<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED) MARCH 25, 1998
-----------------------
CHESAPEAKE ENERGY CORPORATION
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its Charter)
OKLAHOMA 1-13726 73-1395733
- --------------------------------------------------------------------------------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) 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)
<PAGE> 2
INFORMATION TO BE INCLUDED IN THE REPORT
ITEM 5. OTHER EVENTS
On March 25, 1998, Chesapeake Energy Corporation ("Chesapeake") issued
a press release reporting its financial results for the six month transition
period ended December 31, 1997. The March 25, 1998 press release is filed
herewith as Exhibit 99.1 and incorporated herein by reference.
The Company's audited financial statements as of December 31, 1997 and
as of June 30, 1997 and 1996, and the related consolidated statements of
operations, stockholders' equity and cash flows for the six months ended
December 31, 1997 and the years ended June 30, 1997, 1996 and 1995 are filed
herewith as Exhibit 99.2 and incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(c) Exhibits. The following exhibits are filed herewith:
23.1 Consent of Coopers & Lybrand, L.L.P.
23.2 Consent of Price Waterhouse LLP
99.1 Press Release issued by the Registrant on March 25, 1998.
99.2 Audited Financial Statements
2
<PAGE> 3
SIGNATURE
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
BY: /S/ AUBREY K. MCCLENDON
------------------------------------
AUBREY K. MCCLENDON,
Chairman of the Board and
Chief Executive Officer
Dated: March 25, 1998
3
<PAGE> 4
EXHIBIT INDEX
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- -----------------------------
<S> <C>
23.1 Consent of Coopers & Lybrand L.L.P.
23.2 Consent of Price Waterhouse LLP
99.1 Press Release issued by the Registrant on March 25, 1998.
99.2 Audited Financial Statements of the Registrant
</TABLE>
4
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Chesapeake Energy Corporation on Form S-8 (File Nos. 33-84256, 33-84258,
33-89282, 33-88196, 333-27525, 333-07255 and 333-48585) and Form S-3 (File Nos.
333-04027 and 333-12533) of our report dated March 20, 1998, on our audits of
the consolidated financial statements of Chesapeake Energy Corporation as of
December 31, 1997 and for the six month period then ended, and as of June 30,
1997 and 1996 and for the years then ended, which report is included in this
Form 8-K.
/s/ COOPERS & LYBRAND L.L.P.
----------------------------------
COOPERS & LYBRAND L.L.P.
Oklahoma City, Oklahoma
March 24, 1998
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements
of Chesapeake Energy Corporation on Form S-8 (File Nos. 33-84256, 33-84258,
33-89282, 33-88196, 333-27525, 333-07255 and 333-48585) and Form S-3 (File Nos.
333-04027 and 333-12533) of our report dated September 20, 1995, except for the
fourth paragraph of Note 9 which is as of October 9, 1997, and except for the
earning per share information - Note 1, which is as of March 25, 1998, on our
audit of the consolidated financial statements of Chesapeake Energy Corporation
for the year ended June 30, 1995, which report is included in this Form 8-K.
PRICE WATERHOUSE LLP
Houston, Texas
March 25, 1998
<PAGE> 1
EXHIBIT 99.1
CONTACT: MARC ROWLAND, CHIEF FINANCIAL OFFICER
(405)848-8000, EXT. 232
FOR IMMEDIATE RELEASE TOM PRICE, JR.,VICE PRESIDENT-
MARCH 25, 1998 CORPORATE DEVELOPMENT
(405)848-8000, EXT. 257
CHESAPEAKE ENERGY CORPORATION
ANNOUNCES 1997 TRANSITION PERIOD RESULTS
OKLAHOMA CITY, OKLAHOMA, MARCH 25, 1998 -- Chesapeake Energy Corporation
(NYSE:CHK) today reported its financial results for the six month transition
period ended December 31, 1997. As previously announced, Chesapeake has changed
its fiscal year end from June 30 to December 31.
Including the effects of the previously reported $110 million impairment charge
and the $74 million Bayard gain, Chesapeake reported a net loss of $32 million,
or $0.45 per share, during the six month transition period ended December 31,
1997. Excluding the effects of the impairment charge and the Bayard gain,
Chesapeake reported net income of $4.6 million, or $.06 per share, on revenue of
$232.9 million. This is a 75% decrease from net income of $18.5 million, or
$0.28 per common share, on revenue of $122.7 million during the six month period
ending December 31, 1996. Excluding the Bayard gain, cash flow from operating
activities for the transition period decreased by 13% to $67.4 million from
$77.3 million during the similar period in 1996.
PRODUCTION VOLUMES INCREASE
During the transition period, Chesapeake produced 38.5 billion cubic feet of
natural gas equivalent (bcfe), an increase of 5% compared to the 36.8 bcfe
produced in the six month period last year. During the transition period,
average prices received were $2.24 per thousand cubic feet of natural gas (mcf)
and $18.59 per barrel of oil for a natural gas equivalent (mcfe) price of $2.49,
essentially flat to the $2.45 per mcfe received in the six month period ended
December 31, 1996.
<PAGE> 2
MANAGEMENT COMMENT
Aubrey K. McClendon, Chesapeake's Chairman and Chief Executive Officer, stated
"The past nine months have marked a significant transition for Chesapeake. We
have now successfully revised our business strategy and have transformed the
reserve and risk profile of our company through the acquisition of approximately
710 bcfe of Mid-Continent and Canadian proved reserves, approximately 90% of
which are natural gas. These long-lived natural gas reserves provide the solid
foundation to continue building our company through a balanced strategy of
growth through acquisitions and through the drillbit."
####
Chesapeake Energy Corporation is an independent oil and natural gas producer
headquartered in Oklahoma City. The company's operations are focused on
exploratory and developmental drilling and producing property and corporate
acquisitions in major onshore producing areas of the United States and Canada.
The company's Internet address is http://www.chesapeake-energy.com.
The information contained in this release includes certain forward-looking
statements. When used in this document, the words budget, budgeted, anticipate,
expects, estimates, believes, goals or projects and similar expressions are
intended to identify forward-looking statements. It is important to note that
Chesapeake's actual results could differ materially from those projected by such
forward-looking statements. Important factors that could cause actual results to
differ materially from those projected in the forward-looking statements
include, but are not limited to, the following: production variances from
expectations, volatility of oil and gas prices, the need to develop and replace
its reserves, the substantial capital expenditures required to fund its
operations and acquisition strategy and the related need to fund such capital
requirements through commercial banks and/or public securities markets,
environmental risks, drilling and operating risks, risks related to exploration
and development drilling, the uncertainty inherent in estimating future oil and
gas production or reserves, uncertainty inherent in litigation, competition,
government regulation, and the ability of the Company to implement its business
strategy, including risks inherent in integrating acquisition operations into
the Company's operations.
2
<PAGE> 3
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
($ IN 000'S, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED: DECEMBER 31, 1997 DECEMBER 31, 1996
- --------------------------------------------------------------------------------------------------------------------------
$ $/MCFE $ $/MCFE
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES:
Oil and gas sales 95,657 2.49 90,167 2.45
Oil and gas marketing sales 58,241 1.51 30,019 0.82
Interest and other 78,966 2.05 2,516 0.07
-------------------------------------------------------------------
Total revenues 232,864 6.05 122,702 3.34
-------------------------------------------------------------------
EXPENSES:
Production expenses and taxes 10,094 0.26 5,874 0.16
Oil and gas marketing expenses 58,227 1.51 29,548 0.80
Impairment of oil and gas properties 110,000 2.86 - -
Depreciation, depletion, and amortization
of oil and gas properties 60,408 1.57 36,243 0.99
Depreciation and amortization of other assets 2,414 0.06 1,836 0.05
General and administrative 5,847 0.15 3,739 0.10
Interest 17,448 0.46 6,216 0.17
-------------------------------------------------------------------
Total expenses 264,438 6.87 83,456 2.27
-------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM (31,574) (0.82) 39,246 1.07
PROVISION (BENEFIT) FOR INCOME TAXES - - 14,325 0.39
-------------------------------------------------------------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM (31,574) (0.82) 24,921 0.68
EXTRAORDINARY ITEM:
Loss on early extinguishment of debt, net of
applicable income tax of $3,703 - - (6,443) (0.18)
-------------------------------------------------------------------
NET INCOME (LOSS) (31,574) (0.82) 18,478 0.50
===================================================================
-------------------------------------------------------------------
EARNINGS (LOSS) PER COMMON SHARE AND
COMMON EQUIVALENT SHARE (BASIC)
INCOME LOSS) BEFORE EXTRAORDINARY ITEM (0.45) - 0.40 -
EXTRAORDINARY ITEM - - (0.10) -
-------------------------------------------------------------------
NET INCOME (LOSS) (0.45) - 0.30 -
===================================================================
EARNINGS (LOSS) PER COMMON SHARE AND
COMMON EQUIVALENT SHARE (DILUTED)
INCOME LOSS) BEFORE EXTRAORDINARY ITEM (0.45) - 0.38 -
EXTRAORDINARY ITEM - - (0.10) -
-------------------------------------------------------------------
NET INCOME (LOSS) (0.45) - 0.28 -
===================================================================
AVERAGE COMMON SHARES AND COMMON
EQUIVALENT SHARES OUTSTANDING
BASIC 70,835 - 61,985 -
DILUTED 70,835 - 66,300 -
===================================================================
CASH FLOW FROM OPERATING ACTIVITIES (1) 141,248 3.67 77,325 2.10
===================================================================
THOUSANDS OF BARRELS OF OIL (MBBL): 1,857 + 66% 1,116
MILLIONS OF CUBIC FEET OF GAS (MMCF): 27,326 + -9% 30,095
MILLIONS OF CUBIC FEET OF GAS EQUIVALENTS (MMCFE): 38,468 + 5% 36,791
AVERAGE PRICE/BARREL $ 18.59 + -15% $ 21.88
AVERAGE PRICE/MCF $ 2.24 + 3% $ 2.18
AVERAGE GAS EQUIVALENT PRICE/MCFE $ 2.49 + 2% $ 2.45
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Income (loss) before extraordinary item, depreciation, depletion and
amortization, income tax, and impairment of oil and gas properties.
3
<PAGE> 4
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
($ IN 000'S, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED: DECEMBER 31, 1997 DECEMBER 31, 1996
- ----------------------------------------------------------------------------------------------------------------------------
$ $/MCFE $ $/MCFE
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES:
Oil and gas sales 49,990 2.59 53,414 2.89
Oil and gas marketing sales 31,376 1.62 17,835 0.97
Interest and other 73,088 3.79 1,668 0.09
-------------------------------------------------------------------
Total revenues 154,454 8.00 72,917 3.95
-------------------------------------------------------------------
EXPENSES:
Production expenses and taxes 4,914 0.25 3,344 0.18
Oil and gas marketing expenses 31,537 1.63 17,682 0.96
Impairment of oil and gas properties 110,000 5.70 -
Depreciation, depletion, and amortization
of oil and gas properties 31,858 1.65 19,214 1.04
Depreciation and amortization of other assets 1,272 0.07 884 0.05
General and administrative 3,087 0.16 2,068 0.11
Interest 8,873 0.46 3,399 0.18
-------------------------------------------------------------------
Total expenses 191,541 9.92 46,591 2.52
-------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM (37,087) (1.92) 26,326 1.43
PROVISION (BENEFIT) FOR INCOME TAXES - - 9,609 0.52
-------------------------------------------------------------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM (37,087) (1.92) 16,717 0.91
EXTRAORDINARY ITEM:
Loss on early extinguishment of debt, net of
applicable income tax of $3,703 - - (6,443) (0.35)
-------------------------------------------------------------------
NET INCOME (LOSS) (37,087) (1.92) 10,274 0.56
===================================================================
-------------------------------------------------------------------
EARNINGS (LOSS) PER COMMON SHARE AND
COMMON EQUIVALENT SHARE (BASIC)
INCOME LOSS) BEFORE EXTRAORDINARY ITEM (0.52) - 0.26 -
EXTRAORDINARY ITEM - - (0.10) -
-------------------------------------------------------------------
NET INCOME (LOSS) (0.52) - 0.16 -
===================================================================
EARNINGS (LOSS) PER COMMON SHARE AND
COMMON EQUIVALENT SHARE (DILUTED)
INCOME LOSS) BEFORE EXTRAORDINARY ITEM (0.52) - 0.25 -
EXTRAORDINARY ITEM - - (0.10) -
-------------------------------------------------------------------
NET INCOME (LOSS) (0.52) - 0.15 -
===================================================================
AVERAGE COMMON SHARES AND COMMON
EQUIVALENT SHARES OUTSTANDING
BASIC 71,165 - 63,774 -
DILUTED 71,165 - 68,108 -
===================================================================
CASH FLOW FROM OPERATING ACTIVITIES (1) 106,043 5.49 46,424 2.51
===================================================================
THOUSANDS OF BARRELS OF OIL (MBBL): 987 + 60% 618
MILLIONS OF CUBIC FEET OF GAS (MMCF): 13,385 + -9% 14,771
MILLIONS OF CUBIC FEET OF GAS EQUIVALENTS (MMCFE): 19,307 + 4% 18,479
AVERAGE PRICE/BARREL $ 18.69 + -17% $ 22.43
AVERAGE PRICE/MCF $ 2.36 + -12% $ 2.68
AVERAGE GAS EQUIVALENT PRICE/MCFE $ 2.59 + -10% $ 2.89
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Income (loss) before extraordinary item, depreciation, depletion and
amortization, income tax, and impairment of oil and gas properties.
4
<PAGE> 5
CHESAPIAKE ENERGY CORPORATION AND SUBSIDIARIES
SUMMARIZED CONSOLIDATED BALANCE SHEET
($ in 000's)
(unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
DECEMBER 31, DECEMBER 31,
1997 1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and short-term investments $136,430 $176,056
Other current assets 81,291 74,217
---------------------------------------
Total current assets 217,721 250,273
Property and equipment, net 679,187 598,549
Other assets 55,876 11,775
---------------------------------------
TOTAL ASSETS $952,784 $860,597
=======================================
Current liabilities $153,480 $127,092
Long-term liabilities 519,098 249,443
Stockholders' equity 280,206 484,062
---------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $952,784 $860,597
- ----------------------------------------------------------=======================================
</TABLE>
5
<PAGE> 1
EXHIBIT 99.2
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Financial Statements:
Report of Independent Accountants for the Six Months Ended December 31, 1997 and
for the Years Ended June 30, 1997 and 1996................................................. F-2
Report of Independent Accountants for the Year Ended June 30, 1995............................. F-3
Consolidated Balance Sheets at December 31, 1997 and at June 30, 1997 and 1996................. F-4
Consolidated Statements of Operations for the Six Months Ended December 31, 1997 and
for the Years Ended June 30, 1997, 1996 and 1995........................................... F-5
Consolidated Statements of Cash Flows for the Six Months Ended December 31, 1997 and
for the Years Ended June 30, 1997, 1996 and 1995........................................... F-6
Consolidated Statements of Stockholders' Equity for the Six Months Ended December 31, 1997 and
for the Years Ended June 30, 1997, 1996 and 1995........................................... F-8
Notes to Consolidated Financial Statements..................................................... F-9
</TABLE>
F-1
<PAGE> 2
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Chesapeake Energy Corporation
We have audited the accompanying consolidated balance sheets of Chesapeake
Energy Corporation and its subsidiaries as of December 31, 1997 and as of June
30, 1997 and 1996, and the related consolidated statements of operations,
stockholders' equity and cash flows for the six months ended December 31, 1997
and the years ended June 30, 1997 and 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Chesapeake
Energy Corporation and its subsidiaries as of December 31, 1997 and as of June
30, 1997 and 1996, and the consolidated results of their operations and their
cash flows for the six months ended December 31, 1997 and the years ended June
30, 1997 and 1996 in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Oklahoma City, Oklahoma
March 20, 1998
F-2
<PAGE> 3
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Chesapeake Energy Corporation
In our opinion, the consolidated statements of operations, of cash flows and
of stockholders' equity for the year ended June 30, 1995 present fairly, in all
material respects, the results of operations and cash flows of Chesapeake Energy
Corporation and its subsidiaries for the year ended June 30, 1995, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audit. We conducted our
audit of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above. We have not
audited the consolidated financial statements of Chesapeake Energy Corporation
and its subsidiaries for any period subsequent to June 30, 1995.
PRICE WATERHOUSE LLP
Houston, Texas
September 20, 1995, except for the third paragraph of Note 9
which is as of October 9, 1997 and except for the earnings per share
information as described in Note 1, which is as of March 25, 1998
F-3
<PAGE> 4
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30,
DECEMBER 31, ----------------------------
1997 1997 1996
----------- ----------- -----------
($ IN THOUSANDS)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents .................................................... $ 123,860 $ 124,017 $ 51,638
Short-term investments ....................................................... 12,570 104,485 --
Accounts receivable:
Oil and gas sales .......................................................... 10,654 10,906 12,687
Oil and gas marketing sales ................................................ 20,493 19,939 6,982
Joint interest and other, net of allowances of $691,000, $387,000
and $340,000, respectively ............................................... 38,781 25,311 27,661
Related parties ............................................................ 4,246 7,401 2,884
Inventory .................................................................... 5,493 4,854 5,163
Other ........................................................................ 1,624 692 2,158
----------- ----------- -----------
Total Current Assets .................................................. 217,721 297,605 109,173
----------- ----------- -----------
PROPERTY AND EQUIPMENT:
Oil and gas properties, at cost based on full cost accounting:
Evaluated oil and gas properties ........................................... 1,095,363 865,516 363,213
Unevaluated properties ..................................................... 125,155 128,505 165,441
Less: accumulated depreciation, depletion and
amortization ............................................................. (602,391) (431,983) (92,720)
----------- ----------- -----------
618,127 562,038 435,934
Other property and equipment ................................................. 67,633 50,379 18,162
Less: accumulated depreciation and amortization .............................. (6,573) (5,051) (2,922)
----------- ----------- -----------
Total Property and Equipment .......................................... 679,187 607,366 451,174
----------- ----------- -----------
OTHER ASSETS ................................................................... 55,876 44,097 11,988
----------- ----------- -----------
TOTAL ASSETS ................................................................... $ 952,784 $ 949,068 $ 572,335
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable and current maturities of long-term debt ....................... $ -- $ 1,380 $ 6,755
Accounts payable ............................................................. 81,775 86,817 54,514
Accrued liabilities and other ................................................ 42,733 28,701 14,062
Revenues and royalties due others ............................................ 28,972 29,428 33,503
----------- ----------- -----------
Total Current Liabilities ............................................. 153,480 146,326 108,834
----------- ----------- -----------
LONG-TERM DEBT, NET ............................................................ 508,992 508,950 268,431
----------- ----------- -----------
REVENUES AND ROYALTIES DUE OTHERS .............................................. 10,106 6,903 5,118
----------- ----------- -----------
DEFERRED INCOME TAXES .......................................................... -- -- 12,185
----------- ----------- -----------
CONTINGENCIES AND COMMITMENTS (NOTE 4) ......................................... -- -- --
----------- ----------- -----------
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value, 10,000,000 shares
authorized; none issued .................................................... -- -- --
Common Stock, 250,000,000 shares authorized; par value of $.01,
$.01 and $.05 at December 31, 1997, June 30, 1997 and 1996, respectively;
74,298,061, 70,276,975 and 60,159,826 shares issued and outstanding
at December 31, 1997, June 30, 1997 and 1996, respectively ................. 743 703 3,008
Paid-in capital .............................................................. 460,733 432,991 136,782
Accumulated earnings (deficit) ............................................... (181,270) (146,805) 37,977
----------- ----------- -----------
Total Stockholders' Equity ............................................ 280,206 286,889 177,767
----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ..................................... $ 952,784 $ 949,068 $ 572,335
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-4
<PAGE> 5
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31, YEAR ENDED JUNE 30,
----------- --------------------------------------------
1997 1997 1996 1995
----------- ----------- ----------- -----------
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
REVENUES:
Oil and gas sales ..................................... $ 95,657 $ 192,920 $ 110,849 $ 56,983
Oil and gas marketing sales ........................... 58,241 76,172 28,428 --
Oil and gas service operations ........................ -- -- 6,314 8,836
Interest and other .................................... 78,966 11,223 3,831 1,524
----------- ----------- ----------- -----------
Total Revenues ...................................... 232,864 280,315 149,422 67,343
----------- ----------- ----------- -----------
COSTS AND EXPENSES:
Production expenses and taxes ......................... 10,094 15,107 8,303 4,256
Oil and gas marketing expenses ........................ 58,227 75,140 27,452 --
Oil and gas service operations ........................ -- -- 4,895 7,747
Impairment of oil and gas properties .................. 110,000 236,000 -- --
Oil and gas depreciation, depletion and amortization .. 60,408 103,264 50,899 25,410
Depreciation and amortization of other assets ......... 2,414 3,782 3,157 1,765
General and administrative ............................ 5,847 8,802 4,828 3,578
Interest and other .................................... 17,448 18,550 13,679 6,627
----------- ----------- ----------- -----------
Total Costs and Expenses ............................ 264,438 460,645 113,213 49,383
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY
ITEM .................................................. (31,574) (180,330) 36,209 17,960
PROVISION (BENEFIT) FOR INCOME TAXES .................... -- (3,573) 12,854 6,299
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM ................. (31,574) (176,757) 23,355 11,661
EXTRAORDINARY ITEM:
Loss on early extinguishment of debt,
net of applicable income tax of $3,804 .............. -- (6,620) -- --
----------- ----------- ----------- -----------
NET INCOME (LOSS) ....................................... $ (31,574) $ (183,377) $ 23,355 $ 11,661
=========== =========== =========== ===========
EARNINGS (LOSS) PER COMMON SHARE:
EARNINGS (LOSS) PER COMMON SHARE-BASIC
Income (loss) before extraordinary item ............. $ (0.45) $ (2.69) $ 0.43 $ 0.22
Extraordinary item .................................. -- (0.10) -- --
----------- ----------- ----------- -----------
Net income (loss) ................................... $ (0.45) $ (2.79) $ 0.43 $ 0.22
=========== =========== =========== ===========
EARNINGS (LOSS) PER COMMON SHARE-ASSUMING DILUTION
Income (loss) before extraordinary item ............. $ (0.45) $ (2.69) $ 0.40 $ 0.21
Extraordinary item .................................. -- (0.10) -- --
----------- ----------- ----------- -----------
Net income (loss) ................................... $ (0.45) $ (2.79) $ 0.40 $ 0.21
=========== =========== =========== ===========
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES
OUTSTANDING (IN 000'S)
Basic ............................................... 70,835 65,767 54,564 52,624
=========== =========== =========== ===========
Assuming Dilution ................................... 70,835 65,767 58,342 55,872
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-5
<PAGE> 6
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED JUNE 30,
DECEMBER 31, -------------------------------------------
1997 1997 1996 1995
----------- ----------- ----------- -----------
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS) ................................................. $ (31,574) $ (183,377) $ 23,355 $ 11,661
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Depreciation, depletion and amortization ........................ 62,028 105,591 52,768 26,628
Deferred taxes .................................................. -- (3,573) 12,854 6,299
Amortization of loan costs ...................................... 794 1,455 1,288 548
Amortization of bond discount ................................... 41 217 563 567
Bad debt expense ................................................ 40 299 114 308
Gain on sale of Bayard stock .................................... (73,840) -- -- --
Gain on sale of fixed assets .................................... (209) (1,593) (2,511) (108)
Impairment of oil and gas assets ................................ 110,000 236,000 -- --
Extraordinary loss .............................................. -- 6,620 -- --
Equity in (earnings) losses from investments .................... 592 (499) -- --
CHANGES IN ASSETS AND LIABILITIES (NET OF ASSETS AND LIABILITIES
ACQUIRED FROM ANSON PRODUCTION CORPORATION):
(Increase) decrease in short-term investments ................... 92,127 (102,858) 622 --
(Increase) decrease in accounts receivable ...................... (7,173) (19,987) (3,524) (22,510)
(Increase) decrease in inventory ................................ (1,584) (1,467) 78 (1,203)
(Increase) decrease in other current assets ..................... (1,519) 1,466 (1,525) 614
Increase (decrease) in accounts payable, accrued
liabilities and other ......................................... (11,044) 48,085 25,834 19,387
Increase (decrease) in current and non-current revenues
and royalties due others ...................................... 478 (2,290) 11,056 12,540
----------- ----------- ----------- -----------
Cash provided by operating activities ......................... 139,157 84,089 120,972 54,731
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Exploration, development and acquisition of oil and gas
properties .................................................... (189,755) (468,462) (342,045) (117,831)
Proceeds from sale of oil and gas equipment, leasehold and
other ......................................................... 2,503 3,095 6,167 11,953
Net proceeds from sale of Bayard stock .......................... 90,380 -- -- --
Repayment of note receivable .................................... 18,000 -- -- --
Other proceeds from sales ....................................... 17 6,428 698 1,104
Long term loans made to third parties ........................... -- (20,000) -- --
Investment in oil field service company ......................... (200) (3,048) -- --
Investment in gas marketing company, net of cash
acquired ...................................................... -- -- (363) --
Other investments ............................................... (30,434) (8,000) -- --
Other property and equipment additions .......................... (27,015) (33,867) (8,846) (7,929)
----------- ----------- ----------- -----------
Cash used in investing activities ............................. (136,504) (523,854) (344,389) (112,703)
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock .......................... -- 288,091 99,498 --
Proceeds from long-term borrowings .............................. -- 342,626 166,667 128,834
Payments on long-term borrowings ................................ -- (119,581) (48,634) (32,370)
Dividends paid on common stock .................................. (2,810) -- -- --
Cash received from exercise of stock options .................... 322 1,387 1,989 818
Other financing ................................................. (322) (379) -- --
----------- ----------- ----------- -----------
Cash provided by (used in) financing activities ............... (2,810) 512,144 219,520 97,282
----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents .............. (157) 72,379 (3,897) 39,310
Cash and cash equivalents, beginning of period .................... 124,017 51,638 55,535 16,225
----------- ----------- ----------- -----------
Cash and cash equivalents, end of period .......................... $ 123,860 $ 124,017 $ 51,638 $ 55,535
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-6
<PAGE> 7
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED JUNE 30,
DECEMBER 31, --------------------------------------
1997 1997 1996 1995
---------- ---------- ---------- ----------
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
CASH PAYMENTS FOR:
Interest, net of capitalized interest ................... $ 17,367 $ 12,919 $ 10,751 $ 4,914
Income taxes ............................................ $ 500 $ -- $ -- $ --
DETAILS OF ACQUISITION OF ANSON PRODUCTION CORPORATION:
Fair value of assets acquired ........................... $ 43,000 $ -- $ -- $ --
Accrued liability for estimated cash consideration ...... $ (15,500) $ -- $ -- $ --
Stock issued ............................................ $ (27,500) $ -- $ -- $ --
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
The Company had a financing arrangement with a vendor to supply certain oil
and gas equipment inventory. The total amounts owed at June 30, 1997, 1996 and
1995 were $1,380,000, $3,156,000 and $6,513,000, respectively. No cash
consideration is exchanged for inventory under this financing arrangement until
actual draws on the inventory are made.
In fiscal 1997, 1996 and 1995, the Company recognized income tax benefits of
$4,808,000, $7,950,000 and $1,229,000, respectively, related to the disposition
of stock options by directors and employees of the Company. The tax benefits
were recorded as an adjustment to deferred income taxes and paid-in capital.
Proceeds from the issuance of $150 million of 7.875% Senior Notes and $150
million of 8.5% Senior Notes in March 1997 are net of $6.4 million in offering
fees and expenses which were deducted from the actual cash received.
Proceeds from the issuances of $90 million of 10.5% Senior Notes in May 1995
and $120 million of 9.125% Senior Notes in April 1996 are net of $2.7 million
and $3.9 million, respectively, in offering fees and expenses which were
deducted from the actual cash received.
On December 22, 1997 the Company declared a dividend of $0.02 per common
share, or $1,486,000, which was paid on January 15, 1998. On June 13, 1997 the
Company declared a dividend of $0.02 per common share, or $1,405,000, which was
paid on July 15, 1997.
F-7
<PAGE> 8
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED JUNE 30,
DECEMBER 31, -------------------------------------------
1997 1997 1996 1995
----------- ----------- ----------- -----------
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
COMMON STOCK:
Balance, beginning of period .................. $ 703 $ 3,008 $ 58 $ 51
Issuance of 8,972,000 shares of common stock .. -- 90 -- --
Issuance of 5,989,500 shares of common stock .. -- -- 299 --
Exercise of stock options and warrants ........ 2 12 79 7
Issuance of 3,792,724 shares of common stock
to AnSon Production Corporation ......... 38 -- -- --
Change in par value ........................... -- (2,407) 2,572 --
----------- ----------- ----------- -----------
Balance, end of period ........................ 743 703 3,008 58
----------- ----------- ----------- -----------
COMMON STOCK WARRANTS:
Balance, beginning of period .................. -- -- -- 5
Exercise of Common Stock Warrants ............. -- -- -- (5)
----------- ----------- ----------- -----------
Balance, end of period ........................ -- -- -- --
----------- ----------- ----------- -----------
PAID-IN CAPITAL:
Balance, beginning of period .................. 432,991 136,782 30,295 28,243
Exercise of stock options and warrants ........ 320 1,375 1,910 823
Issuance of common stock ...................... 27,459 301,593 105,516 --
Offering expenses and other ................... -- (13,974) (6,317) --
Cumulative exchange loss ...................... (37) -- -- --
Tax benefit from exercise of stock options .... -- 4,808 7,950 1,229
Change in par value ........................... -- 2,407 (2,572) --
----------- ----------- ----------- -----------
Balance, end of period ........................ 460,733 432,991 136,782 30,295
----------- ----------- ----------- -----------
ACCUMULATED EARNINGS (DEFICIT):
Balance, beginning of period .................. (146,805) 37,977 14,622 2,961
Net income (loss) ............................. (31,574) (183,377) 23,355 11,661
Dividends on common stock of $0.02 per share .. (2,891) (1,405) -- --
----------- ----------- ----------- -----------
Balance, end of period ........................ (181,270) (146,805) 37,977 14,622
----------- ----------- ----------- -----------
TOTAL STOCKHOLDERS' EQUITY ...................... $ 280,206 $ 286,889 $ 177,767 $ 44,975
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-8
<PAGE> 9
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Company
The Company is a petroleum exploration and production company engaged in the
acquisition, exploration, and development of properties for the production of
crude oil and natural gas from underground reservoirs. The Company's properties
are located in Texas, Louisiana, Oklahoma, Montana, North Dakota, New Mexico and
Canada.
The Company has changed its fiscal year end from June 30 to December 31. The
Company's results of operations and cash flows for the six months ended December
31, 1997 (the "Transition Period") are included in these consolidated financial
statements.
Principles of Consolidation
The accompanying consolidated financial statements of Chesapeake Energy
Corporation (the "Company") include the accounts of its wholly-owned
subsidiaries Chesapeake Operating, Inc. ("COI"), Chesapeake Exploration Limited
Partnership ("CEX"), a limited partnership, Chesapeake Louisiana, L.P. ("CLLP"),
a limited partnership, Chesapeake Gas Development Corporation ("CGDC"),
Chesapeake Energy Marketing, Inc. ("CEMI"), Chesapeake Canada Corporation
("CCC"), Chesapeake Energy Louisiana Corporation ("CELC"), Chesapeake
Acquisition Corporation ("CAC"), Lindsay Oil Field Supply, Inc.("LOF"), Sander
Trucking Company, Inc. ("STCO") and subsidiaries of those entities. As of June
30, 1997, CGDC had been merged into CEX, and LOF and STCO had been dissolved.
All significant intercompany accounts and transactions have been eliminated.
Investments in companies and partnerships which give the Company significant
influence, but not control, over the investee are accounted for using the equity
method.
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
Cash Equivalents
For purposes of the consolidated financial statements, the Company considers
investments in all highly liquid debt instruments with maturities of three
months or less at date of purchase to be cash equivalents.
Investments in Securities
The Company invests in various equity securities and short-term debt
instruments including corporate bonds and auction preferreds, commercial paper
and government agency notes. The Company has classified all of its short-term
investments in equity and debt instruments as trading securities, which are
carried at fair value with unrealized holding gains and losses included in
earnings. At December 31, 1997, the Company had an unrealized holding loss of
$2.4 million included in interest and other revenue. At June 30, 1997, the
Company had an unrealized holding loss of $0.6 million included in interest and
other revenue. At June 30, 1996 the Company had no trading securities.
Investments in equity securities and limited partnerships that do not have
readily determinable fair values are stated at cost and are included in
noncurrent other assets. In determining realized gains and losses, the cost of
securities sold is based on the average cost method.
F-9
<PAGE> 10
Inventory
Inventory consists primarily of tubular goods and other lease and well
equipment which the Company plans to utilize in its ongoing exploration and
development activities and is carried at the lower of cost or market using the
specific identification method.
Oil and Gas Properties
The Company follows the full cost method of accounting under which all costs
associated with property acquisition, exploration and development activities are
capitalized. The Company capitalizes internal costs that can be directly
identified with its acquisition, exploration and development activities and does
not include any costs related to production, general corporate overhead or
similar activities (see Note 11). Capitalized costs are amortized on a composite
unit-of-production method based on proved oil and gas reserves. The Company's
oil and gas reserves are estimated at least annually by independent petroleum
engineers and quarterly by the Company's internal engineers. The average
composite rates used for depreciation, depletion and amortization were $1.57 per
equivalent Mcf in the six months ended December 31, 1997 and $1.31, $0.85 and
$0.80 per equivalent Mcf in fiscal 1997, 1996 and 1995, respectively.
Proceeds from the sale of properties are accounted for as reductions to
capitalized costs unless such sales involve a significant change in the
relationship between costs and the value of proved reserves or the underlying
value of unproved properties, in which case a gain or loss is recognized. The
costs of unproved properties are excluded from amortization until the properties
are evaluated. The Company reviews all of its unevaluated properties quarterly
to determine whether or not and to what extent proved reserves have been
assigned to the properties, and otherwise if impairment has occurred.
Unevaluated properties are grouped by major producing area where individual
property costs are not significant, and assessed individually when individual
costs are significant.
The Company reviews the carrying value of its oil and gas properties under
the full cost accounting rules of the Securities and Exchange Commission on a
quarterly basis. Under these rules, capitalized costs, less accumulated
amortization and related deferred income taxes, shall not exceed an amount equal
to the sum of the present value of estimated future net revenues less estimated
future expenditures to be incurred in developing and producing the proved
reserves, less any related income tax effects. At December 31, 1997 capitalized
costs of oil and gas properties exceeded the estimated present value of future
net revenues from the Company's proved reserves, net of related income tax
considerations, resulting in a writedown in the carrying value of oil and gas
properties of $110 million. At June 30, 1997, capitalized costs of oil and gas
properties exceeded the estimated present value of future net revenues from the
Company's proved reserves, net of related income tax considerations, resulting
in a fourth quarter writedown in the carrying value of oil and gas properties of
$236 million.
Other Property and Equipment
Other property and equipment consists primarily of gas gathering and
processing facilities, vehicles, land, office buildings and equipment, and
software. Major renewals and betterments are capitalized while the costs of
repairs and maintenance are charged to expense as incurred. The costs of assets
retired or otherwise disposed of and the applicable accumulated depreciation are
removed from the accounts, and the resulting gain or loss is reflected in
operations. Other property and equipment costs are depreciated on both
straight-line and accelerated methods. Buildings are depreciated on a
straight-line basis over 31.5 years. All other property and equipment is
depreciated over the estimated useful lives of the assets, which range from five
to seven years.
Capitalized Interest
During the six months ended December 31, 1997 and fiscal 1997, 1996 and
1995, interest of approximately $5,087,000, $12,935,000, $6,428,000 and
$1,574,000 was capitalized on significant investments in unproved properties
that were not being currently depreciated, depleted, or amortized and on which
exploration activities were in progress.
F-10
<PAGE> 11
Service Operations
Certain subsidiaries of the Company performed contract services on wells the
Company operated as well as for third parties until June 30, 1996. Oil and gas
service operations revenues and costs and expenses reflected in the accompanying
consolidated statements of operations include amounts derived from certain of
the contractual services provided. The Company's economic interest in its oil
and gas properties was not affected by the performance of these contractual
services and all intercompany profits have been eliminated.
On June 30, 1996, Peak USA Energy Services, Ltd., a limited partnership
("Peak"), was formed by Peak Oilfield Services Company (a joint venture between
Cook Inlet Region, Inc. and Nabors Industries, Inc.) and the Company for the
purpose of purchasing the Company's oilfield service assets and providing rig
moving, transportation and related site construction services. The Company sold
its service company assets to Peak for $6.4 million and simultaneously invested
$2.5 million in exchange for a 33.3% partnership interest in Peak. This
transaction resulted in recognition of a $1.8 million pre-tax gain during the
fourth fiscal quarter of 1996 reported in Interest and other. A deferred gain
from the sale of service company assets of $0.9 million was recorded as a
reduction in the Company's investment in Peak and will be amortized to income
over the estimated useful lives of the Peak assets. The Company's investment in
Peak is accounted for using the equity method.
Income Taxes
The Company has adopted Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes ("SFAS 109"). SFAS 109 requires deferred tax
liabilities or assets to be recognized for the anticipated future tax effects of
temporary differences that arise as a result of the differences in the carrying
amounts and the tax bases of assets and liabilities.
Net Income (Loss) Per Share
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS 128"). SFAS
128 requires presentation of "basic" and "diluted" earnings per share, as
defined, on the face of the statement of operations for all entities with
complex capital structures. SFAS 128 is effective for financial statements
issued for periods ending after December 15, 1997 and requires restatement of
all prior period earnings per share amounts. The Company has adopted SFAS 128
and has restated all prior periods presented.
SFAS 128 requires a reconciliation of the numerators and denominators of the
basic and diluted EPS computations. For the Transition Period and fiscal 1997
there was no difference between actual weighted average shares outstanding,
which are used in computing basic EPS and diluted weighted average shares, which
are used in computing diluted EPS because the effect of outstanding options
would be antidilutive. See Note 9 for options outstanding during the Transition
Period and fiscal 1997 which were not included in the computation of diluted
EPS. A reconciliation for fiscal 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
FOR THE YEAR ENDED JUNE 30, 1996:
BASIC EPS
Income available to common stockholders $ 23,355 54,564 $ 0.43
===========
EFFECT OF DILUTIVE SECURITIES
Employee stock options ................ -- 3,778
----------- -----------
DILUTED EPS
Income available to common stockholders
and assumed conversions ............ $ 23,355 58,342 $ 0.40
=========== =========== ===========
FOR THE YEAR ENDED JUNE 30, 1995:
BASIC EPS
Income available to common stockholders $ 11,661 52,624 $ 0.22
===========
EFFECT OF DILUTIVE SECURITIES
Employee stock options ................ -- 3,248
----------- -----------
DILUTED EPS
Income available to common stockholders
and assumed conversions ............ $ 11,661 $ 55,872 $ 0.21
=========== =========== ===========
</TABLE>
F-11
<PAGE> 12
Gas Imbalances -- Revenue Recognition
Revenues from the sale of oil and gas production are recognized when title
passes, net of royalties. The Company follows the "sales method" of accounting
for its gas revenue whereby the Company recognizes sales revenue on all gas sold
to its purchasers, regardless of whether the sales are proportionate to the
Company's ownership in the property. A liability is recognized only to the
extent that the Company has a net imbalance in excess of the remaining gas
reserves on the underlying properties. The Company's net imbalance positions at
December 31, 1997 and June 30, 1997 and 1996 were not material.
Hedging
The Company periodically uses certain instruments to hedge its exposure to
price fluctuations on oil and natural gas transactions. Recognized gains and
losses on hedge contracts are reported as a component of the related
transaction. Results for hedging transactions are reflected in oil and gas sales
to the extent related to the Company's oil and gas production, and in oil and
gas marketing sales to the extent related to the Company's marketing activities
(see Note 10).
Debt Issue Costs
Other assets include the costs associated with the issuance of the 10.5%
Senior Notes on May 25, 1995, the 9.125% Senior Notes on April 9, 1996, and the
7.875% and 8.5% Senior Notes on March 17, 1997 (see Note 2). The remaining
unamortized costs on these issuances of Senior Notes at December 31, 1997
totaled $11.6 million and are being amortized over the life of the Senior Notes.
Stock Options
In October 1995, the Financial Accounting Standards Board issued Statement
No. 123 ("SFAS 123"), "Accounting for Stock Based Compensation". As permitted by
SFAS 123, the Company has continued its previous method of accounting for stock
compensation and adopted the disclosure requirements of this Statement in fiscal
1997.
Reclassifications
Certain reclassifications have been made to the consolidated financial
statements for the years ended June 30, 1997, 1996 and 1995 to conform to the
presentation used for the December 31, 1997 consolidated financial statements.
2. SENIOR NOTES
On March 17, 1997, the Company issued $150 million principal amount of
7.875% Senior Notes due 2004 ("7.875% Senior Notes"). The 7.875% Senior Notes
are redeemable at the option of the Company at any time prior to March 15, 2004
at the make-whole prices determined in accordance with the indenture.
On March 17, 1997, the Company issued $150 million principal amount of 8.5%
Senior Notes due 2012 ("8.5% Senior Notes"). The 8.5% Senior Notes are
redeemable at the option of the Company at any time prior to March 15,
F-12
<PAGE> 13
2004 at the make-whole prices determined in accordance with the indenture and,
on or after March 15, 2004 at the redemption price set forth therein.
On April 9, 1996, the Company issued $120 million principal amount of 9.125%
Senior Notes due 2006 ("9.125% Senior Notes"). The 9.125% Senior Notes are
redeemable at the option of the Company at any time prior to April 15, 2001 at
the make-whole prices determined in accordance with the indenture and, on or
after April 15, 2001 at the redemption prices set forth therein. The Company may
also redeem at its option at any time on or prior to April 15, 1999 up to $42
million of the 9.125% Senior Notes at 109.125% of the principal amount thereof
with the proceeds of an equity offering.
On May 25, 1995, the Company issued $90 million principal amount of 10.5%
Senior Notes due 2002 ("10.5% Senior Notes"). The 10.5% Senior Notes are
redeemable at the option of the Company at any time on or after June 1, 1999.
The Company may also redeem at its option at any time on or prior to June 1,
1998 up to $30 million of the 10.5% Senior Notes at 110% of the principal amount
thereof with the proceeds of an equity offering.
The Company is a holding company and owns no operating assets and has no
significant operations independent of its subsidiaries. The Company's
obligations under the 10.5% Senior Notes, the 9.125% Senior Notes, the 7.875%
Senior Notes and the 8.5% Senior Notes have been fully and unconditionally
guaranteed, on a joint and several basis, by each of the Company's "Restricted
Subsidiaries" (as defined in the respective indentures governing the Senior
Notes) (collectively, the "Guarantor Subsidiaries"). Each of the Guarantor
Subsidiaries is a direct or indirect wholly-owned subsidiary of the Company.
The 10.5%, 9.125%, 7.875% and 8.5% Senior Note Indentures contain certain
covenants, including covenants limiting the Company and the Guarantor
Subsidiaries with respect to asset sales; restricted payments; the incurrence of
additional indebtedness and the issuance of preferred stock; liens; sale and
leaseback transactions; lines of business; dividend and other payment
restrictions affecting Guarantor Subsidiaries; mergers or consolidations; and
transactions with affiliates. The Company is obligated to repurchase the 10.5%
and 9.125% Senior Notes in the event of a change of control or certain asset
sales.
Set forth below are condensed consolidating financial statements of the
Guarantor Subsidiaries, the Company's subsidiaries which are not guarantors of
the Senior Notes (the "Non-Guarantor Subsidiaries") and the Company. Separate
audited financial statements of each Guarantor Subsidiary have not been provided
because management has determined that they are not material to investors.
As of and for the six months ended December 31, 1997, the Guarantor
Subsidiaries were COI, CEX, CLLP, CELC and CCC, and the Non-Guarantor
Subsidiaries were CEMI, CAC and subsidiaries of those companies. As of and for
the year ended June 30, 1997, the Guarantor Subsidiaries were COI, CEX, CLLP,
CELC, and CGDC, and the Non-Guarantor Subsidiaries were CEMI and CCC. Prior to
fiscal 1997, the Guarantor Subsidiaries were COI, CEX and two service company
subsidiaries the assets of which were sold effective June 30, 1996, and the
Non-Guarantor Subsidiaries were CGDC and CEMI (which was acquired in December
1995).
F-13
<PAGE> 14
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 1997
($ IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR
SUBSIDIARIES SUBSIDIARIES COMPANY ELIMINATIONS CONSOLIDATED
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents .............................. $ (589) $ 13,999 $ 110,450 $ -- $ 123,860
Short-term investments ................................. -- -- 12,570 -- 12,570
Accounts receivable .................................... 57,476 22,882 1,524 (7,708) 74,174
Inventory .............................................. 4,918 575 -- -- 5,493
Other .................................................. 1,613 1 10 -- 1,624
----------- ----------- ----------- ----------- -----------
Total Current Assets ........................... 63,418 37,457 124,554 (7,708) 217,721
----------- ----------- ----------- ----------- -----------
PROPERTY AND EQUIPMENT:
Oil and gas properties ................................. 1,056,118 39,245 -- -- 1,095,363
Unevaluated leasehold .................................. 125,155 -- -- -- 125,155
Other property and equipment ........................... 51,868 343 15,422 -- 67,633
Less: accumulated depreciation,
depletion and amortization .......................... (593,359) (14,650) (955) -- (608,964)
----------- ----------- ----------- ----------- -----------
639,782 24,938 14,467 -- 679,187
----------- ----------- ----------- ----------- -----------
INVESTMENTS IN SUBSIDIARIES AND
INTERCOMPANY ADVANCES .................................. 81,755 49,958 903,713 (1,035,426) --
----------- ----------- ----------- ----------- -----------
OTHER ASSETS ............................................. 10,189 6,918 38,769 -- 55,876
----------- ----------- ----------- ----------- -----------
TOTAL ASSETS ............................................. $ 795,144 $ 119,271 $ 1,081,503 $(1,043,134) $ 952,784
=========== =========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable and current
maturities of long-term debt ........................ $ -- $ -- $ -- $ -- $ --
Accounts payable and other ............................. 104,259 29,649 27,280 (7,708) 153,480
----------- ----------- ----------- ----------- -----------
Total Current Liabilities ...................... 104,259 29,649 27,280 (7,708) 153,480
----------- ----------- ----------- ----------- -----------
LONG-TERM DEBT ........................................... -- -- 508,992 -- 508,992
----------- ----------- ----------- ----------- -----------
REVENUES AND ROYALTIES DUE
OTHERS ................................................. 10,106 -- -- -- 10,106
----------- ----------- ----------- ----------- -----------
DEFERRED INCOME TAXES .................................... -- -- -- -- --
----------- ----------- ----------- ----------- -----------
INTERCOMPANY PAYABLES .................................... 853,958 2,959 -- (856,917) --
----------- ----------- ----------- ----------- -----------
STOCKHOLDERS' EQUITY:
Common Stock ............................................. 10 3 733 (3) 743
Other .................................................... (173,189) 86,660 544,498 (178,506) 279,463
----------- ----------- ----------- ----------- -----------
(173,179) 86,663 545,231 (178,509) 280,206
----------- ----------- ----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY ................................................. $ 795,144 $ 119,271 $ 1,081,503 $(1,043,134) $ 952,784
=========== =========== =========== =========== ===========
</TABLE>
F-14
<PAGE> 15
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF JUNE 30, 1997
($ IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR
SUBSIDIARIES SUBSIDIARIES COMPANY ELIMINATIONS CONSOLIDATED
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents .............................. $ (6,534) $ 4,363 $ 126,188 $ -- $ 124,017
Short-term investments ................................. -- 4,324 100,161 -- 104,485
Accounts receivable .................................... 47,379 19,943 3,022 (6,787) 63,557
Inventory .............................................. 4,795 59 -- -- 4,854
Other .................................................. 666 26 -- -- 692
----------- ----------- ----------- ----------- -----------
Total Current Assets ........................... 46,306 28,715 229,371 (6,787) 297,605
----------- ----------- ----------- ----------- -----------
PROPERTY AND EQUIPMENT:
Oil and gas properties ................................. 865,485 31 -- -- 865,516
Unevaluated leasehold .................................. 128,519 (14) -- -- 128,505
Other property and equipment ........................... 33,486 1,904 14,989 -- 50,379
Less: accumulated depreciation,
depletion and amortization .......................... (436,276) -- (758) -- (437,034)
----------- ----------- ----------- ----------- -----------
591,214 1,921 14,231 -- 607,366
----------- ----------- ----------- ----------- -----------
INVESTMENTS IN SUBSIDIARIES AND
INTERCOMPANY ADVANCES .................................. 817 -- 680,439 (681,256) --
----------- ----------- ----------- ----------- -----------
OTHER ASSETS ............................................. 4,961 673 38,463 -- 44,097
----------- ----------- ----------- ----------- -----------
TOTAL ASSETS ............................................. $ 643,298 $ 31,309 $ 962,504 $ (688,043) $ 949,068
=========== =========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable and current
maturities of long-term debt ........................ $ 1,380 $ -- $ -- $ -- $ 1,380
Accounts payable and other ............................. 122,241 17,527 11,965 (6,787) 144,946
----------- ----------- ----------- ----------- -----------
Total Current Liabilities ...................... 123,621 17,527 11,965 (6,787) 146,326
----------- ----------- ----------- ----------- -----------
LONG-TERM DEBT ........................................... -- -- 508,950 -- 508,950
----------- ----------- ----------- ----------- -----------
REVENUES AND ROYALTIES DUE
OTHERS ................................................. 6,903 -- -- -- 6,903
----------- ----------- ----------- ----------- -----------
DEFERRED INCOME TAXES .................................... -- -- -- -- --
----------- ----------- ----------- ----------- -----------
INTERCOMPANY PAYABLES .................................... 589,111 1,492 -- (590,603) --
----------- ----------- ----------- ----------- -----------
STOCKHOLDERS' EQUITY:
Common Stock ............................................. 11 1 693 (2) 703
Other .................................................... (76,348) 12,289 440,896 (90,651) 286,186
----------- ----------- ----------- ----------- -----------
(76,337) 12,290 441,589 (90,653) 286,889
----------- ----------- ----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY ................................................. $ 643,298 $ 31,309 $ 962,504 $ (688,043) $ 949,068
=========== =========== =========== =========== ===========
</TABLE>
F-15
<PAGE> 16
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF JUNE 30, 1996
($ IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR
SUBSIDIARIES SUBSIDIARIES COMPANY ELIMINATIONS CONSOLIDATED
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents .............................. $ 4,061 $ 2,751 $ 44,826 $ -- $ 51,638
Accounts receivable .................................... 44,080 7,723 -- (1,589) 50,214
Inventory .............................................. 4,947 216 -- -- 5,163
Other .................................................. 2,155 3 -- -- 2,158
----------- ----------- ----------- ----------- -----------
Total Current Assets ........................... 55,243 10,693 44,826 (1,589) 109,173
----------- ----------- ----------- ----------- -----------
PROPERTY AND EQUIPMENT:
Oil and gas properties ................................. 338,610 24,603 -- -- 363,213
Unevaluated leasehold .................................. 165,441 -- -- -- 165,441
Other property and equipment ........................... 9,608 61 8,493 -- 18,162
Less: accumulated depreciation,
depletion and amortization .......................... (87,193) (8,007) (442) -- (95,642)
----------- ----------- ----------- ----------- -----------
426,466 16,657 8,051 -- 451,174
----------- ----------- ----------- ----------- -----------
INVESTMENTS IN SUBSIDIARIES AND
INTERCOMPANY ADVANCES .................................. 519,386 8,132 382,388 (909,906) --
----------- ----------- ----------- ----------- -----------
OTHER ASSETS ............................................. 2,310 940 8,738 -- 11,988
----------- ----------- ----------- ----------- -----------
TOTAL ASSETS ............................................. $ 1,003,405 $ 36,422 $ 444,003 $ (911,495) $ 572,335
=========== =========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable and current maturities
of long-term debt ................................... $ 3,846 $ 2,880 $ 29 $ -- $ 6,755
Accounts payable and other ............................. 91,069 7,339 5,260 (1,589) 102,079
----------- ----------- ----------- ----------- -----------
Total Current Liabilities ...................... 94,915 10,219 5,289 (1,589) 108,834
----------- ----------- ----------- ----------- -----------
LONG-TERM DEBT ........................................... 2,113 10,020 256,298 -- 268,431
----------- ----------- ----------- ----------- -----------
REVENUES AND ROYALTIES DUE
OTHERS ................................................. 5,118 -- -- -- 5,118
----------- ----------- ----------- ----------- -----------
DEFERRED INCOME TAXES .................................... 23,950 1,335 (13,100) -- 12,185
----------- ----------- ----------- ----------- -----------
INTERCOMPANY PAYABLES .................................... 824,307 8,182 73,647 (906,136) --
----------- ----------- ----------- ----------- -----------
STOCKHOLDERS' EQUITY:
Common Stock ........................................... 117 2 2,891 (2) 3,008
Other .................................................. 52,885 6,664 118,978 (3,768) 174,759
----------- ----------- ----------- ----------- -----------
53,002 6,666 121,869 (3,770) 177,767
----------- ----------- ----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY ................................................. $ 1,003,405 $ 36,422 $ 444,003 $ (911,495) $ 572,335
=========== =========== =========== =========== ===========
</TABLE>
F-16
<PAGE> 17
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR
SUBSIDIARIES SUBSIDIARIES COMPANY ELIMINATIONS CONSOLIDATED
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED DECEMBER 31, 1997:
REVENUES:
Oil and gas sales ...................................... $ 93,384 $ 1,199 $ -- $ 1,074 $ 95,657
Oil and gas marketing sales ............................ -- 101,689 -- (43,448) 58,241
Interest and other ..................................... 515 192 110,751 (32,492) 78,966
----------- ----------- ----------- ----------- -----------
Total Revenues ......................................... 93,899 103,080 110,751 (74,866) 232,864
----------- ----------- ----------- ----------- -----------
COSTS AND EXPENSES:
Production expenses and taxes .......................... 9,905 189 -- -- 10,094
Oil and gas marketing expenses ......................... -- 100,601 -- (42,374) 58,227
Impairment of oil and gas properties ................... 96,000 14,000 -- -- 110,000
Oil and gas depreciation, depletion and amortization ... 59,758 650 -- -- 60,408
Other depreciation and amortization .................... 1,383 40 991 -- 2,414
General and administrative ............................. 4,598 1,132 117 -- 5,847
Interest ............................................... 27,481 39 22,420 (32,492) 17,448
----------- ----------- ----------- ----------- -----------
Total Costs & Expenses ................................. 199,125 116,651 23,528 (74,866) 264,438
----------- ----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY
ITEM ................................................... (105,226) (13,571) 87,223 -- (31,574)
INCOME TAX EXPENSE (BENEFIT) ........................... -- -- -- -- --
----------- ----------- ----------- ----------- -----------
NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEM ............ $ (105,226) $ (13,571) $ 87,223 $ -- $ (31,574)
=========== =========== =========== =========== ===========
</TABLE>
F-17
<PAGE> 18
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR
SUBSIDIARIES SUBSIDIARIES COMPANY ELIMINATIONS CONSOLIDATED
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED JUNE 30, 1997:
REVENUES:
Oil and gas sales ...................................... $ 191,303 $ -- $ -- $ 1,617 $ 192,920
Oil and gas marketing sales ............................ -- 145,942 -- (69,770) 76,172
Interest and other ..................................... 778 749 49,224 (39,528) 11,223
----------- ----------- ----------- ----------- -----------
Total Revenues ......................................... 192,081 146,691 49,224 (107,681) 280,315
----------- ----------- ----------- ----------- -----------
COSTS AND EXPENSES:
Production expenses and taxes .......................... 15,107 -- -- -- 15,107
Oil and gas marketing expenses ......................... -- 143,293 -- (68,153) 75,140
Impairment of oil and gas properties ................... 236,000 -- -- -- 236,000
Oil and gas depreciation, depletion and amortization ... 103,264 -- -- -- 103,264
Other depreciation and amortization .................... 2,152 80 1,550 -- 3,782
General and administrative ............................. 6,313 921 1,568 -- 8,802
Interest ............................................... 37,644 10 20,424 (39,528) 18,550
----------- ----------- ----------- ----------- -----------
Total Costs & Expenses ................................. 400,480 144,304 23,542 (107,681) 460,645
----------- ----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY
ITEM ................................................... (208,399) 2,387 25,682 -- (180,330)
INCOME TAX EXPENSE (BENEFIT) ........................... (4,129) 47 509 -- (3,573)
----------- ----------- ----------- ----------- -----------
NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEM ............ (204,270) 2,340 25,173 -- (176,757)
----------- ----------- ----------- ----------- -----------
EXTRAORDINARY ITEM:
Loss on early extinguishment of debt, net of
applicable income tax ................................ (769) -- (5,851) -- (6,620)
----------- ----------- ----------- ----------- -----------
NET INCOME (LOSS) ...................................... $ (205,039) $ 2,340 $ 19,322 $ -- $ (183,377)
=========== =========== =========== =========== ===========
FOR THE YEAR ENDED JUNE 30, 1996:
REVENUES:
Oil and gas sales .................................... $ 103,712 $ 6,884 $ -- $ 253 $ 110,849
Gas marketing sales .................................. -- 34,973 -- (6,545) 28,428
Oil and gas service operations ....................... 6,314 -- -- -- 6,314
Interest and other ................................... 1,917 238 1,676 -- 3,831
----------- ----------- ----------- ----------- -----------
111,943 42,095 1,676 (6,292) 149,422
----------- ----------- ----------- ----------- -----------
COSTS AND EXPENSES:
Production expenses and taxes ........................ 7,557 746 -- -- 8,303
Gas marketing expenses ............................... -- 33,744 -- (6,292) 27,452
Oil and gas service operations ....................... 4,895 -- -- -- 4,895
Oil and gas depreciation, depletion and amortization . 48,333 2,566 -- -- 50,899
Other depreciation and amortization .................. 1,924 73 1,160 -- 3,157
General and administrative ........................... 3,683 496 649 -- 4,828
Interest and other ................................... 508 711 12,460 -- 13,679
----------- ----------- ----------- ----------- -----------
66,900 38,336 14,269 (6,292) 113,213
----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes .................... 45,043 3,759 (12,593) -- 36,209
Income tax expense (benefit) ......................... 15,990 1,335 (4,471) -- 12,854
----------- ----------- ----------- ----------- -----------
Net income (loss) .................................... $ 29,053 $ 2,424 $ (8,122) $ -- $ 23,355
=========== =========== =========== =========== ===========
FOR THE YEAR ENDED JUNE 30, 1995:
REVENUES:
Oil and gas sales .................................... $ 55,417 $ 1,566 $ -- $ -- $ 56,983
Oil and gas service operations ....................... 8,836 -- -- -- 8,836
Interest and other ................................... 1,394 -- 130 -- 1,524
----------- ----------- ----------- ----------- -----------
65,647 1,566 130 -- 67,343
----------- ----------- ----------- ----------- -----------
COSTS AND EXPENSES:
Production expenses and taxes ........................ 4,045 211 -- -- 4,256
Oil and gas service operations ....................... 7,747 -- -- -- 7,747
Oil and gas depreciation, depletion and amortization . 24,775 635 -- -- 25,410
Other depreciation and amortization .................. 1,245 5 515 -- 1,765
General and administrative ........................... 2,620 58 900 -- 3,578
Interest and other ................................... 570 184 5,873 -- 6,627
----------- ----------- ----------- ----------- -----------
41,002 1,093 7,288 -- 49,383
----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes .................... 24,645 473 (7,158) -- 17,960
Income tax expense (benefit) ......................... 8,639 165 (2,505) -- 6,299
----------- ----------- ----------- ----------- -----------
Net Income (loss) .................................... $ 16,006 $ 308 $ (4,653) $ -- $ 11,661
=========== =========== =========== =========== ===========
</TABLE>
F-18
<PAGE> 19
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR
SUBSIDIARIES SUBSIDIARIES COMPANY ELIMINATIONS CONSOLIDATED
------------ ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED DECEMBER 31, 1997:
CASH FLOWS FROM OPERATING ACTIVITIES............. $ 28,598 $(10,842) $ 121,401 $ -- $ 139,157
--------- -------- ---------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Oil and gas properties......................... (189,772) 17 -- -- (189,755)
Proceeds from sale of assets................... 2,520 -- -- -- 2,520
Investment in service operations............... (200) -- -- -- (200)
Other investments.............................. (26,472) -- 99,380 -- 72,908
Other additions................................ (22,864) 1,340 (453) -- (21,977)
--------- -------- ---------- -------- ---------
(236,788) 1,357 98,927 -- (136,504)
--------- -------- ---------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid on common stock................. -- -- (2,810) -- (2,810)
Exercise of stock options...................... -- -- 322 -- 322
Other financing................................ -- (322) -- -- (322)
Intercompany advances, net..................... 214,135 19,443 (233,578) -- --
--------- -------- ---------- -------- ---------
214,135 19,121 (236,066) -- (2,810)
--------- -------- ---------- -------- ---------
Net increase (decrease) in cash and cash
equivalents.................................... 5,945 9,636 (15,738) -- (157)
Cash, beginning of period........................ (6,534) 4,363 126,188 -- 124,017
--------- -------- ---------- -------- ---------
Cash, end of period.............................. $ (589) $ 13,999 $ 110,450 $ -- $ 123,860
========= ======== ========== ======== =========
</TABLE>
F-19
<PAGE> 20
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR
SUBSIDIARIES SUBSIDIARIES COMPANY ELIMINATIONS CONSOLIDATED
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED JUNE 30, 1997:
CASH FLOWS FROM OPERATING ACTIVITIES ................... $ 165,850 $ (11,008) $ (70,753) $ -- $ 84,089
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Oil and gas properties ............................... (468,519) 57 -- -- (468,462)
Proceeds from sale of assets ......................... 9,523 -- -- -- 9,523
Investment in service operations ..................... (3,048) -- -- -- (3,048)
Long-term loans to third parties ..................... (2,000) -- (18,000) -- (20,000)
Other investments .................................... -- -- (8,000) -- (8,000)
Other additions ...................................... (24,318) (1,999) (7,550) -- (33,867)
----------- ----------- ----------- ----------- -----------
(488,362) (1,942) (33,550) -- (523,854)
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings ............................. 50,000 -- 292,626 -- 342,626
Payments on borrowings ............................... (118,901) -- (680) -- (119,581)
Exercise of stock options ............................ -- -- 1,387 -- 1,387
Issuance of common stock ............................. -- -- 288,091 -- 288,091
Other financing ...................................... -- -- (379) -- (379)
Intercompany advances, net ........................... 380,735 14,645 (395,380) -- --
----------- ----------- ----------- ----------- -----------
311,834 14,645 185,665 -- 512,144
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents .......................................... (10,678) 1,695 81,362 -- 72,379
Cash, beginning of period .............................. 4,144 2,668 44,826 -- 51,638
----------- ----------- ----------- ----------- -----------
Cash, end of period .................................... $ (6,534) $ 4,363 $ 126,188 $ -- $ 124,017
=========== =========== =========== =========== ===========
FOR THE YEAR ENDED JUNE 30, 1996:
CASH FLOWS FROM OPERATING ACTIVITIES ................... $ 126,868 $ 4,204 $ (10,100) $ -- $ 120,972
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Oil and gas properties ............................... (341,246) (6,099) -- 5,300 (342,045)
Proceeds from sales .................................. 12,165 -- -- (5,300) 6,865
Investment in gas marketing company .................. -- 266 (629) -- (363)
Other additions ...................................... (4,683) (109) (4,054) -- (8,846)
----------- ----------- ----------- ----------- -----------
(333,764) (5,942) (4,683) -- (344,389)
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings ............................. 40,350 10,300 116,017 -- 166,667
Payments on borrowings ............................... (45,397) (3,200) (37) -- (48,634)
Exercise of stock options ............................ -- -- 1,989 -- 1,989
Issuance of common stock ............................. -- -- 99,498 -- 99,498
Intercompany advances, net ........................... 162,777 (2,616) (160,161) -- --
----------- ----------- ----------- ----------- -----------
157,730 4,484 57,306 -- 219,520
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents .......................................... (49,166) 2,746 42,523 -- (3,897)
Cash, beginning of period .............................. 53,227 5 2,303 -- 55,535
----------- ----------- ----------- ----------- -----------
Cash, end of period .................................... $ 4,061 $ 2,751 $ 44,826 $ -- $ 51,638
=========== =========== =========== =========== ===========
FOR THE YEAR ENDED JUNE 30, 1995:
CASH FLOWS FROM OPERATING ACTIVITIES ................... $ 60,049 $ 305 $ (4,692) $ (931) $ 54,731
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Oil and gas properties ............................... (113,722) (4,109) -- -- (117,831)
Proceeds from sales .................................. 24,557 -- -- (11,500) 13,057
Purchase of oil and gas properties ................... -- (11,500) -- 11,500 --
Other additions ...................................... (7,929) -- -- -- (7,929)
----------- ----------- ----------- ----------- -----------
(97,094) (15,609) -- -- (112,703)
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings ............................. 30,034 11,500 87,300 -- 128,834
Payments on borrowings ............................... (32,032) (700) 362 -- (32,370)
Intercompany advances, net ........................... 78,324 4,509 (83,764) 931 --
Other financing ...................................... -- -- 818 -- 818
----------- ----------- ----------- ----------- -----------
76,326 15,309 4,716 931 97,282
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents .......................................... 39,281 5 24 -- 39,310
Cash, beginning of period .............................. 13,946 -- 2,279 -- 16,225
----------- ----------- ----------- ----------- -----------
Cash, end of period .................................... $ 53,227 $ 5 $ 2,303 $ -- $ 55,535
=========== =========== =========== =========== ===========
</TABLE>
F-20
<PAGE> 21
3. NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
DECEMBER 31, --------------------
1997 1997 1996
--------- --------- ---------
($ IN THOUSANDS)
<S> <C> <C> <C>
7.875% Senior Notes (see Note 2)..................................... $ 150,000 $ 150,000 $ --
Discount on 7.875% Senior Notes...................................... (106) (115) --
8.5% Senior Notes (see Note 2)....................................... 150,000 150,000 --
Discount on 8.5% Senior Notes........................................ (833) (862) --
9.125% Senior Notes (see Note 2)..................................... 120,000 120,000 120,000
Discount on 9.125% Senior Notes...................................... (69) (73) (81)
10.5% Senior Notes (see Note 2)...................................... 90,000 90,000 90,000
12% Senior Notes..................................................... -- -- 47,500
Discount on 12% Senior Notes......................................... -- -- (1,772)
Term note payable to Union Bank collateralized by CGDC,
not guaranteed by the Company, variable interest at
Union Bank's base rate (8.25% per annum at June 30,
1996), or at Eurodollar rate +1.875% collateralized by
CGDC's producing oil and gas properties, payable in
monthly installments through November 2002........................ -- -- 12,900
Note payable to a vendor, collateralized by oil and gas
tubulars, payments due 60 days from shipment of the
tubulars.......................................................... -- 1,380 3,156
Note payable to a bank, variable interest at a referenced
base rate + 1.75% (10% per annum at June 30, 1996),
collateralized by office buildings, payments due in
monthly installments through May 1998............................. -- -- 680
Notes payable to various entities to acquire oil service
equipment, interest varies from 7% to 11% per annum,
collateralized by equipment....................................... -- -- 1,212
Other collateralized................................................. -- -- 1,469
Other unsecured...................................................... -- -- 122
--------- --------- ---------
Total notes payable and long-term debt............................... 508,992 510,330 275,186
Less-- Current maturities............................................ -- (1,380) (6,755)
--------- --------- ---------
Notes payable and long-term debt, net of current
maturities........................................................ $ 508,992 $ 508,950 $ 268,431
========= ========= =========
</TABLE>
The aggregate scheduled maturities of notes payable and long-term debt for
the next five fiscal years ending December 31, 2002 and thereafter were as
follows as of December 31, 1997 (in thousands of dollars):
<TABLE>
<S> <C>
1998..................................................... $ --
1999..................................................... --
2000..................................................... --
2001..................................................... --
2002..................................................... 90,000
After 2002............................................... 418,992
---------
$ 508,992
=========
</TABLE>
In January 1998, the Company arranged a $500 million revolving credit
facility with a group of commercial banks. The facility has an initial committed
borrowing base of $200 million ($168 million until the acquisition of DLB Oil &
Gas, Inc. (see Footnote 14) is consummated), of which $120 million was used to
pay off bank debt assumed in the acquisition of Hugoton Energy Corporation (see
footnote 14) on March 10, 1998 and the remainder is anticipated to be used for
other acquisitions. The borrowing base can be expanded as other acquisitions
create collateral value. Borrowings under the facility are collateralized by
CAC's pledge of its subsidiaries capital stock and bear interest currently at a
rate equal to the Eurodollar rate plus 1.5%.
During the quarter ended December 31, 1996, the Company exercised its
covenant defeasance rights with respect to all of its outstanding $47.5 million
of 12% Senior Notes due 2001. A combination of cash and non-callable U.S.
Government Securities in the amount of $55.0 million was irrevocably deposited
in trust to satisfy the Company's obligations, including accrued but unpaid
interest through the date of defeasance of $1.3 million.
F-21
<PAGE> 22
4. CONTINGENCIES AND COMMITMENTS
The Company and certain of its officers and directors are defendants in a
consolidated class action suit alleging violations of the Securities Exchange
Act of 1934. The plaintiffs assert that the defendants made material
misrepresentations and failed to disclose material facts about the success of
the Company's exploration efforts in the Louisiana Trend. As a result, the
complaint alleges the price of the Company's common stock was artificially
inflated from January 25, 1996 until June 27, 1997, when the Company issued a
press release announcing disappointing drilling results in the Louisiana Trend
and a full-cost ceiling writedown to be reflected in its June 30, 1997 financial
statements. The plaintiffs further allege that certain of the named individual
defendants sold common stock during the class period when they knew or should
have known adverse nonpublic information. The plaintiffs seek a determination
that the suit is a proper class action and damages in an unspecified amount,
together with interest and costs of litigation, including attorneys' fees. The
Company and the individual defendants believe that these claims are without
merit, and intend to defend against them vigorously. No estimate of loss or
range of estimate of loss, if any, can be made at this time.
Various purported class actions alleging violations of the Securities Act of
1933 and the Oklahoma Securities Act have been filed against the Company and
others on behalf of investors who purchased common stock of Bayard Drilling
Technologies, Inc. ("Bayard"), in its initial public offering in November 1997.
Total proceeds of the offering were $254 million, of which the Company received
net proceeds of $90.2 million. Plaintiffs allege that the Company, a major
customer of Bayard's drilling services and the owner of 30.1% of Bayard's common
stock outstanding prior to the offering, was a controlling person of Bayard.
Plaintiffs assert that the Bayard prospectus contained material omissions and
misstatements relating to (i) the Company's financial "hardships" and their
significance on Bayard's business, (ii) increased costs associated with Bayard's
growth strategy and (iii) undisclosed pending related-party transactions between
Bayard and third parties other than the Company. The alleged defective
disclosures are claimed to have resulted in a decline in Bayard's share price
following the public offering. Each plaintiff seeks a determination that the
suit is a proper class action and damages in an unspecified amount or
rescission, together with interest and costs of litigation, including attorneys'
fees. The Company believes that these actions are without merit and intends to
defend against them vigorously. No estimate of loss or range of estimate of
loss, if any, can be made at this time.
In October 1996, Union Pacific Resources Company ("UPRC") sued the Company
alleging infringement of a patent for a drilling method, tortious interference
with confidentiality contracts between UPRC and certain of its former employees
and misappropriation of proprietary information of UPRC. UPRC's claims against
the Company are based on services provided to the Company by a third party
vendor controlled by former UPRC employees. UPRC is seeking injunctive relief,
damages of an unspecified amount, including actual, enhanced, consequential and
punitive damages, interest, costs and attorneys' fees. The Company believes that
it has meritorious defenses to UPRC's allegations and has requested the court to
declare the UPRC patent invalid. The Company has also filed a motion to construe
UPRC's patent claims and various motions for summary judgment. No estimate of a
probable loss or range of estimate of a probable loss, if any, can be made at
this time; however, in reports filed in the proceeding, experts for UPRC claim
that damages could be as much as $18 million while Company experts state that
the amount should not exceed $25,000, in each case based on a reasonable
royalty.
The Company is currently involved in various other routine disputes
incidental to its business operations. While it is not possible to determine the
ultimate disposition of these matters, management, after consultation with legal
counsel, is of the opinion that the final resolution of all such currently
pending or threatened litigation is not likely to have a material adverse effect
on the consolidated financial position or results of operations of the Company.
The Company has employment contracts with its two principal shareholders and
its chief financial officer and various other senior management personnel which
provide for annual base salaries, bonus compensation and various benefits. The
contracts provide for the continuation of salary and benefits for the respective
terms of the agreements in the event of termination of employment without cause.
These agreements expire at various times from June 30, 1998 through June 30,
2000.
Due to the nature of the oil and gas business, the Company and its
subsidiaries are exposed to possible environmental risks. The Company has
implemented various policies and procedures to avoid environmental
F-22
<PAGE> 23
contamination and risks from environmental contamination. The Company is not
aware of any potential material environmental issues or claims.
As of December 31, 1997, the Company had guaranteed $1.8 million of debt
owed by Peak.
On December 16, 1997, the Company acquired AnSon Production Corporation
("AnSon"), a privately owned oil and gas producer based in Oklahoma City.
Consideration for this acquisition was approximately $43 million consisting of
the issuance of 3,792,724 shares of Chesapeake's common stock and cash
consideration in accordance with the terms of the merger agreement. The Company
has accrued $15.5 million as the estimated cash payment which will be made
during 1998.
The Company is in the process of acquiring various proved oil and gas
reserves through mergers or through purchases of oil and gas properties. Upon
the closing of each of these acquisitions, the Company will issue either cash or
a combination of cash and Chesapeake common stock as consideration for the
assets and liabilities being acquired. See Note 14 -- Subsequent Events and
Pending Transactions.
5. INCOME TAXES
The components of the income tax provision (benefit) for each of the periods
are as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED JUNE 30,
DECEMBER 31, ----------------------------
1997 1997 1996 1995
--------------- ------- -------- -------
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
Current............................................ $ -- $ -- $ -- $ --
Deferred........................................... -- (3,573) 12,854 6,299
--------- ------- -------- -------
Total.................................... $ -- $(3,573) $ 12,854 $ 6,299
========= ======= ======== =======
</TABLE>
The effective income tax expense (benefit) differed from the computed
"expected" federal income tax expense (benefit) on earnings before income taxes
for the following reasons:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED JUNE 30,
DECEMBER 31, ------------------------------
1997 1997 1996 1995
-------- -------- -------- ------
<S> <C> <C> <C> <C>
Computed "expected" income tax provision (benefit).. $(11,051) $(63,116) $ 12,673 $6,286
Tax percentage depletion............................ (48) (294) (238) (144)
Valuation allowance................................. 13,818 64,116 -- --
State income taxes and other........................ (2,719) (4,279) 419 157
-------- -------- -------- ------
$ -- $ (3,573) $ 12,854 $6,299
======== ======== ======== ======
</TABLE>
Deferred income taxes are provided to reflect temporary differences in the
basis of net assets for income tax and financial reporting purposes. The tax
effected temporary differences and tax loss carryforwards which comprise
deferred taxes are as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED JUNE 30,
DECEMBER 31, ---------------------------------
1997 1997 1996 1995
--------- --------- --------- ---------
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
Deferred tax liabilities:
Acquisition, exploration and development costs and
related depreciation, depletion and
amortization....................................... $ (49,657) $ (49,831) $ (63,725) $ (31,220)
Deferred tax assets:
Net operating loss carryforwards..................... 126,485 112,889 50,776 23,414
Percentage depletion carryforward.................... 1,106 1,058 764 526
--------- --------- --------- ---------
127,591 113,947 51,540 23,940
--------- --------- --------- ---------
Net deferred tax asset (liability)................... 77,934 64,116 (12,185) (7,280)
Less: Valuation allowance............................ (77,934) (64,116) -- --
--------- --------- --------- ---------
Total deferred tax asset (liability)................. $ -- $ -- $ (12,185) $ (7,280)
========= ========= ========= =========
</TABLE>
F-23
<PAGE> 24
SFAS 109 requires that the Company record a valuation allowance when it is
more likely than not that some portion or all of the deferred tax assets will
not be realized. In the Transition Period and the fourth quarter of fiscal 1997,
the Company recorded a $110 million writedown and a $236 million writedown,
respectively, related to the impairment of oil and gas properties. The
writedowns and significant tax net operating loss carryforwards (caused
primarily by expensing intangible drilling costs for tax purposes) resulted in a
net deferred tax asset at December 31, 1997 and June 30, 1997. Management
believes it is more likely than not that the Company will generate future tax
net operating losses for at least the next five years, based in part on the
Company's continued drilling efforts. Therefore, the Company has recorded a
valuation allowance equal to the net deferred tax asset.
At December 31, 1997, the Company had regular tax net operating loss
carryforwards of approximately $337 million and alternative minimum tax net
operating loss carryforwards of approximately $83 million. These loss
carryforward amounts will expire during the years 2007 through 2012. The Company
also had a percentage depletion carryforward of approximately $2.9 million at
December 31, 1997, which is available to offset future federal income taxes
payable and has no expiration date.
In accordance with certain provisions of the Tax Reform Act of 1986, a
change of greater than 50% of the beneficial ownership of the Company within a
three-year period (an "Ownership Change") would place an annual limitation on
the Company's ability to utilize its existing tax carryforwards. Under
regulations issued by the Internal Revenue Service, the Company has had an
Ownership Change. However, management believes this will not result in a
significant limitation of the utilization of the tax carryforwards.
6. RELATED PARTY TRANSACTIONS
Certain directors, shareholders and employees of the Company have acquired
working interests in certain of the Company's oil and gas properties. The owners
of such working interests are required to pay their proportionate share of all
costs. As of December 31, 1997 and June 30, 1997, 1996 and 1995, the Company had
accounts receivable from such parties of $4.2 million, $7.4 million, $2.9
million and $4.4 million, respectively.
During the six months ended December 31, 1997 and during fiscal 1997, 1996
and 1995, the Company incurred legal expenses of $388,000, $207,000, $347,000
and $516,000, respectively, for legal services provided by a law firm of which a
director is a member.
7. EMPLOYEE BENEFIT PLANS
The Company maintains the Chesapeake Energy Corporation Savings and
Incentive Stock Bonus Plan, a 401(k) profit sharing plan. Eligible employees may
make voluntary contributions to the plan which are matched by the Company for up
to 10% of the employee's annual salary with the Company's common stock. The
amount of employee contribution is limited as specified in the plan. The Company
may, at its discretion, make additional contributions to the plan. The Company
contributed $418,000, $603,000, $187,000 and $95,000 to the plan during the six
months ended December 31, 1997 and the fiscal years ended June 30, 1997, 1996
and 1995, respectively.
8. MAJOR CUSTOMERS
Sales to individual customers constituting 10% or more of total oil and gas
sales were as follows:
<TABLE>
<CAPTION>
PERCENT OF
SIX MONTHS ENDED DECEMBER 31, AMOUNT OIL AND GAS SALES
----------------------------- -------------- -----------------
($ IN THOUSANDS)
<S> <C> <C>
1997 Aquila Southwest Pipeline Corporation $20,138 21%
Koch Oil Company $18,594 19%
GPM Gas Corporation $12,610 13%
FISCAL YEAR ENDED JUNE 30,
1997 Aquila Southwest Pipeline Corporation $53,885 28%
Koch Oil Company $29,580 15%
GPM Gas Corporation $27,682 14%
1996 Aquila Southwest Pipeline Corporation $41,900 38%
GPM Gas Corporation $28,700 26%
Wickford Energy Marketing, L.C. $18,500 17%
1995 Aquila Southwest Pipeline Corporation $18,548 33%
Wickford Energy Marketing, L.C. $15,704 28%
GPM Gas Corporation $11,686 21%
</TABLE>
F-24
<PAGE> 25
Management believes that the loss of any of the above customers would not
have a material impact on the Company's results of operations or its financial
position.
9. STOCKHOLDERS' EQUITY AND STOCK BASED COMPENSATION
On December 16, 1997, Chesapeake acquired AnSon, a privately owned oil and
gas producer based in Oklahoma City. Consideration for this acquisition was
approximately $43 million consisting of the issuance of 3,792,724 shares of
Chesapeake common stock and cash consideration in accordance with the terms of
the merger agreement.
On December 2, 1996, the Company completed a public offering of 8,972,000
shares of Common Stock at a price of $33.63 per share, resulting in net proceeds
to the Company of approximately $288.1 million.
On April 12, 1996, the Company completed a public offering of 5,989,500
shares of Common Stock at a price of $17.67 per share, resulting in net proceeds
to the Company of approximately $99.4 million.
A 2-for-1 stock split of the Common Stock in December 1994, and in December
1996, and a 3-for-2 stock split of the Common Stock in December 1995 and in June
1996 have been given retroactive effect in these financial statements.
Stock Option Plans
Under the Company's 1992 Incentive Stock Option Plan (the "ISO Plan"),
options to purchase Common Stock may be granted only to employees of the Company
and its subsidiaries. Subject to any adjustment as provided by the ISO Plan, the
aggregate number of shares which may be issued and sold may not exceed 3,762,000
shares. The maximum period for exercise of an option may not be more than 10
years (or five years for an optionee who owns more than 10% of the Common Stock)
from the date of grant, and the exercise price may not be less than the fair
market value of the shares underlying the options on the date of grant (or 110%
of such value for an optionee who owns more than 10% of the Common Stock).
Options granted become exercisable at dates determined by the Stock Option
Committee of the Board of Directors. No options could be granted under the ISO
Plan after December 16, 1994.
Under the Company's 1992 Nonstatutory Stock Option Plan (the "NSO Plan"),
non-qualified options to purchase Common Stock may be granted only to directors
and consultants of the Company. Subject to any adjustment as provided by the NSO
Plan, the aggregate number of shares which may be issued and sold may not exceed
3,132,000 shares. The maximum period for exercise of an option may not be more
than 10 years from the date of grant, and the exercise price may not be less
than the fair market value of the shares underlying the options on the date of
grant. Options granted become exercisable at dates determined by the Stock
Option Committee of the Board of Directors. No options can be granted under the
NSO Plan after December 10, 2002.
Under the Company's 1994 Stock Option Plan (the "1994 Plan"), and its 1996
Stock Option Plan (the "1996 Plan"), incentive and nonqualified stock options to
purchase Common Stock may be granted to employees and consultants of the Company
and its subsidiaries. Subject to any adjustment as provided by the respective
plans, the aggregate number of shares which may be issued and sold may not
exceed 4,886,910 shares under the 1994 Plan and 6,000,000 shares under the 1996
Plan. The maximum period for exercise of an option may not be more than 10 years
from the date of grant and the exercise price may not be less than 75% of the
fair market value of the shares underlying the options on the date of grant.
Options granted become exercisable at dates determined by the Stock Option
Committee of the Board of Directors. No options can be granted under the 1994
Plan after December 16, 2004 or under the 1996 Plan after October 14, 2006.
F-25
<PAGE> 26
The Company has elected to follow APB No. 25, Accounting for Stock Issued to
Employees and related interpretations in accounting for its employee stock
options. Under APB No. 25, compensation expense is recognized for the difference
between the option price and market value on the measurement date. No
compensation expense has been recognized because the exercise price of the stock
options equaled the market price of the underlying stock on the date of grant.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123 and has been determined as if the Company had accounted
for its employee stock options under the fair value method of the statement. The
fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for the six months ended December 31, 1997 and fiscal 1997 and 1996,
respectively: interest rates (zero-coupon U.S. government issues with a
remaining life equal to the expected term of the options) of 6.45%, 6.74% and
6.21%; dividend yields of 0.9%, 0.9% and 0.9%; volatility factors of the
expected market price of the Company's common stock of .67, .60 and .60; and
weighted-average expected life of the options of four years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion the existing models do not necessarily provide a reliable single measure
of the fair value of its employee stock options.
The Company's pro forma information follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED JUNE 30,
DECEMBER 31, ------------------------
1997 1997 1996
----------------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net Income (Loss)
As reported........................... $ (31,574) $ (183,377) $ 23,355
Pro forma............................. (35,084) (190,160) 22,081
Earnings (Loss) per Share
As reported........................... $ (0.45) $ (2.79) $ 0.40
Pro forma............................. (0.50) (2.89) 0.38
</TABLE>
F-26
<PAGE> 27
[CAPTION]
For purposes of the pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period, which is four
years. Because the Company's stock options vest over four years and additional
awards are typically made each year, the above pro forma disclosures are not
likely to be representative of the effects on pro forma net income for future
years. A summary of the Company's stock option activity and related information
follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED DECEMBER 31,
1997
--------------------------
WEIGHTED-AVG
OPTIONS EXERCISE PRICE
---------- --------------
<S> <C> <C>
Outstanding Beginning of Period 7,903,659 $ 7.09
Granted 3,362,207 8.29
Exercised (219,349) 3.13
Forfeited (2,716,136) 13.87
---------- ----------
Outstanding End of Period 8,330,381 5.49
---------- ----------
Exercisable End of Period 3,838,869
----------
Shares Authorized for Future Grants 4,585,973
----------
Fair Value of Options Granted During the Period $ 4.98
----------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------------------------------------------------------------
1997 1996 1995
-------------------------- --------------------------- -------------------------
WEIGHTED-AVG WEIGHTED-AVG WEIGHTED-AVG
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
--------- -------------- --------- -------------- -------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding Beginning of Year 7,602,884 $ 4.66 6,828,592 $ 1.97 5,033,340 $ 0.72
Granted 3,564,884 19.35 2,426,850 9.98 3,185,550 3.38
Exercised (1,197,998) 1.95 (1,574,046) 1.31 (1,288,732) 0.67
Forfeited (2,066,111) 22.26 (78,512) 2.61 (101,566) 0.92
---------- ------- --------- ------ --------- ------
Outstanding End of Year 7,903,659 7.09 7,602,884 4.66 6,828,592 1.97
--------- ------- --------- ------ --------- ------
Exercisable End of Year 3,323,824 2,974,386 2,489,742
--------- --------- ---------
Shares Authorized for Future Grants 5,212,056 713,826 3,102,982
--------- --------- ---------
Fair Value of Options Granted During
the Year $ 7.51 $ 4.84 N/A
------- ------ ------
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------- ------------------------------
NUMBER WEIGHTED-AVG. NUMBER
RANGE OF OUTSTANDING REMAINING WEIGHTED-AVG. EXERCISABLE WEIGHTED-AVG.
EXERCISE PRICES 12/31/97 CONTRACTUAL LIFE EXERCISE PRICE 12/31/97 EXERCISE PRICE
------------------ ----------- ------------------- ---------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
$ 0.56-$ 0.71 1,010,675 5.04 $ 0.61 1,010,675 $ 0.61
$ 0.78-$ 1.33 562,500 4.47 $ 1.12 562,500 $ 1.12
$ 2.25-$ 2.25 1,048,207 6.80 $ 2.25 687,982 $ 2.25
$ 2.43-$ 4.92 408,689 6.92 $ 3.15 394,159 $ 3.08
$ 4.92-$ 4.92 963,378 7.32 $ 4.92 382,618 $ 4.92
$ 5.67-$ 5.67 1,138,724 7.67 $ 5.67 479,061 $ 5.67
$ 6.47-$ 6.47 180,000 7.78 $ 6.47 180,000 $ 6.47
$ 7.31- $7.31 997,606 9.64 $ 7.31 0 $ 0.00
$ 8.04- $8.04 136,790 4.64 $ 8.04 0 $ 0.00
$ 8.75- $30.63 1,883,812 9.45 $ 10.67 141,874 $ 24.80
$ 0.56-$30.63 8,330,381 7.54 $ 5.49 3,838,869 $ 3.46
</TABLE>
The exercise of certain stock options results in state and federal income
tax benefits to the Company related to the difference between the market price
of the Common Stock at the date of disposition (or sale) and the option price.
During the six months ended December 31, 1997 and fiscal 1997, 1996 and 1995,
$0, $4,808,000, $7,950,000 and $1,229,000, respectively, were recorded as
adjustments to additional paid-in capital and deferred income taxes with respect
to such tax benefits.
10. FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
The Company has only limited involvement with derivative financial
instruments, as defined in Statement of Financial Accounting Standards No. 119
"Disclosure About Derivative Financial Instruments and Fair Value of Financial
Instruments", and does not use them for trading purposes. The Company's
objective is to hedge a portion of its exposure to price volatility from
producing crude oil and natural gas. These arrangements may expose the Company
to credit risk from its counterparties and to basis risk. The Company does not
expect that the counterparties will fail to meet their obligations given their
high credit ratings.
F-27
<PAGE> 28
Hedging Activities
Periodically the Company utilizes hedging strategies to hedge the price of a
portion of its future oil and gas production. These strategies include (1) swap
arrangements that establish an index-related price above which the Company pays
the counterparty and below which the Company is paid by the counterparty, (2)
the purchase of index-related puts that provide for a "floor" price below which
the counterparty pays the Company the amount by which the price of the commodity
is below the contracted floor, (3) the sale of index-related calls that provide
for a "ceiling" price above which the Company pays the counterparty the amount
by which the price of the commodity is above the contracted ceiling, and (4)
basis protection swaps, which are arrangements that guarantee the price
differential of oil or gas from a specified delivery point or points. Results
from hedging transactions are reflected in oil and gas sales to the extent
related to the Company's oil and gas production. The Company only enters into
hedging transactions related to the Company's oil and gas production volumes or
CEMI physical purchase or sale commitments.
As of December 31, 1997, the Company had the following oil swap
arrangements for periods after December 1997:
<TABLE>
<CAPTION>
NYMEX-INDEX
MONTHS VOLUME (Bbls) STRIKE PRICE (per Bbl)
--------------- ------------------------------------
<S> <C> <C>
January through June 1998................ 724,000 $ 19.82
</TABLE>
The Company entered into oil swap arrangements to cancel the effect of the
swaps at a price of $18.85 per Bbl.
As of December 31, 1997, the Company had the following gas swap arrangements
for periods after December 1997:
<TABLE>
<CAPTION>
HOUSTON SHIP CHANNEL
MONTHS VOLUME (MMBTU) INDEX STRIKE PRICE (PER MMBTU)
--------------- --------------- ------------------------------
<S> <C> <C>
April 1998..................... 600,000 $ 2.300
May 1998....................... 620,000 $ 2.215
</TABLE>
The Company received $1.3 million as a premium for calls sold for January
and February 1998 volumes of 2,480,000 MMBtu and 2,240,000 MMBtu, respectively.
The January calls expired on December 31, 1997, the February calls expired on
January 31, 1998, and the associated premiums will be recognized as income
during the corresponding months of production.
The Company has also entered into the following collar transactions:
<TABLE>
<CAPTION>
NYMEX NYMEX
VOLUME DEFINED HIGH DEFINED LOW
MONTHS (MMBTU) STRIKE PRICE STRIKE PRICE
------ ------- ------------ ------------
<S> <C> <C> <C>
March 1998.................... 1,240,000 $ 2.693 $ 2.33
April 1998.................... 1,200,000 $ 2.483 $ 2.11
</TABLE>
These transactions require that the Company pay the counterparty if the
NYMEX price exceeds the defined high strike price and that the counterparty pay
the Company if the NYMEX price is less than the defined low strike price.
The Company entered into a curve lock for 4.9 Bcf of gas which allows the
Company the option to hedge April 1999 through November 1999 gas based upon a
negative $0.285 differential to December 1998 gas any time between the strike
date and December 1998. A curve lock is a commodity swap arrangement that
establishes, or hedges, a price differential between one commodity contract
period and another. In markets where the forward curve is typically negatively
sloped (prompt prices exceed deferred prices), an upward sloping price curve
allows hedgers to lock in a deferred forward sale at a higher premium to a more
prompt swap by a curve lock.
Gains or losses on crude oil and natural gas hedging transactions are
recognized as price adjustments in the month of related production. The Company
estimates that had all of the crude oil and natural gas swap agreements in
effect for production periods beginning on or after January 1, 1998 terminated
on December 31, 1997, based on the closing prices for NYMEX futures contracts as
of that date, the Company would have received a net amount of approximately $1.1
million from the counterparty which would have represented the "fair value" at
that date. These agreements were not terminated.
F-28
<PAGE> 29
Periodically, CEMI enters into various hedging transactions designed to
hedge against physical purchase commitments made by CEMI. Gains or losses on
these transactions are recorded as adjustments to Oil and Gas Marketing Sales in
the consolidated statements of operations and are not considered by management
to be material.
Concentration of Credit Risk
Other financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash, short-term
investments in debt instruments and trade receivables. The Company's accounts
receivable are primarily from purchasers of oil and natural gas products and
exploration and production companies which own interests in properties operated
by the Company. The industry concentration has the potential to impact the
Company's overall exposure to credit risk, either positively or negatively, in
that the customers may be similarly affected by changes in economic, industry or
other conditions. The Company generally requires letters of credit for
receivables from customers which are judged to have sub-standard credit, unless
the credit risk can otherwise be mitigated. The cash and investments in debt
securities are with major banks or institutions with high credit ratings.
Fair Value of Financial Instruments
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of Statement of
Financial Accounting Standards No. 107, "Disclosures About Fair Value of
Financial Instruments". The estimated fair value amounts have been determined by
the Company using available market information and valuation methodologies.
Considerable judgment is required in interpreting market data to develop the
estimates of fair value. The use of different market assumptions or valuation
methodologies may have a material effect on the estimated fair value amounts.
The carrying values of items comprising current assets and current
liabilities approximate fair values due to the short-term maturities of these
instruments. See Note 15 for the fair value of financial instruments included in
noncurrent other assets at December 31, 1997. The Company estimates the fair
value of its long-term, fixed-rate debt using quoted market prices. The
Company's carrying amount for such debt at December 31, 1997 and June 30, 1997
and 1996 was $509.0 million, $508.9 million and $255.6 million, respectively,
compared to approximate fair values of $517.0 million, $514.1 million and $261.2
million, respectively. The carrying value of other long-term debt approximates
its fair value as interest rates are primarily variable, based on prevailing
market rates.
11. DISCLOSURES ABOUT OIL AND GAS PRODUCING ACTIVITIES
Net Capitalized Costs
Evaluated and unevaluated capitalized costs related to the Company's oil and
gas producing activities are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1997 1996
---------- ---------- ---------
($ IN THOUSANDS)
<S> <C> <C> <C>
Oil and gas properties:
Proved...................................................... $1,095,363 $ 865,516 $ 363,213
Unproved.................................................... 125,155 128,505 165,441
---------- ---------- ---------
Total............................................... 1,220,518 994,021 528,654
Less accumulated depreciation, depletion and amortization..... (602,391) (431,983) (92,720)
---------- ---------- ---------
Net capitalized costs......................................... $ 618,127 $ 562,038 $ 435,934
========== ========== =========
</TABLE>
Unproved properties not subject to amortization at December 31, 1997, June
30, 1997 and 1996 consisted mainly of lease acquisition costs. The Company
capitalized approximately $5,087,000, $12,935,000 and $6,428,000 of interest
during the six months ended December 31, 1997 and the years ended June 30, 1997
and 1996 on significant investments in unproved properties that were not yet
included in the amortization base of the full-cost pool. The Company will
continue to evaluate its unevaluated properties; however, the timing of the
ultimate evaluation and disposition of the properties has not been determined.
F-29
<PAGE> 30
Costs Incurred in Oil and Gas Acquisition, Exploration and Development
Costs incurred in oil and gas property acquisition, exploration and
development activities which have been capitalized are summarized as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED JUNE 30,
DECEMBER 31, --------------------------------
1997 1997 1996 1995
---------- --------- --------- ---------
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
Development costs......................................... $ 120,628 $ 187,736 $ 138,188 $ 78,679
Exploration costs......................................... 40,534 136,473 39,410 14,129
Acquisition costs:
Unproved properties..................................... 25,516 140,348 138,188 24,437
Proved properties....................................... 39,245 -- 24,560 --
Capitalized internal costs................................ 2,435 3,905 1,699 586
Proceeds from sale of leasehold, equipment and other...... (1,861) (3,095) (6,167) (11,953)
---------- --------- --------- ---------
Total............................................ $ 226,497 $ 465,367 $ 335,878 $ 105,878
========== ========= ========= =========
</TABLE>
Results of Operations from Oil and Gas Producing Activities (unaudited)
The Company's results of operations from oil and gas producing activities
are presented below for the six months ended December 31, 1997 and for the years
ended June 30, 1997, 1996 and 1995, respectively. The following table includes
revenues and expenses associated directly with the Company's oil and gas
producing activities. It does not include any allocation of the Company's
interest costs and, therefore, is not necessarily indicative of the contribution
to consolidated net operating results of the Company's oil and gas operations.
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED JUNE 30,
DECEMBER 31, --------------------------------
1997 1997 1996 1995
---------- ---------- --------- --------
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
Oil and gas sales......................................... $ 95,657 $ 192,920 $ 110,849 $ 56,983
Production costs (a)...................................... (10,094) (15,107) (8,303) (4,256)
Impairment of oil and gas properties...................... (110,000) (236,000) -- --
Depletion and depreciation................................ (60,408) (103,264) (50,899) (25,410)
Imputed income tax (provision) benefit(b)................. 31,817 60,544 (18,335) (9,561)
---------- ---------- --------- --------
Results of operations from oil
and gas producing activities............................ $ (53,028) $ (100,907) $ 33,312 $ 17,756
========== ========== ========= ========
</TABLE>
- ----------
(a) Production costs include lease operating expenses and production taxes.
(b) The imputed income tax provision is hypothetical (at the statutory rate) and
determined without regard to the Company's deduction for general and
administrative expenses, interest costs and other income tax credits and
deductions.
Capitalized costs, less accumulated amortization and related deferred income
taxes, can not exceed an amount equal to the sum of the present value
(discounted at 10%) of estimated future net revenues less estimated future
expenditures to be incurred in developing and producing the proved reserves,
less any related income tax effects. At December 31, 1997, capitalized costs of
oil and gas properties exceeded the estimated present value of future net
revenues for the Company's proved reserves, net of related income tax
considerations, resulting in a writedown in the carrying value of oil and gas
properties of $110 million. At June 30, 1997, capitalized costs of oil and gas
properties also exceeded the estimated present value of future net revenues for
the Company's proved reserves, net of related income tax considerations,
resulting in a writedown in the carrying value of oil and gas properties of $236
million.
Oil and Gas Reserve Quantities (unaudited)
The reserve information presented below is based upon reports prepared by
independent petroleum engineers and the Company's petroleum engineers. As of
December 31, 1997, Williamson Petroleum Consultants ("Williamson"),
F-30
<PAGE> 31
Porter Engineering Associates, Netherland, Sewell & Associates, Inc. and
internal reservoir engineers evaluated approximately 46%, 48%, 4% and 2% of
total proved oil and gas reserves, respectively. As of June 30, 1997, 1996 and
1995, the reserves evaluated by Williamson constituted approximately 50%, 99%
and 99% of total proved reserves, respectively, with the remaining reserves
being evaluated internally. The reserves evaluated internally in fiscal 1997
were subsequently evaluated by Williamson with a variance of approximately 4% of
total proved reserves. The information is presented in accordance with
regulations prescribed by the Securities and Exchange Commission. The Company
emphasizes that reserve estimates are inherently imprecise. The Company's
reserve estimates were generally based upon extrapolation of historical
production trends, analogy to similar properties and volumetric calculations.
Accordingly, these estimates are expected to change, and such changes could be
material and occur in the near term as future information becomes available.
Proved oil and gas reserves represent the estimated quantities of crude oil,
natural gas, and natural gas liquids which geological and engineering data
demonstrate with reasonable certainty to be recoverable in future years from
known reservoirs under existing economic and operating conditions. Proved
developed oil and gas reserves are those expected to be recovered through
existing wells with existing equipment and operating methods. As of December 31,
1997, all of the Company's oil and gas reserves were located in the United
States.
Presented below is a summary of changes in estimated reserves of the Company
for the six months ended December 31, 1997 and for the years 1997, 1996 and
1995:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
----------------------------------------------------------
1997 1997 1996 1995
----------------- ----------------- ----------------- -----------------
OIL GAS OIL GAS OIL GAS OIL GAS
(MBBL) (MMCF) (MBBL) (MMCF) (MBBL) (MMCF) (MBBL) (MMCF)
------ ------- ------ -------- ------ -------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Proved reserves, beginning of
period........................ 17,373 298,766 12,258 351,224 5,116 211,808 4,154 117,066
Extensions, discoveries and other
additions..................... 5,573 68,813 13,874 147,485 8,781 158,052 2,549 138,372
Revisions of previous estimate.. (3,428) (24,189) (5,989) (137,938) (669) 12,987 (448) (18,516)
Production...................... (1,857) (27,327) (2,770) (62,005) (1,413) (51,710) (1,139) (25,114)
Sale of reserves-in-place....... -- -- -- -- -- -- -- --
Purchase of reserves-in-place... 565 23,055 -- -- 443 20,087 -- --
------ ------- ------ -------- ------ -------- ------ -------
Proved reserves, end of period.. 18,226 339,118 17,373 298,766 12,258 351,224 5,116 211,808
====== ======= ====== ======== ====== ======== ====== =======
Proved developed reserves,
end of period................. 10,087 178,082 7,324 151,879 3,648 144,721 1,973 77,764
====== ======= ====== ======== ====== ======== ====== =======
</TABLE>
For the six months ended December 31, 1997 the Company recorded revisions to
the June 30, 1997 reserve estimates of approximately 3,428 MBbl and 24,189 MMcf,
or approximately 45 Bcfe. The reserve revisions are primarily attributable to
lower than expected results from development drilling and production which
eliminated certain previously established proven reserves.
On December 16, 1997, Chesapeake acquired AnSon, a privately owned oil and
gas producer, based in Oklahoma City. Consideration for this acquisition was
approximately $43 million. The Company estimates that it acquired approximately
26.4 Bcfe in connection with this acquisition.
For the fiscal year ended June 30, 1997, the Company recorded revisions to
the previous year's reserve estimates of approximately 5,989 MBbl and 137,938
MMcf, or approximately 174 Bcfe. The reserve revisions are primarily
attributable to the decrease in oil and gas prices between periods, higher
drilling and completion costs, and unfavorable developmental drilling and
production results during fiscal 1997. Specifically, the Company recorded
aggregate downward adjustments to proved reserves of 159 Bcfe for the Knox,
Giddings and Louisiana Trend areas.
On April 30, 1996, the Company purchased interests in certain producing and
non-producing oil and gas properties, including approximately 14,000 net acres
of unevaluated leasehold, from Amerada Hess Corporation for $37.8 million. The
properties are located in the Knox and Golden Trend fields of southern Oklahoma,
most of which are operated by the Company. In fiscal 1996 the reserves acquired
from Amerada Hess Corporation were included in both "Extensions, discoveries and
other additions" and "Purchase of reserves in-place". The fiscal 1996
presentation has been restated in the current year to remove the acquired
reserves from "Extensions, discoveries and other
F-31
<PAGE> 32
additions" with a corresponding offset to "Revisions of previous estimate". This
revision resulted in no net change to total oil and gas reserves.
Standardized Measure of Discounted Future Net Cash Flows (unaudited)
Statement of Financial Accounting Standards No. 69 ("SFAS 69") prescribes
guidelines for computing a standardized measure of future net cash flows and
changes therein relating to estimated proved reserves. The Company has followed
these guidelines which are briefly discussed below.
Future cash inflows and future production and development costs are
determined by applying year-end prices and costs to the estimated quantities of
oil and gas to be produced. Estimates are made of quantities of proved reserves
and the future periods during which they are expected to be produced based on
year-end economic conditions. Estimated future income taxes are computed using
current statutory income tax rates including consideration for the current tax
basis of the properties and related carryforwards, giving effect to permanent
differences and tax credits. The resulting future net cash flows are reduced to
present value amounts by applying a 10% annual discount factor.
Subsequent to December 31, 1997, oil and gas prices have declined. Such
decreases in commodity prices could result in an additional full-cost ceiling
writedown at March 31, 1998, as well as a reduction to the standardized measure
of discounted future net cash flows.
The assumptions used to compute the standardized measure are those
prescribed by the Financial Accounting Standards Board and, as such, do not
necessarily reflect the Company's expectations of actual revenue to be derived
from those reserves nor their present worth. The limitations inherent in the
reserve quantity estimation process, as discussed previously, are equally
applicable to the standardized measure computations since these estimates are
the basis for the valuation process.
The following summary sets forth the Company's future net cash flows
relating to proved oil and gas reserves based on the standardized measure
prescribed in SFAS 69:
<TABLE>
<CAPTION>
JUNE 30,
DECEMBER 31, -----------------------------------
1997 1997 1996 1995
---------- ---------- ----------- ---------
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
Future cash inflows.................................. $1,100,807 $ 954,839 $ 1,101,642 $ 427,377
Future production costs.............................. (223,030) (190,604) (168,974) (75,927)
Future development costs............................. (158,387) (152,281) (137,068) (76,543)
Future income tax provision.......................... (108,027) (104,183) (135,543) (51,789)
---------- ---------- ----------- ---------
Future net cash flows................................ 611,363 507,771 660,057 223,118
Less effect of a 10% discount factor................. (181,253) (92,273) (198,646) (63,207)
---------- ---------- ----------- ---------
Standardized measure of discounted future net
cash flows......................................... $430,110 $ 415,498 $ 461,411 $ 159,911
========== ========== =========== =========
</TABLE>
The principal sources of change in the standardized measure of discounted
future net cash flows are as follows:
<TABLE>
<CAPTION>
JUNE 30,
DECEMBER 31, -----------------------------------
1997 1997 1996 1995
---------- ---------- ----------- ---------
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
Standardized measure, beginning of period ....... $ 415,498 $ 461,411 $ 159,911 $ 118,608
Sales of oil and gas produced, net of production
costs ........................................ (85,563) (177,813) (102,546) (52,727)
Net changes in prices and production costs ...... 26,106 (99,234) 88,729 (24,807)
Extensions and discoveries, net of production and
development costs ............................ 92,597 287,068 275,916 108,644
Changes in future development costs ............. (7,422) (12,831) (11,201) 3,406
Development costs incurred during the period that
reduced future development costs ............. 47,703 46,888 43,409 23,678
Revisions of previous quantity estimates ........ (62,655) (199,738) 12,728 (21,595)
Purchase of reserves-in-place ................... 25,236 -- 29,641 --
Accretion of discount ........................... 43,739 54,702 18,814 14,126
Net change in income taxes ...................... (14,510) 63,719 (57,382) (5,586)
Changes in production rates and other ........... (50,619) (8,674) 3,392 (3,836)
----------- ----------- ----------- -----------
Standardized measure, end of period ............. $ 430,110 $ 415,498 $ 461,411 $ 159,911
=========== =========== =========== ===========
</TABLE>
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<PAGE> 33
12. TRANSITION PERIOD COMPARATIVE DATA
The following table presents certain financial information for the six
months ended December 31, 1997 and 1996, respectively:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
1997 1996
--------- ---------
(UNAUDITED)
($ IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
Revenues ............................................ $ 232,864 $ 122,702
========= =========
Gross profit (loss) (a) ............................. $ (93,092) $ 42,946
========= =========
Income (loss) before income taxes
and extraordinary item ............................ $ (31,574) $ 39,246
Income taxes ........................................ -- 14,325
--------- ---------
Income (loss) before extraordinary item ............. (31,574) 24,921
Extraordinary item .................................. -- (6,443)
--------- ---------
Net income (loss) ................................... $ (31,574) $ 18,478
========= =========
Earnings per share - basic
Income (loss) before extraordinary item ........ $ (0.45) $ 0.40
Extraordinary item ............................. -- (0.10)
--------- ---------
Net income (loss) .............................. $ (0.45) $ 0.30
========= =========
Earnings per share - assuming dilution
Income (loss) before extraordinary item ........ $ (0.45) $ 0.38
Extraordinary item ............................. -- (0.10)
--------- ---------
Net income (loss) .............................. $ (0.45) $ 0.28
========= =========
Weighted average common shares outstanding (in 000's)
Basic .......................................... 70,835 61,985
========= =========
Assuming dilution .............................. 70,835 66,300
========= =========
</TABLE>
- --------------
(a) Total revenue excluding interest and other income, less total costs and
expenses excluding interest and other expense.
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<PAGE> 34
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized unaudited quarterly financial data for the six months ended
December 31, 1997 and fiscal 1997 and 1996 are as follows ($ in thousands except
per share data):
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------
SEPTEMBER 30, DECEMBER 31,
1997 1997
------------- -----------
<S> <C> <C>
Net sales....................................... $ 72,532 $81,366
Gross profit (loss)(a).......................... 8,210 (101,302)
Net income (loss)............................... 5,513 (37,087)
Net income (loss) per share:
Basic......................................... .08 (.52)
Diluted....................................... .08 (.52)
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1996 1996 1997 1997
------------ ----------- --------- -----------
<S> <C> <C> <C> <C>
Net sales ........................... $ 48,937 $ 71,249 $ 79,809 $ 69,097
Gross profit (loss)(a) .............. 14,889 28,057 25,737 (241,686)
Income (loss) before extraordinary
item .............................. 8,204 16,717 16,105 (217,783)
Net income (loss) ................... 8,204 10,274 15,928 (217,783)
Income (loss) per share before
extraordinary item:
Basic ............................. .14 .26 .23 (3.12)
Diluted ........................... .13 .25 .22 (3.12)
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1995 1995 1996 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales ............... $ 21,988 $ 31,766 $ 44,145 $ 47,692
Gross profit(a) ......... 6,368 11,368 14,741 13,580
Net income .............. 2,915 5,459 7,623 7,358
Net income per share:
Basic ................. .06 .10 .14 .12
Diluted ............... .05 .10 .13 .12
</TABLE>
- ----------
(a) Total revenue excluding interest and other income, less total costs and
expenses excluding interest and other expense.
Capitalized costs, less accumulated amortization and related deferred income
taxes, cannot exceed an amount equal to the sum of the present value of
estimated future net revenues less estimated future expenditures to be incurred
in developing and producing the proved reserves, less any related income tax
effects. At December 31, 1997 and at June 30, 1997, capitalized costs of oil and
gas properties exceeded the estimated present value of future net revenues for
the Company's proved reserves, net of related income tax considerations,
resulting in writedowns in the carrying value of oil and gas properties of $110
million and $236 million, respectively.
14. SUBSEQUENT EVENTS AND PENDING TRANSACTIONS
On October 22, 1997, the Company entered into an agreement to acquire by
merger the Mid-Continent operations of DLB Oil & Gas, Inc. The Company will pay
$17.5 million cash and will issue a total of five million shares of the
Company's common stock as merger consideration to the shareholders of DLB. The
closing of the DLB acquisition is expected to occur in late April 1998 and is
subject to approval by DLB shareholders and other customary conditions. Certain
shareholders of DLB, who collectively own approximately 77.7% of outstanding DLB
common stock, have granted the Company an irrevocable proxy to vote such shares
(or executed a written consent) in favor of the merger.
F-34
<PAGE> 35
On November 12, 1997, the Company entered into an agreement to acquire
Hugoton Energy Corporation which was consummated on March 10, 1998. Each share
of Hugoton common stock was converted into the right to receive 1.3 shares of
Chesapeake common stock, requiring the Company to issue approximately 25.8
million shares of Chesapeake common stock (based on 19.8 million shares of
Hugoton common stock outstanding as of February 6, 1998, which amount excludes
shares issuable upon exercise of outstanding Hugoton options).
On January 30, 1998, the Company entered into an alliance with Ranger Oil
Limited to jointly develop a 3.2 million acre area of mutual interest in the
Helmet, Midwinter, and Peggo areas of northeastern British Columbia. In
addition, the Company paid Ranger approximately $48 million. The transaction
closed in January 1998 with an effective date of December 1, 1997.
In February 1998, the Company closed the purchase of the Mid-Continent
properties of privately owned Enervest Management Company L.L.C. for $38
million.
On March 5, 1998, the Company entered into a definitive agreement to acquire
100% of the stock of MC Panhandle Corp., a wholly owned subsidiary of Occidental
Petroleum Corporation. The Company has agreed to pay $105 million in cash for
the estimated proved reserves in the West Panhandle Field in Carson, Gray,
Hutchinson and Moore Counties of the Texas Panhandle. The effective date of the
transaction is January 1, 1998 with closing scheduled for May 29, 1998.
15. ACQUISITIONS
On December 5, 1997, Chesapeake purchased from Pan East Petroleum
Corporation ("Pan East"), a publicly-traded Canadian exploration and production
company, 19.9% of Pan East's common stock for $22 million. The purpose of
Chesapeake's investment is to assist Pan East in financing its share of the
exploration, development and acquisition activities under a joint venture
whereby Chesapeake has the right to participate as a non-operator with up to a
50% interest in all drilling activities and acquisitions made by Pan East during
the two years ending December 31, 1999. The Company will account for its
investment in Pan East using the equity method. Based upon the closing price of
Pan East's common stock at December 31, 1997, the market value of Chesapeake's
investment in Pan East was $12.6 million.
On December 16, 1997, the Company acquired AnSon, a privately owned oil and
gas producer based in Oklahoma City. Consideration for this acquisition was
approximately $43 million consisting of the issuance of 3,792,724 shares of
Chesapeake's common stock and cash consideration in accordance with the terms of
the merger agreement. The Company has accrued $15.5 million as the estimated
cash payment which will be made during 1998.
F-35
