbons in economically reasonable amounts.
(b) Each Restricted Person will promptly pay and discharge or cause to
be paid and discharged all delay rentals, royalties, expenses and indebtedness
accruing under, and perform or cause to be performed each and every act, matter
or thing required by, each and all of the assignments, deeds, leases,
sub-leases, contracts and agreements affecting its interests in its properties
and will do all other things necessary to keep unimpaired each Restricted
Person's rights with respect thereto and prevent any forfeiture thereof or a
default thereunder, except to the extent a portion of oil and gas properties is
no longer capable of producing hydrocarbons in economically reasonable amounts.
(c) Each Restricted Person will operate its properties or cause or use
commercially reasonably efforts to cause such properties to be operated in a
careful and efficient manner in accordance with the practices of the industry
and in compliance with all applicable contracts and agreements and in compliance
in all material respects with all laws.
Section 6.6. Maintenance of Existence and Qualifications. Each
Restricted Person will maintain and preserve its existence and its rights and
franchises in full force and effect and will qualify to do business in all
states or jurisdictions where required by applicable Law, except where the
failure so to qualify will not cause a Material Adverse Change.
Section 6.7. Payment of Trade Liabilities, Taxes, etc. Each Restricted
Person will (a) timely file all required tax returns; (b) timely pay all taxes,
assessments, and other governmental charges or levies imposed upon it or upon
its income, profits or property; (c) within ninety (90) days after the same
becomes due pay all Liabilities owed by it on ordinary trade terms to vendors,
suppliers and other Persons providing goods and services used by it in the
ordinary course of its business; (d) pay and discharge when due all other
Liabilities now or hereafter owed by it; and (e) maintain appropriate accruals
and reserves for all of the foregoing in accordance with GAAP. Each Restricted
Person may, however, delay paying or discharging any of the foregoing so long as
it is in good faith contesting the validity thereof by appropriate proceedings
and has set aside on its books adequate reserves therefor.
Section 6.8. Insurance. Each Restricted Person will keep or cause to be
kept insured by financially sound and reputable insurers its property in
accordance with the Insurance Schedule. Each Restricted Person shall at all
times maintain insurance against its liability for injury to persons or property
in accordance with the Insurance Schedule, which insurance shall be by
financially sound and reputable insurers. Without limiting the foregoing, each
Restricted Person shall at all time maintain liability insurance in the amounts
set out on the Insurance Schedule.
Section 6.9. Performance on Borrower's Behalf. If any Restricted Person
fails to pay any taxes, insurance premiums, expenses, attorneys' fees or other
amounts it is required to pay under any
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Loan Document, Agent may pay the same. Borrower shall immediately reimburse
Agent for any such payments and each amount paid by Agent shall constitute an
Obligation owed hereunder which is due and payable on the date such amount is
paid by Agent.
Section 6.10. Interest. Borrower hereby promises to each Bank Party to
pay interest at the Default Rate on all Obligations (including Obligations to
pay fees or to reimburse or indemnify any Bank Party) which Borrower has in this
Agreement promised to pay to such Bank Party and which are not paid when due.
Such interest shall accrue from the date such Obligations become due until they
are paid.
Section 6.11. Compliance with Agreements and Law. Each Restricted
Person will perform all material obligations it is required to perform under the
terms of each indenture, mortgage, deed of trust, security agreement, lease,
franchise, agreement, contract or other instrument or obligation to which it is
a party or by which it or any of its properties is bound. Each Restricted Person
will conduct its business and affairs in compliance with all Laws applicable
thereto.
Section 6.12. Environmental Matters; Environmental Reviews.
(a) Each Restricted Person will comply in all material respects with
all Environmental Laws now or hereafter applicable to such Restricted Person and
shall obtain, at or prior to the time required by applicable Environmental Laws,
all environmental, health and safety permits, licenses and other authorizations
necessary for its operations and will maintain such authorizations in full force
and effect.
(b) Each Restricted Person will promptly furnish to Agent all written
notices of violation, orders, claims, citations, complaints, penalty
assessments, suits or other proceedings received by any Restricted Person, or of
which it has notice, pending or threatened against any Restricted Person, by any
governmental authority with respect to any alleged violation of or
non-compliance in any material respect with any Environmental Laws or any
permits, licenses or authorizations in connection with its ownership or use of
its properties or the operation of its business.
(c) Each Restricted Person will promptly furnish to Agent all requests
for information, notices of claim, demand letters, and other notifications,
received by any Restricted Person in connection with its ownership or use of its
properties or the conduct of its business, relating to potential responsibility
which could if adversely determined result in fines or liability of a material
amount with respect to any investigation or clean-up of Hazardous Material at
any location.
Section 6.13. Evidence of Compliance. Each Restricted Person will
furnish to each Bank Party at such Restricted Person's or Borrower's expense all
evidence which Agent from time to time reasonably requests in writing as to the
accuracy and validity of or compliance with all representations, warranties and
covenants made by any Restricted Person in the Loan Documents, the satisfaction
of all conditions contained therein, and all other matters pertaining thereto.
Section 6.14. Solvency. Upon giving effect to the issuance of the
Notes, the execution of the Loan Documents by each Restricted Person, the
consummation of each of the Mergers and the consummation of the transactions
contemplated hereby, each Restricted Person will be solvent (as such term is
used in applicable bankruptcy, liquidation, receivership, insolvency or similar
laws).
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Section 6.15. Guaranties of Borrower's Subsidiaries. Each Subsidiary of
Borrower now existing or created, acquired or coming into existence after the
date hereof shall, promptly upon request by Agent, execute and deliver to Agent
an absolute and unconditional guaranty of the timely repayment of the
Obligations and the due and punctual performance of the obligations of Borrower
hereunder, which guaranty shall be satisfactory to Agent in form and substance.
Each Subsidiary of Borrower existing on the date hereof shall duly execute and
deliver such a guaranty prior to the making of any Loan hereunder. Borrower will
cause each of its Subsidiaries to deliver to Agent, simultaneously with its
delivery of such a guaranty, written evidence satisfactory to Agent and its
counsel that such Subsidiary has taken all corporate or partnership action
necessary to duly approve and authorize its execution, delivery and performance
of such guaranty and any other documents which it is required to execute.
Section 6.16. Mergers. Chesapeake Acquisition and Chesapeake Merger
shall cause the Mergers to be consummated as provided in Section 4.2. Promptly
following each Merger, the Restricted Persons shall file certificates evidencing
such Merger in each county in which such entity owns material property. Within
sixty (60) days after the consummation of each Merger, the Restricted Person
which is the surviving entity from such Merger shall have been merged with and
into CMC, and certificates of merger with respect thereto shall be promptly
filed in each county in which such entity owns material property.
ARTICLE VII - Negative Covenants of Borrower
To conform with the terms and conditions under which each Bank Party is
willing to have credit outstanding to Borrower, and to induce each Bank Party to
enter into this Agreement and make the Loans, each Restricted Person warrants,
covenants and agrees that until the full and final payment of the Obligations
and the termination of this Agreement, unless Majority Lenders have previously
agreed otherwise:
Section 7.1. Indebtedness. No Restricted Person will in any manner owe
or be liable for Indebtedness except:
(a) the Obligations.
(b) obligations under operating leases entered into in the ordinary
course of such Restricted Person's business in arm's length transactions at
competitive market rates under competitive terms and conditions in all respects,
provided that the obligations required to be paid in any Fiscal Year under any
such operating leases do not in the aggregate exceed $50,000.
(c) unsecured Indebtedness among the Restricted Persons arising in the
ordinary course of business.
(d) Indebtedness arising under futures contracts or swap contracts
permitted under Section 7.3
(e) capital leases in an aggregate principal amount not to exceed
$1,000,000 at any time.
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Section 7.2. Limitation on Liens. No Restricted Person will create,
assume or permit to exist any Lien upon any of the properties or assets which it
now owns or hereafter acquires, except the following ("Permitted Liens"):
(a) Liens which secure Obligations only.
(b) statutory Liens for taxes, statutory or contractual mechanics' and
materialmen's Liens incurred in the ordinary course of business, and other
similar Liens incurred in the ordinary course of business, provided such Liens
do not secure Indebtedness and secure only obligations which are not delinquent
or which is being contested as provided in Section 6.7.
Section 7.3. Hedging Contracts. No Restricted Person will be a party to
or in any manner be liable on any forward, future, swap or hedging contract,
except:
(a) contracts entered into with the purpose and effect of fixing prices
on oil or gas expected to be produced by Restricted Persons, provided that at
all times: (1) no such contract fixes a price for a term of more than twelve
(12) months; (2) the aggregate monthly production covered by all such contracts
(determined, in the case of contracts that are not settled on a monthly basis,
by a monthly proration acceptable to Agent) for any single month does not in the
aggregate exceed seventy-five percent (75%) of Restricted Persons' aggregate
Projected Oil and Gas Production anticipated to be sold in the ordinary course
of Restricted Persons' businesses for such month, (3) no such contract requires
any Restricted Person to put up money, assets, letters of credit or other
security against the event of its nonperformance prior to actual default by such
Restricted Person in performing its obligations thereunder, and (4) each such
contract is with a counterparty or has a guarantor of the obligation of the
counterparty who (unless such counterparty is a Bank Party or one of its
Affiliates) at the time the contract is made has long-term obligations rated AA
or Aa2 or better, respectively, by either Rating Agency or is an investment
grade-rated industry participant. As used in this subsection, the term
"Projected Oil and Gas Production" means the projected production of oil or gas
(measured by volume unit or BTU equivalent, not sales price) for the term of the
contracts or a particular month, as applicable, from properties and interests
owned by any Restricted Person which are located in or offshore of the United
States and which have attributable to them proved oil or gas reserves, as such
production is projected in the most recent report delivered pursuant to Section
6.2(f), after deducting projected production from any properties or interests
sold or under contract for sale that had been included in such report and after
adding projected production from any properties or interests that had not been
reflected in such report but that are reflected in a separate or supplemental
reports meeting the requirements of such Section 6.2(f) above and otherwise are
satisfactory to Agent.
(b) contracts entered into by a Restricted Person with the purpose and
effect of fixing interest rates on a principal amount of indebtedness of such
Restricted Person that is accruing interest at a variable rate, provided that
(1) the aggregate notional amount of such contracts never exceeds one hundred
percent (100%) of the anticipated outstanding principal balance of the
indebtedness to be hedged by such contracts or an average of such principal
balances calculated using a generally accepted method of matching interest swap
contracts to declining principal balances, (2) the floating rate index of each
such contract generally matches the index used to determine the floating rates
of interest on the corresponding indebtedness to be hedged by such contract and
(3) each such contract is with a counterparty or has a guarantor of the
obligation of the counterparty who (unless such counterparty is a Bank Party or
one of its Affiliates) at the time the contract is made has long-term
obligations rated AA
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or Aa2 or better, respectively, by either Rating Agency or is an investment
grade-rated industry participant.
Section 7.4. Limitation on Mergers, Issuances of Securities. Except as
expressly provided in this Section, no Restricted Person will merge or
consolidate with or into any other entity. Any Subsidiary of CAC may, however,
be merged into or consolidated with another wholly owned Subsidiary of CAC (but
not into CAC itself). CAC will not issue any securities other than shares of its
common stock issued to Parent. No Subsidiary of CAC will issue any additional
shares of its capital stock or other securities or any options, warrants or
other rights to acquire such additional shares or other securities except to CAC
and only to the extent not otherwise forbidden under the terms hereof. No
Subsidiary of CAC which is a partnership will allow any diminution of CAC's
interest (direct or indirect) therein.
Section 7.5. Limitation on Sales of Property. No Restricted Person will
sell, transfer, lease, exchange, alienate or dispose of any of its material
assets or properties or any material interest therein except:
(a) equipment which is worthless or obsolete or which is replaced by
equipment of equal suitability and value.
(b) inventory (including oil and gas sold as produced and seismic data)
which is sold in the ordinary course of business on ordinary trade terms.
(c) interests in oil and gas properties, or portions thereof, to which
no proved reserves of oil, gas or other liquid or gaseous hydrocarbons are
properly attributed.
(d) other property which is sold for fair consideration to a Person who
is not an Affiliate, provided that, without the prior written consent of the
Majority Lenders, the aggregate amount of such sales during the period between
any two consecutive scheduled Determination Dates, plus sales prior to the first
of such two Determination Dates of properties which were included in the
information submitted to the Agent for the first of such two Determination
Dates, shall not exceed $5,000,000. The value of sales under this clause shall
be the greater of the sale price or the discounted present value of projected
future net revenues (at 10% discount rate) reflected in the most recently
delivered Engineering Report under Section 6.2.
No Restricted Person will sell, transfer or otherwise dispose of capital stock
of any of CAC's Subsidiaries. No Restricted Person will discount, sell, pledge
or assign any notes payable to it, accounts receivable or future income except
to the extent expressly permitted under the Loan Documents.
Section 7.6. Limitation on Dividends and Redemptions. No Restricted
Person will declare or pay any dividends on, or make any other distribution in
respect of, any class of its capital stock or any partnership or other interest
in it, nor will any Restricted Person directly or indirectly make any capital
contribution to or purchase, redeem, acquire or retire any shares of the capital
stock of or partnership interests in any Restricted Person (whether such
interests are now or hereafter issued, outstanding or created), or cause or
permit any reduction or retirement of the capital stock of any Restricted
Person, except as expressly provided in this section. Such dividends,
distributions, contributions, purchases,
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redemptions, acquisitions, retirements or reductions may be made to CAC by its
Subsidiaries or to CAC's Subsidiaries by another of its Subsidiaries.
Section 7.7. Limitation on Investments and New Businesses. No
Restricted Person will (i) make any expenditure or commitment or incur any
obligation or enter into or engage in any transaction except in the ordinary
course of business, (ii) engage directly or indirectly in any business or
conduct any operations except in connection with or incidental to its present
businesses and operations, (iii) make any acquisitions of or capital
contributions to or other investments in any Person, other than Permitted
Investments, or (iv) make any acquisitions or investments in any properties, in
excess of $500,000 in the aggregate at any one time outstanding, other than oil
and gas properties, gas gathering, treating and processing properties and assets
directly related thereto. No Restricted Person will make any investment in any
Parent Affiliate.
Section 7.8. Limitation on Credit Extensions. Except for Permitted
Investments, no Restricted Person will extend credit, make advances or make
loans other than (i) normal and prudent extensions of credit to customers buying
goods and services in the ordinary course of business, which extensions shall
not be for longer periods than those extended by similar businesses operated in
a normal and prudent manner, and (ii) loans among Restricted Persons.
Section 7.9. Transactions with Affiliates. No Restricted Person will
engage in any material transaction with any of their Affiliates; provided that
such restriction shall not apply to the Designated Affiliate Contracts or to
transactions among Restricted Persons. Borrower shall have no Subsidiaries that
are not wholly owned Subsidiaries.
Section 7.10. Certain Contracts; Multiemployer ERISA Plans; Designated
Affiliate Contracts. Except as expressly provided for in the Loan Documents, no
Restricted Person will, directly or indirectly, enter into, create, or otherwise
allow to exist any contract or other consensual restriction on the ability of
any Subsidiary of Borrower to: (i) pay dividends or make other distributions to
Borrower, (ii) to redeem equity interests held in it by Borrower, (iii) to repay
loans and other indebtedness owing by it to Borrower, or (iv) to transfer any of
its assets to Borrower. No Restricted Person will enter into any "take-or-pay"
contract or other contract or arrangement for the purchase of goods or services
which obligates it to pay for such goods or service regardless of whether they
are delivered or furnished to it. No ERISA Affiliate will incur any obligation
to contribute to any "multiemployer plan" as defined in Section 4001 of ERISA.
No Restricted Person will cause or permit (i) any Designated Affiliate Contract
to be amended, modified, terminated or waived or (ii) any general or
administrative expenses, management services expenses or any operating expenses
to exceed the amount properly determined under the applicable Designated
Affiliate Contract.
Section 7.11. Corporate Requirements. Except as required by Section
4.3(b), no Restricted Person will amend its Certificates of Incorporation, nor
violate or fail to comply with any of the requirements of its Certificates of
Incorporation, including without limitation, the requirements of paragraph 7,
Restrictions on Corporate Action, paragraph 8, Independent Director, paragraph
9, Reservation of Right to Amend Certificate of Incorporation, or paragraph 10,
Corporate Procedures and Maintenance of Separate Business.
Section 7.12. Indenture Requirements. Each Restricted Person shall at
all times remain designated as "Unrestricted Subsidiaries" under the 1995
Indenture and the 1996 Indenture. No
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Restricted Person shall take any action which would cause any Restricted Person
to not be properly designated as an "Unrestricted Subsidiary" under the 1995
Indenture or the 1996 Indenture. CAC shall not own or lease (as lessor or
lessee) any property capable of producing oil or gas or minerals or any
processing or manufacturing plant or pipeline. No Restricted Person shall ever
assume or become liable in any manner (whether as a co-maker, guarantor or
otherwise) on any Indebtedness under any of the Indentures or any other
Indebtedness or Liability of Parent or any Parent Affiliate.
Section 7.13. Interest Coverage. At the end of any Fiscal Quarter,
beginning with the Fiscal Quarter ending September 30, 1998, the ratio of (a)
Borrower's Consolidated EBITDA to (b) Cash Interest Expense for the four-Fiscal
Quarter period ending with such Fiscal Quarter (or with respect to the Fiscal
Quarters ending on September 30, 1998 and December 31, 1998, for the period from
April 1, 1998 to the end of such Fiscal Quarter) will never be less than 3.0 to
1.0. As used herein, "Cash Interest Expense" means interest paid, plus
amortization of original issue discount, plus interest component of capital
lease obligations, in each case by Borrower and its Subsidiaries.
Section 7.14. EBITDA Coverage. At the end of any Fiscal Quarter,
beginning with the Fiscal Quarter ending September 30, 1998, the ratio of (a)
Borrower's Consolidated total Indebtedness at the end of each Fiscal Quarter to
Borrower's Consolidated EBITDA for the four-Fiscal Quarter period ending with
such Fiscal Quarter will never be greater than 3.5 to 1.0; provided, however,
with respect to the Fiscal Quarters ending on September 30, 1998 and December
31, 1998, EBITDA shall be annualized by multiplying the EBITDA for the period
from April 1, 1998 to the end of such applicable Fiscal Quarter by a fraction
the denominator of which is the number of days in such period and the numerator
of which is 365.
Section 7.15. Tangible Net Worth. Borrower's Consolidated Tangible Net
Worth will never be less than the sum of (i) 85% of Borrower's Consolidated
Tangible Net Worth as of March 31, 1998, plus (ii) 50% of Transactional
Increases to Tangible Net Worth occurring after March 31, 1998 (or 85% in the
case of the Hugoton Merger or the DLB Merger, if either Merger occurs after
March 31, 1998), plus (iii) the amount equal to 50% of Borrower's Consolidated
net income (if positive) for the period from March 31, 1998 through December 31,
1998, plus (iv) the amount equal to 50% of Borrower's Consolidated net income
(if positive) for each fiscal year from and including the fiscal year ending
December 31, 1999. As used herein "Transactional Increases to Tangible Net
Worth" means the resulting increase to Borrower's Consolidated Tangible Net
Worth from (a) sale or issuance of any equity security by any Restricted Person,
(b) any other form of capital contribution or equity investment into any
Restricted Person, and whether consisting of contribution of cash or other
asset, or (c) any merger or consolidation to which any Restricted Person is a
party.
Section 7.16. Current Ratio. The ratio of Borrower's Consolidated
current assets, plus the unused portion of the Borrowing Base, to Borrower's
Consolidated current liabilities will never be less than 1.0 to 1.0. For
purposes of this section, current liabilities will include LC Obligations,
regardless of whether or not contingent (but without duplication) but will
exclude the current portion of long term debt.
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ARTICLE VIII - Events of Default and Remedies
Section 8.1. Events of Default. Each of the following events
constitutes an Event of Default under this Agreement:
(a) Any Restricted Person fails to pay the principal component of any
Obligation when due and payable, whether at a date for the payment of a fixed
installment or as a contingent or other payment becomes due and payable or as a
result of acceleration or otherwise;
(b) Any Restricted Person fails to pay any Obligation (other than the
Obligations in clause (a) above) when due and payable, whether at a date for the
payment of a fixed installment or as a contingent or other payment becomes due
and payable or as a result of acceleration or otherwise, within three Business
Days after the same becomes due;
(c) Any "default" or "event of default" occurs under any Loan Document
which defines either such term, and the same is not remedied within the
applicable period of grace (if any) provided in such Loan Document;
(d) Any Restricted Person fails to duly observe, perform or comply with
any covenant, agreement or provision of Section 6.4 or Article VII;
(e) Any Restricted Person fails (other than as referred to in
subsections (a), (b), (c) or (d) above) to duly observe, perform or comply with
any covenant, agreement, condition or provision of any Loan Document, and such
failure remains unremedied for a period of thirty (30) days after notice of such
failure is given by Agent to Borrower;
(f) Any representation or warranty previously, presently or hereafter
made in writing by or on behalf of any Restricted Person in connection with any
Loan Document shall prove to have been false or incorrect in any material
respect on any date on or as of which made, or any Loan Document at any time
ceases to be valid, binding and enforceable as warranted in Section 5.5 for any
reason other than its release or subordination by Agent;
(g) Any Restricted Person fails to duly observe, perform or comply with
any agreement with any Person or any term or condition of any instrument, if
such agreement or instrument is materially significant to Borrower or to
Borrower and its Subsidiaries on a Consolidated basis or materially significant
to any Guarantor, and such failure is not remedied within the applicable period
of grace (if any) provided in such agreement or instrument;
(h) Any Restricted Person or any Parent Affiliate (i) fails to pay any
portion, when such portion is due, of any of its Indebtedness in excess of
$100,000 in the case of a Restricted Person, or in excess of $1,000,000 in the
case of any Parent Affiliate, or (ii) breaches or defaults in the performance of
any agreement or instrument by which any such Indebtedness is issued, evidenced,
governed, or secured, and any such failure, breach or default continues beyond
any applicable period of grace provided therefor;
(i) Either (i) any "accumulated funding deficiency" (as defined in
Section 412(a) of the Internal Revenue Code of 1986, as amended) in excess of
$100,000 exists with respect to any ERISA Plan, whether or not waived by the
Secretary of the Treasury or his delegate, or (ii) any Termination Event occurs
with respect to any ERISA Plan and the then current value of such ERISA Plan's
benefit
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liabilities exceeds the then current value of such ERISA Plan's assets available
for the payment of such benefit liabilities by more than $100,000 (or in the
case of a Termination Event involving the withdrawal of a substantial employer,
the withdrawing employer's proportionate share of such excess exceeds such
amount); and
(j) Any Restricted Person or any Parent Affiliate:
(i) suffers the entry against it of a judgment, decree or order
for relief by a Tribunal of competent jurisdiction in an involuntary
proceeding commenced under any applicable bankruptcy, insolvency or
other similar Law of any jurisdiction now or hereafter in effect,
including the federal Bankruptcy Code, as from time to time amended,
or has any such proceeding commenced against it which remains
undismissed for a period of thirty days; or
(ii) commences a voluntary case under any applicable bankruptcy,
insolvency or similar Law now or hereafter in effect, including the
federal Bankruptcy Code, as from time to time amended; or applies for
or consents to the entry of an order for relief in an involuntary case
under any such Law; or makes a general assignment for the benefit of
creditors; or fails generally to pay (or admits in writing its
inability to pay) its debts as such debts become due; or takes
corporate or other action to authorize any of the foregoing; or
(iii) suffers the appointment of or taking possession by a
receiver, liquidator, assignee, custodian, trustee, sequestrator or
similar official of all or a substantial part of its assets in a
proceeding brought against or initiated by it, and such appointment or
taking possession is neither made ineffective nor discharged within
thirty days after the making thereof, or such appointment or taking
possession is at any time consented to, requested by, or acquiesced to
by it; or
(iv) suffers the entry against it of a final judgment for the
payment of money in excess of $500,000 (not covered by insurance
satisfactory to Agent in its discretion), unless the same is discharged
within thirty days after the date of entry thereof or an appeal or
appropriate proceeding for review thereof is taken within such period
and a stay of execution pending such appeal is obtained; or
(v) suffers a writ or warrant of attachment or any similar
process to be issued by any Tribunal against all or any substantial
part of its assets, and such writ or warrant of attachment or any
similar process is not stayed or released within thirty days after the
entry or levy thereof or after any stay is vacated or set aside; and
(k) Any Change in Control occurs; and
(l) Any Material Adverse Change occurs.
Upon the occurrence of an Event of Default described in subsection (j)(i),
(j)(ii) or (j)(iii) of this section with respect to Borrower, all of the
Obligations shall thereupon be immediately due and payable, without demand,
presentment, notice of demand or of dishonor and nonpayment, protest, notice of
protest, notice of intention to accelerate, declaration or notice of
acceleration, or any other notice or declaration of any kind, all of which are
hereby expressly waived by Borrower and each Restricted
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Person who at any time ratifies or approves this Agreement. Upon any such
acceleration, any obligation of any Lender to make any further Loans shall be
permanently terminated. During the continuance of any other Event of Default,
Agent at any time and from time to time may (and upon written instructions from
Majority Lenders, Agent shall), without notice to Borrower or any other
Restricted Person, do either or both of the following: (1) terminate any
obligation of Lenders to make Loans hereunder, and (2) declare any or all of the
Obligations immediately due and payable, and all such Obligations shall
thereupon be immediately due and payable, without demand, presentment, notice of
demand or of dishonor and nonpayment, protest, notice of protest, notice of
intention to accelerate, declaration or notice of acceleration, or any other
notice or declaration of any kind, all of which are hereby expressly waived by
Borrower and each Restricted Person who at any time ratifies or approves this
Agreement.
Section 8.2. Remedies. If any Default shall occur and be continuing,
Agent may protect and enforce Lenders' rights under the Loan Documents by any
appropriate proceedings, including proceedings for specific performance of any
covenant or agreement contained in any Loan Document, and Agent may enforce the
payment of any Obligations due Lenders or enforce any other legal or equitable
right which it may have. All rights, remedies and powers conferred upon Bank
Parties under the Loan Documents shall be deemed cumulative and not exclusive of
any other rights, remedies or powers available under the Loan Documents or at
Law or in equity.
ARTICLE IX - Agent
Section 9.1. Appointment and Authority. Each Bank Party hereby
irrevocably authorizes Agent, and Agent hereby undertakes, to receive payments
of principal, interest and other amounts due hereunder as specified herein and
to take all other actions and to exercise such powers under the Loan Documents
as are specifically delegated to Agent by the terms hereof or thereof, together
with all other powers reasonably incidental thereto. The relationship of Agent
to the other Bank Parties is only that of one commercial lender acting as agent
for others, and nothing in the Loan Documents shall be construed to constitute
Agent a trustee or other fiduciary for any holder of any of the Notes or of any
participation therein nor to impose on Agent duties and obligations other than
those expressly provided for in the Loan Documents. With respect to any matters
not expressly provided for in the Loan Documents and any matters which the Loan
Documents place within the discretion of Agent, Agent shall not be required to
exercise any discretion or take any action, and it may request instructions from
Lenders with respect to any such matter, in which case it shall be required to
act or to refrain from acting (and shall be fully protected and free from
liability to all Lenders in so acting or refraining from acting) upon the
instructions of Majority Lenders (including itself), provided, however, that
Agent shall not be required to take any action which exposes it to a risk of
personal liability that it considers unreasonable or which is contrary to the
Loan Documents or to applicable Law. Upon receipt by Agent from Borrower of any
communication calling for action on the part of Lenders or upon notice from any
other Bank Party to Agent of any Default or Event of Default, Agent shall
promptly notify each other Bank Party thereof. No Lender designated as a
Co-Agent shall have any duties nor any liabilities hereunder by reason of such
Co-Agent designation.
Section 9.2. Exculpation, Agent's Reliance, Etc. Neither Agent nor any
of its directors, officers, agents, attorneys, or employees shall be liable for
any action taken or omitted to be taken by any of them under or in connection
with the Loan Documents, INCLUDING THEIR NEGLIGENCE OF ANY KIND, except that
each shall be liable for its own gross negligence or willful misconduct.
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Without limiting the generality of the foregoing, Agent (a) may treat the payee
of any Note as the holder thereof until Agent receives written notice of the
assignment or transfer thereof in accordance with this Agreement, signed by such
payee and in form satisfactory to Agent; (b) may consult with legal counsel
(including counsel for Borrower), independent public accountants and other
experts selected by it and shall not be liable for any action taken or omitted
to be taken in good faith by it in accordance with the advice of such counsel,
accountants or experts; (c) makes no warranty or representation to any other
Bank Party and shall not be responsible to any other Bank Party for any
statements, warranties or representations made in or in connection with the Loan
Documents; (d) shall not have any duty to ascertain or to inquire as to the
performance or observance of any of the terms, covenants or conditions of the
Loan Documents on the part of any Restricted Person or to inspect the property
(including the books and records) of any Restricted Person; (e) shall not be
responsible to any other Bank Party for the due execution, legality, validity,
enforceability, genuineness, sufficiency or value of any Loan Document or any
instrument or document furnished in connection therewith; (f) may rely upon the
representations and warranties of each Restricted Person and the Lenders in
exercising its powers hereunder; and (g) shall incur no liability under or in
respect of the Loan Documents by acting upon any notice, consent, certificate or
other instrument or writing (including any telecopy, telegram, cable or telex)
believed by it to be genuine and signed or sent by the proper Person or Persons.
Section 9.3. Credit Decisions. Each Bank Party acknowledges that it
has, independently and without reliance upon any other Bank Party, made its own
analysis of Borrower and the transactions contemplated hereby and its own
independent decision to enter into this Agreement and the other Loan Documents.
Each Bank Party also acknowledges that it will, independently and without
reliance upon any other Bank Party and based on such documents and information
as it shall deem appropriate at the time, continue to make its own credit
decisions in taking or not taking action under the Loan Documents.
Section 9.4. Indemnification. Each Lender agrees to indemnify Agent (to
the extent not reimbursed by Borrower within ten (10) days after demand) from
and against such Lender's Percentage Share of any and all liabilities,
obligations, claims, losses, damages, penalties, fines, actions, judgments,
suits, settlements, costs, expenses or disbursements (including reasonable fees
of attorneys, accountants, experts and advisors) of any kind or nature
whatsoever (in this section collectively called "liabilities and costs") which
to any extent (in whole or in part) may be imposed on, incurred by, or asserted
against Agent growing out of, resulting from or in any other way associated with
the Loan Documents and the transactions and events (including the enforcement
thereof) at any time associated therewith or contemplated therein (including any
violation or noncompliance with any Environmental Laws by any Person or any
liabilities or duties of any Person with respect to Hazardous Materials found in
or released into the environment).
THE FOREGOING INDEMNIFICATION SHALL APPLY WHETHER OR NOT SUCH LIABILITIES AND
COSTS ARE IN ANY WAY OR TO ANY EXTENT OWED, IN WHOLE OR IN PART, UNDER ANY CLAIM
OR THEORY OF STRICT LIABILITY, OR ARE CAUSED, IN WHOLE OR IN PART, BY ANY
NEGLIGENT ACT OR OMISSION OF ANY KIND BY AGENT,
provided only that no Lender shall be obligated under this section to indemnify
Agent for that portion, if any, of any liabilities and costs which is
proximately caused by Agent's own individual gross negligence or willful
misconduct, as determined in a final judgment. Cumulative of the foregoing, each
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Lender agrees to reimburse Agent promptly upon demand for such Lender's
Percentage Share of any costs and expenses to be paid to Agent by Borrower under
Section 10.4(a) to the extent that Agent is not timely reimbursed for such
expenses by Borrower as provided in such section. As used in this section the
term "Agent" shall refer not only to the Person designated as such in Section
1.1 but also to each director, officer, agent, attorney, employee,
representative and Affiliate of such Person.
Section 9.5. Rights as Lender. In its capacity as a Lender, Agent shall
have the same rights and obligations as any Lender and may exercise such rights
as though it were not Agent. Agent may accept deposits from, lend money to, act
as Trustee under indentures of, and generally engage in any kind of business
with any Restricted Person or their Affiliates, all as if it were not Agent
hereunder and without any duty to account therefor to any other Lender.
Section 9.6. Sharing of Set-Offs and Other Payments. Each Bank Party
agrees that if it shall, whether through the exercise of rights of banker's
lien, set off, or counterclaim against Borrower or otherwise, obtain payment of
a portion of the aggregate Obligations owed to it which, taking into account all
distributions made by Agent under Section 3.1, causes such Bank Party to have
received more than it would have received had such payment been received by
Agent and distributed pursuant to Section 3.1, then (a) it shall be deemed to
have simultaneously purchased and shall be obligated to purchase interests in
the Obligations as necessary to cause all Bank Parties to share all payments as
provided for in Section 3.1, and (b) such other adjustments shall be made from
time to time as shall be equitable to ensure that Agent and all Lenders share
all payments of Obligations as provided in Section 3.1; provided, however, that
nothing herein contained shall in any way affect the right of any Bank Party to
obtain payment (whether by exercise of rights of banker's lien, set-off or
counterclaim or otherwise) of indebtedness other than the Obligations. Borrower
expressly consents to the foregoing arrangements and agrees that any holder of
any such interest or other participation in the Obligations, whether or not
acquired pursuant to the foregoing arrangements, may to the fullest extent
permitted by Law exercise any and all rights of banker's lien, set-off, or
counterclaim as fully as if such holder were a holder of the Obligations in the
amount of such interest or other participation. If all or any part of any funds
transferred pursuant to this section is thereafter recovered from the seller
under this section which received the same, the purchase provided for in this
section shall be deemed to have been rescinded to the extent of such recovery,
together with interest, if any, if interest is required pursuant to Tribunal
order to be paid on account of the possession of such funds prior to such
recovery.
Section 9.7. Investments. Whenever Agent in good faith determines that
it is uncertain about how to distribute to Lenders any funds which it has
received, or whenever Agent in good faith determines that there is any dispute
among Lenders about how such funds should be distributed, Agent may choose to
defer distribution of the funds which are the subject of such uncertainty or
dispute. If Agent in good faith believes that the uncertainty or dispute will
not be promptly resolved, or if Agent is otherwise required to invest funds
pending distribution to Lenders, Agent shall invest such funds pending
distribution; all interest on any such investment shall be distributed upon the
distribution of such investment and in the same proportion and to the same
Persons as such investment. All moneys received by Agent for distribution to
Lenders (other than to the Person who is Agent in its separate capacity as a
Lender) shall be held by Agent pending such distribution solely as Agent for
such Lenders, and Agent shall have no equitable title to any portion thereof.
Section 9.8. Benefit of Article IX. The provisions of this Article
(other than the following Section 9.9) are intended solely for the benefit of
Bank Parties, and no Restricted Person shall be
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entitled to rely on any such provision or assert any such provision in a claim
or defense against any Bank Party. Bank Parties may waive or amend such
provisions as they desire without any notice to or consent of Borrower or any
Restricted Person.
Section 9.9. Resignation. Agent may resign at any time by giving
written notice thereof to Lenders and Borrower. Each such notice shall set forth
the date of such resignation. Upon any such resignation, Majority Lenders shall
have the right to appoint a successor Agent. A successor must be appointed for
any retiring Agent, and such Agent's resignation shall become effective when
such successor accepts such appointment. If, within thirty days after the date
of the retiring Agent's resignation, no successor Agent has been appointed and
has accepted such appointment, then the retiring Agent may appoint a successor
Agent, which shall be a commercial bank organized or licensed to conduct a
banking or trust business under the Laws of the United States of America or of
any state thereof. Upon the acceptance of any appointment as Agent hereunder by
a successor Agent, the retiring Agent shall be discharged from its duties and
obligations under this Agreement and the other Loan Documents. After any
retiring Agent's resignation hereunder the provisions of this Article IX shall
continue to inure to its benefit as to any actions taken or omitted to be taken
by it while it was Agent under the Loan Documents.
ARTICLE X - Miscellaneous
Section 10.1. Waivers and Amendments; Acknowledgements.
(a) Waivers and Amendments. No failure or delay (whether by course of
conduct or otherwise) by any Bank Party in exercising any right, power or remedy
which such Bank Party may have under any of the Loan Documents shall operate as
a waiver thereof or of any other right, power or remedy, nor shall any single or
partial exercise by any Bank Party of any such right, power or remedy preclude
any other or further exercise thereof or of any other right, power or remedy. No
waiver of any provision of any Loan Document and no consent to any departure
therefrom shall ever be effective unless it is in writing and signed as provided
below in this section, and then such waiver or consent shall be effective only
in the specific instances and for the purposes for which given and to the extent
specified in such writing. No notice to or demand on any Restricted Person shall
in any case of itself entitle any Restricted Person to any other or further
notice or demand in similar or other circumstances. This Agreement and the other
Loan Documents set forth the entire understanding between the parties hereto
with respect to the transactions contemplated herein and therein and supersede
all prior discussions and understandings with respect to the subject matter
hereof and thereof, and no waiver, consent, release, modification or amendment
of or supplement to this Agreement or the other Loan Documents shall be valid or
effective against any party hereto unless the same is in writing and signed by
(i) if such party is Borrower, by Borrower, (ii) if such party is Agent or LC
Issuer, by such party, and (iii) if such party is a Lender, by such Lender or by
Agent on behalf of Lenders with the written consent of Majority Lenders (which
consent has already been given as to the termination of the Loan Documents as
provided in Section 10.9). Notwithstanding the foregoing or anything to the
contrary herein, Agent shall not, without the prior consent of each individual
Lender, execute and deliver on behalf of such Lender any waiver or amendment
which would: (1) waive any of the conditions specified in Article IV (provided
that Agent may in its discretion withdraw any request it has made under Section
4.4(f)), (2) increase the Borrowing Base above the maximum amount which requires
the agreement of all Lenders pursuant to the last sentence of Section 2.09(a) or
subject such Lender to any additional obligations, (3) reduce any fees payable
to such Lender hereunder, or the
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principal of, or interest on, such Lender's Note, (4) postpone any date fixed
for any payment of any such fees, principal or interest, (5) amend the
definition herein of "Majority Lenders", "Required Lenders" or otherwise change
the aggregate amount of Percentage Shares which is required for Agent, Lenders
or any of them to take any particular action under the Loan Documents, or (6)
release Borrower from its obligation to pay such Lender's Note or any Guarantor
from its guaranty of such payment.
(b) Acknowledgements and Admissions. Borrower hereby represents,
warrants, acknowledges and admits that (i) it has been advised by counsel in the
negotiation, execution and delivery of the Loan Documents to which it is a
party, (ii) it has made an independent decision to enter into this Agreement and
the other Loan Documents to which it is a party, without reliance on any
representation, warranty, covenant or undertaking by Agent or any Lender,
whether written, oral or implicit, other than as expressly set out in this
Agreement or in another Loan Document delivered on or after the date hereof,
(iii) there are no representations, warranties, covenants, undertakings or
agreements by any Bank Party as to the Loan Documents except as expressly set
out in this Agreement or in another Loan Document delivered on or after the date
hereof, (iv) no Bank Party has any fiduciary obligation toward Borrower with
respect to any Loan Document or the transactions contemplated thereby, (v) the
relationship pursuant to the Loan Documents between Borrower and the other
Restricted Persons, on one hand, and each Bank Party, on the other hand, is and
shall be solely that of debtor and creditor, respectively, (vi) no partnership
or joint venture exists with respect to the Loan Documents between any
Restricted Person and any Bank Party, (vii) Agent is not Borrower's Agent, but
Agent for Lenders, (viii) should an Event of Default or Default occur or exist,
each Bank Party will determine in its sole discretion and for its own reasons
what remedies and actions it will or will not exercise or take at that time,
(ix) without limiting any of the foregoing, Borrower is not relying upon any
representation or covenant by any Bank Party, or any representative thereof, and
no such representation or covenant has been made, that any Bank Party will, at
the time of an Event of Default or Default, or at any other time, waive,
negotiate, discuss, or take or refrain from taking any action permitted under
the Loan Documents with respect to any such Event of Default or Default or any
other provision of the Loan Documents, and (x) all Bank Parties have relied upon
the truthfulness of the acknowledgements in this section in deciding to execute
and deliver this Agreement and to become obligated hereunder.
(c) Joint Acknowledgment. THIS WRITTEN AGREEMENT AND THE OTHER LOAN
DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
Section 10.2. Survival of Agreements; Cumulative Nature. All of
Restricted Persons' various representations, warranties, covenants and
agreements in the Loan Documents shall survive the execution and delivery of
this Agreement and the other Loan Documents and the performance hereof and
thereof, including the making or granting of the Loans and the delivery of the
Notes and the other Loan Documents, and shall further survive until all of the
Obligations are paid in full to each Bank Party and all of Bank Parties'
obligations to Borrower are terminated. All statements and agreements contained
in any certificate or other instrument delivered by any Restricted Person to any
Bank Party under any Loan Document shall be deemed representations and
warranties by Borrower or agreements
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and covenants of Borrower under this Agreement. The representations, warranties,
indemnities, and covenants made by Restricted Persons in the Loan Documents, and
the rights, powers, and privileges granted to Bank Parties in the Loan
Documents, are cumulative, and, except for expressly specified waivers and
consents, no Loan Document shall be construed in the context of another to
diminish, nullify, or otherwise reduce the benefit to any Bank Party of any such
representation, warranty, indemnity, covenant, right, power or privilege. In
particular and without limitation, no exception set out in this Agreement to any
representation, warranty, indemnity, or covenant herein contained shall apply to
any similar representation, warranty, indemnity, or covenant contained in any
other Loan Document, and each such similar representation, warranty, indemnity,
or covenant shall be subject only to those exceptions which are expressly made
applicable to it by the terms of the various Loan Documents.
Section 10.3. Notices. All notices, requests, consents, demands and
other communications required or permitted under any Loan Document shall be in
writing, unless otherwise specifically provided in such Loan Document (provided
that Agent may give telephonic notices to the other Bank Parties), and shall be
deemed sufficiently given or furnished if delivered by personal delivery, by
telecopy or telex, by delivery service with proof of delivery, or by registered
or certified United States mail, postage prepaid, to Borrower and Restricted
Persons at the address of Borrower specified on the signature pages hereto and
to each Bank Party at its address specified on the signature pages hereto
(unless changed by similar notice in writing given by the particular Person
whose address is to be changed). Any such notice or communication shall be
deemed to have been given (a) in the case of personal delivery or delivery
service, as of the date of first attempted delivery during normal business hours
at the address provided herein, (b) in the case of telecopy or telex, upon
receipt, or (c) in the case of registered or certified United States mail, three
days after deposit in the mail; provided, however, that no Borrowing Notice
shall become effective until actually received by Agent.
Section 10.4. Payment of Expenses; Indemnity.
(a) Payment of Expenses. Whether or not the transactions contemplated
by this Agreement are consummated, Borrower will promptly (and in any event,
within 30 days after any invoice or other statement or notice) pay: (i) all
transfer, stamp, mortgage, documentary or other similar taxes, assessments or
charges levied by any governmental or revenue authority in respect of this
Agreement or any of the other Loan Documents or any other document referred to
herein or therein, (ii) all reasonable costs and expenses incurred by or on
behalf of Agent (including attorneys' fees, consultants' fees and engineering
fees, travel costs and miscellaneous expenses) in connection with (1) the
negotiation, preparation, execution and delivery of the Loan Documents, and any
and all consents, waivers or other documents or instruments relating thereto,
(2) the filing, recording, refiling and re-recording of any Loan Documents and
any other documents or instruments or further assurances required to be filed or
recorded or refiled or re-recorded by the terms of any Loan Document, (3) the
borrowings hereunder and other action reasonably required in the course of
administration hereof, (4) monitoring or confirming (or preparation or
negotiation of any document related to) Borrower's compliance with any covenants
or conditions contained in this Agreement or in any Loan Document, and (iii) all
reasonable costs and expenses incurred by or on behalf of any Bank Party
(including attorneys' fees, consultants' fees and accounting fees) in connection
with the defense or enforcement of any of the Loan Documents (including this
section) or the defense of any Bank Party's exercise of its rights thereunder.
In addition to the foregoing, until and all Obligations have been paid in full,
Borrower will also pay or reimburse Agent for all reasonable out-of-pocket costs
and expenses of
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Agent or its agents or employees in connection with the continuing
administration of the Loans and the related due diligence of Agent, including
travel and miscellaneous expenses and fees and expenses of Agent's outside
counsel, reserve engineers and consultants engaged in connection with the Loan
Documents.
(b) Indemnity. Borrower agrees to indemnify each Bank Party, upon
demand, from and against any and all liabilities, obligations, claims, losses,
damages, penalties, fines, actions, judgments, suits, settlements, costs,
expenses or disbursements (including reasonable fees of attorneys, accountants,
experts and advisors) of any kind or nature whatsoever (in this section
collectively called "liabilities and costs") which to any extent (in whole or in
part) may be imposed on, incurred by, or asserted against such Bank Party
growing out of, resulting from or in any other way associated with the Loan
Documents and the transactions and events (including the enforcement or defense
thereof) at any time associated therewith or contemplated therein (including any
violation or noncompliance with any Environmental Laws by any Restricted Person
or any liabilities or duties of any Restricted Person or any Bank Party with
respect to Hazardous Materials found in or released into the environment).
THE FOREGOING INDEMNIFICATION SHALL APPLY WHETHER OR NOT SUCH LIABILITIES AND
COSTS ARE IN ANY WAY OR TO ANY EXTENT OWED, IN WHOLE OR IN PART, UNDER ANY CLAIM
OR THEORY OF STRICT LIABILITY, OR ARE CAUSED, IN WHOLE OR IN PART, BY ANY
NEGLIGENT ACT OR OMISSION OF ANY KIND BY ANY BANK PARTY,
provided only that no Bank Party shall be entitled under this section to receive
indemnification for that portion, if any, of any liabilities and costs which is
proximately caused by its own individual gross negligence or willful misconduct,
as determined in a final judgment. If any Person (including Borrower or any of
its Affiliates) ever alleges such gross negligence or willful misconduct by any
Bank Party, the indemnification provided for in this section shall nonetheless
be paid upon demand, subject to later adjustment or reimbursement, until such
time as a court of competent jurisdiction enters a final judgment as to the
extent and effect of the alleged gross negligence or willful misconduct. As used
in this section the term "Bank Parties" shall refer not only to the Persons
designated as such in Section 1.1 but also to each director, officer, agent,
attorney, employee, representative and Affiliate of such Persons.
Section 10.5. Joint and Several Liability; Parties in Interest;
Assignments. All Obligations which are incurred by two or more Restricted
Persons shall be their joint and several obligations and liabilities. All
grants, covenants and agreements contained in the Loan Documents shall bind and
inure to the benefit of the parties thereto and their respective successors and
assigns; provided, however, that no Restricted Person may assign or transfer any
of its rights or delegate any of its duties or obligations under any Loan
Document without the prior consent of all of the Lenders. Neither Borrower nor
any Affiliates of Borrower shall directly or indirectly purchase or otherwise
retire any Obligations owed to any Lender nor will any Lender accept any offer
to do so, unless each Lender shall have received substantially the same offer
with respect to the same Percentage Share of the Obligations owed to it. If
Borrower or any Affiliate of Borrower at any time purchases some but less than
all of the Obligations owed to all Bank Parties, such purchaser shall not be
entitled to any rights of any Bank Party under the Loan Documents unless and
until Borrower or its Affiliates have purchased all of the Obligations.
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(b) No Lender shall sell any participation interest in its commitment
hereunder or any of its rights under its Loans or under the Loan Documents to
any Person only if the agreement between such Lender and such participant at all
times provides: (i) that such participation exists only as a result of the
agreement between such participant and such Lender and that such transfer does
not give such participant any right to vote as a Lender or any other direct
claims or rights against any Person other than such Lender, (ii) that such
participant is not entitled to payment from any Restricted Person under Sections
3.2 through 3.6 of amounts in excess of those payable to such Lender under such
sections (determined without regard to the sale of such participation), and
(iii) unless such participant is an Affiliate of such Lender, that such
participant shall not be entitled to require such Lender to take any action
under any Loan Document or to obtain the consent of such participant prior to
taking any action under any Loan Document, except for actions which would
require the consent of all Lenders under the next-to-last sentence of subsection
(a) of Section 10.1. No Lender selling such a participation shall, as between
the other parties hereto and such Lender, be relieved of any of its obligations
hereunder as a result of the sale of such participation. Each Lender which sells
any such participation to any Person (other than an Affiliate of such Lender)
shall give prompt notice thereof to Agent and Borrower.
(c) Except for sales of participations under the immediately preceding
subsection (b), no Lender shall make any assignment or transfer of any kind of
its commitments or any of its rights under its Loans or under the Loan
Documents, except for assignments to an Eligible Transferee, and then only if
such assignment is made in accordance with the following requirements:
(i) Each such assignment shall apply to all Obligations owing to
the assignor Lender hereunder and to the unused portion of the assignor
Lender's commitments, so that after such assignment is made the
assignor Lender shall have a fixed (and not a varying) Percentage Share
in its Loans and Note and be committed to make that Percentage Share of
all future Loans, the assignee shall have a fixed Percentage Share in
such Loans and Note and be committed to make that Percentage Share of
all future Loans, and the Percentage Share of the Maximum Loan Amount
of both the assignor and assignee shall equal or exceed $5,000,000.
(ii) The parties to each such assignment shall execute and
deliver to Agent, for its acceptance and recording in the "Register"
(as defined below in this section), an Assignment and Acceptance in the
form of Exhibit H, appropriately completed, together with the Note
subject to such assignment and a processing fee payable to Agent of
$2,500. Upon such execution, delivery, and payment and upon the
satisfaction of the conditions set out in such Assignment and
Acceptance, then (i) Borrower shall issue new Notes to such assignor
and assignee upon return of the old Notes to Borrower, and (ii) as of
the "Settlement Date" specified in such Assignment and Acceptance the
assignee thereunder shall be a party hereto and a Lender hereunder and
Agent shall thereupon deliver to Borrower and each Lender a schedule
showing the revised Percentage Shares of such assignor Lender and such
assignee Lender and the Percentage Shares of all other Lenders.
(iii) Each assignee Lender which is not a United States person
(as such term is defined in Section 7701(a)(30) of the Internal Revenue
Code of 1986, as amended) for Federal income tax purposes, shall (to
the extent it has not already done so) provide Agent and Borrower with
the "Prescribed Forms" referred to in Section 3.6(d).
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(d) Nothing contained in this section shall prevent or prohibit any
Lender from assigning or pledging all or any portion of its Loans and Note to
any Federal Reserve Bank as collateral security pursuant to Regulation A of the
Board of Governors of the Federal Reserve System and any Operating Circular
issued by such Federal Reserve Bank; provided that no such assignment or pledge
shall relieve such Lender from its obligations hereunder.
(e) By executing and delivering an Assignment and Acceptance, each
assignee Lender thereunder will be confirming to and agreeing with Borrower,
Agent and each other Lender hereunder that such assignee understands and agrees
to the terms hereof, including Article IX hereof.
(f) Agent shall maintain a copy of each Assignment and Acceptance and a
register for the recordation of the names and addresses of Lenders and the
Percentage Shares of, and principal amount of the Loans owing to, each Lender
from time to time (in this section called the "Register"). The entries in the
Register shall be conclusive, in the absence of manifest error, and Borrower and
each Bank Party may treat each Person whose name is recorded in the Register as
a Lender hereunder for all purposes. The Register shall be available for
inspection by Borrower or any Bank Party at any reasonable time and from time to
time upon reasonable prior notice.
Section 10.6. Confidentiality. Each Bank Party agrees that it will take
all reasonable steps to keep confidential any proprietary information given to
it by any Restricted Person, provided, however, that this restriction shall not
apply to information which (i) has at the time in question entered the public
domain, (ii) is required to be disclosed by Law (whether valid or invalid) of
any Tribunal, (iii) is disclosed to any Bank Party's Affiliates, auditors,
attorneys, or agents, (iv) is furnished to any other Bank Party or to any
purchaser or prospective purchaser of participations or other interests in any
Loan or Loan Document, or (v) is disclosed in the course of enforcing its rights
and remedies during the existence of an Event of Default.
Section 10.7. Governing Law; Submission to Process.
EXCEPT TO THE EXTENT THAT THE LAW OF ANOTHER JURISDICTION IS EXPRESSLY ELECTED
IN A LOAN DOCUMENT, THE LOAN DOCUMENTS SHALL BE DEEMED CONTRACTS AND INSTRUMENTS
MADE UNDER THE LAWS OF THE STATE OF TEXAS AND SHALL BE CONSTRUED AND ENFORCED IN
ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS AND THE LAWS OF
THE UNITED STATES OF AMERICA, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW.
CHAPTER 15 OF TEXAS REVISED CIVIL STATUTES ANNOTATED ARTICLE 5069 (WHICH
REGULATES CERTAIN REVOLVING CREDIT LOAN ACCOUNTS AND REVOLVING TRI-PARTY
ACCOUNTS) DOES NOT APPLY TO THIS AGREEMENT OR TO THE NOTES. BORROWER HEREBY
IRREVOCABLY SUBMITS ITSELF AND EACH OTHER RESTRICTED PERSON TO THE NON-EXCLUSIVE
JURISDICTION OF THE STATE AND FEDERAL COURTS SITTING IN THE STATE OF TEXAS AND
AGREES AND CONSENTS THAT SERVICE OF PROCESS MAY BE MADE UPON IT OR ANY
RESTRICTED PERSON IN ANY LEGAL PROCEEDING RELATING TO THE LOAN DOCUMENTS OR THE
OBLIGATIONS BY ANY MEANS ALLOWED UNDER TEXAS OR FEDERAL LAW. ANY LEGAL
PROCEEDING ARISING OUT OF OR IN ANY WAY RELATED TO ANY OF THE LOAN DOCUMENTS
SHALL BE BROUGHT AND LITIGATED EXCLUSIVELY IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF TEXAS, DALLAS DIVISION, TO THE EXTENT IT HAS
SUBJECT MATTER JURISDICTION, AND OTHERWISE IN THE TEXAS DISTRICT COURTS SITTING
IN DALLAS COUNTY, TEXAS. THE PARTIES
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HERETO HEREBY WAIVE AND AGREE NOT TO ASSERT, BY WAY OF MOTION, AS A DEFENSE OR
OTHERWISE, THAT ANY SUCH PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM OR THAT
THE VENUE THEREOF IS IMPROPER, AND FURTHER AGREE TO A TRANSFER OF ANY SUCH
PROCEEDING TO A FEDERAL COURT SITTING IN THE STATE OF TEXAS TO THE EXTENT THAT
IT HAS SUBJECT MATTER JURISDICTION, AND OTHERWISE TO A STATE COURT IN DALLAS,
TEXAS. IN FURTHERANCE THEREOF, BORROWER AND BANK PARTIES EACH HEREBY ACKNOWLEDGE
AND AGREE THAT IT WAS NOT INCONVENIENT FOR THEM TO NEGOTIATE AND RECEIVE FUNDING
OF THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT IN SUCH COUNTY AND THAT IT
WILL BE NEITHER INCONVENIENT NOR UNFAIR TO LITIGATE OR OTHERWISE RESOLVE ANY
DISPUTES OR CLAIMS IN A COURT SITTING IN SUCH COUNTY.
Section 10.8. Usury. Bank Parties, Restricted Persons and any other
parties to the Loan Documents intend to contract in strict compliance with
applicable usury law from time to time in effect. In furtherance thereof such
Persons stipulate and agree that none of the terms and provisions contained in
the Loan Documents shall ever be construed to create a contract to pay, for the
use, forbearance or detention of money, interest in excess of the maximum amount
of interest permitted to be charged by applicable law from time to time in
effect. Neither any Restricted Person nor any present or future guarantors,
endorsers, or other Persons hereafter becoming liable for payment of any
Obligation shall ever be liable for unearned interest thereon or shall ever be
required to pay interest thereon in excess of the maximum amount that may be
lawfully charged under applicable law from time to time in effect, and the
provisions of this section shall control over all other provisions of the Loan
Documents which may be in conflict or apparent conflict herewith. Bank Parties
expressly disavow any intention to charge or collect excessive unearned interest
or finance charges in the event the maturity of any Obligation is accelerated.
If (a) the maturity of any Obligation is accelerated for any reason, (b) any
Obligation is prepaid and as a result any amounts held to constitute interest
are determined to be in excess of the legal maximum, or (c) any Bank Party or
any other holder of any or all of the Obligations shall otherwise collect moneys
which are determined to constitute interest which would otherwise increase the
interest on any or all of the Obligations to an amount in excess of that
permitted to be charged by applicable law then in effect, then all sums
determined to constitute interest in excess of such legal limit shall, without
penalty, be promptly applied to reduce the then outstanding principal of the
related Obligations or, at such Bank Party's or holder's option, promptly
returned to Borrower or the other payor thereof upon such determination. In
determining whether or not the interest paid or payable, under any specific
circumstance, exceeds the maximum amount permitted under applicable law, Bank
Parties and Restricted Persons (and any other payors thereof) shall to the
greatest extent permitted under applicable law, (i) characterize any
non-principal payment as an expense, fee or premium rather than as interest,
(ii) exclude voluntary prepayments and the effects thereof, and (iii) amortize,
prorate, allocate, and spread the total amount of interest throughout the entire
contemplated term of the instruments evidencing the Obligations in accordance
with the amounts outstanding from time to time thereunder and the maximum legal
rate of interest from time to time in effect under applicable law in order to
lawfully charge the maximum amount of interest permitted under applicable law.
In the event applicable law provides for an interest ceiling under ss.303 of the
Texas Finance Code (the "Texas Finance Code") and Chapter 1D of Title 79, Tex.
Rev. Civ. Stats. 1925 ("Chapter 1D") as amended, respectively, for any day, the
ceiling shall be the "indicated rate ceiling" or "weekly ceiling" as defined in
the Texas Finance Code and Chapter 1D, provided that if any applicable law
permits greater interest, the law permitting the greatest interest shall apply.
As used in this section the term "applicable law" means the Laws of the State of
Texas or the Laws of the United States of America,
61
<PAGE> 67
whichever Laws allow the greater interest, as such Laws now exist or may be
changed or amended or come into effect in the future.
Section 10.9. Termination; Limited Survival. In its sole and absolute
discretion Borrower may at any time that no Obligations are owing elect in a
written notice delivered to Agent to terminate this Agreement. Upon receipt by
Agent of such a notice, if no Obligations are then owing this Agreement and all
other Loan Documents shall thereupon be terminated and the parties thereto
released from all prospective obligations thereunder. Notwithstanding the
foregoing or anything herein to the contrary, any waivers or admissions made by
any Restricted Person in any Loan Document, any Obligations under Sections 3.2
through 3.6, and any obligations which any Person may have to indemnify or
compensate any Bank Party shall survive any termination of this Agreement or any
other Loan Document. At the request and expense of Borrower, Agent shall prepare
and execute all necessary instruments to reflect and effect such termination of
the Loan Documents. Agent is hereby authorized to execute all such instruments
on behalf of all Lenders, without the joinder of or further action by any
Lender.
Section 10.10. Severability. If any term or provision of any Loan
Document shall be determined to be illegal or unenforceable all other terms and
provisions of the Loan Documents shall nevertheless remain effective and shall
be enforced to the fullest extent permitted by applicable Law.
Section 10.11. Counterparts. This Agreement may be separately executed
in any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed shall be deemed to constitute one
and the same Agreement.
Section 10.12. Waiver of Jury Trial, Punitive Damages, etc. BORROWER
AND EACH BANK PARTY HEREBY KNOWINGLY, VOLUNTARILY, INTENTIONALLY, AND
IRREVOCABLY (A) WAIVES, TO THE MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY RIGHT
IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR
DIRECTLY OR INDIRECTLY AT ANY TIME ARISING OUT OF, UNDER OR IN CONNECTION WITH
THE LOAN DOCUMENTS OR ANY TRANSACTION CONTEMPLATED THEREBY OR ASSOCIATED
THEREWITH, BEFORE OR AFTER MATURITY; (B) WAIVES, TO THE MAXIMUM EXTENT NOT
PROHIBITED BY LAW, ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY SUCH
LITIGATION ANY "SPECIAL DAMAGES", AS DEFINED BELOW, (C) CERTIFIES THAT NO PARTY
HERETO NOR ANY REPRESENTATIVE OR AGENT OR COUNSEL FOR ANY PARTY HERETO HAS
REPRESENTED, EXPRESSLY OR OTHERWISE, OR IMPLIED THAT SUCH PARTY WOULD NOT, IN
THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVERS, AND (D)
ACKNOWLEDGES THAT IT HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT, THE OTHER
LOAN DOCUMENTS AND THE TRANSACTIONS CONTEMPLATED HEREBY AND THEREBY BY, AMONG
OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS CONTAINED IN THIS SECTION.
AS USED IN THIS SECTION, "SPECIAL DAMAGES" INCLUDES ALL SPECIAL, CONSEQUENTIAL,
EXEMPLARY, OR PUNITIVE DAMAGES (REGARDLESS OF HOW NAMED), BUT DOES NOT INCLUDE
ANY PAYMENTS OR FUNDS WHICH ANY PARTY HERETO HAS EXPRESSLY PROMISED TO PAY OR
DELIVER TO ANY OTHER PARTY HERETO.
62
<PAGE> 68
IN WITNESS WHEREOF, this Agreement is executed as of the date first
written above.
CHESAPEAKE ACQUISITION CORPORATION
BORROWER
By: /s/ MARTHA BURGER
---------------------------------------
Martha Burger
Treasurer
CHESAPEAKE MID-CONTINENT CORP.
BORROWER
By: /s/ MARTHA BURGER
---------------------------------------
Martha Burger
Treasurer
CHESAPEAKE MERGER CORP.
INITIAL GUARANTOR
By: /s/ MARTHA BURGER
---------------------------------------
Martha Burger
Treasurer
CHESAPEAKE ACQUISITION CORP.
INITIAL GUARANTOR
By: /s/ MARTHA BURGER
---------------------------------------
Martha Burger
Treasurer
S-1
<PAGE> 69
CHESAPEAKE COLUMBIA CORP.
INITIAL GUARANTOR
By: /s/ MARTHA BURGER
---------------------------------------
Martha Burger
Treasurer
MID-CONTINENT GAS PIPELINE COMPANY
INITIAL GUARANTOR
By: Chesapeake Mid-Continent Corp.,
Managing General Partner
By: /s/ MARTHA BURGER
---------------------------------------
Martha Burger
Treasurer
ANSON GAS MARKETING
INITIAL GUARANTOR
By: Chesapeake Mid-Continent Corp.,
Managing General Partner
By: /s/ MARTHA BURGER
---------------------------------------
Martha Burger
Treasurer
Address for Borrowers and Initial Guarantors:
6100 North Western
Oklahoma City, Oklahoma
Attention: Treasurer
Telephone: (405) 848-8000
Telecopy: (405) 879-9587
S-2
<PAGE> 70
With copy to:
Self, Giddens & Lees, Inc.
2725 Oklahoma Tower
210 Park Avenue
Oklahoma City, Oklahoma 73102
Attn: C. Ray Lees
Telephone: (405) 232-3001
Telecopy: (405) 232-5553
S-3
<PAGE> 71
UNION BANK OF CALIFORNIA, N.A.
Agent, LC Issuer and Lender
By: /s/ CARL STUTZMAN
----------------------------------------
Name: Carl Stutzman
Title: Vice President
By: /s/ TONY R. WEBER
----------------------------------------
Name: Tony R. Weber
Title: Sr. Vice President
Address:
500 North Akard
4200 Lincoln Plaza
Dallas, Texas 75201
Attention: Randall L. Osterberg
Telephone: (214) 922-4200
Telecopy: (214) 922-4209
S-4
<PAGE> 72
DEN NORSKE BANK ASA
Co-Agent and Lender
By: /s/ CHARLES E. HALL, SR.
----------------------------------------
Name: Charles E. Hall, Sr.
Title: Vice President
By: /s/ JAY MORTEN KREUTZ
----------------------------------------
Name: Jay Morten Kreutz
Title: Vice President
Address:
Three Allen Center
333 Clay Street, Suite 4890
Houston, Texas 77002
Attention: Helene Vales
Telephone: (713) 844-9255
Telecopy: (713) 757-1167
S-5
<PAGE> 73
BANK ONE, TEXAS, N.A.
Co-Agent and Lender
By: /s/ W. MARK CRANMER
----------------------------------------
Name: W. Mark Cranmer
Title: Vice President
Address:
1717 Main Street
Dallas, Texas 75063
Attention: Wm. Mark Cranmer
Telephone: (214) 290-2212
Telecopy: (214) 290-2332
S-6
<PAGE> 74
THE FIRST NATIONAL BANK OF CHICAGO
Co-Agent and Lender
By: /s/ DIXON P. SCHULTZ
----------------------------------------
Name: Dixon P. Schultz
Title: Vice President
By:
----------------------------------------
Name:
Title:
Address:
One First National Plaza
0634, 1FNP, 10
Chicago, Illinois 60670
Attention: Jamilla Pointer
Telephone: (312) 732-8875
Telecopy: (312) 732-4810
with copy to:
1100 Louisiana
Suite 3200
Houston, Texas 77002
Attention: Ron Dierker
Telephone: (713) 654-7341
Telecopy: (713) 654-7370
S-7
<PAGE> 75
BANK OF SCOTLAND, Lender
By: /s/ ANNIE CHIN TAT
----------------------------------------
Name: Annie Chin Tat
Title: Vice President
Address:
565 Fifth Avenue
New York, New York 10017
Attention: Ms. Annie Chin Tat
Telephone: (212) 450-0800
Telecopy: (212) 557-9460
S-8
<PAGE> 76
SOCIETE GENERALE SOUTHWEST AGENCY,
Lender
By: /s/ LOUIS P. LAVILLE, III
----------------------------------------
Name: Louis P. Laville, III
Title: Vice President
Address:
2001 Ross Ave., Suite 4800
Dallas, Texas 75201
Attention: Parker Laville
Telephone: (214) 979-2762
Telecopy: (214) 979-1104
S-9
<PAGE> 77
THE BANK OF NOVA SCOTIA, Lender
By: /s/ M. D. SMITH
----------------------------------------
Name: M. D. Smith
Title: Agent Operations
Address:
600 Peachtree St., N.E.
Atlanta, Georgia 30308
Attention:
Telephone:
Telecopy:
S-10
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF CHESAPEAKE ENERGY CORPORATION
(an Oklahoma corporation)
<TABLE>
<CAPTION>
Corporations State of Organization
- ------------ ---------------------
<S> <C>
AmGas Corporation Kansas
Chesapeake Acquisition Corporation Oklahoma
Chesapeake Canada Corporation Alberta, Canada
Chesapeake Columbia Corp. Oklahoma
Chesapeake Energy Louisiana Corporation Oklahoma
Chesapeake Energy Marketing, Inc. Oklahoma
Chesapeake Merger Corp. Oklahoma
Chesapeake Mid-Continent Corp. Oklahoma
Chesapeake Operating, Inc. Oklahoma
HEC Trading Company Texas
Hugoton Energy Corporation Kansas
Hugoton Exploration Corporation Kansas
Tiffany Gathering, Inc. Delaware
Partnerships
- ------------
AnSon Gas Marketing Oklahoma
Chesapeake Exploration Limited Partnership Oklahoma
Chesapeake Louisiana, L. P. Oklahoma
Mid-Continent Gas Pipeline Co. Oklahoma
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements
of Chesapeake Energy Corporation on Form S-8 (File Nos. 33-84256, 33-84258,
33-89282, 33-88196, 333-27525, 333-07255, 333-46129 and 333-48585), Form S-3
(File Nos. 333-04027 and 333-12533) and Form S-4 (File No. 333-48735) of our
report dated March 20, 1998, on our audits of the consolidated financial
statements of Chesapeake Energy Corporation as of December 31, 1997 and for the
six month period then ended, and as of June 30, 1997 and 1996 and for the years
then ended, which report is included in this Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
Oklahoma City, Oklahoma
March 31, 1998
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Chesapeake Energy Corporation on Form S-8 (File Nos. 33-84256, 33-84258,
33-89282, 33-88196, 333-27525, 333-07255, 333-46129 and 333-48585), Form S-3
(File Nos. 333-04027 and 333-12533) and Form S-4 (File No. 333-48735) of our
report dated September 20, 1995, except for the fourth paragraph of Note 9 which
is as of October 9, 1997, and except for the earnings per share information in
Note 1, which is as of March 24, 1998, on our audit of the consolidated
financial statements of Chesapeake Energy Corporation for the year ended June
30, 1995, which report is included in this Annual Report on Form 10-K.
PRICE WATERHOUSE LLP
Houston, Texas
March 31, 1998
<PAGE> 1
EXHIBIT 23.3
CONSENT OF WILLIAMSON PETROLEUM CONSULTANTS, INC.
As independent oil and gas consultants, Williamson Petroleum Consultants, Inc.
hereby consents to (a) the use of our reserve report entitled "Evaluation of Oil
and Gas Reserves to the Interests of Chesapeake Energy Corporation in Certain
Properties in Louisiana and Texas, Effective December 31, 1997, for Disclosure
to the Securities and Exchange Commission, Williamson Project 7.8569" dated
March 12, 1998 and all references to our firm included in or made a part of the
Chesapeake Energy Corporation Annual Report on Form 10-K to be filed with the
Securities and Exchange Commission on or about March 31, 1998 and (b) to the
incorporation by reference of this Form 10-K for the year ending December 31,
1997 in the Registration Statements on Form S-8 (Nos. 33-84256, 33-84258,
33-88196, 333-07255, 33-89282, 333-27525, 333-46129 and 333-48585), Form S-3
(Nos. 333-04027 and 333-12533) and on Form S-4 (No. 333-48735).
/s/ WILLIAMSON PETROLEUM CONSULTANTS, INC.
---------------------------------------------
WILLIAMSON PETROLEUM CONSULTANTS, INC.
Houston, Texas
March 31, 1998
<PAGE> 1
EXHIBIT 23.4
CONSENT OF NETHERLAND, SEWELL & ASSOCIATES, INC.
As independent oil and gas consultants, Netherland, Sewell & Associates, Inc.
hereby consent to (a) the use of our reserve report dated December 31, 1997 and
all references to our firm included in or made a part of the Chesapeake Energy
Corporation Annual Report on Form 10-K to be filed with the Securities and
Exchange Commission on or about March 31, 1998 and (b) to the incorporation by
reference of this Form 10-K for the year ending December 31, 1997 in the
Registration Statements on Form S-8 (Nos. 33-84256, 33-84258, 33-88196,
333-07255, 33-89282, 333-27525, 333-46129 and 333-48585), on Form S-3 (Nos.
333-04027 and 333-12533) and on Form S-4 (No.
333-48735).
NETHERLAND, SEWELL & ASSOCIATES, INC.
Dallas, Texas
March 31, 1998
<PAGE> 1
EXHIBIT 23.5
CONSENT OF PORTER ENGINEERING ASSOCIATES
As independent oil and gas consultants, Porter Engineering Associates hereby
consents to (a) the use of our reserve report dated December 31, 1997 and all
references to our firm included in or made a part of the Chesapeake Energy
Corporation Annual Report on Form 10-K to be filed with the Securities and
Exchange Commission on or about March 31, 1998 and (b) to the incorporation by
reference of this Form 10-K for the year ending December 31, 1997 in the
Registration Statements on Form S-8 (Nos. 33-84256, 33-84258, 33-88196,
333-07255, 33-89282, 333-27525, 333-46129 and 333-48585), on Form S-3 (Nos.
333-04027 and 333-12533) and on Form S-4 (No.
333-48735).
PORTER ENGINEERING ASSOCIATES
Joe H. Porter, PE
Oklahoma City, Oklahoma
March 31, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) Balance
sheet as of December 31, 1997 and Statement of income for six months ended
December 31,1997.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 123,860
<SECURITIES> 12,570
<RECEIVABLES> 74,865
<ALLOWANCES> 691
<INVENTORY> 5,493
<CURRENT-ASSETS> 217,721
<PP&E> 1,288,151
<DEPRECIATION> 608,964
<TOTAL-ASSETS> 952,784
<CURRENT-LIABILITIES> 153,480
<BONDS> 508,992
0
0
<COMMON> 743
<OTHER-SE> 279,463
<TOTAL-LIABILITY-AND-EQUITY> 952,784
<SALES> 153,898
<TOTAL-REVENUES> 232,864
<CGS> 246,990
<TOTAL-COSTS> 264,438
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 40
<INTEREST-EXPENSE> 17,448
<INCOME-PRETAX> (31,574)
<INCOME-TAX> 0
<INCOME-CONTINUING> (31,574)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (31,574)
<EPS-PRIMARY> (0.45)
<EPS-DILUTED> (0.45)
</TABLE>
