<PAGE> 1
===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF
1934
FOR THE TRANSITION PERIOD FROM____________TO____________
COMMISSION FILE NO. 1-13726
CHESAPEAKE ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
OKLAHOMA 73-1395733
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6100 NORTH WESTERN AVENUE
OKLAHOMA CITY, OKLAHOMA 73118
(Address of principal executive offices) (Zip Code)
(405) 848-8000
(Registrant's telephone number, including area code)
---------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
At October 30, 1998, there were 96,710,450 shares of the registrant's $.01
par value Common Stock outstanding.
===============================================================================
<PAGE> 2
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
INDEX TO FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets at September 30, 1998 (Unaudited) and
December 31, 1997 3
Consolidated Statements of Operations for the Three and Nine Months
Ended September 30, 1998 and 1997 (Unaudited) 4
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1998 and 1997 (Unaudited) 5
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 16
Item 3. Quantitative and Qualitative Disclosure About Market Risks 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 2. Changes in Securities and Use of Proceeds 25
Item 3. Defaults Upon Senior Securities 25
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 25
</TABLE>
2
<PAGE> 3
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(UNAUDITED)
($ IN THOUSANDS)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ............................................... $ 20,749 $ 123,860
Restricted cash ......................................................... 4,200 --
Short-term investments .................................................. -- 12,570
Accounts receivable:
Oil and gas sales ...................................................... 11,524 10,654
Oil and gas marketing sales ............................................ 23,120 20,493
Joint interest and other, net of allowance for doubtful accounts
of $1,209,000 and $691,000............................................ 30,183 38,781
Related parties ........................................................ 16,568 4,246
Inventory ............................................................... 6,327 5,493
Other ................................................................... 4,618 1,624
----------- -----------
Total current assets ................................................. 117,289 217,721
----------- -----------
PROPERTY AND EQUIPMENT:
Oil and gas properties, at cost based on full-cost accounting:
Evaluated oil and gas properties ....................................... 2,054,907 1,095,363
Unevaluated properties ................................................. 92,083 125,155
Less: accumulated depreciation, depletion and amortization.............. (1,176,946) (602,391)
----------- -----------
970,044 618,127
Other property and equipment ............................................ 78,974 67,633
Less: accumulated depreciation and amortization ......................... (20,537) (6,573)
----------- -----------
Total property and equipment ......................................... 1,028,481 679,187
----------- -----------
OTHER ASSETS .............................................................. 81,504 55,876
----------- -----------
TOTAL ASSETS ......................................................... $ 1,227,274 $ 952,784
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ........................................................ $ 43,150 $ 81,775
Accrued liabilities and other ........................................... 55,505 42,733
Revenues and royalties due others ....................................... 20,645 28,972
----------- -----------
Total current liabilities ............................................ 119,300 153,480
----------- -----------
LONG-TERM DEBT, NET ....................................................... 919,055 508,992
----------- -----------
REVENUES AND ROYALTIES DUE OTHERS ......................................... 12,524 10,106
----------- -----------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 10,000,000 shares authorized;
4,600,000 and 0 shares of 7% cumulative convertible stock
issued and outstanding at September 30, 1998 and December 31,
1997, respectively, entitled in liquidation to $230 million............. 230,000 --
Common stock, $.01 par value, 250,000,000 shares authorized;
96,702,650 and 74,298,061 shares issued and outstanding at.............. 967 743
September 30, 1998 and December 31, 1997, respectively
Paid-in capital ......................................................... 677,453 460,733
Accumulated deficit ..................................................... (702,063) (181,270)
Less: treasury stock, at cost; 8,503,300 and 0 shares
at September 30, 1998 and December 31, 1997, respectively............... (29,962) --
----------- -----------
Total stockholders' equity ........................................... 176,395 280,206
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ................................ $ 1,227,274 $ 952,784
=========== ===========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
3
<PAGE> 4
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- --------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
REVENUES:
Oil and gas sales ......................................... $ 70,082 $ 45,667 $ 195,962 $ 148,420
Oil and gas marketing sales ............................... 36,256 26,865 96,451 73,018
Interest and other ........................................ 778 5,878 3,573 14,585
--------- --------- --------- ---------
Total revenues ........................................ 107,116 78,410 295,986 236,023
--------- --------- --------- ---------
COSTS AND EXPENSES:
Production expenses ....................................... 14,208 3,894 36,775 11,071
Production taxes .......................................... 1,976 1,286 6,141 3,342
Oil and gas marketing expenses ............................ 34,720 26,690 94,686 72,282
Impairment of oil and gas properties ...................... -- -- 466,000 236,000
Impairment of other assets ................................ -- -- 10,000 --
Oil and gas depreciation, depletion and amortization ...... 34,069 28,550 109,311 95,571
Depreciation and amortization of other assets ............. 2,518 1,142 5,820 3,088
General and administrative ................................ 5,197 2,760 14,711 7,823
Interest .................................................. 18,577 8,575 47,930 20,909
--------- --------- --------- ---------
Total costs and expenses .............................. 111,265 72,897 791,374 450,086
--------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAX AND EXTRAORDINARY ITEM ..... (4,149) 5,513 (495,388) (214,063)
INCOME TAX BENEFIT ......................................... -- -- -- (17,898)
--------- --------- --------- ---------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM .................... (4,149) 5,513 (495,388) (196,165)
EXTRAORDINARY ITEM:
Loss on early extinguishment of debt ...................... -- -- (13,334) (177)
--------- --------- --------- ---------
NET INCOME (LOSS) .......................................... (4,149) 5,513 (508,722) (196,342)
PREFERRED STOCK DIVIDENDS .................................. (4,026) -- (8,051) --
--------- --------- --------- ---------
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS ......... $ (8,175) $ 5,513 $(516,773) $(196,342)
========= ========= ========= =========
EARNINGS PER COMMON SHARE (BASIC AND ASSUMING DILUTION)
Income (loss) before extraordinary item ................... $ (0.08) $ 0.08 $ (5.34) $ (2.79)
Extraordinary item ........................................ -- -- (0.14) --
--------- --------- --------- ---------
Net income (loss) ......................................... $ (0.08) $ 0.08 $ (5.48) $ (2.79)
========= ========= ========= =========
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING
Basic ..................................................... 98,046 70,376 94,355 70,376
========= ========= ========= =========
Assuming dilution ......................................... 98,046 72,699 94,355 70,376
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
4
<PAGE> 5
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1998 1997
--------- ---------
($ IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ................................................................ $(508,722) $(196,342)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation, depletion and amortization ............................... 113,449 97,571
Impairment of oil and gas assets ....................................... 466,000 236,000
Impairment of other assets ............................................. 10,000 --
Deferred taxes ......................................................... -- (17,898)
Amortization of loan costs ............................................. 1,682 1,088
Amortization of bond discount .......................................... 77 46
Gain on sale of fixed assets and other ................................. (142) (3,766)
Extraordinary loss ..................................................... 13,334 177
Equity in (earnings) losses of equity investees ........................ 487 (181)
Bad debt expense ....................................................... 516 324
--------- ---------
Cash provided by operating activities before changes
in current assets and liabilities .................................. 96,681 117,019
Changes in current assets and liabilities .............................. (43,358) (32,207)
--------- ---------
Cash provided by operating activities ................................ 53,323 84,812
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Exploration, development and acquisition of oil and gas properties ...... (478,394) (380,804)
Investment in preferred stock of Gothic Energy Corporation .............. (39,500) --
Proceeds from sale of assets ............................................ 6,714 1,190
Additions to other property and equipment ............................... (9,771) (40,605)
Long-term loans made to third parties ................................... -- (20,000)
Repayment of long-term loan ............................................. 2,000 --
Other investments ....................................................... -- (13,751)
--------- ---------
Cash used in investing activities .................................... (518,951) (453,970)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term borrowings ...................................... 658,750 292,626
Payments on long-term borrowings ........................................ (474,166) (12,750)
Proceeds from issuance of preferred stock ............................... 222,760 --
Purchase of treasury stock .............................................. (29,962) --
Dividends paid on common stock .......................................... (5,592) (1,405)
Dividends paid on preferred stock ....................................... (4,025) --
Cash received from exercise of stock options ............................ 131 1,340
Other financing ......................................................... -- (210)
--------- ---------
Cash provided by financing activities ................................ 367,896 279,601
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH ................................... (5,379) --
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS ................................. (103,111) (89,557)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ............................ 123,860 140,739
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD .................................. $ 20,749 $ 51,182
========= =========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
5
<PAGE> 6
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
1. ACCOUNTING PRINCIPLES
The accompanying unaudited consolidated financial statements of Chesapeake
Energy Corporation and subsidiaries (the "Company") have been prepared in
accordance with the instructions to Form 10-Q as prescribed by the Securities
and Exchange Commission. All material adjustments (consisting solely of normal
recurring adjustments) which, in the opinion of management, are necessary for a
fair presentation of the results for the interim periods have been reflected.
The results for the three and nine months ended September 30, 1998 are not
necessarily indicative of the results to be expected for the full fiscal year.
The Company changed its fiscal year end from June 30 to December 31 for the
period ended December 31, 1997. This Form 10-Q relates to the three and nine
months ended September 30, 1998 (the "Current Quarter" and "Current Period",
respectively) and September 30, 1997 (the "Prior Quarter" and "Prior Period",
respectively).
2. RECENT EVENTS
On July 7, 1998 the Company's Board of Directors authorized management to
explore strategic alternatives to enhance shareholder value, including a
possible sale or merger of the Company, based upon the Board's opinion that the
market was substantially undervaluing the Company's assets and exploration
potential. Also on July 7, 1998 Chesapeake's Board of Directors unanimously
adopted a shareholder rights plan designed to deter coercive takeover tactics
and to prevent a change of control from occurring without all shareholders
receiving a fair price.
Pursuant to the decision to explore various alternatives, the Company engaged
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ") to advise the
Company. The Company and DLJ are presently evaluating various alternatives,
including the potential sale or merger of the Company, sale of certain assets,
or alternative financial strategies. This process is underway and is expected to
be concluded within the next few months.
On November 2, 1998 the Company announced it had entered into an agreement to
tender its 19.9% stake in Pan East Petroleum Corp. ("Pan East") to Poco
Petroleums Ltd. and agreed to a property exchange with Pan East. Subject to the
successful completion by Poco of its tender offer, the Company anticipates
receiving approximately $26 million in cash and increasing its net reserves by
four bcfe. As of September 30, 1998, the Company's net investment in the common
stock of Pan East of $21.3 million has been accounted for using the equity
method and is included in Other Assets in the accompanying Consolidated Balance
Sheets.
3. LEGAL PROCEEDINGS
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.
A purported class action alleging violations of the Securities Act of 1933 and
the Oklahoma Securities Act has been filed against the Company and others on
behalf of investors who purchased common stock of Bayard Drilling Technologies,
Inc. ("Bayard") in, or traceable to, its initial public offering in November
1997. Total proceeds of the
6
<PAGE> 7
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
offering were $254 million, of which the Company received net proceeds of $90
million as a selling shareholder. 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 "problems" and their
impact on Bayard's operating results, (ii) increased costs associated with
Bayard's growth strategy, (iii) undisclosed pending related-party transactions
between Bayard and third parties other than the Company, (iv) Bayard's planned
use of offering proceeds and (v) Bayard's capital expenditures and liquidity.
The alleged defective disclosures are claimed to have resulted in a decline in
Bayard's share price following the public offering. Plaintiffs seek 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 the claims 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 drillbit steering method. Other claims
asserted by UPRC have been dismissed. UPRC's infringement 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 and enhanced damages, interest, costs
and attorneys' fees. The Company believes that it has meritorious defenses to
UPRC's allegations and that the UPRC patent is invalid. The Company has filed a
motion to construe UPRC's patent claims and other dispositive motions are
pending. No estimate of loss or range of estimate of 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.
4. NET LOSS PER SHARE
In February 1997, the Financial Accounting Standards Board ("FASB") 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 Current Quarter, the Current Period
and the Prior Period, there was no difference between actual weighted average
shares outstanding, which are used in computing basic EPS, and diluted weighted
average shares outstanding, which are used in computing diluted EPS. Options to
purchase 10.6 million and 8.5 million shares of common stock at a weighted
average exercise price of $3.88 and $5.48 were outstanding at September 30, 1998
and 1997, respectively, but were not included in the computation of diluted EPS
because the effect of these outstanding options would be antidilutive. A
reconciliation for the Prior Quarter is as follows:
7
<PAGE> 8
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Net Income Shares Outstanding
(Numerator) (Denominator) Per-Share
(in 000's) (in 000's) Amount
----------- ------------------ ---------
<S> <C> <C> <C>
For the quarter ended September 30, 1997:
Basic EPS
Income available to common stockholders ............ $5,513 70,376 $0.08
=====
Effect of Dilutive Securities
Employee stock options ............................. -- 2,323
------ ------
Diluted EPS
Income available to common stockholders
and assumed conversions .......................... $5,513 72,699 $0.08
====== ====== =====
</TABLE>
5. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131 "Disclosures about Segments of an Enterprise and Related Information". This
Statement establishes standards for the way that public enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. The Statement is effective for
annual financial statements for periods beginning after December 15, 1997 and
for interim financial statements issued subsequent to adoption in the annual
financial statements. The Company expects that the adoption of this standard
will not impact its results of operation or financial position, but may require
additional disclosures.
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, Accounting for Derivative Instruments and Hedging Activities ("FAS 133").
FAS 133 is effective for all fiscal quarters of all fiscal years beginning after
June 15, 1999 (January 1, 2000 for the Company). FAS 133 requires that all
derivative instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of derivatives are recorded each period in current
earnings or other comprehensive income, depending on whether a derivative is
designed as part of a hedge transaction and, if it is, the type of hedge
transaction. For fair-value hedge transactions in which the Company is hedging
changes in the fair value of an asset, liability, or firm commitment, changes in
the fair value of the derivative instrument will generally be offset in the
income statement by changes in the hedged item's fair value. For cash-flow hedge
transactions, in which the Company is hedging the variability of cash flows
related to a variable-rate asset, liability, or a forecasted transaction,
changes in the fair value of the derivative instrument will be reported in other
comprehensive income. The gains and losses on the derivative instrument that are
reported in other comprehensive income will be reclassified as earnings in the
periods in which earnings are impacted by the variability of the cash flows of
the hedged item. The ineffective portion of all hedges will be recognized in
current-period earnings.
The Company has not yet determined the impact that the adoption of FAS 133 will
have on its results of operations or its financial position.
6. ACQUISITION OF HUGOTON
In March 1998, the Company acquired Hugoton Energy Corporation ("Hugoton")
pursuant to a merger by issuing 25.8 million shares of the Company's common
stock in exchange for 100% of Hugoton's common stock. The acquisition of Hugoton
was accounted for using the purchase method as of March 1, 1998, and the results
of operations of Hugoton have been included since that date.
The following unaudited pro forma information has been prepared assuming Hugoton
had been acquired as of the beginning of the periods presented. The pro forma
information is presented for information purposes only and is not necessarily
indicative of what would have occurred if the acquisition had been made as of
those dates. In
8
<PAGE> 9
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
addition, the pro forma information is not intended to be a projection of future
results and does not reflect the efficiencies expected to result from the
integration of Hugoton.
Pro Forma Information (Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1998 1997
----------- ----------
(In thousands, except per share data)
<S> <C> <C>
Revenues................................................ $ 305,678 $ 294,462
Loss before extraordinary item.......................... $ (496,837) $ (192,285)
Net Loss................................................ $ (510,171) $ (192,462)
Loss before extraordinary item per common share......... $ (4.96) $ (2.00)
Net loss per common share............................... $ (5.10) $ (2.00)
</TABLE>
The Company acquired other businesses and oil and gas properties in the Current
Period. The results of operations of these businesses and properties were not
material in relation to the Company's consolidated results of operations.
7. SENIOR NOTES
9.125% Notes
The Company has outstanding $120 million in aggregate principal amount of 9.125%
Senior Notes which mature April 15, 2006. The 9.125% Notes bear interest at an
annual rate of 9.125%, payable semiannually on each April 15 and October 15. The
9.125% Notes are senior, unsecured obligations of the Company and are fully and
unconditionally guaranteed, jointly and severally, by the Guarantor Subsidiaries
(as defined below).
7.875% Notes
The Company has outstanding $150 million in aggregate principal amount of 7.875%
Senior Notes which mature March 15, 2004. The 7.875% Notes bear interest at the
rate of 7.875%, payable semiannually on each March 15 and September 15. The
7.875% Notes are senior, unsecured obligations of the Company and are fully and
unconditionally guaranteed, jointly and severally, by the Guarantor
Subsidiaries.
8.5% Notes
The Company has outstanding $150 million in aggregate principal amount of 8.5%
Senior Notes which mature March 15, 2012. The 8.5% Notes bear interest at the
rate of 8.5%, payable semiannually on each March 15 and September 15. The 8.5%
Notes are senior, unsecured obligations of the Company and are fully and
unconditionally guaranteed, jointly and severally, by the Guarantor
Subsidiaries.
9.625% Notes
On April 22, 1998, the Company issued $500 million aggregate principal amount of
9.625% Senior Notes which mature May 1, 2005. The 9.625% Notes bear interest at
an annual rate of 9.625%, payable semiannually on each May 1 and November 1. The
9.625% Notes are senior, unsecured obligations of the Company and are fully and
unconditionally guaranteed, jointly and severally, by the Guarantor
Subsidiaries.
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 its 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 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
9
<PAGE> 10
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
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 9.125% and 9.625% 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
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 three and nine months ended September 30, 1998, the only
Non-Guarantor Subsidiary was Chesapeake Energy Marketing, Inc. As of and for the
three and nine months ended September 30, 1997, the Non-Guarantor Subsidiaries
were Chesapeake Energy Marketing, Inc. and Chesapeake Canada Corporation. For
the 1997 and 1998 periods, the remaining subsidiaries of the Company were
Guarantor Subsidiaries.
10
<PAGE> 11
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF SEPTEMBER 30, 1998
($ IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR COMPANY
SUBSIDIARIES SUBSIDIARIES (PARENT) ELIMINATIONS CONSOLIDATED
------------ ------------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ............ $ (4,882) $ 2,981 $ 26,850 $ -- $ 24,949
Short-term investments ............... -- -- -- -- --
Accounts receivable, net ............. 56,930 32,746 276 (8,557) 81,395
Inventory ............................ 6,189 138 -- -- 6,327
Other ................................ 4,059 43 516 -- 4,618
----------- ----------- ----------- ----------- -----------
Total Current Assets .............. 62,296 35,908 27,642 (8,557) 117,289
----------- ----------- ----------- ----------- -----------
PROPERTY AND EQUIPMENT:
Oil and gas properties ............... 2,054,907 -- -- -- 2,054,907
Unevaluated leasehold ................ 92,083 -- -- -- 92,083
Other property and equipment ......... 59,484 2,572 16,918 -- 78,974
Less: accumulated depreciation,
depletion and amortization ......... (1,196,120) (85) (1,278) -- (1,197,483)
----------- ----------- ----------- ----------- -----------
Total Property and Equipment ...... 1,010,354 2,487 15,640 -- 1,028,481
----------- ----------- ----------- ----------- -----------
INVESTMENTS IN SUBSIDIARIES AND
INTERCOMPANY ADVANCES ................ 474,616 -- 471,151 (945,767) --
OTHER ASSETS ........................... 39,500 580 41,424 -- 81,504
----------- ----------- ----------- ----------- -----------
TOTAL ASSETS ...................... $ 1,586,766 $ 38,975 $ 555,857 $ (954,324) $ 1,227,274
=========== =========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable and current maturities
of long-term debt .................. $ -- $ -- $ -- $ -- $ --
Accounts payable and other ........... 82,006 14,910 31,240 (8,856) 119,300
----------- ----------- ----------- ----------- -----------
Total Current Liabilities ......... 82,006 14,910 31,240 (8,856) 119,300
----------- ----------- ----------- ----------- -----------
LONG-TERM DEBT ......................... -- -- 919,055 -- 919,055
----------- ----------- ----------- ----------- -----------
REVENUES PAYABLE ....................... 12,524 -- -- -- 12,524
----------- ----------- ----------- ----------- -----------
INTERCOMPANY PAYABLES .................. 1,346,717 10,524 (1,357,540) 299 --
----------- ----------- ----------- ----------- -----------
STOCKHOLDERS' EQUITY:
Preferred Stock ...................... -- -- 230,000 -- 230,000
Common Stock ......................... 27 1 956 (17) 967
Other ................................ 145,492 13,540 732,146 (945,750) (54,572)
----------- ----------- ----------- ----------- -----------
Total Stockholders' Equity ........ 145,519 13,541 963,102 (945,767) 176,395
----------- ----------- ----------- ----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY ............ $ 1,586,766 $ 38,975 $ 555,857 $ (954,324) $ 1,227,274
=========== =========== =========== =========== ===========
</TABLE>
11
<PAGE> 12
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 1997
($ IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR COMPANY
SUBSIDIARIES SUBSIDIARIES (PARENT) ELIMINATIONS CONSOLIDATED
------------ ------------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ............. $ (589) $ 13,999 $ 110,450 $ -- $ 123,860
Short-term investments ................ -- -- 12,570 -- 12,570
Accounts receivable, net .............. 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)
----------- ----------- ----------- ----------- -----------
Total Property and Equipment ....... 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 PAYABLE ........................ 10,106 -- -- -- 10,106
----------- ----------- ----------- ----------- -----------
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
----------- ----------- ----------- ----------- -----------
Total Stockholders' Equity ......... (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>
12
<PAGE> 13
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR COMPANY
SUBSIDIARIES SUBSIDIARIES (PARENT) ELIMINATIONS CONSOLIDATED
------------ ------------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
REVENUES:
Oil and gas sales ........................... $ 69,780 $ (187) $ -- $ 489 $ 70,082
Oil and gas marketing sales ................. 973 64,769 -- (29,486) 36,256
Interest and other .......................... 966 405 28,024 (28,617) 778
--------- --------- --------- --------- ---------
Total Revenues ........................... 71,719 64,987 28,024 (57,614) 107,116
--------- --------- --------- --------- ---------
COSTS AND EXPENSES:
Production expenses and taxes ............... 16,184 -- -- -- 16,184
Oil and gas marketing expenses .............. 1,040 62,677 -- (28,997) 34,720
Impairment of oil and gas properties ........ -- -- -- -- --
Impairment of other assets .................. -- -- -- -- --
Oil and gas depreciation, depletion
and amortization .......................... 34,069 -- -- -- 34,069
Other depreciation and amortization ......... 1,637 88 793 -- 2,518
General and administrative .................. 4,514 636 47 -- 5,197
Interest .................................... 26,605 4 20,585 (28,617) 18,577
--------- --------- --------- --------- ---------
Total Costs and Expenses ................. 84,049 63,405 21,425 (57,614) 111,265
--------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM ...................... (12,330) 1,582 6,599 -- (4,149)
INCOME TAX EXPENSE (BENEFIT) .................. -- -- -- -- --
--------- --------- --------- --------- ---------
NET INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM .......................... (12,330) 1,582 6,599 -- (4,149)
--------- --------- --------- --------- ---------
EXTRAORDINARY ITEM:
Loss on early extinguishment of debt,
net of applicable income tax .............. -- -- -- -- --
--------- --------- --------- --------- ---------
NET INCOME (LOSS) ........................ $ (12,330) $ 1,582 $ 6,599 $ -- $ (4,149)
========= ========= ========= ========= =========
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997
REVENUES:
Oil and gas sales ........................... $ 45,049 $ -- $ -- $ 618 $ 45,667
Gas marketing sales ......................... -- 44,326 -- (17,461) 26,865
Interest and other .......................... 135 487 20,118 (14,862) 5,878
--------- --------- --------- --------- ---------
Total Revenues ........................... 45,184 44,813 20,118 (31,705) 78,410
--------- --------- --------- --------- ---------
COSTS AND EXPENSES:
Production expenses and taxes ............... 5,180 -- -- -- 5,180
Gas marketing expenses ...................... -- 43,533 -- (16,843) 26,690
Impairment of oil and gas properties ........ -- -- -- -- --
Oil and gas depreciation, depletion and
Amortization .............................. 28,550 -- -- -- 28,550
Other depreciation and amortization ......... 628 21 493 -- 1,142
General and administrative .................. 2,578 265 (83) -- 2,760
Interest .................................... 12,246 33 11,158 (14,862) 8,575
--------- --------- --------- --------- ---------
Total Costs and Expenses ................. 49,182 43,852 11,568 (31,705) 72,897
--------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAX ............... (3,998) 961 8,550 -- 5,513
INCOME TAX EXPENSE (BENEFIT) .................. -- -- -- -- --
--------- --------- --------- --------- ---------
NET INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM ..................... (3,998) 961 8,550 -- 5,513
EXTRAORDINARY ITEM:
Loss on early extinguishment of debt, net
of applicable income tax .................. -- -- -- -- --
--------- --------- --------- --------- ---------
NET INCOME (LOSS) ........................ $ (3,998) $ 961 $ 8,550 $ -- $ 5,513
========= ========= ========= ========= =========
</TABLE>
13
<PAGE> 14
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR COMPANY
SUBSIDIARIES SUBSIDIARIES (PARENT) ELIMINATIONS CONSOLIDATED
------------ ------------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
REVENUES:
Oil and gas sales ........................... $ 193,800 $ -- $ -- $ 2,162 $ 195,962
Oil and gas marketing sales ................. 973 173,405 -- (77,927) 96,451
Interest and other .......................... 1,471 685 72,007 (70,590) 3,573
--------- --------- --------- --------- ---------
Total Revenues ........................... 196,244 174,090 72,007 (146,355) 295,986
--------- --------- --------- --------- ---------
COSTS AND EXPENSES:
Production expenses and taxes ............... 42,916 -- -- -- 42,916
Oil and gas marketing expenses .............. 1,040 169,411 -- (75,765) 94,686
Impairment of oil and gas properties ........ 466,000 -- -- -- 466,000
Impairment of other assets .................. 10,000 -- -- -- 10,000
Oil and gas depreciation, depletion
and amortization .......................... 109,311 -- -- -- 109,311
Other depreciation and amortization ......... 3,698 142 1,980 -- 5,820
General and administrative .................. 13,122 1,535 54 -- 14,711
Interest .................................... 67,704 4 50,812 (70,590) 47,930
--------- --------- --------- --------- ---------
Total Costs and Expenses ................. 713,791 171,092 52,846 (146,355) 791,374
--------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM ...................... (517,547) 2,998 19,161 -- (495,388)
INCOME TAX EXPENSE (BENEFIT) .................. -- -- -- -- --
--------- --------- --------- --------- ---------
NET INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM .......................... (517,547) 2,998 19,161 -- (495,388)
--------- --------- --------- --------- ---------
EXTRAORDINARY ITEM:
Loss on early extinguishment of debt,
net of applicable income tax .............. (2,164) -- (11,170) -- (13,334)
--------- --------- --------- --------- ---------
NET INCOME (LOSS) ........................ $(519,711) $ 2,998 $ 7,991 $ -- $(508,722)
========= ========= ========= ========= =========
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
REVENUES:
Oil and gas sales ........................... $ 150,416 $ (3,579) $ -- $ 1,583 $ 148,420
Gas marketing sales ......................... -- 131,661 -- (58,643) 73,018
Interest and other .......................... 746 665 67,564 (54,390) 14,585
--------- --------- --------- --------- ---------
Total Revenues ........................... 151,162 128,747 67,564 (111,450) 236,023
--------- --------- --------- --------- ---------
COSTS AND EXPENSES:
Production expenses and taxes ............... 14,824 (411) -- -- 14,413
Gas marketing expenses ...................... -- 129,342 -- (57,060) 72,282
Impairment of oil and gas properties ........ 236,000 -- -- -- 236,000
Oil and gas depreciation, depletion
and amortization .......................... 96,864 (1,293) -- -- 95,571
Other depreciation and amortization ......... 1,737 30 1,321 -- 3,088
General and administrative .................. 6,348 691 784 -- 7,823
Interest .................................... 49,582 (184) 25,901 (54,390) 20,909
--------- --------- --------- --------- ---------
Total Costs and Expenses ................. 405,355 128,175 28,006 (111,450) 450,086
--------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAX ............... (254,193) 572 39,558 -- (214,063)
INCOME TAX EXPENSE (BENEFIT) .................. (19,384) (967) 2,453 -- (17,898)
--------- --------- --------- --------- ---------
NET INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM ..................... (234,809) 1,539 37,105 -- (196,165)
EXTRAORDINARY ITEM:
Loss on early extinguishment of debt, net
of applicable income tax .................. (179) -- 2 -- (177)
--------- --------- --------- --------- ---------
NET INCOME (LOSS) ........................ $(234,988) $ 1,539 $ 37,107 $ -- $(196,342)
========= ========= ========= ========= =========
</TABLE>
14
<PAGE> 15
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR COMPANY
SUBSIDIARIES SUBSIDIARIES (PARENT) ELIMINATIONS CONSOLIDATED
------------ ------------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
CASH FLOWS FROM OPERATING
ACTIVITIES: .......................................... $ 32,384 $ (21,068) $ 42,007 $ -- $ 53,323
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Oil and gas properties ............................... (478,394) -- -- -- (478,394)
Proceeds from sale of assets ......................... 3,114 -- 3,600 -- 6,714
Investment in preferred stock of Gothic .............. (39,500) -- -- -- (39,500)
Repayment of long-term loan .......................... 2,000 -- -- -- 2,000
Other additions ...................................... (6,161) (1,343) (2,267) -- (9,771)
--------- --------- --------- --------- ---------
(518,941) (1,343) 1,333 -- (518,951)
--------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings ............................. -- -- 658,750 -- 658,750
Payments on borrowings ............................... -- -- (474,166) -- (474,166)
Cash received from issuance of preferred stock ....... -- -- 222,760 -- 222,760
Cash paid for purchase of treasury stock ............. -- -- (29,962) -- (29,962)
Cash received from exercise of stock options ......... -- -- 131 -- 131
Cash dividends paid on common and
preferred stock .................................... -- -- (9,617) -- (9,617)
Intercompany advances, net ........................... 465,229 (2,545) (462,684) -- --
--------- --------- --------- --------- ---------
465,229 (2,545) (94,788) -- 367,896
--------- --------- --------- --------- ---------
Effect of exchange rate changes on cash .............. (5,379) -- -- -- (5,379)
--------- --------- --------- --------- ---------
Net increase (decrease) in cash ...................... (26,707) (24,956) (51,448) -- (103,111)
Cash, beginning of period ............................ (284) 13,694 110,450 -- 123,860
--------- --------- --------- --------- ---------
Cash, end of period .................................. $ (26,991) $ (11,262) $ 59,002 $ -- $ 20,749
========= ========= ========= ========= =========
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
CASH FLOWS FROM OPERATING ACTIVITIES: .................. $ 76,828 $ 742 $ 7,242 $ -- $ 84,812
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Oil and gas properties ............................... (380,868) 64 -- -- (380,804)
Proceeds from sale of assets ......................... 1,190 -- -- -- 1,190
Loans to third parties ............................... (2,000) -- (18,000) -- (20,000)
Other investments .................................... -- -- (13,751) -- (13,751)
Other additions ...................................... (34,723) (240) (5,642) -- (40,605)
--------- --------- --------- --------- ---------
(416,401) (176) (37,393) -- (453,970)
--------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term borrowings ................... -- -- 292,626 -- 292,626
Payments on borrowings ............................... (67,655) 1,710 53,195 -- (12,750)
Cash received from exercise of stock options.......... -- -- 1,340 -- 1,340
Cash dividends paid on common stock .................. -- -- (1,405) -- (1,405)
Other financing ...................................... -- (15) (195) -- (210)
Intercompany advances, net ........................... 396,018 (1,709) (394,309) -- --
--------- --------- --------- --------- ---------
328,363 (14) (48,748) -- 279,601
--------- --------- --------- --------- ---------
Net increase (decrease) in cash and cash
Equivalents ........................................ (11,210) 552 (78,899) -- (89,557)
Cash, beginning of period ............................ 4,865 6,099 129,775 -- 140,739
--------- --------- --------- --------- ---------
Cash, end of period .................................. $ (6,345) $ 6,651 $ 50,876 $ -- $ 51,182
========= ========= ========= ========= =========
</TABLE>
15
<PAGE> 16
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RECENT EVENTS
On July 7, 1998 the Company's Board of Directors authorized management to
explore strategic alternatives to enhance shareholder value, including a
possible sale or merger of the Company, based upon the Board's opinion that the
market is substantially undervaluing the Company's assets and exploration
potential. Also on July 7, 1998 Chesapeake's Board of Directors unanimously
adopted a shareholder rights plan designed to deter coercive takeover tactics
and to prevent a change of control from occurring without all shareholders
receiving a fair price.
Pursuant to the decision to explore various alternatives, the Company engaged
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ") to advise the
Company. The Company and DLJ are presently evaluating various alternatives,
including the potential sale or merger of the Company, sale of certain assets,
or alternative financial strategies. This process is underway and is expected to
be concluded within the next few months.
On November 2, 1998 the Company announced it entered into an agreement to tender
its 19.9% stake in Pan East Petroleum Corp. ("Pan East") to Poco Petroleums Ltd.
and agreed to a property exchange with Pan East. Subject to the successful
completion by Poco of its tender offer, the Company anticipates receiving
approximately $26 million in cash and increasing its net reserves by four
billion cubic feet equivalent of natural gas. As of September 30, 1998, the
Company's net investment in the common stock of Pan East of $21.3 million has
been accounted for using the equity method and is included in Other Assets in
the accompanying Consolidated Balance Sheets.
RESULTS OF OPERATIONS
Three Months Ended September 30, 1998 vs. September 30, 1997
General. For the three months ended September 30, 1998 (the "Current Quarter"),
the Company realized a net loss of $4.1 million, or a loss of $0.08 per common
share after deducting preferred dividends of $4.0 million. This compares to net
income of $5.5 million, or income of $0.08 per common share, for the three
months ended September 30, 1997 (the "Prior Quarter").
During the Current Quarter and Prior Quarter, the Company did not record any
impairment of its oil and gas properties. Any future impairment is subject to a
number of factors, some of which are beyond the control of the Company,
including oil and natural gas prices. Lower oil or gas prices could have a
material adverse effect on the Company's operations and financial condition and
may result in future write-downs of the Company's oil and gas properties due to
full-cost ceiling test limitations. As of September 30, 1998, the Company
estimates that the present value (SEC-PV10%) of its proved reserves, based on
prices at that time of $15.43 per bbl (NYMEX) and $2.32 per mcf (NYMEX),
adjusted for usual well-head quality and location (basis) variances, was $929
million. The Company estimates that, as of September 30, 1998, for every $0.10
per thousand cubic feet ("mcf") reduction in natural gas prices and $1.00 per
barrel of oil ("bbl") reduction in oil prices, the present value of the
Company's proved oil and gas reserves would be reduced by approximately $55
million and $22 million, respectively.
Oil and Gas Sales. During the Current Quarter, oil and gas sales increased
significantly to $70.1 million from $45.7 million, an increase of $24.4 million,
or 53%. This increase resulted from significantly higher oil and gas production
volumes, which increased from 19.2 bcfe in the Prior Quarter to 36.3 bcfe in the
Current Quarter, an increase of 17.1 bcfe, or 89%. The higher production volumes
were primarily the result of the Company's acquisitions completed during the
first four months of 1998. For the Current Quarter, the Company produced 1.6
million barrels of oil ("mmbo") and 26.8 billion cubic feet of natural gas
("bcf"), compared to 0.9 mmbo and 13.9 bcf in the Prior Quarter. Average oil
prices realized were $12.41 per barrel of oil in the Current Quarter compared
16
<PAGE> 17
to $18.48 per barrel in the Prior Quarter, a decrease of 33%. Average gas prices
realized were $1.88 per mcf in the Current Quarter compared to $2.12 per mcf in
the Prior Quarter, a decrease of 11%.
For the Current Quarter, the Company realized an average price of $1.93 per
thousand cubic feet equivalent of natural gas ("mcfe"), compared to $2.38 per
mcfe in the Prior Quarter. The Company's hedging activities resulted in
increased oil and gas revenues of $6.5 million, or $0.18 per mcfe, in the
Current Quarter, compared to increases in oil and gas revenues of $0.4 million
in the Prior Quarter.
The following table shows the Company's production by region for the Current
Quarter and the Prior Quarter:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------------------
1998 1997
----------------------------- --------------------------
OPERATING AREAS MMCFE PERCENT MMCFE PERCENT
- --------------------- ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Mid-Continent ................ 17,969 50% 4,277 22%
Gulf Coast ................... 13,099 36 13,793 72
Canada ....................... 2,533 7 -- --
Other areas .................. 2,667 7 1,091 6
------ ------ ------ ------
Total ................... 36,268 100% 19,161 100%
====== ====== ====== ======
</TABLE>
Natural gas production represented approximately 74% of the Company's total
production volume on an equivalent basis in the Current Quarter, compared to 73%
in the Prior Quarter. The Company anticipates natural gas will represent 70-80%
of anticipated 1998 and 1999 production.
Oil and Gas Marketing Sales. The Company realized $36.3 million in oil and gas
marketing sales for third parties in the Current Quarter, with corresponding oil
and gas marketing expenses of $34.7 million, for a gross profit margin of $1.6
million. This compares to sales of $26.9 million and expenses of $26.7 million,
resulting in a gross profit margin of $0.2 million in the Prior Quarter.
Interest and Other. Interest and other revenues for the Current Quarter were
$0.8 million compared to $5.9 million in the Prior Quarter. The decrease was
primarily caused by the Company maintaining lower invested cash balances
resulting in reduced interest income during the Current Quarter.
Production Expenses and Taxes. Production expenses increased to $14.2 million in
the Current Quarter, a $10.3 million increase from $3.9 million incurred in the
Prior Quarter. This significant increase was due to higher production
attributable to acquisitions and higher unit-of-production expense. On a
production unit basis, production expenses were $0.39 and $0.20 per mcfe in the
Current and Prior Quarters, respectively. Properties acquired in late 1997 and
1998 typically have higher unit-of-production expenses than the Company's
historical production base. The Company anticipates production expenses will
average $0.40 per mcfe for 1998.
Production taxes, which consist primarily of wellhead severance taxes, were $2.0
million and $1.3 million in the Current and Prior Quarters, respectively. This
increase was the result of increased production, offset by certain accounting
reclassifications. On a per unit basis, production taxes were $0.05 per mcfe in
the Current Quarter compared to $0.07 per mcfe in the Prior Quarter. The Company
anticipates incurring production taxes at the rate of $0.07 per mcfe for the
remainder of 1998 and 1999.
Oil and Gas Depreciation, Depletion and Amortization. Depreciation, depletion
and amortization of oil and gas properties ("DD&A") for the Current Quarter was
$34.1 million, compared to $28.6 million in the Prior Quarter. This increase was
caused by significantly increased production, partially offset by a decrease in
the DD&A rate per mcfe from $1.49 to $0.94 in the Prior and Current Quarters,
respectively. The Company's DD&A rate is expected to be approximately
$0.95-$1.00 per mcfe for the remainder of 1998.
Depreciation and Amortization of Other Assets. Depreciation and amortization of
other assets ("D&A") increased to $2.5 million in the Current Quarter compared
to $1.1 million in the Prior Quarter. This increase in D&A was caused by
increased investments in depreciable buildings and equipment incurred in
conjunction with the
17
<PAGE> 18
acquisitions and increased amortization of debt issuance costs as a result of
the issuance of Senior Notes in April 1998. The Company anticipates D&A expense
throughout the remainder of 1998 to remain at approximately the same level
incurred in the Current Quarter.
General and Administrative. General and administrative expenses ("G&A"), which
are net of capitalized internal payroll and non-payroll expenses, were $5.2
million in the Current Quarter compared to $2.8 million in the Prior Quarter.
This increase was primarily caused by increased employment levels resulting from
the Company's acquisitions. The Company capitalized $0.8 million of internal
costs in the Current Quarter directly related to the Company's oil and gas
exploration and development efforts, compared to $1.4 million in the Prior
Quarter. The Company anticipates that G&A costs for the remainder of 1998 will
not increase significantly and expects G&A costs to trend somewhat lower in
1999.
Interest. Interest expense increased to $18.6 million in the Current Quarter
from $8.6 million in the Prior Quarter. This increase was a result of additional
interest expense in the Current Quarter on the $500 million principal amount of
Senior Notes issued on April 22, 1998. In addition to the interest expense
reported, the Company capitalized $2.0 million of interest during the Current
Quarter compared to $2.6 million capitalized in the Prior Quarter. The Company
does not anticipate interest expense will increase significantly during the
remainder of 1998.
Provision for Income Taxes. The Company recorded no income tax expense for the
Current Quarter or the Prior Quarter. At September 30, 1998, the Company had a
net operating loss carryforward of approximately $525 million for regular
federal income taxes which will expire in future years beginning in 2007.
Management believes that it 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 has been recorded equaling the net deferred tax
asset. The Company does not expect to record any book income tax expense or
benefit for the remainder of 1998.
Nine Months Ended September 30, 1998 vs. September 30, 1997
General. For the nine months ended September 30, 1998 (the "Current Period"),
the Company realized a net loss of $508.7 million, or a loss of $5.48 per common
share after deducting preferred dividends of $8.1 million. This compares to a
net loss of $196.3 million, or a loss of $2.79 per common share, in the nine
months ended September 30, 1997 (the "Prior Period"). The loss in the Current
Period was primarily caused by a $466 million asset writedown recorded under the
full-cost method of accounting, a $10 million impairment related to certain of
the Company's gas processing and transportation assets located in Louisiana, a
$13.3 million extraordinary loss on the early extinguishment of debt, and a
$19.4 million loss from recurring operations. The asset writedown was partially
caused by the acquisitions completed during the Current Period for consideration
in excess of the present value (10% discount) of the future net revenues of the
acquired proved reserves as of March 31, 1998 or June 30, 1998. See "-
Impairment of Oil and Gas Properties". The loss in the Prior Period was caused
by a $236 million asset write-down recorded under the full-cost method of
accounting. The asset writedown in the Prior Period was primarily caused by poor
exploration results in the Company's drilling program, particularly in the
Austin Chalk portion of the Louisiana Trend, combined with decreased oil and gas
prices, and higher drilling and equipping costs.
Oil and Gas Sales. During the Current Period, oil and gas sales increased
significantly to $196.0 million from $148.4 million, an increase of $47.6
million, or 32%. This increase resulted from significantly higher oil and gas
production volumes, which increased from 61.0 bcfe in the Prior Period to 96.5
bcfe in the Current Period, an increase of 35.5 bcfe, or 58%. The higher
production volumes were primarily the result of the Company's acquisitions
completed during the first four months of 1998. For the Current Period, the
Company produced 4.6 mmbo and 69.0 bcf, compared to 2.5 mmbo and 45.9 bcf in the
Prior Period. Average oil prices realized were $13.21 per barrel in the Current
Period compared to $19.66 per barrel in the Prior Period, a decrease of 33%.
Average gas prices realized were $1.96 per mcf in the Current Period compared to
$2.15 per mcf in the Prior Period, a decrease of 9%.
For the Current Period, the Company realized an average price of $2.03 per mcfe,
compared to $2.43 per mcfe in the Prior Period. The Company's hedging activities
resulted in increased oil and gas revenues of $10.5 million, or
18
<PAGE> 19
$0.11 per mcfe, in the Current Period, compared to increases in oil and gas
revenues of $0.1 million in the Prior Period.
The following table shows the Company's production by region for the Current
Period and the Prior Period:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------------------
1998 1997
----------------------------- ---------------------------
OPERATING AREAS MMCFE PERCENT MMCFE PERCENT
- --------------------- ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Mid-Continent ................ 44,809 46% 12,568 21%
Gulf Coast ................... 39,519 41 45,136 74
Canada ....................... 5,677 6 -- --
Other areas .................. 6,457 7 3,291 5
------ ------ ------ ------
Total ................... 96,462 100% 60,995 100%
====== ====== ====== ======
</TABLE>
Natural gas production represented approximately 72% of the Company's total
production volume on an equivalent basis in the Current Period, compared to 75%
in the Prior Period.
Oil and Gas Marketing Sales. The Company realized $96.4 million in oil and gas
marketing sales for third parties in the Current Period, with corresponding oil
and gas marketing expenses of $94.7 million, resulting in a gross profit margin
of $1.7 million. This compares to sales of $73.0 million and expenses of $72.3
million with a gross profit margin of $0.7 million in the Prior Period.
Interest and Other. Interest and other revenues for the Current Period were $3.6
million compared to $14.6 million in the Prior Period. The decrease was
primarily caused by the Company maintaining lower invested cash balances
resulting in reduced interest income during the Current Period.
Production Expenses and Taxes. Production expenses increased to $36.8 million in
the Current Period, a $25.7 million increase from $11.1 million incurred in the
Prior Period, due to the significantly higher production levels and higher per
unit costs. On a production unit basis, production expenses were $0.38 and $0.18
per mcfe in the Current and Prior Periods, respectively. The primary reason for
the increase per mcfe was production from properties acquired in late 1997 and
1998, which typically have higher unit-of-production expenses than the Company's
historical production base.
Production taxes, which consist primarily of wellhead severance taxes, were $6.1
million and $3.3 million in the Current and Prior Periods, respectively. This
increase was primarily the result of increased production. On a per unit basis,
production taxes were $0.06 per mcfe in the Current Period compared to $0.05 per
mcfe in the Prior Period, the result of higher tax rates associated with
production from properties acquired in late 1997 and 1998 compared to the
Company's historical production base.
Impairment of Oil and Gas Properties. The Company utilizes the full-cost method
to account for its investments 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, including 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 $466
million in the Current Period ($250 million recorded during the quarter ended
March 31, 1998, and $216 million recorded during the quarter ended June
19
<PAGE> 20
30, 1998), compared to an impairment charge of $236 million in the Prior Period.
The writedown in the Current Period was caused by a combination of several
factors, including the acquisitions completed by the Company during the Current
Period, which were accounted for using the purchase method. The most significant
of these acquisitions were Hugoton Energy Corporation and DLB Oil & Gas, Inc.
Higher drilling and completion costs, the evaluation of certain leasehold,
seismic and other exploration-related costs that were previously unevaluated,
together with decreases in oil and gas prices from December 31, 1997 to June 30,
1998, were the remaining contributing factors which led to the writedown in the
Current Period. The $236 million writedown incurred in the Prior Period was due
primarily to significant expenditures for acreage acquisition and drilling costs
followed by unfavorable exploration and production results in Louisiana,
together with increases in drilling and equipment costs and lower oil and gas
prices as of June 30, 1997. Future impairment charges, if any, will be dependent
upon several factors, primarily oil and gas prices in effect at the date of
determination and the results of the Company's exploration activities.
Impairment of Other Assets. In the Current Period, the Company incurred an
impairment charge of $10 million as of June 30, 1998 related to certain of the
Company's gas processing and transportation assets located in Louisiana. No such
charge was recorded in the Prior Period.
Oil and Gas Depreciation, Depletion and Amortization. DD&A for the Current
Period was $109.3 million, compared to $95.6 million in the Prior Period. This
increase was caused by significantly increased production offset by a decrease
in the DD&A rate per mcfe from $1.57 to $1.13 in the Prior and Current Periods,
respectively.
Depreciation and Amortization of Other Assets. D&A increased to $5.8 million in
the Current Period compared to $3.1 million in the Prior Period. This increase
in D&A was caused by increased investments in depreciable buildings and
equipment incurred in conjunction with acquisitions and increased amortization
of debt issuance costs as a result of the issuance of Senior Notes in April
1998.
General and Administrative. G&A, which is net of capitalized internal payroll
and non-payroll expenses, was $14.7 million in the Current Period compared to
$7.8 million in the Prior Period. This increase was primarily caused by
increased employment levels associated with the Company's acquisitions. The
Company capitalized $4.0 million of internal costs in the Current Period
directly related to the Company's oil and gas exploration and development
efforts, compared to $4.2 million in the Prior Period.
Interest. Interest expense increased to $47.9 million in the Current Period from
$20.9 million in the Prior Period. This increase was a result of additional
interest expense in the Current Period on the $500 million principal amount of
Senior Notes issued on April 22, 1998. In addition to the interest expense
reported, the Company capitalized $5.8 million of interest during the Current
Period compared to $7.9 million capitalized in the Prior Period.
Provision for Income Taxes. The Company recorded no income tax expense for the
Current Period, and recorded a $17.9 million tax benefit in the Prior Period.
Loss on Early Extinguishment of Debt. During the Current Period and Prior
Period, the Company recorded a loss on early extinguishment of debt of $13.3
million and $0.2 million, respectively. The loss in the Current Period was due
primarily to the early retirement of the Company's 10.5% Senior Notes due 2002.
The cost to acquire the $90 million aggregate principal amount 10.5% Senior
Notes of $99 million, together with the write-off of associated debt issue
costs, resulted in an extraordinary charge of $13.3 million during the Current
Period. The Company did not record any such charges in the Current Quarter or
Prior Quarter.
20
<PAGE> 21
RISK MANAGEMENT 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. The
Company only enters into commodity hedging transactions related to the Company's
oil and gas production volumes or physical purchase or sale commitments of its
oil and gas marketing subsidiaries. Results from commodity hedging transactions
are reflected in oil and gas sales to the extent related to the Company's oil
and gas production. Gains or losses on crude oil and natural gas hedging
transactions are recognized as price adjustments in the months of related
production.
As of September 30, 1998, the Company had the following natural gas swap
arrangement for periods after September 1998:
<TABLE>
<CAPTION>
MONTHLY NYMEX-INDEX
VOLUME STRIKE PRICE
MONTHS (MMBTU) (PER MMBTU)
------ ------- ------------
<S> <C> <C>
October 1998............... 4,960,000 $ 2.346
</TABLE>
The swap arrangement listed above was closed but not settled as of September 30,
1998, resulting in net proceeds to the Company of $1.1 million in October 1998.
The Company has closed transactions for natural gas previously hedged for the
period April 1999 through November 1999 and locked in net proceeds of $3.2
million. Subsequent to September 30, 1998, the Company sold December 1998
natural gas call options with a strike price of $2.60 on volume of 3.1 bcf for
$0.1325 per mmbtu, and sold January 1999 natural gas call options with a strike
price of $2.70 on volume of 3.1 bcf for $0.2225 per mmbtu.
As of October 15, 1998, the Company closed transactions for oil previously
hedged from January 1999 through December 1999, resulting in a $0.9 million
reduction of revenue. The Company has closed transactions for crude oil
previously hedged for the period from September 1998 through February 1999 and
has locked in net proceeds of $0.4 million.
The Company also utilizes hedging strategies to manage fixed-interest rate
exposure. Through the use of a swap arrangement, the Company believes that it
can benefit from stable or falling interest rates and reduce its upfront
interest expense. As of September 30, 1998, the Company's interest rate swap
resulted in a $0.2 million reduction of interest expense for the period August
1998 through October 1998, which settled on November 2, 1998.
LIQUIDITY AND CAPITAL RESOURCES
In April 1998, the Company completed an offering of $230 million of 7%
Cumulative Convertible Preferred Stock and $500 million principal amount of
9.625% Senior Notes due 2005. The net proceeds of these offerings were
approximately $711 million, of which $170 million was used to retire all of the
Company's commercial bank debt, approximately $99 million was used to retire all
$90 million principal amount of the Company's 10.5% Senior Notes due 2002, $345
million was used to fund certain of the Company's acquisitions, with the balance
of the net proceeds increasing the Company's working capital.
As of September 30, 1998, the Company had a working capital deficit of
approximately $2.0 million. The Company, as the result of significantly lower
oil and gas prices and a change in the Company's strategy away from higher risk
drilling and toward a more balanced acquisition and exploitation strategy, has
continued to reduce its capital expenditure plans. The Company currently
estimates that it will expend approximately $50 million for drilling, seismic
and leasehold expenditures for the three months ended December 31, 1998 and is
currently
21
<PAGE> 22
budgeting $195 million in expenditures for 1999. The capital expenditure budget
is largely discretionary, and can be adjusted by the Company based on operating
results or other factors. The Company believes it has sufficient capital
resources from anticipated cash flow from operations, planned asset sales and
unused commercial bank facilities to fund the reduced drilling program for the
remainder of 1998.
As part of its capital resources plan, the Company has undertaken to sell
various non-core assets. The Company expects to realize between $75 and $100
million of cash from these asset sales within the six months beginning October
1, 1998, inclusive of the $26 million transaction announced on November 2, 1998
between Poco Petroleums Ltd. and the Company involving Pan East common stock and
oil and gas reserves in the Helmet area of British Columbia. Other completed
asset sales combined with offers currently in hand total approximately $25
million. These asset sales are independent of the Company's strategic
alternatives evaluation process.
The Company has a $50 million secured revolving bank facility with its primary
commercial bank. As a result of its reduced capital expenditure plan, reduced
acquisition program, and the planned sale of assets, the Company believes this
size of bank facility is appropriate for the foreseeable future, although
significantly larger secured facilities could be established within the limits
of the Company's senior note indentures. The facility contains terms and
conditions similar to the bank facilities the Company has had in the past,
including collateral-based borrowing limitations. The primary purpose of the
facility is to provide standby liquidity for the Company. The Company had no
borrowings outstanding under this facility at September 30, 1998.
On May 20, 1998, the Company's Board of Directors approved the expenditure of up
to $25 million to purchase outstanding Company common stock. On July 14, 1998,
the Board increased the authorized expenditure to $30 million. As of August 25,
1998 the Company had purchased approximately 8.5 million shares of common stock
for an aggregate amount of $30.0 million pursuant to such authorization.
The Company's senior note indentures contain restrictions on the Company's
ability to make Restricted Payments (as defined), including the payment of
preferred stock dividends unless certain tests are met. The Company anticipates
that, based on expected production, pricing, and expenses for the twelve months
ending December 31, 1998, it may not be able to meet the requirements to incur
additional unsecured indebtedness, and consequently would not be able to pay
cash dividends on its 7% Cumulative Convertible Preferred Stock as of February
1, 1999. Subsequent payments will be subject to the same restrictions and are
dependent upon variables that are beyond the Company's ability to predict,
chiefly the future level of oil and gas prices. This restriction does not affect
the Company's ability to borrow under or expand its secured commercial bank
facility. If the Company fails to pay dividends for six quarterly periods, the
holders of preferred stock would be entitled to elect two additional members to
the Board.
The Company's cash provided by operating activities before changes in current
assets and liabilities decreased 17% to $96.7 million during the Current Period
compared to $117.0 million during the Prior Period. The decrease was due
primarily to reduced operating income as a result of a decrease in average oil
and gas prices between periods.
Cash used in investing activities increased to $518.9 million during the Current
Period from $453.9 million in the Prior Period. The Company completed several
acquisitions requiring cash in the Current Period which totaled $345 million,
compared to none in the Prior Period, offset by a significant decrease in
drilling activity and leasehold acquisitions in the Current Period compared to
the Prior Period. During the Current Period the Company expended approximately
$143.8 million to initiate drilling on 166 gross (91.5 net) wells and invested
approximately $11.1 million in leasehold acquisitions. This compares to $254.4
million to initiate drilling on 140 gross (78.2 net) wells and $113.1 million to
purchase leasehold in the Prior Period.
Cash provided by financing activities was $367.9 million in the Current Period,
compared to $279.6 million in the Prior Period. During the Current Period, the
Company retired $465 million of debt consisting of $85 million of debt assumed
at the completion of the DLB acquisition, $120 million of debt assumed at the
completion of the Hugoton acquisition, $90 million of senior notes, and $170
million of borrowings made under its commercial bank credit facilities. The
Company issued $500 million in senior notes and $230 million in preferred stock.
During the Prior Period, the Company issued $300 million in Senior Notes.
22
<PAGE> 23
The Company is subject to certain routine legal proceedings, none of which are
expected to have a material adverse effect upon the Company's financial
condition or operations. The Company is also a defendant in other non-routine
lawsuits, which are described in Note 3 of the notes to the accompanying
financial statements. Also see Part II, Item 1 of this report. An adverse
outcome in one or more of such suits could have a material effect on the
Company, although management is unable to quantify the Company's exposure to
liability. No provision for litigation liability has been recorded for these
non-routine lawsuits in the Company's financial statements.
YEAR 2000
Project. The Company has placed a high priority on proactively resolving
computer or imbedded chip problems related to the "Year 2000" which may have
adverse material effects on its continuing operations or cash flow. This problem
would be caused by the inability of a component (software, hardware or equipment
with embedded microprocessors) to correctly process date data in and between the
20th and 21st centuries and therefore fail to properly perform its intended
functions, and/or to exchange correct date data with other components. This
problem would most typically be caused by erroneous date calculations, which
results from using two digits to signify a year (century implied), handling leap
years incorrectly or the use of "special" values that can be confused with
legitimate calendar dates. The scope of the Year 2000 project includes
conducting an inventory of the Company's software, hardware and "embedded
systems" equipment, assessing potential for failure and the associated risk,
prioritizing the need for remediation, repairing or replacing significant
noncompliant items, and testing. In addition, the Company will take a similar
approach to mitigating risks associated with the Year 2000 readiness of material
business partners (vendors, suppliers, customers, etc.). The project will also
identify contingency plans to cope with unexpected events resulting from Year
2000 issues.
Beginning in mid 1997, the Company began an assessment of its core financial and
operational software systems. Three critical systems were identified with date
sensitivities: oil and gas financial accounting, production accounting and
land/lease administration. A Year 2000 compliant release of the oil and gas
financial accounting package in use at the Company is available and has been
scheduled for implementation during the first calendar quarter of 1999. The
production accounting system in use at the Company is also scheduled for upgrade
to a Year 2000 compliant version early in 1999. Both of these upgrades have been
scheduled to maintain currency with the respective vendors' support and to take
advantage of additional features and performance enhancements. A project has
been underway since early 1997 to implement a completely revamped version of the
land/lease administration package in use at the Company to provide significantly
increased functionality and reliability. The terms of this development
arrangement stipulated Year 2000 compliance and is being monitored. Assessment
continues for lower priority software systems.
In addition, the Year 2000 compliant AS/400, on which the accounting package
resides, was upgraded to provide additional capacity in late 1997. Operating
system upgrades will be implemented in the near future for the Windows NT based
servers to complete their remediation.
Other activities either already underway or scheduled to start during the
balance of 1998 include testing of desktop PC's, assessment of material business
partners, and inventory of embedded systems in field locations. The following
table summarizes the current overall status of the project with anticipated
completion dates:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
Phase
-------------------------------------------------------------------------------------
Component Inventory Assessment/Prioritization Remediation/Contingency
---------------------- ----------------------- ------------------------------ ----------------------------
<S> <C> <C> <C>
Software November 30, 1998 December 31, 1998 June 30, 1999
Hardware December 31, 1998 January 31, 1999 March 31, 1999
Business Partners December 31, 1998 March 31, 1999 June 30, 1999
Embedded Systems March 31, 1999 April 30, 1999 June 30, 1999
(Non-IT Systems)
</TABLE>
23
<PAGE> 24
In addition to the above, during the second quarter of 1999 the Company will
develop an overall contingency plan to assure continued operations which will
include precautionary measures.
Cost. To date, the Company has incurred only minor consulting costs for Year
2000 project planning and scope definition. All software packages requiring an
upgrade which have been identified will be upgraded within normal maintenance
procedures and will not require additional out of pocket expense. In all cases
these upgrades had been previously scheduled to maintain desired vendor support
and no upgrade project schedule has been accelerated to achieve Year 2000
compliance. An accurate cost cannot be determined prior to conclusion of the
Assessment/Prioritization phase, but it is expected total project expenditures
including the use of outside consultants should not exceed $1 million. This does
not include any costs which may be assessed by joint venture partners on
properties not operated by the Company.
Risks/Contingency. The failure to remediate critical systems (software, hardware
or embedded systems), or the failure of a material business partner to resolve
critical Year 2000 issues could have serious adverse impact on the ability of
the Company to continue operations and meet obligations. At the current time, it
is believed that any interruption in operation will be minor and short-lived and
will pose no safety or environmental risks. However, until all assessment phases
have been completed it is impossible to accurately identify the risks, quantify
potential impacts or establish a contingency plan. The Company has not yet
clearly identified the most likely worst case scenario if the Company and its
material business partners do not achieve Year 2000 compliance on a timely
basis. The Company currently intends to complete its contingency planning by
June 30, 1999.
FORWARD LOOKING STATEMENTS
This Form 10-Q includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. All
statements other than statements of historical facts included in this Form 10-Q,
including without limitation statements under "Management's Discussion and
Analysis of Financial Condition and Results of Operations" regarding oil and gas
reserve estimates, planned capital expenditures, expected oil and gas
production, the Company's financial position, business strategy and other plans
and objectives for future operations, capital expenditures plans, expected
future expenses, and Year 2000 compliance efforts are forwardlooking statements.
Although the Company believes that the expectations reflected in such
forward-looking statements are reasonable, it can give no assurance that such
expectations will prove to have been correct. Factors that could cause actual
results to differ materially from those expected by the Company, including,
without limitation, factors discussed under Risk Factors in the Company's Form
10-K for the period ended December 31, 1997, are concentration of unevaluated
leasehold in Louisiana, impairment of asset value, need to replace reserves,
substantial capital requirements, ability to supplement capital resources with
asset sales, substantial indebtedness, fluctuations in the prices of oil and
gas, uncertainties inherent in estimating quantities of oil and gas reserves,
projecting future rates of production and the timing of development
expenditures, competition, operating risks, acquisition and integration of
operation risks, restrictions imposed by lenders, liquidity and capital
requirements, the effects of governmental and environmental regulation, patent
and securities litigation, adverse changes in the market for the Company's oil
and gas production and the Company's ability to successfully address Year 2000
issues. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. The Company
undertakes no obligation to release publicly the result of any revisions to
these forward-looking statements that may be made to reflect events or
circumstances after the date hereof, including, without limitation, changes in
the Company's business strategy or planned capital expenditures, or to reflect
the occurrence of unanticipated events.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
- - Not applicable
24
<PAGE> 25
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is subject to ordinary routine litigation incidental to its
business. In addition, the Company and its officers and directors are defendants
in two purported class actions alleging violations of federal and Oklahoma state
securities laws. Also the Company is defending a patent infringement claim in
another pending action. These matters are described in Item 3 of the Company's
Transition Report on Form 10-K for the six-month period ended December 31, 1997,
as updated by its Quarterly Reports on Form 10-Q for the first and second
quarters of 1998.
On September 11, 1998, the Company and the other named defendants filed a motion
to dismiss in Yuan, et al. v. Bayard Drilling Technologies, Inc., et al. pending
in the U.S. District Court for the Western District of Oklahoma.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Effective as of September 11, 1998, the Rights Agreement between the Company and
UMB Bank, N.A., as rights agent, was amended to add as an "Exempt Person" the
pledgee of shares beneficially owned by certain other Exempt Persons as of the
date of the amendment, to the extent that such pledgee exercises its rights
under the pledge other than the exercise of any voting power or the acquisition
of ownership.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
- - Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- - Not applicable
ITEM 5. OTHER INFORMATION
In July 1998, the Company made a $5 million secured loan to each of Aubrey K.
McClendon and Tom L. Ward, the Company's Chairman and Chief Executive Officer
and President, respectively. Each loan is payable on or before December 31, 1998
with interest accruing at an annual rate of 9 1/8%, payable quarterly.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed as a part of this report:
Exhibit No.
4.1.1 Fourth Supplemental Indenture, dated July 1, 1998, to
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
7-7/8% Senior Notes due 2004.
4.2.1 Fourth Supplemental Indenture, dated July 1, 1998, to
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
8-1/2% Senior Notes due 2012.
4.3.1 Fourth Supplemental Indenture, dated July 1, 1998, to
Indenture dated as of April 1, 1996 among the
Registrant, as issuer, its subsidiaries signatory
thereto, as Subsidiary Guarantors,
25
<PAGE> 26
and United States Trust Company of New York, as
Trustee, with respect to 9-1/8% Senior Notes due 2006.
4.4.1 First Supplemental Indenture, dated July 1, 1998, to
Indenture dated as of April 1, 1998 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
9-5/8% Senior Notes due 2005.
10.2.1 Amended and Restated Employment Agreement dated July 1,
1998 between Aubrey K. McClendon and Chesapeake Energy
Corporation.
10.2.2 Amended and Restated Employment Agreement dated July 1,
1998 between Tom L. Ward and Chesapeake Energy
Corporation.
10.3 Amendment No. 1 dated September 11, 1998 to Rights
Agreement dated July 15, 1998 between the Registrant
and UMB Bank, N.A., as Rights Agent.
12 Schedule of Ratios
27 Financial Data Schedule
(b) Reports on Form 8-K
During the quarter ended September 30, 1998, the Company filed the
following Current Reports on Form 8-K:
On July 2, 1998, the Company filed a current report on Form 8-K
reporting under Item 5 that the Company issued a press release
announcing the declaration of quarterly cash dividends on the Company's
common stock and preferred stock.
On July 6, 1998, the Company filed a current report on Form 8-K
reporting under Item 5 that the Company issued a press release
announcing that Thomas L. Winton has been named Senior Vice President
Information Technology.
On July 9, 1998, the Company filed a current report on Form 8-K
reporting under Item 5 that the Company issued a press release
announcing that the Board of Directors authorized management to explore
strategic alternatives to enhance shareholder value, involving possible
sale or merger of the Company.
On July 16, 1998, the Company filed a current report on Form 8-K
reporting under Item 5 that the Company issued a press release
announcing that the Board of Directors adopted a shareholder rights
plan on July 7, 1998.
On July 31, 1998, the Company filed a current report on Form 8-K
reporting under Item 5 that the Company issued a press release
announcing it had hired Donaldson Lufkin & Jenrette to act as financial
advisor in evaluating the Company's various strategic alternatives.
On August 7, 1998, the Company filed a current report on Form 8-K
reporting under Item 5 that the Company issued a press release
reporting 1998 second quarter results.
On September 29, 1998, the Company filed a current report on Form 8-K
reporting under Item 5 that the Company issued a press release
announcing the declaration of a quarterly cash dividend on the
Company's preferred stock and the suspension of cash dividends on its
common stock.
26
<PAGE> 27
On October 7, 1998, the Company filed a current report on Form 8-K
reporting under Item 5 that the Company issued a press release
announcing a significant Tuscaloosa discovery.
On October 23, 1998, the Company filed a current report on Form 8-K
reporting under Item 5 that the Company issued a press release
providing a status report on drilling activity.
On November 9, 1998, the Company filed a current report on Form 8-K
announcing that it agreed to tender its 19.9% stake in Pan East
Petroleum Corp. to Poco Petroleums Ltd. and agreed to a property
exchange with Pan East.
27
<PAGE> 28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHESAPEAKE ENERGY CORPORATION
(Registrant)
November 16, 1998 /s/ Aubrey K. McClendon
- -------------------------- -------------------------------------
Date Aubrey K. McClendon
Chairman and
Chief Executive Officer
November 16, 1998 /s/ Marcus C. Rowland
- -------------------------- -------------------------------------
Date Marcus C. Rowland
Executive Vice President and
Chief Financial Officer
28
<PAGE> 29
Index to Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description Page
- ---------- ----------- ----
<S> <C> <C>
4.1.1 Fourth Supplemental Indenture, dated July 1, 1998, to
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
7-7/8% Senior Notes due 2004.
4.2.1 Fourth Supplemental Indenture, dated July 1, 1998, to
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
8-1/2% Senior Notes due 2012.
4.3.1 Fourth Supplemental Indenture, dated July 1, 1998, to
Indenture dated as of April 1, 1996 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
9-1/8% Senior Notes due 2006.
4.4.1 First Supplemental Indenture, dated July 1, 1998, to
Indenture dated as of April 1, 1998 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
9-5/8% Senior Notes due 2005.
10.2.1 Amended and Restated Employment Agreement dated July 1,
1998 between Aubrey K. McClendon and Chesapeake Energy
Corporation.
10.2.2 Amended and Restated Employment Agreement dated July 1,
1998 between Tom L. Ward and Chesapeake Energy
Corporation.
10.3 Amendment No. 1 dated September 11, 1998 to Rights
Agreement dated July 15, 1998 between the Registrant and
UMB Bank, N.A., as Rights Agent.
12 Schedule of Ratios
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 4.1.1
FOURTH SUPPLEMENTAL INDENTURE TO
INDENTURE DATED MARCH 15, 1997 (7 7/8% SECURITIES)
FOURTH SUPPLEMENTAL INDENTURE dated as of July 1, 1998, 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 PANHANDLE LIMITED PARTNERSHIP, an
Oklahoma limited partnership ("CPLP"), CHESAPEAKE ACQUISITIONS, LTD., an
Alberta, Canada corporation ("CAL") and THE AMES COMPANY, INC., an Oklahoma
corporation ("TAC").
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, CPLP, CAL and TAC are Restricted Subsidiaries of the Company
and the parties desire to add CPLP, CAL and TAC as Subsidiary Guarantors under
the Indenture;
WHEREAS, Chesapeake Merger Corp., an Oklahoma corporation ("CMC"),
Hugoton Energy Corporation, a Kansas corporation ("HEC"), and Hugoton
Exploration Corporation, a Kansas corporation ("HEX"), are Restricted
Subsidiaries of the Company and Subsidiary Guarantors under the Indenture;
WHEREAS, the parties desire to release CMC, HEC and HEX as Subsidiary
Guarantors under the Indenture because CMC, HEC and HEX have directly or
indirectly merged with and into Chesapeake Mid-Continent Corp., an Oklahoma
corporation ("CMCC"), and CMCC is the surviving entity, a Restricted Subsidiary
of the Company and a Subsidiary Guarantor under the Indenture;
WHEREAS, HEC Trading Company, a Texas corporation ("HTC"), AmGas
Corporation, a Kansas corporation ("AC"), Tiffany Gathering, Inc., a Texas
corporation ("TGI"), AnSon Gas Marketing, an Oklahoma general partnership
("AGM"), and Mid-Continent Gas Pipeline Company, an Oklahoma general partnership
("MGPC"), are Restricted Subsidiaries of the Company and Subsidiary Guarantors
under the Indenture;
WHEREAS, the parties desire to release HTC, AC, TGI, AGM and MGPC as
Subsidiary Guarantors under the Indenture because HTC, AC, TGI, AGM and MGPC
have directly or indirectly merged with and into Chesapeake Energy Marketing,
Inc., an Oklahoma corporation ("CEMI"), and CEMI is the surviving entity and an
Unrestricted Subsidiary of the Company and, to the extent required under the
Indenture, each such merger has been treated as an Asset Sale under the
Indenture;
<PAGE> 2
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 Indenture without notice to or consent of any Holder to reflect
the addition or release of any Subsidiary Guarantor, as provided for by the
Indenture; and
WHEREAS, the execution and delivery of this Fourth Supplemental
Indenture have been duly authorized by the Company, the Subsidiary Guarantors,
CPLP, CAL and TAC and all actions necessary to make this Fourth 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 FOURTH 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, CPLP, CAL and TAC 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 Fourth Supplemental
Indenture, as fully and to the same extent as if set forth herein, except as
otherwise expressly provided herein. As used in this Fourth Supplemental
Indenture, the following terms shall have the following meanings:
"Indenture" means the Original Indenture, as amended by this Fourth
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, as amended by: (i) that certain First
Supplemental Indenture dated as of December 17, 1997, (ii) that certain Second
Supplemental Indenture dated as of February 16, 1998, and (iii) that certain
Third Supplemental Indenture dated as of April 22, 1998.
ARTICLE II
ADDITION OF SUBSIDIARY GUARANTOR
SECTION 2.1 As a Subsidiary Guarantor, each of CPLP, CAL and TAC
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
- 2 -
<PAGE> 3
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 CPLP, CAL and TAC had
been an original party thereto; and (b) subjects each of CPLP, CAL and TAC to
the provisions (including the representations and warranties) of the Indenture
as a Subsidiary Guarantor.
ARTICLE III
RELEASE OF SUBSIDIARY GUARANTOR
SECTION 3.1 As a result of the direct or indirect merger with CMCC,
which constitutes a merger with a Subsidiary Guarantor under Section 10.2(a) of
the Indenture, CMC, HEC and HEX shall for all purposes be released as a
Subsidiary Guarantor from all of their Guarantee and related obligations in the
Indenture, pursuant to Section 10.4(b) of the Indenture.
SECTION 3.2 As a result of the direct or indirect merger with CEMI,
which constitutes an Asset Sale under Section 10.2(b) of the Indenture, HTC, AC,
TGI, AGM and MGPC shall for all purposes be released as a Subsidiary Guarantor
from all of their Guarantee and related obligations in the Indenture, pursuant
to Section 10.4(b) of the Indenture.
SECTION 3.3 The notation on the Securities relating to the Guarantee
shall be deemed to exclude the names of CMC, HEC, HEX, HTC, AC, TGI, AGM and
MGPC and the signature of an Officer on behalf of CMC, HEC, HEX, HTC, AC, TGI,
AGM and MGPC.
ARTICLE IV
ASSUMPTION OF OBLIGATIONS
SECTION 4.1 As the surviving entity in the merger with CMC, HEC and
HEX, and as a Subsidiary Guarantor, CMCC hereby agrees to assume all the
obligations of CMC, HEC and HEX.
ARTICLE V
MISCELLANEOUS
SECTION 5.1 This Fourth Supplemental Indenture is a supplemental
indenture pursuant to Section 9.1 of the Indenture. Upon execution and delivery
of this Fourth Supplemental Indenture, the terms and conditions of this Fourth
Supplemental Indenture will be part of the terms and conditions of the Indenture
for any and all purposes, and all the terms and
- 3 -
<PAGE> 4
conditions of both shall be read together as though they constitute one
instrument, except that in case of conflict, the provisions of this Fourth
Supplemental Indenture will control.
SECTION 5.2 Except as they have been modified in this Fourth
Supplemental Indenture, each and every term and provision of the Indenture shall
remain in full force and effect.
SECTION 5.3 This Fourth 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 5.4 This Fourth 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 Fourth
Supplemental Indenture to be duly executed as of the date first written above.
UNITED STATES TRUST COMPANY OF NEW YORK,
a New York corporation, as Trustee
By /s/ LOUIS P. YOUNG
------------------------------------------
Name: Louis P. Young
------------------------------------
Title: Vice President
-----------------------------------
CHESAPEAKE ENERGY CORPORATION, an
Oklahoma corporation
By /s/ AUBREY K. MCCLENDON
------------------------------------------
Aubrey K. McClendon, Chief Executive
Officer
- 4 -
<PAGE> 5
CHESAPEAKE PANHANDLE 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
CHESAPEAKE ACQUISITIONS, LTD., an
Alberta, Canada corporation
By /s/ AUBREY K. MCCLENDON
--------------------------------------------
Aubrey K. McClendon, Chief Executive Officer
THE AMES COMPANY, INC., an Oklahoma
corporation
By /s/ AUBREY K. MCCLENDON
--------------------------------------------
Aubrey K. McClendon, Chief Executive Officer
SUBSIDIARY GUARANTORS
CHESAPEAKE OPERATING, INC., 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
- 5 -
<PAGE> 6
CHESAPEAKE ACQUISITION CORPORATION,
an Oklahoma corporation
By /s/ AUBREY K. MCCLENDON
--------------------------------------------
Aubrey K. McClendon, Chief Executive Officer
CHESAPEAKE MID-CONTINENT CORP., an
Oklahoma corporation
By /s/ AUBREY K. MCCLENDON
--------------------------------------------
Aubrey K. McClendon, Chief Executive Officer
CHESAPEAKE GOTHIC CORP., 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 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
- 6 -
<PAGE> 7
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
- 7 -
<PAGE> 1
EXHIBIT 4.2.1
FOURTH SUPPLEMENTAL INDENTURE TO
INDENTURE DATED MARCH 15, 1997 (8 1/2% SECURITIES)
FOURTH SUPPLEMENTAL INDENTURE dated as of July 1, 1998, 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 PANHANDLE LIMITED PARTNERSHIP, an
Oklahoma limited partnership ("CPLP"), CHESAPEAKE ACQUISITIONS, LTD., an
Alberta, Canada corporation ("CAL") and THE AMES COMPANY, INC., an Oklahoma
corporation ("TAC").
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, CPLP, CAL and TAC are Restricted Subsidiaries of the Company
and the parties desire to add CPLP, CAL and TAC as Subsidiary Guarantors under
the Indenture;
WHEREAS, Chesapeake Merger Corp., an Oklahoma corporation ("CMC"),
Hugoton Energy Corporation, a Kansas corporation ("HEC"), and Hugoton
Exploration Corporation, a Kansas corporation ("HEX"), are Restricted
Subsidiaries of the Company and Subsidiary Guarantors under the Indenture;
WHEREAS, the parties desire to release CMC, HEC and HEX as Subsidiary
Guarantors under the Indenture because CMC, HEC and HEX have directly or
indirectly merged with and into Chesapeake Mid-Continent Corp., an Oklahoma
corporation ("CMCC"), and CMCC is the surviving entity, a Restricted Subsidiary
of the Company and a Subsidiary Guarantor under the Indenture;
WHEREAS, HEC Trading Company, a Texas corporation ("HTC"), AmGas
Corporation, a Kansas corporation ("AC"), Tiffany Gathering, Inc., a Texas
corporation ("TGI"), AnSon Gas Marketing, an Oklahoma general partnership
("AGM"), and Mid-Continent Gas Pipeline Company, an Oklahoma general partnership
("MGPC"), are Restricted Subsidiaries of the Company and Subsidiary Guarantors
under the Indenture;
WHEREAS, the parties desire to release HTC, AC, TGI, AGM and MGPC as
Subsidiary Guarantors under the Indenture because HTC, AC, TGI, AGM and MGPC
have directly or indirectly merged with and into Chesapeake Energy Marketing,
Inc., an Oklahoma corporation ("CEMI"), and CEMI is the surviving entity and an
Unrestricted Subsidiary of the Company and, to the extent required under the
Indenture, each such merger has been treated as an Asset Sale under the
Indenture;
<PAGE> 2
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 Indenture without notice to or consent of any Holder to reflect
the addition or release of any Subsidiary Guarantor, as provided for by the
Indenture; and
WHEREAS, the execution and delivery of this Fourth Supplemental
Indenture have been duly authorized by the Company, the Subsidiary Guarantors,
CPLP, CAL and TAC and all actions necessary to make this Fourth 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 FOURTH 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, CPLP, CAL and TAC 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 Fourth Supplemental
Indenture, as fully and to the same extent as if set forth herein, except as
otherwise expressly provided herein. As used in this Fourth Supplemental
Indenture, the following terms shall have the following meanings:
"Indenture" means the Original Indenture, as amended by this Fourth
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, as amended by: (i) that certain First
Supplemental Indenture dated as of December 17, 1997, (ii) that certain Second
Supplemental Indenture dated as of February 16, 1998, and (iii) that certain
Third Supplemental Indenture dated as of April 22, 1998.
ARTICLE II
ADDITION OF SUBSIDIARY GUARANTOR
SECTION 2.1 As a Subsidiary Guarantor, each of CPLP, CAL and TAC
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
- 2 -
<PAGE> 3
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 CPLP, CAL and TAC had
been an original party thereto; and (b) subjects each of CPLP, CAL and TAC to
the provisions (including the representations and warranties) of the Indenture
as a Subsidiary Guarantor.
ARTICLE III
RELEASE OF SUBSIDIARY GUARANTOR
SECTION 3.1 As a result of the direct or indirect merger with CMCC,
which constitutes a merger with a Subsidiary Guarantor under Section 10.2(a) of
the Indenture, CMC, HEC and HEX shall for all purposes be released as a
Subsidiary Guarantor from all of their Guarantee and related obligations in the
Indenture, pursuant to Section 10.4(b) of the Indenture.
SECTION 3.2 As a result of the direct or indirect merger with CEMI,
which constitutes an Asset Sale under Section 10.2(b) of the Indenture, HTC, AC,
TGI, AGM and MGPC shall for all purposes be released as a Subsidiary Guarantor
from all of their Guarantee and related obligations in the Indenture, pursuant
to Section 10.4(b) of the Indenture.
SECTION 3.3 The notation on the Securities relating to the Guarantee
shall be deemed to exclude the names of CMC, HEC, HEX, HTC, AC, TGI, AGM and
MGPC and the signature of an Officer on behalf of CMC, HEC, HEX, HTC, AC, TGI,
AGM and MGPC.
ARTICLE IV
ASSUMPTION OF OBLIGATIONS
SECTION 4.1 As the surviving entity in the merger with CMC, HEC and
HEX, and as a Subsidiary Guarantor, CMCC hereby agrees to assume all the
obligations of CMC, HEC and HEX.
ARTICLE V
MISCELLANEOUS
SECTION 5.1 This Fourth Supplemental Indenture is a supplemental
indenture pursuant to Section 9.1 of the Indenture. Upon execution and delivery
of this Fourth Supplemental Indenture, the terms and conditions of this Fourth
Supplemental Indenture will be part of the terms and conditions of the Indenture
for any and all purposes, and all the terms and
- 3 -
<PAGE> 4
conditions of both shall be read together as though they constitute one
instrument, except that in case of conflict, the provisions of this Fourth
Supplemental Indenture will control.
SECTION 5.2 Except as they have been modified in this Fourth
Supplemental Indenture, each and every term and provision of the Indenture shall
remain in full force and effect.
SECTION 5.3 This Fourth 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 5.4 This Fourth 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 Fourth
Supplemental Indenture to be duly executed as of the date first written above.
UNITED STATES TRUST COMPANY OF NEW YORK,
a New York corporation, as Trustee
By /s/ LOUIS P. YOUNG
------------------------------------------
Name: Louis P. Young
------------------------------------
Title: Vice President
-----------------------------------
CHESAPEAKE ENERGY CORPORATION, an
Oklahoma corporation
By /s/ AUBREY K. MCCLENDON
------------------------------------------
Aubrey K. McClendon, Chief Executive
Officer
- 4 -
<PAGE> 5
CHESAPEAKE PANHANDLE 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
CHESAPEAKE ACQUISITIONS, LTD., an
Alberta, Canada corporation
By /s/ AUBREY K. MCCLENDON
--------------------------------------------
Aubrey K. McClendon, Chief Executive Officer
THE AMES COMPANY, INC., an Oklahoma
corporation
By /s/ AUBREY K. MCCLENDON
--------------------------------------------
Aubrey K. McClendon, Chief Executive Officer
SUBSIDIARY GUARANTORS
CHESAPEAKE OPERATING, INC., 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
- 5 -
<PAGE> 6
CHESAPEAKE ACQUISITION CORPORATION,
an Oklahoma corporation
By /s/ AUBREY K. MCCLENDON
--------------------------------------------
Aubrey K. McClendon, Chief Executive Officer
CHESAPEAKE MID-CONTINENT CORP., an
Oklahoma corporation
By /s/ AUBREY K. MCCLENDON
--------------------------------------------
Aubrey K. McClendon, Chief Executive Officer
CHESAPEAKE GOTHIC CORP., 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 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
- 6 -
<PAGE> 7
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
- 7 -
<PAGE> 1
EXHIBIT 4.3.1
FOURTH SUPPLEMENTAL INDENTURE TO
INDENTURE DATED APRIL 1, 1996
FOURTH SUPPLEMENTAL INDENTURE dated as of July 1, 1998, 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 PANHANDLE LIMITED PARTNERSHIP, an
Oklahoma limited partnership ("CPLP"), CHESAPEAKE ACQUISITIONS, LTD., an
Alberta, Canada corporation ("CAL") and THE AMES COMPANY, INC., an Oklahoma
corporation ("TAC").
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, CPLP, CAL and TAC are Restricted Subsidiaries of the Company
and the parties desire to add CPLP, CAL and TAC as Subsidiary Guarantors under
the Indenture;
WHEREAS, Chesapeake Merger Corp., an Oklahoma corporation ("CMC"),
Hugoton Energy Corporation, a Kansas corporation ("HEC"), and Hugoton
Exploration Corporation, a Kansas corporation ("HEX"), are Restricted
Subsidiaries of the Company and Subsidiary Guarantors under the Indenture;
WHEREAS, the parties desire to release CMC, HEC and HEX as Subsidiary
Guarantors under the Indenture because CMC, HEC and HEX have directly or
indirectly merged with and into Chesapeake Mid-Continent Corp., an Oklahoma
corporation ("CMCC"), and CMCC is the surviving entity, a Restricted Subsidiary
of the Company and a Subsidiary Guarantor under the Indenture;
WHEREAS, HEC Trading Company, a Texas corporation ("HTC"), AmGas
Corporation, a Kansas corporation ("AC"), Tiffany Gathering, Inc., a Texas
corporation ("TGI"), AnSon Gas Marketing, an Oklahoma general partnership
("AGM"), and Mid-Continent Gas Pipeline Company, an Oklahoma general partnership
("MGPC"), are Restricted Subsidiaries of the Company and Subsidiary Guarantors
under the Indenture;
WHEREAS, the parties desire to release HTC, AC, TGI, AGM and MGPC as
Subsidiary Guarantors under the Indenture because HTC, AC, TGI, AGM and MGPC
have directly or indirectly merged with and into Chesapeake Energy Marketing,
Inc., an Oklahoma corporation ("CEMI"), and CEMI is the surviving entity and an
Unrestricted Subsidiary of the Company and, to the extent required under the
Indenture, each such merger has been treated as an Asset Sale under the
Indenture;
<PAGE> 2
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 Holder to reflect
the addition or release of any Subsidiary Guarantor, as provided for by the
Indenture; and
WHEREAS, the execution and delivery of this Fourth Supplemental
Indenture have been duly authorized by the Company, the Subsidiary Guarantors,
CPLP, CAL and TAC and all actions necessary to make this Fourth 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 FOURTH 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, CPLP, CAL and TAC 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 Fourth Supplemental
Indenture, as fully and to the same extent as if set forth herein, except as
otherwise expressly provided herein. As used in this Fourth Supplemental
Indenture, the following terms shall have the following meanings:
"Indenture" means the Original Indenture, as amended by this Fourth
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: (i) that certain First
Supplemental Indenture dated as of December 30, 1996, (ii) that certain Second
Supplemental Indenture dated as of December 17, 1997, and (iii) that certain
Third Supplemental Indenture dated as of April 22, 1998.
ARTICLE II
ADDITION OF SUBSIDIARY GUARANTOR
SECTION 2.1 As a Subsidiary Guarantor, each of CPLP, CAL and TAC
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
- 2 -
<PAGE> 3
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 CPLP, CAL and TAC had
been an original party thereto; and (b) subjects each of CPLP, CAL and TAC to
the provisions (including the representations and warranties) of the Indenture
as a Subsidiary Guarantor.
ARTICLE III
RELEASE OF SUBSIDIARY GUARANTOR
SECTION 3.1 As a result of the direct or indirect merger with CMCC,
which constitutes a merger with a Subsidiary Guarantor under Section 10.02(a) of
the Indenture, CMC, HEC and HEX shall for all purposes be released as a
Subsidiary Guarantor from all of their Guarantee and related obligations in the
Indenture, pursuant to Section 10.04 of the Indenture.
SECTION 3.2 As a result of the direct or indirect merger with CEMI,
which constitutes an Asset Sale under Section 10.02(b) of the Indenture, HTC,
AC, TGI, AGM and MGPC shall for all purposes be released as a Subsidiary
Guarantor from all of their Guarantee and related obligations in the Indenture,
pursuant to Section 10.04 of the Indenture.
SECTION 3.3 The notation on the Securities relating to the Guarantee
shall be deemed to exclude the names of CMC, HEC, HEX, HTC, AC, TGI, AGM and
MGPC and the signature of an Officer on behalf of CMC, HEC, HEX, HTC, AC, TGI,
AGM and MGPC.
ARTICLE IV
ASSUMPTION OF OBLIGATIONS
SECTION 4.1 As the surviving entity in the merger with CMC, HEC and
HEX, and as a Subsidiary Guarantor, CMCC hereby agrees to assume all the
obligations of CMC, HEC and HEX.
ARTICLE V
MISCELLANEOUS
SECTION 5.1 This Fourth Supplemental Indenture is a supplemental
indenture pursuant to Section 9.01 of the Indenture. Upon execution and delivery
of this Fourth Supplemental Indenture, the terms and conditions of this Fourth
Supplemental Indenture will be part of the terms and conditions of the Indenture
for any and all purposes, and all the terms and
- 3 -
<PAGE> 4
conditions of both shall be read together as though they constitute one
instrument, except that in case of conflict, the provisions of this Fourth
Supplemental Indenture will control.
SECTION 5.2 Except as they have been modified in this Fourth
Supplemental Indenture, each and every term and provision of the Indenture shall
remain in full force and effect.
SECTION 5.3 This Fourth 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 5.4 This Fourth 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 Fourth
Supplemental Indenture to be duly executed as of the date first written above.
UNITED STATES TRUST COMPANY OF NEW YORK,
a New York corporation, as Trustee
By /s/ LOUIS P. YOUNG
------------------------------------------
Name: Louis P. Young
------------------------------------
Title: Vice President
-----------------------------------
CHESAPEAKE ENERGY CORPORATION, an
Oklahoma corporation
By /s/ AUBREY K. MCCLENDON
------------------------------------------
Aubrey K. McClendon, Chief Executive
Officer
- 4 -
<PAGE> 5
CHESAPEAKE PANHANDLE 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
CHESAPEAKE ACQUISITIONS, LTD., an
Alberta, Canada corporation
By /s/ AUBREY K. MCCLENDON
--------------------------------------------
Aubrey K. McClendon, Chief Executive Officer
THE AMES COMPANY, INC., an Oklahoma
corporation
By /s/ AUBREY K. MCCLENDON
--------------------------------------------
Aubrey K. McClendon, Chief Executive Officer
SUBSIDIARY GUARANTORS
CHESAPEAKE OPERATING, INC., 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
- 5 -
<PAGE> 6
CHESAPEAKE ACQUISITION CORPORATION,
an Oklahoma corporation
By /s/ AUBREY K. MCCLENDON
--------------------------------------------
Aubrey K. McClendon, Chief Executive Officer
CHESAPEAKE MID-CONTINENT CORP., an
Oklahoma corporation
By /s/ AUBREY K. MCCLENDON
--------------------------------------------
Aubrey K. McClendon, Chief Executive Officer
CHESAPEAKE GOTHIC CORP., 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 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
- 6 -
<PAGE> 7
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
- 7 -
<PAGE> 1
EXHIBIT 4.4.1
FIRST SUPPLEMENTAL INDENTURE TO
INDENTURE DATED APRIL 1, 1998
FIRST SUPPLEMENTAL INDENTURE dated as of July 1, 1998, 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 PANHANDLE LIMITED PARTNERSHIP, an
Oklahoma limited partnership ("CPLP"), CHESAPEAKE ACQUISITIONS, LTD., an
Alberta, Canada corporation ("CAL") and THE AMES COMPANY, INC., an Oklahoma
corporation ("TAC").
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 $500,000,000 in aggregate principal
amount of the Securities;
WHEREAS, CPLP, CAL and TAC are Restricted Subsidiaries of the Company
and the parties desire to add CPLP, CAL and TAC as Subsidiary Guarantors under
the Indenture;
WHEREAS, Chesapeake Merger Corp., an Oklahoma corporation ("CMC"),
Hugoton Energy Corporation, a Kansas corporation ("HEC"), and Hugoton
Exploration Corporation, a Kansas corporation ("HEX"), are Restricted
Subsidiaries of the Company and Subsidiary Guarantors under the Indenture;
WHEREAS, the parties desire to release CMC, HEC and HEX as Subsidiary
Guarantors under the Indenture because CMC, HEC and HEX have directly or
indirectly merged with and into Chesapeake Mid-Continent Corp., an Oklahoma
corporation ("CMCC"), and CMCC is the surviving entity, a Restricted Subsidiary
of the Company and a Subsidiary Guarantor under the Indenture;
WHEREAS, HEC Trading Company, a Texas corporation ("HTC"), AmGas
Corporation, a Kansas corporation ("AC"), Tiffany Gathering, Inc., a Texas
corporation ("TGI"), AnSon Gas Marketing, an Oklahoma general partnership
("AGM"), and Mid-Continent Gas Pipeline Company, an Oklahoma general partnership
("MGPC"), are Restricted Subsidiaries of the Company and Subsidiary Guarantors
under the Indenture;
WHEREAS, the parties desire to release HTC, AC, TGI, AGM and MGPC as
Subsidiary Guarantors under the Indenture because HTC, AC, TGI, AGM and MGPC
have directly or indirectly merged with and into Chesapeake Energy Marketing,
Inc., an Oklahoma corporation ("CEMI"), and CEMI is the surviving entity and an
Unrestricted Subsidiary of the Company and, to the extent required under the
Indenture, each such merger has been treated as an Asset Sale under the
Indenture;
<PAGE> 2
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 Holder to reflect
the addition or release 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,
CPLP, CAL and TAC 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, CPLP, CAL and TAC 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 April 1, 1998,
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 CPLP, CAL and TAC
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
- 2 -
<PAGE> 3
Indenture as if each of CPLP, CAL and TAC had been an original party thereto;
and (b) subjects each of CPLP, CAL and TAC to the provisions (including the
representations and warranties) of the Indenture as a Subsidiary Guarantor.
ARTICLE III
RELEASE OF SUBSIDIARY GUARANTOR
SECTION 3.1 As a result of the direct or indirect merger with CMCC,
which constitutes a merger with a Subsidiary Guarantor under Section 10.02(a) of
the Indenture, CMC, HEC and HEX shall for all purposes be released as a
Subsidiary Guarantor from all of their Guarantee and related obligations in the
Indenture, pursuant to Section 10.04 of the Indenture.
SECTION 3.2 As a result of the direct or indirect merger with CEMI,
which constitutes an Asset Sale under Section 10.02(b) of the Indenture, HTC,
AC, TGI, AGM and MGPC shall for all purposes be released as a Subsidiary
Guarantor from all of their Guarantee and related obligations in the Indenture,
pursuant to Section 10.04 of the Indenture.
SECTION 3.3 The notation on the Securities relating to the Guarantee
shall be deemed to exclude the names of CMC, HEC, HEX, HTC, AC, TGI, AGM and
MGPC and the signature of an Officer on behalf of CMC, HEC, HEX, HTC, AC, TGI,
AGM and MGPC.
ARTICLE IV
ASSUMPTION OF OBLIGATIONS
SECTION 4.1 As the surviving entity in the merger with CMC, HEC and
HEX, and as a Subsidiary Guarantor, CMCC hereby agrees to assume all the
obligations of CMC, HEC and HEX.
ARTICLE V
MISCELLANEOUS
SECTION 5.1 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.
- 3 -
<PAGE> 4
SECTION 5.2 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 5.3 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 5.4 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.
UNITED STATES TRUST COMPANY OF NEW YORK,
a New York corporation, as Trustee
By /s/ LOUIS P. YOUNG
------------------------------------------
Name: Louis P. Young
------------------------------------
Title: Vice President
-----------------------------------
CHESAPEAKE ENERGY CORPORATION, an
Oklahoma corporation
By /s/ AUBREY K. MCCLENDON
------------------------------------------
Aubrey K. McClendon, Chief Executive
Officer
CHESAPEAKE PANHANDLE 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
CHESAPEAKE ACQUISITIONS, LTD., an
Alberta, Canada corporation
By /s/ AUBREY K. MCCLENDON
--------------------------------------------
Aubrey K. McClendon, Chief Executive Officer
THE AMES COMPANY, INC., an Oklahoma
corporation
By /s/ AUBREY K. MCCLENDON
--------------------------------------------
Aubrey K. McClendon, Chief Executive Officer
SUBSIDIARY GUARANTORS
CHESAPEAKE OPERATING, INC., 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
CHESAPEAKE ACQUISITION CORPORATION,
an Oklahoma corporation
By /s/ AUBREY K. MCCLENDON
--------------------------------------------
Aubrey K. McClendon, Chief Executive Officer
CHESAPEAKE MID-CONTINENT CORP., an
Oklahoma corporation
By /s/ AUBREY K. MCCLENDON
--------------------------------------------
Aubrey K. McClendon, Chief Executive Officer
- 5 -
<PAGE> 6
CHESAPEAKE GOTHIC CORP., 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 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
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
- 6 -
<PAGE> 1
EXHIBIT 10.2.1
AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
between
AUBREY K. McCLENDON
and
CHESAPEAKE ENERGY CORPORATION
Effective July 1, 1998
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
1. Employment...............................................................................................1
2. Executive's Duties.......................................................................................1
2.1 Specific Duties.................................................................................1
2.2 Modifications...................................................................................2
2.3 Rules and Regulations...........................................................................2
2.4 Stock Investment................................................................................2
3. Other Activities.........................................................................................3
3.1 Company's Activities............................................................................3
3.1.1 Amount of Participation................................................................3
3.1.2 Conditions of Participation. ..........................................................4
3.2 Other Activities................................................................................5
4. Executive's Compensation.................................................................................5
4.1 Base Salary.....................................................................................5
4.2 Bonus...........................................................................................5
4.3 Stock Options...................................................................................5
4.4 Benefits........................................................................................5
4.4.1 Vacation...............................................................................6
4.4.2 Membership Dues........................................................................6
4.4.3 Automobile and Travel Allowance........................................................6
4.4.4 Accounting Support.....................................................................6
4.5 Compensation Review.............................................................................7
5. Term.....................................................................................................7
6. Termination..............................................................................................7
6.1 Termination by Company..........................................................................7
6.1.1 Termination without Cause..............................................................7
6.1.2 Termination for Cause..................................................................7
6.2 Termination by Executive........................................................................8
6.3 Termination After Change in Control.............................................................8
6.3.1 Change of Control......................................................................8
6.3.2 CC Termination.........................................................................9
6.4 Incapacity of Executive.........................................................................9
6.5 Death of Executive..............................................................................9
6.6 Effect of Termination..........................................................................10
</TABLE>
-i-
<PAGE> 3
<TABLE>
<S> <C>
7. Confidentiality.........................................................................................10
8. Noncompetition..........................................................................................11
9. Proprietary Matters.....................................................................................11
10. Arbitration.............................................................................................12
11. Miscellaneous...........................................................................................12
11.1 Time...........................................................................................12
11.2 Notices........................................................................................12
11.3 Assignment.....................................................................................13
11.4 Construction...................................................................................13
11.5 Entire Agreement...............................................................................13
11.6 Binding Effect.................................................................................13
11.7 Attorneys' Fees................................................................................13
11.8 Supercession...................................................................................13
</TABLE>
-ii-
<PAGE> 4
AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made effective July 1, 1998, between CHESAPEAKE
ENERGY CORPORATION, an Oklahoma corporation (the "Company"), and AUBREY K.
McCLENDON, an individual (the "Executive").
W I T N E S S E T H:
WHEREAS, the Company and the Executive entered into that certain
employment agreement dated effective July 1, 1997 (the "Prior Agreement");
WHEREAS, the Company has announced that it would explore strategic
alternatives to increase shareholder value, and to retain employees during that
process the Company adopted a retention program for the Company's key employees
other than the senior executive officers;
WHEREAS, for the reasons the Company adopted the retention program for
the other employees, the Board of Directors of the Company believes that it is
in the best interests of the Company to provide for the retention of the
Executive as part of the process of exploring the Company's strategic
alternatives; and
WHEREAS, the Company and the Executive desire to amend and restate the
Prior Agreement in its entirety.
NOW, THEREFORE, in consideration of the mutual promises herein
contained, the Company and the Executive agree as follows:
1. Employment. The Company hereby employs the Executive and the Executive
hereby accepts such employment subject to the terms and conditions contained in
this Agreement. The Executive is engaged as an employee of the Company, and the
Executive and the Company do not intend to create a joint venture, partnership
or other relationship which might impose a fiduciary obligation on the Executive
or the Company in the performance of this Agreement.
2. Executive's Duties. The Executive is employed on a full-time basis.
Throughout the term of this Agreement, the Executive will use the Executive's
best efforts and due diligence to assist the Company in achieving the most
profitable operation of the Company and the Company's affiliated entities
consistent with developing and maintaining a quality business operation.
2.1 Specific Duties. The Executive will serve as Chairman of the
Board and Chief Executive Officer for the Company. From time
to time, the Executive may be appointed as an officer of one
(1) or more of the Company's subsidiaries. During the term of
this Agreement, the Executive will be nominated for election
or appointed to serve as a director of the Company and one (1)
or more of the Company's subsidiaries. The Executive will use
the Executive's best efforts to perform all of the services
required to fully and faithfully execute the offices and
positions to which the Executive is appointed and such other
services as may be reasonably directed by the board of
directors of the Company in accordance with this Agreement.
<PAGE> 5
2.2 Modifications. The precise duties to be performed by the
Executive may be extended or curtailed in the discretion of
the respective boards of directors of the Company. However,
except for termination for cause under paragraph 6.1.2 of this
Agreement, the failure of the Executive to be elected, be
reelected or serve as a director of the Company during the
term of this Agreement, the removal of the Executive as a
member of the board of directors of the Company, the
withdrawal of the designation of the Executive as Chairman of
the Board or Chief Executive Officer of the Company, or the
assignment of the performance of duties incumbent on the
foregoing offices to other persons without the prior written
consent of the Executive will constitute termination without
cause by the Company.
2.3 Rules and Regulations. The Company currently has an Employment
Policies Manual which addresses frequently asked questions
regarding the Company. The Executive agrees to comply with the
Employment Policies Manual except to the extent inconsistent
with this Agreement. The Employment Policies Manual is subject
to change without notice in the sole discretion of the Company
at any time. In the event of a conflict between the Employment
Policies Manual and this Agreement, this Agreement will
control over the terms of the Employment Policies Manual.
2.4 Stock Investment. For each calendar year during the term of
this Agreement the Executive agrees to hold shares of the
Company's common stock having an aggregate Investment Value
(as hereafter defined) equal to five hundred percent (500%) of
the compensation paid to the Executive under paragraphs 4.1
and 4.2 of this Agreement during such calendar year. Any
shares of common stock acquired by the Executive prior to the
date of this Agreement and still owned by the Executive during
the term of this Agreement may be used to satisfy this
requirement to own common stock. For purposes of this
paragraph, the "Investment Value" of each share of stock will
be as follows: (a) for shares purchased in the open market the
price paid by the Executive for such shares; (b) for shares
acquired through the exercise of stock options, the fair
market value of the common stock on the date the option was
exercised; and (c) for shares acquired other than through open
market purchases or the exercise of options the fair market
value of the Company's common stock on the date of the
acquisition of such common stock. The stock acquired or owned
pursuant to this paragraph 2.4 must be held by the Executive
at all times during the Executive's employment by the Company
or the Company's affiliated entities. In order to administer
this provision, the Executive agrees to deliver to the
Company's Chief Executive Officer a semi-annual report of
purchases and ownership in a form prepared by the Company.
This paragraph will become null and void if the Company's
common stock ceases to be listed on the New York Stock
Exchange, the National Association of Securities Dealers
Automated Quotation System or other national exchange. The
Company has no obligation to sell or to purchase from the
Executive any of the Company's stock in connection with this
paragraph 2.4 and has made no representations or warranties
regarding the Company's stock, operations or financial
condition.
-2-
<PAGE> 6
3. Other Activities. Except for the activities (the "Permitted Activities")
expressly permitted by paragraphs 3.1 and 3.2 of this Agreement, or the prior
written approval of the board of directors of the Company, the Executive will
not: (a) engage in business independent of the Executive's employment by the
Company which requires any substantial portion of the Executive's time; (b)
serve as an officer or director of any corporation, partnership, company, or
firm; (c) except for passive investments that do not violate this Agreement and
require a minimal portion of the Executive's time, serve as a general partner or
member of any corporation, partnership, company or firm; or (d) directly or
indirectly invest in, participate in or acquire an interest in any oil and gas
business, including, without limitation, (i) producing oil and gas, (ii)
drilling, owning or operating oil and gas leases or wells, (iii) providing
services or materials to the oil and gas industry, (iv) marketing or refining
oil or gas, or (v) owning any interest in any corporation, partnership, company
or entity which conducts any of the foregoing activities. The limitations in
this paragraph 3 will not prohibit an investment by the Executive in publicly
traded securities. Notwithstanding the foregoing, the Executive will be
permitted to participate in the following activities which will be deemed to be
approved by the Company, if such activities are undertaken in strict compliance
with this Agreement.
3.1 Company's Activities. The Executive or the Executive's
designated affiliate will be permitted to acquire a working
interest in all of the wells spudded by the Company or the
Company's subsidiary corporations, partnerships or entities
(the "Program Wells") on the terms and conditions set forth
herein in any Calendar Quarter (as hereafter defined) during
the Participation Term (as hereafter defined). The Program
Wells include any well spudded during such Calendar Quarter in
which the Company or the Company's subsidiary corporations,
partnerships or entities participate as a nonoperator.
3.1.1 Amount of Participation. On or before the date which
is thirty (30) days before the first (1st) day of
each Calendar Quarter, the Executive will provide
notice to the compensation committee of the Company's
board of directors of the Executive's intent to
participate in the Program Wells during the
succeeding Calendar Quarter and the approximate
percentage working interest which the Executive
proposes to participate with during such Calendar
Quarter (the "Approved Percentage"). The Executive's
Approved Percentage working interest participation
(determined without consideration of any carried
interest) in the Program Wells for any Calendar
Quarter will not exceed two and one-half percent
(2.5%) on an eight- eighths (8/8ths) basis. On
designation of the Approved Percentage for a Calendar
Quarter, the Executive will be deemed to have elected
to participate in each Program Well spudded during
such Calendar Quarter with a working interest equal
to the following applicable percentage determined on
a well-by-well basis (the "Minimum Participation"):
(a) the
-3-
<PAGE> 7
Approved Percentage for each Operations Well, each
Program Well which does not fall within clause (b) of
this paragraph 3 1.1 and any Program Well which does
not fall within clause (c) of this paragraph 3.1.1;
(b) zero percent (0%) if the combined participation
in the Program Well by the Executive, Mr. Tom L. Ward
and Mr. Marcus C. Rowland with such individuals'
Approved Percentage under their respective employment
agreements causes the Company's working interest
(determined without consideration of any carried
interest) on the spud date for such Program Well to
be less than twelve and one-half percent (12.5%) on
an eight eighths (8/8ths) basis; or (c) subsequent to
a termination under paragraphs 6.1.1 or 6.3 of this
Agreement the lowest Approved Percentage elected by
the Executive subsequent to such termination. If
clause (b) of this paragraph 3.1.1 prohibits the
Executive's participation in a Program Well, then
Messrs. Ward and Rowland will not be entitled to
participate in such Program Well under their
employment agreements. An "Operations Well" means a
Program Well which falls within the provisions of
clause (b) of this paragraph 3.1.1, but for which the
Executive's participation is deemed necessary for the
Company to retain operations as determined by the
disinterested members of the compensation committee
of the Company's board of directors. If the Executive
fails to provide notice of the Executive's intent to
participate and the Executive's proposed
participation prior to the specified date as provided
herein, the amount of the Approved Percentage for the
Calendar Quarter will be deemed to be zero (0).
3.1.2 Conditions of Participation. The Participation by the
Executive in each Program Well will be on no better
terms than the terms agreed to by unaffiliated third
party participants in connection with the acquisition
of an interest in such Program Well from the Company
or its subsidiary corporations, partnerships or
entities. The Approved Percentage cannot be changed
during any Calendar Quarter without the prior
approval of the disinterested members of the
compensation committee of the Company's board of
directors. Any participation by the Executive under
this paragraph 3.1 is also conditioned upon the
Executive's participation in each Program Well
spudded during such Calendar Quarter in an amount
equal to the Minimum Participation. The Executive
hereby agrees to execute and deliver any documents
reasonably requested by the Company and hereby
appoints the Company as the Executive's agent and
attorney-in-fact to execute and deliver such
documents if the Executive fails or refuses to
execute such documents. The Executive further agrees
to pay all joint interest billings within one hundred
fifty (150) days after receipt. For purposes of this
Agreement, the term: (a) "Calendar Quarter" means the
three (3) month periods commencing on the first (1st)
day of January, April, July and October; and (b)
"Participation Term" means the term of this Agreement
plus five (5) years after a termination under
paragraphs 6.1.1 or 6.3 of this Agreement.
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<PAGE> 8
3.2 Other Activities. The Executive currently conducts oil and gas
investment activities individually and through Chesapeake
Investments, an Oklahoma Limited Partnership ("Investments"),
Chesapeake Production Company, an Oklahoma corporation
("Production"), and Chesapeake/Wood Joint Venture ("Venture").
The Executive will be permitted to continue oil and gas
activities in such entities but only to the extent such
activities are conducted on oil and gas leases or interests
owned by the Executive, Investments, Production or Venture as
of July 1, 1995, or acquired by Investments, Production or
Venture from the Company. The interests acquired by
Investments shall be limited by the provisions of paragraph
3.1 of this Agreement. The Company also consents to the
Executive serving: (a) as a director of American Bank and
Trust Company located in Edmond, Oklahoma; (b) as a director
of Pan East Petroleum Corp., an Ontario Canada corporation,
pursuant to approval by the board of directors.
4. Executive's Compensation. The Company agrees to compensate the
Executive as follows:
4.1 Base Salary. A base salary (the "Base Salary"), at the initial
annual rate of not less than Three Hundred Fifty Thousand
Dollars ($350,000.00), will be paid to the Executive in equal
semi-monthly installments beginning July 15, 1998 during the
term of this Agreement.
4.2 Bonus. In addition to the Base Salary described at paragraph
4.1 of this Agreement, the Company may periodically pay bonus
compensation to the Executive. Any bonus compensation will be
at the absolute discretion of the Company in such amounts and
at such times as the board of directors of the Company may
determine.
4.3 Stock Options. In addition to the compensation set forth in
paragraphs 4.1 and 4.2 of this Agreement, the Executive may
periodically receive grants of stock options from the
Company's various stock option plans, subject to the terms and
conditions thereof.
4.4 Benefits. The Company will provide the Executive such
retirement benefits, reimbursement of reasonable expenditures
for dues, travel and entertainment and other benefits on terms
customarily provided by the Company from time to time. The
Company will also provide the Executive the opportunity to
apply for coverage under the Company's medical, life and
disability plans, if any. If the Executive is accepted for
coverage under such plans, the Company will provide such
coverage on the same terms as is customarily provided by the
Company to the plan participants as modified from time to
time. The following specific benefits will also be provided to
the Executive at the expense of the Company:
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<PAGE> 9
4.4.1 Vacation. The Executive will be entitled to take
three (3) weeks of paid vacation each calendar year
during the term of this Agreement. No additional
compensation will be paid for failure to take
vacation and no vacation may be carried forward from
one calendar year to another.
4.4.2 Membership Dues. The Company will reimburse the
Executive for: (a) the monthly dues necessary to
maintain a full membership in (1) golf and/or country
club in the Oklahoma City area selected by the
Executive; and (b) the reasonable cost of any
qualified business entertainment at such country
club. All other costs, including, without implied
limitation, any initiation costs, initial membership
costs, personal use and business entertainment
unrelated to the Company will be the sole obligation
of the Executive and the Company will have no
liability with respect to such amounts.
4.4.3 Automobile and Travel Allowance. The Executive will
receive a monthly cash allowance in the amount of One
Thousand Five Hundred Dollars ($1,500.00) to defer a
portion of the Executive's cost of acquiring,
operating and maintaining an automobile for use in
the Executive's employment. Additionally, the
Executive will be entitled to utilize any aircraft
owned by the Company (whether in whole or in part)
for personal use and will not be required to
reimburse the Company for any cost related to such
use or pay any cost or charge with respect to such
use up to an amount during any calendar year equal to
the Aircraft Allowance. For purposes of this
Agreement the term "Aircraft Allowance" means the
variable costs directly identifiable with each use
(including fuel, pilot charges, landing fees, hourly
charges under co-ownership arrangements and other
such costs) but specifically excludes any fixed costs
of the aircraft (including acquisition costs and
depreciation). The Aircraft Allowance will be equal
to $40,000.00 for the Company's fiscal year ending on
June 30, 1998, $25,000.00 for the six month period
ending on December 31, 1998, and $50,000.00 for each
fiscal year thereafter during the term of this
Agreement. If the Executive's use of the Company's
aircraft exceeds the Aircraft Allowance during any
fiscal year the Executive will be required to
reimburse the Company for the variable costs directly
identified with each such use.
4.4.4 Accounting Support. The Executive will be permitted
to utilize the Company's office space, computer
facilities and the equivalent of one (1) full-time
accounting employee of the Company (presently Ms.
Linda Peterburs) to maintain books and records for
the Executive and the Executive's Permitted
Activities. The Executive will not be required to pay
any compensation to the Company in connection with
such accounting services.
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<PAGE> 10
4.5 Compensation Review. The compensation of the Executive will be
reviewed not less frequently than annually by the board of
directors of the Company. The compensation of the Executive
prescribed by paragraph 4 of this Agreement may be increased
at the discretion of the Company, but may not be reduced
without the prior written consent of the Executive.
5. Term. In the absence of termination as set forth in paragraph 6 below,
this Agreement will extend for a term of five (5) years commencing on July 1,
1998, and ending on June 30, 2003 (the "Expiration Date") as extended from time
to time. Unless the Company provides thirty (30) days prior written notice of
nonextension to the Executive, on each June 30 during the term of this
Agreement, the term and the Expiration Date will be automatically extended for
one (1) additional year so that the remaining term on this Agreement will be not
less than four (4) and not more than five (5) years.
6. Termination. This Agreement will continue in effect until the
expiration of the term set forth in paragraph 5 of this Agreement unless earlier
terminated pursuant to this paragraph 6.
6.1 Termination by Company. The Company will have the following
rights to terminate this Agreement:
6.1.1 Termination without Cause. The Company may terminate
this Agreement without cause at any time by the
service of written notice of termination to the
Executive specifying an effective date of such
termination not sooner than sixty (60) business days
after the date of such notice (the "Termination
Date"). In the event the Executive is terminated
without cause (other than a CC Termination under
paragraph 6.3 of this Agreement), the Executive will
receive as termination compensation: (a) Base
Compensation (as hereafter defined) during the
remaining term of this Agreement, but in any event
through the Expiration Date; (b) any benefits payable
by operation of paragraph 4.4 of this Agreement
during the remaining term of this Agreement, but in
any event through the Expiration Date; and (c) any
vacation pay accrued through the Termination Date.
For purposes of this Agreement the term "Base
Compensation" means the Executive's current Base
Salary under paragraph 4.1 on the Termination Date
plus the bonus compensation received by the Executive
during the twelve (12) month period preceding the
Termination Date.
6.1.2 Termination for Cause. The Company may terminate this
Agreement for cause if the Executive: (a)
misappropriates the property of the Company or
commits any other act of dishonesty; (b) engages in
personal misconduct which materially injures the
Company; (c) willfully violates any law or regulation
relating to the business of the Company which results
in injury to the Company; or (d) willfully and
repeatedly fails to perform the Executive's duties
hereunder. In the event this Agreement is terminated
for
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<PAGE> 11
cause, the Company will not have any obligation to
provide any further payments or benefits to the
Executive after the effective date of such
termination. This Agreement will not be deemed to
have terminated for cause unless a written
determination specifying the reasons for such
termination is made, approved by a majority of the
disinterested members of the board of directors of
the Company and delivered to the Executive.
Thereafter, the Executive will have the right for a
period of twenty (20) days to request a board of
directors meeting to be held at a mutually agreeable
time and location within thirty (30) days, at which
meeting the Executive will have an opportunity to be
heard. Failing such determination and opportunity for
hearing, any termination of this Agreement will be
deemed to have occurred without cause.
6.2 Termination by Executive. The Executive may voluntarily
terminate this Agreement with or without cause by the service
of written notice of such termination to the Company
specifying an effective date of such termination sixty (60)
days after the date of such notice, during which time
Executive may use remaining accrued vacation days, or at the
Company's option, be paid for such days. In the event this
Agreement is terminated by the Executive, neither the Company
nor the Executive will have any further obligations hereunder
including, without limitation, any obligation of the Company
to provide any further payments or benefits to the Executive
after the effective date of such termination.
6.3 Termination After Change in Control. If during the term of
this Agreement there is a "Change of Control" and within two
(2) years thereafter there is a CC Termination (as hereafter
defined) then the Executive will be entitled to a severance
payment (in addition to any other rights and other amounts
payable to the Executive under this Agreement or otherwise) in
an amount equal to the sum of the following: (a) five (5)
times the Executive's Base Compensation; plus (b) the Gross-up
Amount (as hereafter defined). If the foregoing amount is not
paid within ten (10) days after the CC Termination, the unpaid
amount will bear interest at the per annum rate equal to the
prime rate published from time to time in the Wall Street
Journal. The interest rate will be adjusted on the date of a
change in such prime rate. For purposes of this Agreement the
term "Gross-up Amount" means the amount of the payment which
will result in the Executive retaining from such payment
(after paying all taxes imposed on such payment and any
interest or penalties related to such taxes) an amount equal
to any excise tax imposed by Section 4999 of the Internal
Revenue Code of 1986, as amended, together with any interest
and penalties with respect to such excise tax imposed on the
all of the payments made to the Executive under this paragraph
6.3.
6.3.1 Change of Control. The term "Change of Control" means
any action of a nature that would be required to be
reported in response to Item 6(e) of Schedule 14A of
Regulation 14A under the Securities Exchange Act of
1934
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<PAGE> 12
with respect to the Company including, without
limitation (i) the direct or indirect acquisition by
any person after the date hereof of beneficial
ownership of the right to vote or securities of the
Company representing the right to vote thirty five
percent (35%) or more of the combined voting power of
the Company's then outstanding securities having the
right to vote for the election of directors, or (ii)
within two years of a tender offer or exchange offer
for the voting stock of the Company or as a result of
a merger, consolidation, sale of assets or contested
election (or any combination of the foregoing), a
majority of the members of the Company's board of
directors is replaced by directors who were not
nominated and approved by the board of directors.
6.3.2 CC Termination. The term "CC Termination" means any
of the following: (a) this Agreement expires in
accordance with its terms; (b) this Agreement is not
extended under paragraph 5 of this Agreement and the
Executive resigns within one (1) year after such
nonextension; (c) the Executive is terminated by the
Company other than under paragraphs 6.1.2, 6.4 or 6.5
based on adequate grounds; (d) the Executive resigns
as a result of a change in the Executive's duties, a
reduction in the Executive's then current
compensation, a required relocation more than 25
miles from the Executive's then current place of
employment or a default by the Company under this
Agreement; (e) the failure by the Company after a
Change of Control to obtain the assumption of this
Agreement, without limitation or reduction, by any
successor to the Company or any parent corporation of
the Company; or (f) after a Change of Control has
occurred, the Executive agrees to remain employed by
the Company for a period of three (3) months to
assist in the transition and thereafter resigns.
6.4 Incapacity of Executive. If the Executive suffers from a
physical or mental condition which in the reasonable judgment
of the Company's board of directors prevents the Executive in
whole or in part from performing the duties specified herein
for a period of three (3) consecutive months, the Executive
may be terminated. Although the termination shall be deemed as
a termination with cause, any compensation payable under
paragraph 4 of this Agreement will be continued through the
remaining term of this Agreement, but in any event through the
Expiration Date. Notwithstanding the foregoing, the
Executive's Base Salary specified in paragraph 4.1 of this
Agreement will be reduced by any benefits payable under any
disability plans provided by the Company under paragraph 4 of
this Agreement.
6.5 Death of Executive. If the Executive dies during the term of
this Agreement, the Company may thereafter terminate this
Agreement without compensation to the Executive's estate
except: (a) the obligation to continue the Base Salary
payments under paragraph 4.1 of this Agreement for twelve (12)
months after the effective date of such termination, and (b)
the benefits described in paragraph 4.4 of this Agreement
accrued through the effective date of such termination.
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<PAGE> 13
6.6 Effect of Termination. The termination of this Agreement will
terminate all obligations of the Executive to render services
on behalf of the Company, provided that the Executive will
maintain the confidentiality of all information acquired by
the Executive during the term of his employment in accordance
with paragraph 7 of this Agreement. In the event of a
termination under paragraphs 6.1.1 or 6.3 of this Agreement
the Executive's right to participate in Program Wells will
continue in accordance with paragraph 3 of this Agreement.
Except as otherwise provided in this paragraph 6, no accrued
bonus, severance pay or other form of compensation will be
payable by the Company to the Executive by reason of the
termination of this Agreement. All keys, entry cards, credit
cards, files, records, financial information, furniture,
furnishings, equipment, supplies and other items relating to
the Company will remain the property of the Company. The
Executive will have the right to retain and remove all
personal property and effects which are owned by the Executive
and located in the offices of the Company. All such personal
items will be removed from such offices no later than seven
(7) days after the effective date of termination, and the
Company is hereby authorized to discard any items remaining
and to reassign the Executive's office space after such date.
Prior to the effective date of termination, the Executive will
render such services to the Company as might be reasonably
required to provide for the orderly termination of the
Executive's employment.
7. Confidentiality. The Executive recognizes that the nature of the
Executive's services are such that the Executive will have access to information
which constitutes trade secrets, is of a confidential nature, is of great value
to the Company or is the foundation on which the business of the Company is
predicated. The Executive agrees not to disclose to any person other than the
Company's employees or the Company's legal counsel nor use for any purpose,
other than the performance of this Agreement, any confidential information
("Confidential Information"). Confidential Information includes data or material
(regardless of form) which is: (a) a trade secret; (b) provided, disclosed or
delivered to Executive by the Company, any officer, director, employee, agent,
attorney, accountant, consultant, or other person or entity employed by the
Company in any capacity, any customer, borrower or business associate of the
Company or any public authority having jurisdiction over the Company of any
business activity conducted by the Company; or (c) produced, developed, obtained
or prepared by or on behalf of Executive or the Company (whether or not such
information was developed in the performance of this Agreement) with respect to
the Company or any assets oil and gas prospects, business activities, officers,
directors, employees, borrowers or customers of the foregoing. However,
Confidential Information shall not include any information, data or material
which at the time of disclosure or use was generally available to the public
other than by a breach of this Agreement, was available to the party to whom
disclosed on a non-confidential basis by disclosure or access provided by the
Company or a third party, or was otherwise developed or obtained independently
by the person to whom disclosed without a breach of this Agreement. On request
by the Company, the
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<PAGE> 14
Company will be entitled to a copy of any Confidential Information in the
possession of the Executive. The Executive also agrees that the provisions of
this paragraph 7 will survive the termination, expiration or cancellation of
this Agreement for a period of five (5) years. The Executive will deliver to the
Company all originals and copies of the documents or materials containing
Confidential Information. For purposes of paragraphs 7, 8, and 9 of this
Agreement, the Company expressly includes any of the Company's affiliated
corporations, partnerships or entities.
8. Noncompetition. For a period of twelve (12) months after Executive is
no longer employed by the Company as a result of either the resignation by the
Executive pursuant to paragraph 6.2 above or termination for cause pursuant to
paragraph 6.1.2 above, the Executive will not: (a) acquire, attempt to acquire
or aid another in the acquisition or attempted acquisition of an interest in oil
and gas assets, oil and gas production, oil and gas leases, mineral interests,
oil and gas wells or other such oil and gas exploration, development or
production activities within five (5) miles of any operations or ownership
interests of the Company or its subsidiary corporations, partnerships or
entities (but excluding operations or ownership interests acquired by the
Company from a successor entity through a Change of Control as described in
paragraph 6.3); and (b) solicit, induce, entice or attempt to entice any
employee, contractor, customer, vendor or subcontractor to terminate or breach
any relationship with the Company or the Company's affiliates for the
Executive's own account or for the benefit of another party. The Executive
further agrees that the Executive will not circumvent or attempt to circumvent
the foregoing agreements by any future arrangement or through the actions of a
third party.
9. Proprietary Matters. The Executive expressly understands and agrees
that any and all improvements, inventions, discoveries, processes or know-how
that are generated or conceived by the Executive during the term of this
Agreement, whether generated or conceived during the Executive's regular working
hours or otherwise, will be the sole and exclusive property of the Company.
Whenever requested by the Company (either during the term of this Agreement or
thereafter), the Executive will assign or execute any and all applications,
assignments and or other instruments and do all things which the Company deems
necessary or appropriate in order to permit the Company to: (a) assign and
convey or otherwise make available to the Company the sole and exclusive right,
title, and interest in and to said improvements, inventions, discoveries,
processes, know-how, applications, patents, copyrights, trade names or
trademarks; or (b) apply for, obtain, maintain, enforce and defend patents,
copyrights, trade names, or trademarks of the United States or of foreign
countries for said improvements, inventions, discoveries, processes or know-how.
However, the improvements, inventions, discoveries, processes or know-how
generated or conceived by the Executive and referred to above (except as they
may be included in the patents, copyrights or registered trade names or
trademarks of the Company, or corporations, partnerships or other entities which
may be affiliated with the Company) shall not be exclusive property of the
Company at any time after having been disclosed or revealed or have otherwise
become available to the public or to a third party on a non-confidential basis
other than by a breach of this Agreement, or after they have been independently
developed or discussed without a breach of this Agreement by a third party who
has no obligation to the Company or its affiliates.
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<PAGE> 15
10. Arbitration. The parties will attempt to promptly resolve any dispute
or controversy arising out of or relating to this Agreement or termination of
the Executive by the Company. Any negotiations pursuant to this paragraph 10 are
confidential and will be treated as compromise and settlement negotiations for
all purposes. If the parties are unable to reach a settlement amicably, the
dispute will be submitted to binding arbitration before a single arbitrator in
accordance with the Employment Dispute Resolution Rules of the American
Arbitration Association. The arbitrator will be instructed and empowered to take
reasonable steps to expedite the arbitration and the arbitrator's judgment will
be final and binding upon the parties subject solely to challenge on the grounds
of fraud or gross misconduct. Except for damages arising out of a breach of
paragraphs 6, 7, 8 or 9 of this Agreement, the arbitrator is not empowered to
award total damages (including compensatory damages) which exceed 300% of
compensatory damages and each party hereby irrevocably waives any damages in
excess of that amount. The arbitration will be held in Oklahoma County,
Oklahoma. Judgment upon any verdict in arbitration may be entered in any court
of competent jurisdiction and the parties hereby consent to the jurisdiction of,
and proper venue in, the federal and state courts located in Oklahoma County,
Oklahoma. Each party will bear its own costs in connection with the arbitration
and the costs of the arbitrator will be borne by the party who the arbitrator
determines did not prevail in the matter. Unless otherwise expressly set forth
in this Agreement, the procedures specified in this paragraph 10 will be the
sole and exclusive procedures for the resolution of disputes and controversies
between the parties arising out of or relating to this Agreement.
Notwithstanding the foregoing, a party may seek a preliminary injunction or
other provisional judicial relief if in such party's judgment such action is
necessary to avoid irreparable damage or to preserve the status quo.
11. Miscellaneous. The parties further agree as follows:
11.1 Time. Time is of the essence of each provision of this
Agreement.
11.2 Notices. Any notice, payment, demand or communication required
or permitted to be given by any provision of this Agreement
will be in writing and will be deemed to have been given when
delivered personally or by telefacsimile to the party
designated to receive such notice, or on the date following
the day sent by overnight courier, or on the third (3rd)
business day after the same is sent by certified mail, postage
and charges prepaid, directed to the following address or to
such other or additional addresses as any party might
designate by written notice to the other party:
To the Company: Chesapeake Energy Corporation
Post Office Box 18496
Oklahoma City, Oklahoma 73154-0496
Attn: Mr. Tom L. Ward
To the Executive: Mr. Aubrey K. McClendon
1214 Larchmont Lane
Oklahoma City, Oklahoma 73116
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<PAGE> 16
11.3 Assignment. Neither this Agreement nor any of the parties'
rights or obligations hereunder can be transferred or assigned
without the prior written consent of the other parties to this
Agreement.
11.4 Construction. If any provision of this Agreement or the
application thereof to any person or circumstances is
determined, to any extent, to be invalid or unenforceable, the
remainder of this Agreement, or the application of such
provision to persons or circumstances other than those as to
which the same is held invalid or unenforceable, will not be
affected thereby, and each term and provision of this
Agreement will be valid and enforceable to the fullest extent
permitted by law. This Agreement is intended to be
interpreted, construed and enforced in accordance with the
laws of the State of Oklahoma and any litigation relating to
this Agreement will be conducted in a court of competent
jurisdiction sitting in Oklahoma County, Oklahoma.
11.5 Entire Agreement. Except as provided in paragraph 2.3 of this
Agreement, this Agreement constitutes the entire agreement
between the parties hereto with respect to the subject matter
herein contained, and no modification hereof will be effective
unless made by a supplemental written agreement executed by
all of the parties hereto.
11.6 Binding Effect. This Agreement will be binding on the parties
and their respective successors, legal representatives and
permitted assigns. In the event of a merger, consolidation,
combination, dissolution or liquidation of the Company, the
performance of this Agreement will be assumed by any entity
which succeeds to or is transferred the business of the
Company as a result thereof.
11.7 Attorneys' Fees. If any party institutes an action or
proceeding against any other party relating to the provisions
of this Agreement or any default hereunder, the unsuccessful
party to such action or proceeding will reimburse the
successful party therein for the reasonable expenses of
attorneys' fees and disbursements and litigation expenses
incurred by the successful party.
11.8 Supercession. This Agreement is the final, complete and
exclusive expression of the agreement between the Company and
the Executive and supersedes and replaces in all respects any
prior employment agreements (including the Prior Agreement).
On execution of this Agreement by the Company and the
Executive, the relationship between the Company and the
Executive after the effective date of this Agreement will be
governed by the terms of this Agreement and not by any other
agreements, oral or otherwise.
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<PAGE> 17
IN WITNESS WHEREOF, the undersigned have executed this
Agreement effective the date first above written.
CHESAPEAKE ENERGY CORPORATION, an
Oklahoma corporation
By /s/ TOM L. WARD
------------------------------
Tom L. Ward, President
(the "Company")
/s/ AUBREY K. McCLENDON
---------------------------------
Aubrey K. McClendon, individually
(the "Executive")
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<PAGE> 1
EXHIBIT 10.2.2
AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
between
TOM L. WARD
and
CHESAPEAKE ENERGY CORPORATION
Effective July 1, 1998
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
1. Employment...............................................................................................1
2. Executive's Duties.......................................................................................1
2.1 Specific Duties.................................................................................1
2.2 Modifications...................................................................................2
2.3 Rules and Regulations...........................................................................2
2.4 Stock Investment................................................................................2
3. Other Activities.........................................................................................3
3.1 Company's Activities............................................................................3
3.1.1 Amount of Participation..................................................................3
3.1.2 Conditions of Participation. ..........................................................4
3.2 Other Activities................................................................................5
4. Executive's Compensation.................................................................................5
4.1 Base Salary.....................................................................................5
4.2 Bonus...........................................................................................5
4.3 Stock Options...................................................................................5
4.4 Benefits........................................................................................5
4.4.1 Vacation...............................................................................6
4.4.2 Membership Dues........................................................................6
4.4.3 Automobile and Travel Allowance........................................................6
4.4.4 Accounting Support.....................................................................6
4.5 Compensation Review.............................................................................7
5. Term.....................................................................................................7
6. Termination..............................................................................................7
6.1 Termination by Company..........................................................................7
6.1.1 Termination without Cause..............................................................7
6.1.2 Termination for Cause..................................................................8
6.2 Termination by Executive........................................................................8
6.3 Termination After Change in Control.............................................................8
6.3.1 Change of Control......................................................................9
6.3.2 CC Termination.........................................................................9
6.4 Incapacity of Executive.........................................................................9
6.5 Death of Executive.............................................................................10
6.6 Effect of Termination..........................................................................10
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
7. Confidentiality.........................................................................................10
8. Noncompetition..........................................................................................11
9. Proprietary Matters.....................................................................................11
10. Arbitration.............................................................................................12
11. Miscellaneous...........................................................................................12
11.1 Time...........................................................................................12
11.2 Notices........................................................................................12
11.3 Assignment.................................................................................... 13
11.4 Construction...................................................................................13
11.5 Entire Agreement...............................................................................13
11.6 Binding Effect.................................................................................13
11.7 Attorneys' Fees................................................................................14
11.8 Supercession...................................................................................14
</TABLE>
ii
<PAGE> 4
AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made effective July 1, 1998, between CHESAPEAKE
ENERGY CORPORATION, an Oklahoma corporation (the "Company"), and TOM L. WARD, an
individual (the "Executive").
W I T N E S S E T H:
WHEREAS, the Company and the Executive entered into that certain
employment agreement dated effective July 1, 1997 (the "Prior Agreement");
WHEREAS, the Company has announced that it would explore strategic
alternatives to increase shareholder value, and to retain employees during that
process the Company adopted a retention program for the Company's key employees
other than the senior executive officers;
WHEREAS, for the reasons the Company adopted the retention program for
the other employees, the Board of Directors of the Company believes that it is
in the best interests of the Company to provide for the retention of the
Executive as part of the process of exploring the Company's strategic
alternatives; and
WHEREAS, the Company and the Executive desire to amend and restate the
Prior Agreement in its entirety.
NOW, THEREFORE, in consideration of the mutual promises herein
contained, the Company and the Executive agree as follows:
1. Employment. The Company hereby employs the Executive and the Executive
hereby accepts such employment subject to the terms and conditions contained in
this Agreement. The Executive is engaged as an employee of the Company, and the
Executive and the Company do not intend to create a joint venture, partnership
or other relationship which might impose a fiduciary obligation on the Executive
or the Company in the performance of this Agreement.
2. Executive's Duties. The Executive is employed on a full-time basis.
Throughout the term of this Agreement, the Executive will use the Executive's
best efforts and due diligence to assist the Company in achieving the most
profitable operation of the Company and the Company's affiliated entities
consistent with developing and maintaining a quality business operation.
2.1 Specific Duties. The Executive will serve as President and
Chief Operating Officer for the Company. From time to time,
the Executive may be appointed as an officer of one (1) or
more of the Company's subsidiaries. During the term of this
Agreement, the Executive will be nominated for election or
appointed to serve as a director of the Company and one (1) or
more of the Company's subsidiaries. The Executive will use the
Executive's best efforts to perform all of the services
required to fully and faithfully execute the offices and
positions to which the Executive is appointed and such other
services as may be reasonably directed by the board of
directors of the Company in accordance with this Agreement.
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2.2 Modifications. The precise duties to be performed by the
Executive may be extended or curtailed in the discretion of
the respective boards of directors of the Company. However,
except for termination for cause under paragraph 6.1.2 of this
Agreement, the failure of the Executive to be elected, be
reelected or serve as a director of the Company during the
term of this Agreement, the removal of the Executive as a
member of the board of directors of the Company, the
withdrawal of the designation of the Executive as President or
Chief Operating Officer of the Company, or the assignment of
the performance of duties incumbent on the foregoing offices
to other persons without the prior written consent of the
Executive will constitute termination without cause by the
Company.
2.3 Rules and Regulations. The Company currently has an Employment
Policies Manual which addresses frequently asked questions
regarding the Company. The Executive agrees to comply with the
Employment Policies Manual except to the extent inconsistent
with this Agreement. The Employment Policies Manual is subject
to change without notice in the sole discretion of the Company
at any time. In the event of a conflict between the Employment
Policies Manual and this Agreement, this Agreement will
control over the terms of the Employment Policies Manual.
2.4 Stock Investment. For each calendar year during the term of
this Agreement the Executive agrees to hold shares of the
Company's common stock having an aggregate Investment Value
(as hereafter defined) equal to five hundred percent (500%) of
the compensation paid to the Executive under paragraphs 4.1
and 4.2 of this Agreement during such calendar year. Any
shares of common stock acquired by the Executive prior to the
date of this Agreement and still owned by the Executive during
the term of this Agreement may be used to satisfy this
requirement to own common stock. For purposes of this
paragraph, the "Investment Value" of each share of stock will
be as follows: (a) for shares purchased in the open market the
price paid by the Executive for such shares; (b) for shares
acquired through the exercise of stock options, the fair
market value of the common stock on the date the option was
exercised; and (c) for shares acquired other than through open
market purchases or the exercise of options the fair market
value of the Company's common stock on the date of the
acquisition of such common stock. The stock acquired or owned
pursuant to this paragraph 2.4 must be held by the Executive
at all times during the Executive's employment by the Company
or the Company's affiliated entities. In order to administer
this provision, the Executive agrees to deliver to the
Company's Chief Executive Officer a semi-annual report of
purchases and ownership in a form prepared by the Company.
This paragraph will become null and void if the Company's
common
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stock ceases to be listed on the New York Stock Exchange, the
National Association of Securities Dealers Automated Quotation
System or other national exchange. The Company has no
obligation to sell or to purchase from the Executive any of
the Company's stock in connection with this paragraph 2.4 and
has made no representations or warranties regarding the
Company's stock, operations or financial condition.
3. Other Activities. Except for the activities (the "Permitted Activities")
expressly permitted by paragraphs 3.1 and 3.2 of this Agreement, or the prior
written approval of the board of directors of the Company, the Executive will
not: (a) engage in business independent of the Executive's employment by the
Company which requires any substantial portion of the Executive's time; (b)
serve as an officer or director of any corporation, partnership, company, or
firm; (c) except for passive investments that do not violate this Agreement and
require a minimal portion of the Executive's time, serve as a general partner or
member of any corporation, partnership, company or firm; or (d) directly or
indirectly invest in, participate in or acquire an interest in any oil and gas
business, including, without limitation, (i) producing oil and gas, (ii)
drilling, owning or operating oil and gas leases or wells, (iii) providing
services or materials to the oil and gas industry, (iv) marketing or refining
oil or gas, or (v) owning any interest in any corporation, partnership, company
or entity which conducts any of the foregoing activities. The limitations in
this paragraph 3 will not prohibit an investment by the Executive in publicly
traded securities. Notwithstanding the foregoing, the Executive will be
permitted to participate in the following activities which will be deemed to be
approved by the Company, if such activities are undertaken in strict compliance
with this Agreement.
3.1 Company's Activities. The Executive or the Executive's
designated affiliate will be permitted to acquire a working
interest in all of the wells spudded by the Company or the
Company's subsidiary corporations, partnerships or entities
(the "Program Wells") on the terms and conditions set forth
herein in any Calendar Quarter (as hereafter defined) during
the Participation Term (as hereafter defined). The Program
Wells include any well spudded during such Calendar Quarter in
which the Company or the Company's subsidiary corporations,
partnerships or entities participate as a nonoperator.
3.1.1 Amount of Participation. On or before the date which
is thirty (30) days before the first (1st) day of
each Calendar Quarter, the Executive will provide
notice to the compensation committee of the Company's
board of directors of the Executive's intent to
participate in the Program Wells during the
succeeding Calendar Quarter and the approximate
percentage working interest which the Executive
proposes to participate with during such Calendar
Quarter (the "Approved Percentage"). The Executive's
Approved Percentage working interest participation
(determined without consideration of any carried
interest) in the Program Wells for any Calendar
Quarter will not exceed two and one-half percent
(2.5%) on an eight-
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eighths (8/8ths) basis. On designation of the
Approved Percentage for a Calendar Quarter, the
Executive will be deemed to have elected to
participate in each Program Well spudded during such
Calendar Quarter with a working interest equal to the
following applicable percentage determined on a
well-by-well basis (the "Minimum Participation"): (a)
the Approved Percentage for each Operations Well,
each Program Well which does not fall within clause
(b) of this paragraph 3 1.1 and any Program Well
which does not fall within clause (c) of this
paragraph 3.1.1; (b) zero percent (0%) if the
combined participation in the Program Well by the
Executive, Mr. Tom L. Ward and Mr. Marcus C. Rowland
with such individuals' Approved Percentage under
their respective employment agreements causes the
Company's working interest (determined without
consideration of any carried interest) on the spud
date for such Program Well to be less than twelve and
one-half percent (12.5%) on an eight- eighths
(8/8ths) basis; or (c) subsequent to a termination
under paragraphs 6.1.1 or 6.3 of this Agreement the
lowest Approved Percentage elected by the Executive
subsequent to such termination. If clause (b) of this
paragraph 3.1.1 prohibits the Executive's
participation in a Program Well, then Messrs. Ward
and Rowland will not be entitled to participate in
such Program Well under their employment agreements.
An "Operations Well" means a Program Well which falls
within the provisions of clause (b) of this paragraph
3.1.1, but for which the Executive's participation is
deemed necessary for the Company to retain operations
as determined by the disinterested members of the
compensation committee of the Company's board of
directors. If the Executive fails to provide notice
of the Executive's intent to participate and the
Executive's proposed participation prior to the
specified date as provided herein, the amount of the
Approved Percentage for the Calendar Quarter will be
deemed to be zero (0).
3.1.2 Conditions of Participation. The Participation by the
Executive in each Program Well will be on no better
terms than the terms agreed to by unaffiliated third
party participants in connection with the acquisition
of an interest in such Program Well from the Company
or its subsidiary corporations, partnerships or
entities. The Approved Percentage cannot be changed
during any Calendar Quarter without the prior
approval of the disinterested members of the
compensation committee of the Company's board of
directors. Any participation by the Executive under
this paragraph 3.1 is also conditioned upon the
Executive's participation in each Program Well
spudded during such Calendar Quarter in an amount
equal to the Minimum Participation. The Executive
hereby agrees to execute and deliver any documents
reasonably requested by the Company and hereby
appoints the Company as the Executive's agent and
attorney-in-fact to execute and deliver such
documents if the Executive fails or refuses to
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execute such documents. The Executive further agrees
to pay all joint interest billings within one hundred
fifty (150) days after receipt. For purposes of this
Agreement, the term: (a) "Calendar Quarter" means the
three (3) month periods commencing on the first (1st)
day of January, April, July and October; and (b)
"Participation Term" means the term of this Agreement
plus five (5) years after a termination under
paragraphs 6.1.1 or 6.3 of this Agreement.
3.2 Other Activities. The Executive currently conducts oil and gas
investment activities individually and through TLW
Investments, Inc., ("Investments"). The Executive will be
permitted to continue oil and gas activities in such entities
but only to the extent such activities are conducted on oil
and gas leases or interests owned by the Executive or
Investments as of July 1, 1995, or acquired by Investments
from the Company. The interests acquired by Investments shall
be limited by the provisions of paragraph 3.1 of this
Agreement. The Company also consents to the Executive serving
as a director of Pan East Petroleum Corp., an Ontario Canada
corporation, pursuant to approval by the board of directors.
4. Executive's Compensation. The Company agrees to compensate the
Executive as follows:
4.1 Base Salary. A base salary (the "Base Salary"), at the initial
annual rate of not less than Three Hundred Fifty Thousand
Dollars ($350,000.00), will be paid to the Executive in equal
semi-monthly installments beginning July 15, 1998 during the
term of this Agreement.
4.2 Bonus. In addition to the Base Salary described at paragraph
4.1 of this Agreement, the Company may periodically pay bonus
compensation to the Executive. Any bonus compensation will be
at the absolute discretion of the Company in such amounts and
at such times as the board of directors of the Company may
determine.
4.3 Stock Options. In addition to the compensation set forth in
paragraphs 4.1 and 4.2 of this Agreement, the Executive may
periodically receive grants of stock options from the
Company's various stock option plans, subject to the terms and
conditions thereof.
4.4 Benefits. The Company will provide the Executive such
retirement benefits, reimbursement of reasonable expenditures
for dues, travel and entertainment and other benefits on terms
customarily provided by the Company from time to time. The
Company will also provide the Executive the opportunity to
apply for coverage under the Company's medical, life and
disability plans, if any. If the Executive is accepted for
coverage under such plans, the Company will provide such
coverage on the same terms as is customarily provided by the
Company to the plan participants as modified from time to
time. The following specific benefits will also be provided to
the Executive at the expense of the Company:
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4.4.1 Vacation. The Executive will be entitled to take
three (3) weeks of paid vacation each calendar year
during the term of this Agreement. No additional
compensation will be paid for failure to take
vacation and no vacation may be carried forward from
one calendar year to another.
4.4.2 Membership Dues. The Company will reimburse the
Executive for: (a) the monthly dues necessary to
maintain a full membership in (1) golf and/or country
club in the Oklahoma City area selected by the
Executive; and (b) the reasonable cost of any
qualified business entertainment at such country
club. All other costs, including, without implied
limitation, any initiation costs, initial membership
costs, personal use and business entertainment
unrelated to the Company will be the sole obligation
of the Executive and the Company will have no
liability with respect to such amounts.
4.4.3 Automobile and Travel Allowance. The Executive will
receive a monthly cash allowance in the amount of One
Thousand Five Hundred Dollars ($1,500.00) to defer a
portion of the Executive's cost of acquiring,
operating and maintaining an automobile for use in
the Executive's employment. Additionally, the
Executive will be entitled to utilize any aircraft
owned by the Company (whether in whole or in part)
for personal use and will not be required to
reimburse the Company for any cost related to such
use or pay any cost or charge with respect to such
use up to an amount during any calendar year equal to
the Aircraft Allowance. For purposes of this
Agreement the term "Aircraft Allowance" means the
variable costs directly identifiable with each use
(including fuel, pilot charges, landing fees, hourly
charges under co-ownership arrangements and other
such costs) but specifically excludes any fixed costs
of the aircraft (including acquisition costs and
depreciation). The Aircraft Allowance will be equal
to $40,000.00 for the Company's fiscal year ending on
June 30, 1998, $25,000.00 for the six month period
ending on December 31, 1998, and $50,000.00 for each
fiscal year thereafter during the term of this
Agreement. If the Executive's use of the Company's
aircraft exceeds the Aircraft Allowance during any
fiscal year the Executive will be required to
reimburse the Company for the variable costs directly
identified with each such use.
4.4.4 Accounting Support. The Executive will be permitted
to utilize the Company's office space, computer
facilities and the equivalent of one (1) full-time
accounting employee of the Company (presently Ms.
Cheryl Hamilton) to maintain books and records for
the Executive and the
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Executive's Permitted Activities. The Executive will
not be required to pay any compensation to the
Company in connection with such accounting services.
4.5 Compensation Review. The compensation of the Executive will be
reviewed not less frequently than annually by the board of
directors of the Company. The compensation of the Executive
prescribed by paragraph 4 of this Agreement may be increased
at the discretion of the Company, but may not be reduced
without the prior written consent of the Executive.
5. Term. In the absence of termination as set forth in paragraph 6 below,
this Agreement will extend for a term of five (5) years commencing on July 1,
1998, and ending on June 30, 2003 (the "Expiration Date") as extended from time
to time. Unless the Company provides thirty (30) days prior written notice of
nonextension to the Executive, on each June 30 during the term of this
Agreement, the term and the Expiration Date will be automatically extended for
one (1) additional year so that the remaining term on this Agreement will be not
less than four (4) and not more than five (5) years.
6. Termination. This Agreement will continue in effect until the
expiration of the term set forth in paragraph 5 of this Agreement unless earlier
terminated pursuant to this paragraph 6.
6.1 Termination by Company. The Company will have the following
rights to terminate this Agreement:
6.1.1 Termination without Cause. The Company may terminate
this Agreement without cause at any time by the
service of written notice of termination to the
Executive specifying an effective date of such
termination not sooner than sixty (60) business days
after the date of such notice (the "Termination
Date"). In the event the Executive is terminated
without cause (other than a CC Termination under
paragraph 6.3 of this Agreement), the Executive will
receive as termination compensation: (a) Base
Compensation (as hereafter defined) during the
remaining term of this Agreement, but in any event
through the Expiration Date; (b) any benefits payable
by operation of paragraph 4.4 of this Agreement
during the remaining term of this Agreement, but in
any event through the Expiration Date; and (c) any
vacation pay accrued through the Termination Date.
For purposes of this Agreement the term "Base
Compensation" means the Executive's current Base
Salary under paragraph 4.1 on the Termination Date
plus the bonus compensation received by the Executive
during the twelve (12) month period preceding the
Termination Date.
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6.1.2 Termination for Cause. The Company may terminate
this Agreement for cause if the Executive: (a)
misappropriates the property of the Company or
commits any other act of dishonesty; (b) engages in
personal misconduct which materially injures the
Company; (c) willfully violates any law or regulation
relating to the business of the Company which results
in injury to the Company; or (d) willfully and
repeatedly fails to perform the Executive's duties
hereunder. In the event this Agreement is terminated
for cause, the Company will not have any obligation
to provide any further payments or benefits to the
Executive after the effective date of such
termination. This Agreement will not be deemed to
have terminated for cause unless a written
determination specifying the reasons for such
termination is made, approved by a majority of the
disinterested members of the board of directors of
the Company and delivered to the Executive.
Thereafter, the Executive will have the right for a
period of twenty (20) days to request a board of
directors meeting to be held at a mutually agreeable
time and location within thirty (30) days, at which
meeting the Executive will have an opportunity to be
heard. Failing such determination and opportunity for
hearing, any termination of this Agreement will be
deemed to have occurred without cause.
6.2 Termination by Executive. The Executive may voluntarily
terminate this Agreement with or without cause by the service
of written notice of such termination to the Company
specifying an effective date of such termination sixty (60)
days after the date of such notice, during which time
Executive may use remaining accrued vacation days, or at the
Company's option, be paid for such days. In the event this
Agreement is terminated by the Executive, neither the Company
nor the Executive will have any further obligations hereunder
including, without limitation, any obligation of the Company
to provide any further payments or benefits to the Executive
after the effective date of such termination.
6.3 Termination After Change in Control. If during the term of
this Agreement there is a "Change of Control" and within two
(2) years thereafter there is a CC Termination (as hereafter
defined) then the Executive will be entitled to a severance
payment (in addition to any other rights and other amounts
payable to the Executive under this Agreement or otherwise) in
an amount equal to the sum of the following: (a) five (5)
times the Executive's Base Compensation; plus (b) the Gross-up
Amount (as hereafter defined). If the foregoing amount is not
paid within ten (10) days after the CC Termination, the unpaid
amount will bear interest at the per annum rate equal to the
prime rate published from time to time in the Wall Street
Journal. The interest rate will be adjusted on the date of a
change in such prime rate. For purposes of this Agreement the
term "Gross-up Amount" means the amount of the payment which
will result in the Executive retaining from such payment
(after paying all taxes imposed on such payment and any
interest or penalties related to such taxes) an amount equal
to any excise tax imposed by Section 4999 of the Internal
Revenue Code of 1986, as amended, together with any
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interest and penalties with respect to such excise tax imposed
on the all of the payments made to the Executive under this
paragraph 6.3.
6.3.1 Change of Control. The term "Change of Control"
means any action of a nature that would be required
to be reported in response to Item 6(e) of Schedule
14A of Regulation 14A under the Securities Exchange
Act of 1934 with respect to the Company including,
without limitation (i) the direct or indirect
acquisition by any person after the date hereof of
beneficial ownership of the right to vote or
securities of the Company representing the right to
vote thirty five percent (35%) or more of the
combined voting power of the Company's then
outstanding securities having the right to vote for
the election of directors, or (ii) within two years
of a tender offer or exchange offer for the voting
stock of the Company or as a result of a merger,
consolidation, sale of assets or contested election
(or any combination of the foregoing), a majority of
the members of the Company's board of directors is
replaced by directors who were not nominated and
approved by the board of directors.
6.3.2 CC Termination. The term "CC Termination" means any
of the following: (a) this Agreement expires in
accordance with its terms; (b) this Agreement is not
extended under paragraph 5 of this Agreement and the
Executive resigns within one (1) year after such
nonextension; (c) the Executive is terminated by the
Company other than under paragraphs 6.1.2, 6.4 or 6.5
based on adequate grounds; (d) the Executive resigns
as a result of a change in the Executive's duties, a
reduction in the Executive's then current
compensation, a required relocation more than 25
miles from the Executive's then current place of
employment or a default by the Company under this
Agreement; (e) the failure by the Company after a
Change of Control to obtain the assumption of this
Agreement, without limitation or reduction, by any
successor to the Company or any parent corporation of
the Company; or (f) after a Change of Control has
occurred, the Executive agrees to remain employed by
the Company for a period of three (3) months to
assist in the transition and thereafter resigns.
6.4 Incapacity of Executive. If the Executive suffers from a
physical or mental condition which in the reasonable judgment
of the Company's board of directors prevents the Executive in
whole or in part from performing the duties specified herein
for a period of three (3) consecutive months, the Executive
may be terminated. Although the termination shall be deemed as
a termination with cause, any compensation payable under
paragraph 4 of this Agreement will be continued through the
remaining term of this Agreement, but in any event through the
Expiration Date. Notwithstanding the foregoing, the
Executive's Base Salary specified in paragraph 4.1 of this
Agreement will be reduced by any benefits payable under any
disability plans provided by the Company under paragraph 4 of
this Agreement.
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6.5 Death of Executive. If the Executive dies during the term of
this Agreement, the Company may thereafter terminate this
Agreement without compensation to the Executive's estate
except: (a) the obligation to continue the Base Salary
payments under paragraph 4.1 of this Agreement for twelve (12)
months after the effective date of such termination, and (b)
the benefits described in paragraph 4.4 of this Agreement
accrued through the effective date of such termination.
6.6 Effect of Termination. The termination of this Agreement will
terminate all obligations of the Executive to render services
on behalf of the Company, provided that the Executive will
maintain the confidentiality of all information acquired by
the Executive during the term of his employment in accordance
with paragraph 7 of this Agreement. In the event of a
termination under paragraphs 6.1.1 or 6.3 of this Agreement
the Executive's right to participate in Program Wells will
continue in accordance with paragraph 3 of this Agreement.
Except as otherwise provided in this paragraph 6, no accrued
bonus, severance pay or other form of compensation will be
payable by the Company to the Executive by reason of the
termination of this Agreement. All keys, entry cards, credit
cards, files, records, financial information, furniture,
furnishings, equipment, supplies and other items relating to
the Company will remain the property of the Company. The
Executive will have the right to retain and remove all
personal property and effects which are owned by the Executive
and located in the offices of the Company. All such personal
items will be removed from such offices no later than seven
(7) days after the effective date of termination, and the
Company is hereby authorized to discard any items remaining
and to reassign the Executive's office space after such date.
Prior to the effective date of termination, the Executive will
render such services to the Company as might be reasonably
required to provide for the orderly termination of the
Executive's employment.
7. Confidentiality. The Executive recognizes that the nature of the
Executive's services are such that the Executive will have access to information
which constitutes trade secrets, is of a confidential nature, is of great value
to the Company or is the foundation on which the business of the Company is
predicated. The Executive agrees not to disclose to any person other than the
Company's employees or the Company's legal counsel nor use for any purpose,
other than the performance of this Agreement, any confidential information
("Confidential Information"). Confidential Information includes data or material
(regardless of form) which is: (a) a trade secret; (b) provided, disclosed or
delivered to Executive by the Company, any officer, director, employee, agent,
attorney, accountant, consultant, or other person or entity employed by the
Company in any capacity, any customer, borrower or business associate of the
Company or any public authority having jurisdiction over the Company of any
business activity conducted by the Company; or (c) produced, developed, obtained
or prepared by or on behalf of Executive or the
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Company (whether or not such information was developed in the performance of
this Agreement) with respect to the Company or any assets oil and gas prospects,
business activities, officers, directors, employees, borrowers or customers of
the foregoing. However, Confidential Information shall not include any
information, data or material which at the time of disclosure or use was
generally available to the public other than by a breach of this Agreement, was
available to the party to whom disclosed on a non-confidential basis by
disclosure or access provided by the Company or a third party, or was otherwise
developed or obtained independently by the person to whom disclosed without a
breach of this Agreement. On request by the Company, the Company will be
entitled to a copy of any Confidential Information in the possession of the
Executive. The Executive also agrees that the provisions of this paragraph 7
will survive the termination, expiration or cancellation of this Agreement for a
period of five (5) years. The Executive will deliver to the Company all
originals and copies of the documents or materials containing Confidential
Information. For purposes of paragraphs 7, 8, and 9 of this Agreement, the
Company expressly includes any of the Company's affiliated corporations,
partnerships or entities.
8. Noncompetition. For a period of twelve (12) months after Executive is
no longer employed by the Company as a result of either the resignation by the
Executive pursuant to paragraph 6.2 above or termination for cause pursuant to
paragraph 6.1.2 above, the Executive will not: (a) acquire, attempt to acquire
or aid another in the acquisition or attempted acquisition of an interest in oil
and gas assets, oil and gas production, oil and gas leases, mineral interests,
oil and gas wells or other such oil and gas exploration, development or
production activities within five (5) miles of any operations or ownership
interests of the Company or its subsidiary corporations, partnerships or
entities (but excluding operations or ownership interests acquired by the
Company from a successor entity through a Change of Control as described in
paragraph 6.3); and (b) solicit, induce, entice or attempt to entice any
employee, contractor, customer, vendor or subcontractor to terminate or breach
any relationship with the Company or the Company's affiliates for the
Executive's own account or for the benefit of another party. The Executive
further agrees that the Executive will not circumvent or attempt to circumvent
the foregoing agreements by any future arrangement or through the actions of a
third party.
9. Proprietary Matters. The Executive expressly understands and agrees
that any and all improvements, inventions, discoveries, processes or know-how
that are generated or conceived by the Executive during the term of this
Agreement, whether generated or conceived during the Executive's regular working
hours or otherwise, will be the sole and exclusive property of the Company.
Whenever requested by the Company (either during the term of this Agreement or
thereafter), the Executive will assign or execute any and all applications,
assignments and or other instruments and do all things which the Company deems
necessary or appropriate in order to permit the Company to: (a) assign and
convey or otherwise make available to the Company the sole and exclusive right,
title, and interest in and to said improvements, inventions, discoveries,
processes, know-how, applications, patents, copyrights, trade names or
trademarks; or (b) apply for, obtain, maintain, enforce and defend patents,
copyrights, trade names, or trademarks of the United States or of foreign
countries for said improvements, inventions, discoveries, processes or
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know-how. However, the improvements, inventions, discoveries, processes or
know-how generated or conceived by the Executive and referred to above (except
as they may be included in the patents, copyrights or registered trade names or
trademarks of the Company, or corporations, partnerships or other entities which
may be affiliated with the Company) shall not be exclusive property of the
Company at any time after having been disclosed or revealed or have otherwise
become available to the public or to a third party on a non-confidential basis
other than by a breach of this Agreement, or after they have been independently
developed or discussed without a breach of this Agreement by a third party who
has no obligation to the Company or its affiliates.
10. Arbitration. The parties will attempt to promptly resolve any dispute
or controversy arising out of or relating to this Agreement or termination of
the Executive by the Company. Any negotiations pursuant to this paragraph 10 are
confidential and will be treated as compromise and settlement negotiations for
all purposes. If the parties are unable to reach a settlement amicably, the
dispute will be submitted to binding arbitration before a single arbitrator in
accordance with the Employment Dispute Resolution Rules of the American
Arbitration Association. The arbitrator will be instructed and empowered to take
reasonable steps to expedite the arbitration and the arbitrator's judgment will
be final and binding upon the parties subject solely to challenge on the grounds
of fraud or gross misconduct. Except for damages arising out of a breach of
paragraphs 6, 7, 8 or 9 of this Agreement, the arbitrator is not empowered to
award total damages (including compensatory damages) which exceed 300% of
compensatory damages and each party hereby irrevocably waives any damages in
excess of that amount. The arbitration will be held in Oklahoma County,
Oklahoma. Judgment upon any verdict in arbitration may be entered in any court
of competent jurisdiction and the parties hereby consent to the jurisdiction of,
and proper venue in, the federal and state courts located in Oklahoma County,
Oklahoma. Each party will bear its own costs in connection with the arbitration
and the costs of the arbitrator will be borne by the party who the arbitrator
determines did not prevail in the matter. Unless otherwise expressly set forth
in this Agreement, the procedures specified in this paragraph 10 will be the
sole and exclusive procedures for the resolution of disputes and controversies
between the parties arising out of or relating to this Agreement.
Notwithstanding the foregoing, a party may seek a preliminary injunction or
other provisional judicial relief if in such party's judgment such action is
necessary to avoid irreparable damage or to preserve the status quo.
11. Miscellaneous. The parties further agree as follows:
11.1 Time. Time is of the essence of each provision of this
Agreement.
11.2 Notices. Any notice, payment, demand or communication required
or permitted to be given by any provision of this Agreement
will be in writing and will be deemed to have been given when
delivered personally or by telefacsimile to the party
designated to receive such notice, or on the date following
the day sent by overnight courier, or on the third (3rd)
business day after the same is sent by certified mail, postage
and charges prepaid, directed to the following address or to
-12-
<PAGE> 16
such other or additional addresses as any party might
designate by written notice to the other party:
To the Company: Chesapeake Energy Corporation
Post Office Box 18496
Oklahoma City, OK 73154-0496
Attn: Aubrey K. McClendon
To the Executive: Mr. Tom L. Ward
19200 North Rockwell Avenue
Edmond, Oklahoma 73003-9200
11.3 Assignment. Neither this Agreement nor any of the parties'
rights or obligations hereunder can be transferred or assigned
without the prior written consent of the other parties to this
Agreement.
11.4 Construction. If any provision of this Agreement or the
application thereof to any person or circumstances is
determined, to any extent, to be invalid or unenforceable, the
remainder of this Agreement, or the application of such
provision to persons or circumstances other than those as to
which the same is held invalid or unenforceable, will not be
affected thereby, and each term and provision of this
Agreement will be valid and enforceable to the fullest extent
permitted by law. This Agreement is intended to be
interpreted, construed and enforced in accordance with the
laws of the State of Oklahoma and any litigation relating to
this Agreement will be conducted in a court of competent
jurisdiction sitting in Oklahoma County, Oklahoma.
11.5 Entire Agreement. Except as provided in paragraph 2.3 of this
Agreement, this Agreement constitutes the entire agreement
between the parties hereto with respect to the subject matter
herein contained, and no modification hereof will be effective
unless made by a supplemental written agreement executed by
all of the parties hereto.
11.6 Binding Effect. This Agreement will be binding on the parties
and their respective successors, legal representatives and
permitted assigns. In the event of a merger, consolidation,
combination, dissolution or liquidation of the Company, the
performance of this Agreement will be assumed by any entity
which succeeds to or is transferred the business of the
Company as a result thereof.
-13-
<PAGE> 17
11.7 Attorneys' Fees. If any party institutes an action or
proceeding against any other party relating to the provisions
of this Agreement or any default hereunder, the unsuccessful
party to such action or proceeding will reimburse the
successful party therein for the reasonable expenses of
attorneys' fees and disbursements and litigation expenses
incurred by the successful party.
11.8 Supercession. This Agreement is the final, complete and
exclusive expression of the agreement between the Company and
the Executive and supersedes and replaces in all respects any
prior employment agreements (including the Prior Agreement).
On execution of this Agreement by the Company and the
Executive, the relationship between the Company and the
Executive after the effective date of this Agreement will be
governed by the terms of this Agreement and not by any other
agreements, oral or otherwise.
IN WITNESS WHEREOF, the undersigned have executed this Agreement
effective the date first above written.
CHESAPEAKE ENERGY CORPORATION, an
Oklahoma corporation
By /s/ AUBREY K. MCCLENDON
--------------------------------------------
Aubrey K. McClendon, Chief Executive Officer
(the "Company")
/s/ TOM L. WARD
--------------------------------------------
Tom L. Ward, individually
(the "Executive")
-14-
<PAGE> 1
EXHIBIT 10.3
AMENDMENT NO. 1 TO RIGHTS AGREEMENT
BETWEEN
CHESAPEAKE ENERGY CORPORATION
AND
UMB BANK, N.A., AS RIGHTS AGENT
THIS AMENDMENT NO. 1 TO RIGHTS AGREEMENT (this "First Amendment"),
dated as of September 11, 1998, is by and between Chesapeake Energy Corporation,
and Oklahoma corporation (the "Company"), and UMB Bank, N.A., as Rights Agent
(the "Rights Agent").
R E C I T A L S:
WHEREAS, the Company and the Rights Agent have heretofore entered into
a Rights Agreement, dated as of July 15, 1998 (the "Rights Agreement"); and
WHEREAS, the Company desires to amend the Rights Agreement to revise
Section 1(p) thereof; and
WHEREAS, the Board of Directors of the Company has unanimously
approved the amendment to the Rights Agreement effected hereby and in accordance
with Section 27 of the Rights Agreement, this First Amendment can be effected
without the approval of any holders of the Rights.
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein set forth and in accordance with Section 27 of the Rights
Agreement, the parties hereby agree as follows:
1. Section 1(p) of the Rights Agreement is hereby amended, effective
as of the date set forth above, by revising such Section to read in its
entirety as follows:
"Exempt Person" shall mean (i) the Company or any Subsidiary (as
such term is hereinafter defined) of the Company or any employee
benefit plan of the Company, (ii) Aubrey K. McClendon, his
spouse, lineal descendants and ascendants, heirs, executors or
other legal representatives and any trusts established for the
benefit of the foregoing, or any other person or entity in which
the foregoing persons or entities are at the time of
determination the direct record and beneficial owners of all
outstanding voting securities (each a "McClendon Stockholder"),
(iii) Tom L. Ward, his spouse, lineal descendants and ascendants,
heirs, executors or other legal representatives and any trusts
established for the benefit of the
<PAGE> 2
foregoing (each a "Ward Stockholder"), (iv) Morgan Guaranty Trust
Company of New York in its capacity as pledgee (the
"McClendon/Ward Pledgee") of shares ("Pledged Shares")
Beneficially Owned by a McClendon Stockholder or Ward Stockholder
or both under pledge agreement(s) in effect on the date of this
First Amendment, to the extent that upon the exercise by the
McClendon/Ward Pledgee of any rights or duties thereunder other
than the exercise of any voting power by the McClendon/Ward
Pledgee or the acquisition of ownership by the McClendon/Ward
Pledgee such McClendon/Ward Pledgee becomes a Beneficial Owner of
Pledged Shares, or (v) any Person (other than a McClendon/Ward
Pledgee) that is neither a McClendon Stockholder nor a Ward
Stockholder but who or which is the Beneficial Owner or Common
Stock Beneficially Owned by a McClendon Stockholder or Ward
Stockholder (a "Second Tier Stockholder"), but only if the shares
of Common Stock otherwise Beneficially Owned by such Second Tier
Stockholder ("Second Tier Holder Shares") do not exceed the sum
of (A) such holder's Second Tier Holder Shares held on the date
hereof and (B) 1% of the shares of Common Stock of the Company
then outstanding.
2. Except to the extent amended by this First Amendment, the Rights
Agreement shall continue in full force and effect.
3. Capitalized terms used herein but not defined shall have the
meanings assigned to such terms in the Rights Agreement.
<PAGE> 3
IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to
be duly executed and attested, all as of the day and year first above written.
CHESAPEAKE ENERGY CORPORATION
By:/s/ AUBREY K. MCCLENDON
--------------------------------
Name: Aubrey K. McClendon
Title: Chairman of the Board and
Chief Executive Officer
UMB BANK, N.A.
as Rights Agent
By:/s/ FRANK C. BRAMWELL
--------------------------------
Name: Frank C. Bramwell
Title: Sr. Vice President
<PAGE> 1
EXHIBIT 12
<TABLE>
<CAPTION>
9 Months 9 Months
Ended Ended
Sept. 30, Sept. 30,
1997 1998
---- ----
<S> <C> <C>
RATIO OF EARNINGS TO FIXED CHARGES
Income before income taxes and extraordinary item (214,063) (495,388)
Interest 20,909 47,930
Preferred Stock Dividends - 8,051
Bond discount amortization (a) - -
Loan cost amortization 1,088 1,682
-------- --------
Earnings (192,066) (437,725)
Interest expense 20,909 47,930
Capitalized interest 7,944 5,805
Preferred Stock Dividends - 8,051
Bond discount amortization (a) - -
Loan cost amortization 1,088 1,682
-------- --------
Fixed Charges 29,941 63,468
Ratio (6.41) (6.90)
(a) Bond discount excluded since its included in interest
expense
Insufficient coverage 222,007 501,193
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE
SHEET AS OF SEPTEMBER 30, 1998 AND STATEMENT OF INCOME FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 24,949
<SECURITIES> 0
<RECEIVABLES> 82,604
<ALLOWANCES> 1,209
<INVENTORY> 6,327
<CURRENT-ASSETS> 117,289
<PP&E> 2,225,964
<DEPRECIATION> 1,197,483
<TOTAL-ASSETS> 1,227,274
<CURRENT-LIABILITIES> 119,300
<BONDS> 919,055
0
230,000
<COMMON> 967
<OTHER-SE> (54,572)
<TOTAL-LIABILITY-AND-EQUITY> 1,227,274
<SALES> 292,413
<TOTAL-REVENUES> 295,986
<CGS> 743,444
<TOTAL-COSTS> 791,374
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 47,930
<INCOME-PRETAX> (495,388)
<INCOME-TAX> 0
<INCOME-CONTINUING> (495,388)
<DISCONTINUED> 0
<EXTRAORDINARY> (13,334)
<CHANGES> 0
<NET-INCOME> (508,722)
<EPS-PRIMARY> (5.48)
<EPS-DILUTED> (5.48)
</TABLE>
