<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 11, 1998
REGISTRATION NO. 333-
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------------
CHESAPEAKE ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
OKLAHOMA 1311 73-1395733
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
AUBREY K. MCCLENDON
6100 NORTH WESTERN AVENUE 6100 NORTH WESTERN AVENUE
OKLAHOMA CITY, OKLAHOMA 73118 OKLAHOMA CITY, OKLAHOMA 73118
(405) 848-8000 (405) 848-8000
(Address, including zip code, and telephone number, (Name, address, including zip code, and telephone
including area code, of registrant's principal executive offices) number, including area code, of agent for service)
</TABLE>
---------------------------
Copies to:
G. MICHAEL O'LEARY DAVID S. ELKOURI
ANDREWS & KURTH L.L.P. HINKLE, EBERHART & ELKOURI, L.L.C.
600 TRAVIS, SUITE 4200 301 NORTH MAIN, SUITE 2000
HOUSTON, TEXAS 77002 WICHITA, KANSAS 67202
(713) 220-4200 (316) 267-2000
---------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE
SECURITIES TO THE PUBLIC:
As soon as practicable after the Registration Statement becomes effective and
the satisfaction or waiver of all other conditions to the Merger, pursuant to
the Agreement and Plan of Merger, dated as of November 12, 1997, as amended by
that certain Amendment No. 1 thereto dated as of February 9, 1998, described in
the enclosed Joint Proxy Statement/Prospectus.
---------------------------
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. |_|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. |_|
---------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=========================================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING REGISTRATION FEE (3)
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE (2) PRICE (2)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $0.01 par value 27,019,784 $ 7.6875 $ 159,780,452 $ 47,136
=========================================================================================================================
</TABLE>
(1) Shares of common stock, par value $0.01 per share, of Registrant issuable
upon the conversion, pursuant to the Merger described herein (the "Merger
Shares"), of (i) 19,838,574 shares of common stock, par value $0.01 per
share, of Hugoton Energy Corporation ("Hugoton Common Stock"), outstanding
on February 6, 1998 and (ii) up to 945,875 shares of Hugoton Common Stock
which may be issued pursuant to outstanding options between February 6,
1998 and the consummation of the Merger.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(f)(1) and Rule 457(c), based on the product of $7.6875
(the average of the high and low prices of Hugoton Common Stock on February
6, 1998 on the Nasdaq National Market) times 20,784,449 (the number of
shares of Hugoton Common Stock outstanding and reserved for issuance upon
the exercise of outstanding options to purchase Hugoton Common Stock on
February 6, 1998).
(3) Pursuant to Rule 457(b), with respect to the Merger Shares, the required
fee of $47,136 is reduced by an aggregate fee of $38,660 previously paid at
the time of the filing of the preliminary proxy materials in connection
with this transaction.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL
THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT
THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN
ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
================================================================================
<PAGE> 2
[LOGO]
HUGOTON ENERGY CORPORATION
SPECIAL MEETING OF SHAREHOLDERS
MERGER PROPOSED -- YOUR VOTE IS VERY IMPORTANT
The Board of Directors of Hugoton Energy Corporation has unanimously approved a
merger in which Hugoton will become a subsidiary of Chesapeake Energy
Corporation. The Board unanimously believes that the merger provides Hugoton
shareholders with both fair value for their investment in the company and an
opportunity to continue their investment in a larger energy company with a more
diverse geographic mix of properties and expanding operations.
In the merger, Hugoton shareholders will receive 1.3 shares of Chesapeake common
stock for each share of Hugoton common stock. We estimate that the shares of
Chesapeake common stock to be issued to Hugoton shareholders would represent
approximately 26% of the outstanding Chesapeake common stock immediately after
the merger.
Chesapeake has agreed to acquire for cash and stock DLB Oil & Gas, Inc. If that
transaction occurs, we estimate that the shares of Chesapeake common stock to be
issued to Hugoton shareholders would represent approximately 24.5% of the
outstanding Chesapeake common stock and the current shareholders of Chesapeake
will retain ownership of approximately 71% of the combined company.
This Joint Proxy Statement/Prospectus provides you with detailed information
about the proposed merger. In addition, you may obtain information about Hugoton
and Chesapeake from documents filed with the Securities and Exchange Commission.
I encourage you to read this entire document carefully before you decide how you
wish to vote.
At the Hugoton special meeting, Hugoton shareholders will be asked to approve
the merger and the related merger agreement. The affirmative vote of the holders
of a majority of the outstanding shares of Hugoton common stock is required to
approve the merger and the related merger agreement. At February 18, 1998, the
record date for the vote, there were outstanding 19,838,574 shares of Hugoton
common stock. THE MERGER CANNOT BE COMPLETED UNLESS HUGOTON SHAREHOLDERS APPROVE
IT. Shareholders of Chesapeake are also required to approve the merger.
Whether or not you plan to attend the Hugoton special meeting, please take the
time to vote by completing and mailing the enclosed proxy card to us. If you
sign, date and mail your proxy card without indicating how you wish to vote,
your proxy will be counted as a vote "FOR" approval of the merger and the
related merger agreement. If you fail to return your card, the effect will be a
vote against the merger. YOUR VOTE IS VERY IMPORTANT.
On behalf of the Board, I urge you to be represented in person or by proxy at
this meeting, regardless of the number of shares you own. Please complete, sign,
date and return the enclosed proxy card as soon as possible. This action will
not limit your right to vote in person at the meeting if you wish to do so.
ON BEHALF OF YOUR BOARD OF DIRECTORS, I THANK YOU FOR YOUR SUPPORT AND URGE YOU
TO VOTE "FOR" APPROVAL OF THE MERGER AND THE RELATED MERGER AGREEMENT.
The date, time and place of the Hugoton special meeting:
March 10, 1998
10:00 a.m.
Hugoton Energy Corporation
301 N. Main, Suite 1900
Wichita, Kansas 67202
Floyd C. Wilson
Chairman of the Board, President
and Chief Executive Officer
SEE "RISK FACTORS" BEGINNING ON PAGE 11 FOR A DISCUSSION OF CERTAIN MATTERS
WHICH SHOULD BE CONSIDERED BY HUGOTON SHAREHOLDERS WITH RESPECT TO THE MERGER.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
REGULATORS HAVE APPROVED THE CHESAPEAKE COMMON STOCK TO BE ISSUED IN THE MERGER
OR DETERMINED IF THIS JOINT PROXY STATEMENT/PROSPECTUS IS ACCURATE OR ADEQUATE.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Joint Proxy Statement dated February , 1998, and first mailed to Hugoton
shareholders on February 17, 1998.
<PAGE> 3
HUGOTON ENERGY CORPORATION
301 NORTH MAIN, SUITE 1900
WICHITA, KANSAS 67202
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON TUESDAY, MARCH 10, 1998
To the Shareholders of Hugoton Energy Corporation:
A Special Meeting of the holders of common stock of Hugoton Energy
Corporation, a Kansas corporation ("Hugoton"), will be held at 10:00 a.m. local
time, on Tuesday, March 10, 1998 at Hugoton's corporate office, 301 North Main,
Suite 1900, Wichita, Kansas 67202. At the Hugoton Special Meeting, the holders
of common stock of Hugoton will:
1. Consider and vote upon a proposal to approve and adopt the Agreement and
Plan of Merger, dated as of November 12, 1997, as amended by Amendment
No. 1 thereto, dated as of February 9, 1998 (the "Merger Agreement"),
among Chesapeake Energy Corporation, an Oklahoma corporation
("Chesapeake"), Chesapeake Acquisition Corp., a Kansas corporation and
an indirect, wholly owned subsidiary of Chesapeake ("Sub"), and Hugoton,
relating to the merger (the "Merger") of Sub with and into Hugoton, with
Hugoton surviving the Merger. In the Merger, each outstanding share of
Hugoton common stock, no par value, will be converted into the right to
receive 1.3 shares of common stock, par value $0.01 per share, of
Chesapeake. A description of the Merger and the Merger Agreement is
contained in the accompanying Joint Proxy Statement/Prospectus, which
includes a copy of the Merger Agreement; and
2. Transact such other business as may properly come before the Special
Meeting or any adjournments or postponements thereof.
The Board of Directors has fixed the close of business on February 18, 1998
as the record date for determining which shareholders are entitled to notice of,
and to vote at, the Special Meeting or any adjournments thereof. Complete lists
of such shareholders will be available for examination at the offices of Hugoton
during normal business hours by any holder of Hugoton common stock, for any
purpose relevant to the Special Meeting, for a period of 10 days prior to the
Special Meeting.
THE BOARD OF DIRECTORS OF HUGOTON UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR
THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT. The affirmative vote of the
holders of the majority of the outstanding shares of Hugoton common stock is
required to approve and adopt the Merger Agreement and the Merger.
IF YOU DO NOT SEND IN YOUR PROXY OR VOTE AT THE SPECIAL MEETING, IT WILL
HAVE THE SAME EFFECT AS IF YOU VOTED AGAINST THE MERGER.
Holders of Hugoton common stock, even if they expect to be present at the
Special Meeting, are requested to sign, vote and date the enclosed proxy and
return it promptly in the enclosed envelope. Any shareholder giving a proxy has
the power to revoke it any time prior to the Special Meeting. Shareholders who
are present at the Special Meeting may withdraw their proxies and vote in
person.
By Order of the Board of Directors,
W. Mark Womble
Corporate Secretary
February , 1998
<PAGE> 4
SUBJECT TO COMPLETION, DATED FEBRUARY 11, 1998
[LOGO]
CHESAPEAKE ENERGY CORPORATION
SPECIAL MEETING OF SHAREHOLDERS
MERGER PROPOSED -- YOUR VOTE IS VERY IMPORTANT
The Board of Directors of Chesapeake Energy Corporation has unanimously approved
a merger in which Chesapeake will acquire Hugoton Energy Corporation. In the
merger, Hugoton will become a subsidiary of Chesapeake. The Board unanimously
believes that the merger is fair to the Chesapeake shareholders and will provide
the Chesapeake shareholders with an opportunity to benefit from the increase of
Chesapeake's proved reserves at September 30, 1997 by 74% and the increase of
Chesapeake's total reserves to approximately 699 billion cubic feet of gas
equivalent. If we complete the pending acquisition of DLB Oil & Gas, Inc., our
proved reserves at September 30, 1997 will increase by an additional 18% and our
aggregate total reserves will increase to approximately 825 billion cubic feet
of gas equivalent. These reserve estimates do not give effect to the other
acquisitions made by Chesapeake subsequent to September 30, 1997 as further
discussed herein.
Chesapeake shareholders will continue to own their existing shares after the
merger. If the merger is completed, Hugoton shareholders will receive 1.3 shares
of newly issued Chesapeake common stock for each share of Hugoton common stock.
We estimate that the shares of Chesapeake common stock to be issued to Hugoton
shareholders would represent approximately 26% of the outstanding Chesapeake
common stock immediately after the merger.
If we complete the pending acquisition of DLB Oil & Gas, Inc., the shares of
Chesapeake common stock to be issued to Hugoton shareholders will represent
approximately 24.5% of the outstanding Chesapeake common stock and the current
shareholders of Chesapeake will retain ownership of 71% of the combined company.
At the Chesapeake special meeting, Chesapeake shareholders will be asked to
approve the merger, the related merger agreement and the issuance of Chesapeake
common stock in connection therewith. The affirmative vote of the holders of a
majority of the outstanding shares of Chesapeake common stock is required to
approve the merger and related merger agreement. At February 18, 1998, the
record date for the vote, there were outstanding shares of Chesapeake
common stock. THE MERGER CANNOT BE COMPLETED UNLESS CHESAPEAKE SHAREHOLDERS
APPROVE IT. Hugoton shareholders are also required to approve the merger.
The date, time and place of the Chesapeake Special Meeting:
March 10, 1998
10:00 a.m.
Chesapeake Energy Corporation
6100 North Western Avenue
Oklahoma City, OK 73118
Whether or not you plan to attend the Chesapeake special meeting, please take
the time to vote by completing and mailing the enclosed proxy card to us. If you
sign, date and mail your proxy card without indicating how you wish to vote,
your proxy will be counted as a vote in favor of the merger and the related
merger agreement. If you fail to return your card, the effect will be a vote
against the merger. YOUR VOTE IS VERY IMPORTANT.
On behalf of the Board, I urge you to be represented in person or by proxy at
this meeting, regardless of the number of shares you own. Please complete, sign,
date and return the enclosed proxy card as soon as possible. This action will
not limit your right to vote in person at the meeting if you wish to do so.
ON BEHALF OF YOUR BOARD OF DIRECTORS, I THANK YOU FOR YOUR SUPPORT AND URGE YOU
TO VOTE "FOR" APPROVAL OF THE MERGER AND THE RELATED MERGER AGREEMENT.
This Joint Proxy Statement/Prospectus provides you with detailed information
about the proposed merger. In addition, you may obtain information about
Chesapeake and Hugoton from documents filed with the Securities and Exchange
Commission. I encourage you to read this entire document carefully before you
decide how you wish to vote.
Aubrey K. McClendon
Chairman of the Board and
Chief Executive Officer
SEE "RISK FACTORS" BEGINNING ON PAGE 11 FOR A DISCUSSION OF CERTAIN MATTERS
WHICH SHOULD BE CONSIDERED BY CHESAPEAKE SHAREHOLDERS WITH RESPECT TO THE
MERGER.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
REGULATORS HAVE APPROVED THE CHESAPEAKE COMMON STOCK TO BE ISSUED IN THE MERGER
OR DETERMINED IF THIS JOINT PROXY STATEMENT/PROSPECTUS IS ACCURATE OR ADEQUATE.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Joint Proxy Statement/Prospectus dated February , 1998, and first mailed to
Chesapeake shareholders on February 17, 1998.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE> 5
CHESAPEAKE ENERGY CORPORATION
6100 NORTH WESTERN AVENUE
OKLAHOMA CITY, OKLAHOMA 73118
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON MARCH 10, 1998
To the Shareholders of Chesapeake Energy Corporation:
A Special Meeting of the holders of common stock of Chesapeake Energy
Corporation, an Oklahoma corporation ("Chesapeake"), will be held at 10:00 a.m.
local time, on Tuesday, March 10, 1998 at 6100 North Western Avenue, Oklahoma
City, Oklahoma 73118. At the Special Meeting, the holders of common stock of
Chesapeake will:
1. Consider and vote upon a proposal to approve and adopt the Agreement
and Plan of Merger, dated as of November 12, 1997, as amended by
Amendment No. 1 thereto, dated as of February 9, 1998 (the "Merger
Agreement"), among Chesapeake, Chesapeake Acquisition Corp., a
Kansas corporation and an indirect wholly owned subsidiary of
Chesapeake ("Sub"), and Hugoton Energy Corporation, a Kansas
corporation ("Hugoton"), relating to the merger (the "Merger") of
Sub with and into Hugoton, with Hugoton surviving the Merger and, in
connection therewith, to approve the issuance of 1.3 shares of
common stock, par value $0.01 per share, of Chesapeake for each
share of Hugoton common stock, no par value. A description of the
Merger and the Merger Agreement is contained in the accompanying
Joint Proxy Statement/Prospectus, which includes a copy of the
Merger Agreement; and
2. Transact such other business as may properly come before the Special
Meeting or any adjournments thereof.
The Board of Directors has fixed the close of business on February 18, 1998
as the record date for determining which shareholders are entitled to notice of,
and to vote at, the Special Meeting or any adjournments thereof. Complete lists
of such shareholders will be available for examination at the offices of
Chesapeake during normal business hours by any holder of Chesapeake's common
stock, for any purpose relevant to the Special Meeting, for a period of 10 days
prior to the Special Meeting.
THE BOARD OF DIRECTORS OF CHESAPEAKE UNANIMOUSLY RECOMMENDS THAT YOU VOTE
FOR THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT. The affirmative vote of
the holders of the majority of the outstanding shares of Chesapeake common stock
is required to approve and adopt the Merger Agreement and the Merger.
IF YOU DO NOT SEND IN YOUR PROXY OR VOTE AT THE SPECIAL MEETING, IT WILL
HAVE THE SAME EFFECT AS IF YOU VOTED AGAINST THE MERGER.
Holders of Chesapeake common stock, even if they expect to be present at
the Special Meeting, are requested to sign, vote and date the enclosed proxy and
return it promptly in the enclosed envelope. Any shareholder giving a proxy has
the power to revoke it any time prior to the Special Meeting. Shareholders who
are present at the Special Meeting may withdraw their proxies and vote in
person.
By Order of the Board of Directors,
Janice A. Dobbs
Corporate Secretary
February , 1998
<PAGE> 6
TABLE OF CONTENTS
<TABLE>
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QUESTIONS AND ANSWERS ABOUT THE MERGER FOR HUGOTON
SHAREHOLDERS.................................... 1
QUESTIONS AND ANSWERS ABOUT THE MERGER FOR
CHESAPEAKE SHAREHOLDERS......................... 2
SUMMARY........................................... 3
SELECTED HISTORICAL FINANCIAL DATA................ 8
COMPARATIVE PER SHARE DATA........................ 10
RISK FACTORS
Fixed Merger Consideration Despite Potential
Changes in Stock Prices......................... 11
Integration of Operations......................... 11
Stock Ownership in Chesapeake..................... 11
Louisiana Trend -- Concentration of Unevaluated
Leasehold, Poor Drilling Results in 1997,
Impairment of Asset Value....................... 11
Need to Replace Reserves; Substantial Capital
Requirements.................................... 12
Patent and Securities Litigation.................. 12
Reliance on Key Personnel; Control by Certain
Shareholders.................................... 13
Interests of Certain Persons in the Merger........ 14
INFORMATION REGARDING RECENT AND PENDING
ACQUISITIONS BY CHESAPEAKE...................... 15
THE MERGER
General........................................... 16
Background of the Merger.......................... 16
Reasons for the Merger; Recommendations of Boards
of Directors.................................... 19
Opinions of Financial Advisors.................... 21
Forward-Looking Statements May Prove Inaccurate... 33
Accounting Treatment.............................. 33
Certain Material U.S. Federal Income Tax
Consequences.................................... 33
Regulatory Matters; Certain Legal Matters......... 34
No Appraisal Rights............................... 35
Federal Securities Laws Consequences; Resale
Restrictions.................................... 35
COMPARATIVE PER SHARE MARKET PRICE AND DIVIDEND
INFORMATION..................................... 36
INTERESTS OF CERTAIN PERSONS IN THE MERGER AND
RELATED MATTERS
Employment Agreements............................. 37
Option Agreements................................. 38
Severance Plan.................................... 38
401K Plan......................................... 38
Registration Rights Agreement..................... 38
Proxy Agreements.................................. 38
Affiliate Letters................................. 38
Data Room Bonuses................................. 39
THE MERGER AGREEMENT
Structure; Effective Time......................... 39
Merger Consideration.............................. 39
Employee Stock Options............................ 39
Conversion of Shares.............................. 39
Certain Covenants................................. 40
Certain Representations and Warranties............ 41
Conditions to the Merger.......................... 42
Termination of the Merger Agreement............... 43
Amendments........................................ 44
HUGOTON SPECIAL MEETING
Time and Place; Purpose........................... 44
Record Date; Voting Rights and Proxies............ 44
Solicitation of Proxies........................... 44
Quorum............................................ 45
Required Vote, Failure to Vote and Broker
Non-Votes....................................... 45
CHESAPEAKE SPECIAL MEETING
Time and Place; Purpose........................... 46
Record Date; Voting Rights and Proxies............ 46
Solicitation of Proxies........................... 46
Quorum............................................ 47
Required Vote, Failure to Vote and Broker
Non-Votes....................................... 47
DIRECTORS AND OFFICERS OF CHESAPEAKE FOLLOWING THE
MERGER.......................................... 47
BUSINESS OF HUGOTON............................... 48
BUSINESS OF CHESAPEAKE............................ 48
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS,
DIRECTORS AND EXECUTIVE OFFICERS................ 49
COMPARISON OF SHAREHOLDER RIGHTS
General........................................... 53
Comparison of Current Hugoton Shareholder Rights
and Rights of Chesapeake Shareholders Following
the Merger...................................... 53
DESCRIPTION OF CHESAPEAKE CAPITAL STOCK
Authorized Capital Stock.......................... 57
Common Stock...................................... 57
Preferred Stock................................... 57
Transfer Agent and Registrar...................... 57
Stock Exchange Listing; Delisting and
Deregistration of Hugoton Common Stock.......... 57
LEGAL MATTERS..................................... 58
EXPERTS........................................... 58
FUTURE SHAREHOLDER PROPOSALS...................... 58
WHERE YOU CAN FIND MORE
INFORMATION..................................... 58
INDEX TO PRO FORMA FINANCIAL STATEMENTS........... F-1
LIST OF ANNEXES
ANNEX A -- Agreement and Plan of Merger, as
modified by Amendment No. 1 thereto
ANNEX B -- Opinion of Petrie Parkman & Co., Inc.
ANNEX C -- Opinion of Bear, Stearns & Co. Inc.
</TABLE>
i
<PAGE> 7
QUESTIONS AND ANSWERS ABOUT THE MERGER
FOR HUGOTON SHAREHOLDERS
Q: WHY IS HUGOTON PROPOSING THE MERGER?
A: The merger provides Hugoton shareholders with both fair value for their
investment in the company and the opportunity to benefit, as shareholders of
Chesapeake, from the diversity of Chesapeake's combined exploration and
development opportunities, financial strength and technological expertise.
Q: WHAT DO I NEED TO DO NOW?
A: Please mail your signed proxy card in the enclosed return envelope as soon as
possible, so that your shares may be represented at the Hugoton special meeting.
In addition, you may attend and vote at the Hugoton special meeting in person,
whether or not you have signed and mailed your proxy card.
Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A: No. If the merger is completed, we will send Hugoton shareholders written
instructions for exchanging their share certificates. Chesapeake shareholders
will keep their certificates.
Q: WHAT DO I DO IF I WANT TO CHANGE MY VOTE?
A: Just send in a later-dated, signed proxy card before the Hugoton Special
Meeting or attend the meeting in person and vote.
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY
SHARES FOR ME?
A: Your broker will vote your shares only if you provide instructions on how to
vote. You should instruct your broker to vote your shares, following the
directions provided by your broker. Without instructions, your shares will not
be voted.
Q: PLEASE EXPLAIN WHAT I WILL RECEIVE IN THE MERGER.
A: If the merger is completed, Hugoton shareholders will receive 1.3 shares of
Chesapeake common stock in exchange for each share of Hugoton common stock they
own.
Example:
- If you currently own 1,000 shares of Hugoton common stock, then after the
merger you will receive 1,300 shares of Chesapeake common stock. The
value of the Chesapeake common stock that you will receive depends upon
the price of Chesapeake common stock immediately after the merger.
- On , 1998 (the most recent date for which prices are
available prior to the distribution of this Joint Proxy
Statement/Prospectus), the respective closing prices of Hugoton common
stock on the NASDAQ National Market and Chesapeake common stock on the
New York Stock Exchange were as follows:
Hugoton $
Chesapeake $
Applying the 1.3:1 exchange ratio, on that date, each holder of Hugoton
common stock would be entitled to receive Chesapeake common stock with a
market value of approximately $ for each share of Hugoton common
stock. However, the market prices for Hugoton and Chesapeake common stock
are likely to change between now and the merger. You are urged to obtain
current price quotes for Hugoton and Chesapeake common stock.
Chesapeake will not issue fractional shares. Instead, you will receive cash for
any fractional shares of Chesapeake common stock owed to you based on the net
proceeds received from the sale on the New York Stock Exchange of the number of
shares of Chesapeake common stock representing such fractional shares.
Q: WILL I OWE ANY FEDERAL INCOME TAX AS A RESULT OF THE MERGER?
A: No, unless you receive cash for fractional Chesapeake shares. Each Hugoton
shareholder will have to pay tax on the difference, if any, between the cash
received for fractional shares and such shareholder's adjusted tax basis in the
shareholder's fractional share interest. The exchange of shares by Hugoton
shareholders will be otherwise tax-free to Hugoton shareholders for federal
income tax purposes.
Q: WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED?
A: Hugoton and Chesapeake are working toward completing the merger as quickly as
possible. Both Hugoton and Chesapeake shareholders must approve the merger. We
hope to complete the merger by March 11, 1998.
Q: WHAT HAPPENS TO MY FUTURE DIVIDENDS?
A: We expect no changes in Hugoton's or Chesapeake's dividend policies before
the merger. The payment of dividends by Chesapeake in the future will depend on
business conditions, its financial condition and earnings, and other factors.
Q: WHOM SHOULD I CALL WITH QUESTIONS?
A: If you have any questions about the merger, please call W. Mark Womble at
(316) 262-1522.
<PAGE> 8
QUESTIONS AND ANSWERS ABOUT THE MERGER
FOR
CHESAPEAKE SHAREHOLDERS
Q: WHY IS CHESAPEAKE PROPOSING THE MERGER?
A: The proposed merger will combine Chesapeake's existing properties in
Louisiana, Oklahoma, Texas, New Mexico, Montana, North Dakota and Canada with
Hugoton's assets located in Kansas, Oklahoma, Texas, New Mexico, Louisiana,
Montana and North Dakota, providing Chesapeake shareholders with an opportunity
to benefit from the combination of Chesapeake's exploration program and
Hugoton's stable base of oil and gas production.
Q: WHAT DO I NEED TO DO NOW?
A: Please mail your signed proxy card in the enclosed return envelope as soon as
possible, so that your shares may be represented at the Chesapeake special
meeting. In addition, you may attend and vote at the Chesapeake special meeting
in person, whether or not you have signed and mailed your proxy card. Do not
send in your stock certificates -- Chesapeake's shareholders are not exchanging
their shares.
Q: WHY IS A VOTE OF CHESAPEAKE'S SHAREHOLDERS REQUIRED?
A: A vote of Chesapeake's shareholders is required because more than 20% of
Chesapeake's shares of common stock will be used in the merger. Oklahoma law and
certain rules of the New York Stock Exchange (on which Chesapeake common stock
is listed for trading) require such a vote.
Q: WHAT DO I DO IF I WANT TO CHANGE MY VOTE?
A: Just send in a later-dated, signed proxy card before the Chesapeake special
meeting or attend the meeting in person and vote.
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY
SHARES FOR ME?
A: Your broker will vote your shares only if you provide instructions on how to
vote. You should instruct your broker to vote your shares, following the
directions provided by your broker. Without instructions, your shares will not
be voted.
Q: WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED?
A: Hugoton and Chesapeake are working toward completing the merger as quickly as
possible. Both Hugoton and Chesapeake shareholders must approve the merger. We
hope to complete the merger by March 11, 1998.
Q: WHAT HAPPENS TO MY FUTURE DIVIDENDS?
A: We expect no changes in Hugoton's or Chesapeake's dividend policies before
the merger. The payment of dividends by Chesapeake in the future will depend on
business conditions, its financial condition and earnings, and other factors.
Q: WHOM SHOULD I CALL WITH QUESTIONS?
A: If you have any questions about the merger, please call Chesapeake Investor
Relations, at (405) 848-8000, extension 257.
2
<PAGE> 9
SUMMARY
This summary highlights selected information from this Joint Proxy
Statement/Prospectus and may not contain all of the information that is
important to you. To understand the merger fully and for a more complete
description of the legal terms of the merger, you should read carefully this
entire document and the documents to which we have referred you. See "Where You
Can Find More Information" on page 58. We have included page references in
parentheses to direct you to a more complete description of the topics presented
in this summary.
THE COMPANIES
HUGOTON ENERGY CORPORATION
301 North Main, Suite 1900
Wichita, Kansas 67202
Telephone: (316) 262-1522
Hugoton is an independent oil and gas company engaged in the exploration,
production, development and acquisition of oil and natural gas, principally in
Kansas, Oklahoma and Texas.
CHESAPEAKE ENERGY CORPORATION
6100 North Western Avenue
Oklahoma City, Oklahoma 73118
Telephone: (405) 848-8000
Chesapeake is an independent oil and gas company engaged in the exploration,
production, development and acquisition of oil and natural gas in major onshore
producing areas of the United States and Canada.
REASONS FOR THE MERGER
Hugoton. The Hugoton Board unanimously believes that Hugoton's shareholders will
benefit from the combined company's financial and operational resources,
experience, flexibility, diverse properties and ability to take advantage of
strategic opportunities. In reaching its conclusion to approve the merger and
the related merger agreement and recommend that Hugoton shareholders approve
them, the Board considered and analyzed a number of factors which are summarized
under "Hugoton's Reasons for the Merger; Recommendation of Hugoton Board" that
begins on page 19.
Chesapeake. The Chesapeake Board unanimously believes that the merger provides
Chesapeake shareholders with an opportunity to benefit from the combination of
Chesapeake's exploration program and Hugoton's stable base of oil and gas
production primarily in Kansas, Oklahoma and Texas. In reaching its conclusion
to approve the merger, the related merger agreement and the issuance of
Chesapeake common stock in exchange for Hugoton common stock and to recommend
that Chesapeake shareholders approve the same, the Board considered and analyzed
a number of factors which are summarized under "Chesapeake's Reasons for the
Merger; Recommendation of Chesapeake Board" that begins on page 20.
TIME AND LOCATION OF SPECIAL MEETINGS
Hugoton. The Hugoton special meeting will be held at 10:00 a.m. on March 10,
1998. At the Hugoton special meeting, Hugoton shareholders will be asked to
approve the merger and the related merger agreement. The Hugoton special meeting
will be held at 301 North Main, Suite 1900, Wichita, Kansas 67202.
Chesapeake. The Chesapeake special meeting will be held at 10:00 a.m. on March
10, 1998. At the Chesapeake special meeting, shareholders will be asked to
approve the merger, the related merger agreement and the issuance of Chesapeake
common stock in exchange for Hugoton common stock. The Chesapeake special
meeting will be held at 6100 North Western Avenue, Oklahoma City, Oklahoma
73118.
BOARD RECOMMENDATIONS TO SHAREHOLDERS
Hugoton. THE HUGOTON BOARD OF DIRECTORS BELIEVES THAT THE MERGER IS IN YOUR BEST
INTERESTS AND UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" APPROVAL OF THE MERGER
AND THE RELATED MERGER AGREEMENT.
Chesapeake. THE CHESAPEAKE BOARD OF DIRECTORS BELIEVES THAT THE MERGER IS IN
YOUR BEST INTERESTS AND UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" APPROVAL OF
THE MERGER, THE RELATED MERGER AGREEMENT AND THE ISSUANCE OF CHESAPEAKE COMMON
STOCK IN EXCHANGE FOR HUGOTON COMMON STOCK.
RECORD DATE; VOTING POWER
Hugoton. You are entitled to vote at the Hugoton special meeting if you owned
shares as of the close of business on February 18, 1998, the Hugoton record
date.
3
<PAGE> 10
On the Hugoton record date, there were 19,838,574 shares of Hugoton common stock
entitled to vote at the special meeting. There were approximately 81 holders of
record on the Hugoton record date. Hugoton shareholders will have one vote at
the Hugoton special meeting for each share of Hugoton common stock they own on
the Hugoton record date.
Chesapeake. You are entitled to vote at the Chesapeake special meeting if you
owned shares as of the close of business on February 18, 1998, the Chesapeake
record date.
On the Chesapeake record date, there were 74,304,811 shares of Chesapeake common
stock entitled to vote at the Chesapeake special meeting. There were
approximately 575 holders of record on the Chesapeake record date. Chesapeake
shareholders will have one vote at the Chesapeake special meeting for each share
of Chesapeake common stock they own on the Chesapeake record date.
SHAREHOLDER VOTE REQUIRED TO APPROVE THE MERGER
Hugoton. The favorable vote of the holders of a majority of the outstanding
shares of Hugoton common stock is required to approve the merger and the related
merger agreement. Your failure to vote will have the effect of a vote against
the merger.
Chesapeake. The favorable vote of the holders of a majority of the outstanding
shares of Chesapeake common stock is required to approve the merger, the related
merger agreement and the issuance of Chesapeake common stock in exchange for
Hugoton common stock. Your failure to vote will have the effect of a vote
against the merger.
SHARE OWNERSHIP OF HUGOTON MANAGEMENT AND CERTAIN HUGOTON SHAREHOLDERS
On February 6, 1998, Hugoton directors, executive officers and their affiliates
owned and were entitled to vote 9,442,102 shares of Hugoton common stock, or
approximately 47.6% of the shares of Hugoton common stock outstanding on that
date.
Directors and executive officers of Hugoton (and their affiliates) owning 45.9%
of outstanding shares of Hugoton common stock have granted proxies to Chesapeake
to vote their shares in favor of the merger at the Hugoton special meeting. The
directors and executive officers of Hugoton have indicated that they intend to
vote the Hugoton common stock owned by them "FOR" approval of the merger and the
related merger agreement.
SHARE OWNERSHIP OF CHESAPEAKE MANAGEMENT AND CERTAIN CHESAPEAKE SHAREHOLDERS
On February 6, 1998, Chesapeake directors, executive officers and their
affiliates owned and were entitled to vote 28,048,015 shares of Chesapeake
common stock, or approximately 36% of the shares of Chesapeake common stock
outstanding on that date.
Directors and executive officers of Chesapeake (and their affiliates) owning
approximately 33% of outstanding Chesapeake common stock have executed proxies
granting Hugoton the power to vote their shares in favor of the merger at the
Chesapeake special meeting. The remaining directors and executive officers of
Chesapeake have indicated that they intend to vote the Chesapeake common stock
owned by them "for" approval of the merger and the related merger agreement.
THE MERGER
The merger agreement, as amended, (a copy of which is included as Annex A) is
attached at the back of this Joint Proxy Statement/Prospectus. We encourage you
to read this agreement, as it is the legal document that governs the merger.
WHAT HUGOTON SHAREHOLDERS WILL RECEIVE IN THE MERGER (SEE PAGE 39)
If both Hugoton's and Chesapeake's shareholders approve the merger and the
merger is completed, Hugoton shareholders will have the right to receive 1.3
shares of Chesapeake common stock in exchange for each share of Hugoton common
stock they own.
Chesapeake will not issue fractional shares. Instead, Hugoton shareholders will
receive cash for any fractional shares of Chesapeake common stock owed to them
based on the net proceeds received from the sale on the New York Stock Exchange
of the number of shares of Chesapeake common stock representing such fractional
shares.
Hugoton and Chesapeake hope to complete the merger shortly after the date of the
Hugoton and Chesapeake special meetings and after obtaining the necessary
regulatory approvals.
4
<PAGE> 11
Hugoton shareholders should not send their stock certificates for exchange until
instructed to do so.
WHAT CURRENT CHESAPEAKE SHAREHOLDERS WILL HOLD AFTER THE MERGER
Chesapeake shareholders will continue to own their existing shares after the
merger. Chesapeake shareholders should not send in their stock certificates in
connection with the merger.
OWNERSHIP OF CHESAPEAKE AFTER THE MERGER
In the merger, Hugoton shareholders will receive 1.3 shares of Chesapeake common
stock for each share of Hugoton common stock. We estimate that the shares of
Chesapeake common stock to be issued to Hugoton shareholders would represent
approximately 26% of the outstanding Chesapeake common stock immediately after
the merger.
Chesapeake has agreed to acquire for cash and stock DLB Oil & Gas, Inc. If that
transaction occurs, we estimate that the shares of Chesapeake common stock to be
issued to Hugoton shareholders would represent approximately 24.5% of the
outstanding Chesapeake common stock and the current shareholders of Chesapeake
will retain ownership of approximately 71% of the combined company.
DIRECTORS AND OFFICERS OF THE COMBINED COMPANY FOLLOWING THE MERGER
We do not anticipate that the directors or officers of Chesapeake will change as
a result of the merger.
INTERESTS OF HUGOTON'S OFFICERS AND DIRECTORS IN THE MERGER (SEE PAGE 37)
When considering the recommendation by the Hugoton Board that Hugoton
shareholders vote "for" approval of the merger and the related merger agreement,
you should be aware that Hugoton directors and certain officers have agreements,
stock options and other benefit plans that may provide them with interests in
the merger that are different from, and in addition to, yours. The Board of
Hugoton was aware of these interests and considered them in approving the merger
and the related merger agreement.
CONDITIONS TO THE MERGER (SEE PAGE 42)
The merger will be completed if certain conditions, including the following, are
met:
(1) the approval of Hugoton shareholders of the merger and the related
merger agreement;
(2) the approval of Chesapeake shareholders of the merger, the related
merger agreement and the issuance of Chesapeake common stock in
exchange for Hugoton common stock;
(3) the increase to 250,000,000 shares of authorized Chesapeake common
stock. This increase was approved at the 1997 annual shareholders'
meeting held on December 12, 1997;
(4) the absence of legal restraints or prohibitions that prevent the
completion of the merger;
(5) the receipt of legal opinions from Hugoton's special tax counsel and
Chesapeake's special tax counsel regarding the tax-free nature of the
merger;
(6) the performance in all material respects by Hugoton and Chesapeake of
their obligations under the merger agreement;
(7) the representations and warranties of Hugoton and Chesapeake contained
in the merger agreement being true as of the date of the closing of
the merger, or if not true, such failure to be true having no material
adverse effect;
(8) the receipt by Chesapeake of letters from affiliates of Hugoton
acknowledging restrictions on their sales of Chesapeake common stock
received in the merger;
(9) the approval for listing on the New York Stock Exchange of the shares
of Chesapeake common stock to be issued in exchange for Hugoton common
stock;
(10) execution of the Registration Rights Agreement; and
(11) no change (with certain exceptions) having occurred that would have or
would be reasonably likely to have a material adverse effect on
Hugoton or Chesapeake.
5
<PAGE> 12
TERMINATION OF THE MERGER AGREEMENT
(SEE PAGE 43)
The Boards of Directors of Hugoton and Chesapeake may jointly agree in writing
to terminate the merger agreement without completing the merger. The merger
agreement may also be terminated in other circumstances:
(1) Either company may terminate the merger agreement if:
(a) the merger is not completed by April 30, 1998. However, neither Hugoton
nor Chesapeake may terminate the merger agreement if that party's
breach is the reason the merger has not been completed by that time;
(b) the Hugoton shareholders do not approve the merger;
(c) the Chesapeake shareholders do not approve the merger; or
(d) a law or final court order prohibits the merger.
(2) Only Chesapeake may terminate the merger agreement if:
(a) the Hugoton Board of Directors withdraws or modifies its recommendation
in favor of the merger in a manner adverse to Chesapeake or fails to
reaffirm such recommendation if requested by Chesapeake;
(b) Hugoton breaches its representations and warranties contained in the
merger agreement resulting in a material adverse effect on Hugoton and
such failure is not cured within the prescribed time limit;
(c) Hugoton fails to comply in any material respect with its covenants or
agreements contained in the merger agreement and such failure is not
cured within the prescribed time limit; or
(d) Hugoton solicits alternative acquisition proposals from, negotiates
with, or discloses confidential information to, certain persons in
violation of the merger agreement.
(3) Only Hugoton may terminate the merger agreement if:
(a) Hugoton's Board of Directors determines in good faith that its
fiduciary obligations require the acceptance of an offer or proposal of
another transaction the consummation of which would have results more
favorable to Hugoton's shareholders from a financial point of view than
the transaction contemplated by the merger agreement;
(b) Chesapeake fails to comply in any material respect with its covenants
or agreements contained in the merger agreement and such failure is not
cured within the prescribed time limit; or
(c) Chesapeake breaches its representations and warranties contained in the
merger agreement resulting in a material adverse effect on Chesapeake
and such failure is not cured within the prescribed time limit.
TERMINATION FEE AND EXPENSES (SEE PAGE 43)
Hugoton must pay Chesapeake a termination fee of $8 million in cash if the
merger agreement is terminated in the following circumstances:
- Hugoton solicits alternative acquisition proposals from, negotiates with,
or discloses confidential information to, certain persons in violation of
the merger agreement;
- a new acquisition proposal with respect to Hugoton is announced prior to
the Hugoton special meeting, the shareholders of Hugoton do not approve
the merger, and Hugoton enters into an agreement relating to the new
acquisition proposal within seven months of the termination of the merger
agreement; or
- the Hugoton Board of Directors withdraws or modifies its recommendation
in favor of the merger in a manner adverse to Chesapeake.
REGULATORY APPROVALS (SEE PAGE 34)
Hugoton and Chesapeake both believe that, based on available exemptions, they
are not required to make a filing with United States antitrust authorities or
wait a specified period (typically 30 days, although it may be shorter or longer
in some circumstances) to complete the merger.
FAIRNESS OPINIONS OF FINANCIAL ADVISORS (SEE PAGE 21)
Hugoton's Fairness Opinion. In deciding to approve the merger, Hugoton's Board
of Directors considered, among many factors, an opinion dated No-
6
<PAGE> 13
vember 12, 1997 of Petrie Parkman & Co., Inc. to Hugoton's Board of Directors
that, as of such date and based upon and subject to the matters set forth
therein, the per share consideration to be received by the holders of Hugoton
common stock in the merger was fair from a financial point of view to such
holders. Petrie Parkman subsequently confirmed that opinion in a written opinion
dated the date of this Joint Proxy Statement/Prospectus. A copy of such opinion
is attached as Annex B to this Joint Proxy Statement/Prospectus. We encourage
you to read the opinion carefully before voting on the merger.
Chesapeake's Fairness Opinion. In deciding to approve the merger, Chesapeake's
Board of Directors considered as one of many factors an opinion dated November
12, 1997 from one of its financial advisors, Bear, Stearns & Co. Inc., to
Chesapeake's Board of Directors that, as of that date and based upon and subject
to the matters described in the opinion, the exchange ratio in the merger was
fair to the Chesapeake public shareholders from a financial point of view. A
copy of this opinion is attached as Annex C to this Joint Proxy Statement/
Prospectus. We encourage you to read this opinion carefully before voting on the
merger.
CERTAIN MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES (SEE PAGE 33)
Hugoton and Chesapeake have structured the merger so that neither Hugoton nor
its shareholders will recognize gain or loss for federal income tax purposes as
a result of the merger, except for taxes payable by each Hugoton shareholder on
the difference, if any, between cash received for fractional shares and such
shareholder's adjusted tax basis in the shareholder's fractional share interest.
Hugoton's and Chesapeake's obligation to complete the merger is conditional upon
receipt of a legal opinion from their counsel as to such tax consequences.
Hugoton and Chesapeake may each waive these conditions. In the event of such
waiver, approval of the Hugoton shareholders would be resolicited.
TAX MATTERS ARE VERY COMPLICATED AND THE TAX CONSEQUENCES OF THE MERGER TO YOU
WILL DEPEND ON THE FACTS OF YOUR OWN SITUATION. YOU SHOULD CONSULT WITH YOUR TAX
ADVISORS FOR A FULL UNDERSTANDING OF THE TAX CONSEQUENCES OF THE MERGER TO YOU.
NO APPRAISAL RIGHTS (SEE PAGE 35)
Under Kansas law, Hugoton shareholders do not have any right to an appraisal of
the value of their shares in connection with the merger.
COMPARATIVE PER SHARE MARKET PRICE INFORMATION (SEE PAGE 36)
Hugoton. Hugoton common stock is listed for quotation on the NASDAQ National
Market. On November 12, 1997, the last full trading day prior to the public
announcement of the proposed merger, Hugoton common stock closed at $12.50 per
share. On February 6, 1998, Hugoton common stock closed at $7.75 per share.
Chesapeake. Chesapeake common stock is listed for trading on the New York Stock
Exchange. On November 12, 1997, the last full trading day prior to the public
announcement of the proposed merger, Chesapeake common stock closed at $10.25
per share. On February 6, 1998, Chesapeake common stock closed at $6.00 per
share.
LISTING OF CHESAPEAKE COMMON STOCK
Chesapeake will list the shares of its common stock to be issued in the merger
on the New York Stock Exchange.
FORWARD-LOOKING STATEMENTS (SEE PAGE 33)
This document (and the documents that are incorporated by reference in this
document) includes forward-looking statements about Hugoton, Chesapeake and the
combined company that will result from the merger. These forward-looking
statements are subject to risks and uncertainties, and include information
concerning future results of operations of Hugoton, Chesapeake and the combined
company. Also, statements including the words "expects," "anticipates,"
"intends," "plans," "believes," "estimates," "should," "could," "predict" or
similar expressions are forward-looking statements. Both Chesapeake and Hugoton
shareholders should note that many factors, some of which are discussed at other
places in this document and in the documents that are incorporated by reference,
could affect the future financial results of Hugoton, Chesapeake and the
combined company and could cause actual results to differ materially from those
expressed in forward-looking statements contained or incorporated by reference
in this document. These factors are described on page 33 and in the documents of
Chesapeake and Hugoton incorporated by reference in this document.
7
<PAGE> 14
SELECTED HISTORICAL FINANCIAL DATA
CHESAPEAKE SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following table sets forth, for the periods indicated, selected
financial data for Chesapeake. The selected financial data should be read in
conjunction with Chesapeake's financial statements and the notes thereto
incorporated by reference in this Joint Proxy Statement/Prospectus. See "Where
You Can Find More Information" on page 58. This information should not be
considered indicative of future operating results of Chesapeake.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED JUNE 30,
-------------------- -------------------------------------------------------
1997 1996 1997 1996 1995 1994 1993
--------- -------- --------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Oil and gas sales..................... $ 45,667 $ 36,753 $ 192,920 $ 110,849 $ 56,983 $ 22,404 $ 11,602
Oil and gas marketing sales........... 26,865 12,184 76,172 28,428 -- -- --
Oil and gas service operations........ -- -- -- 6,314 8,836 6,439 5,526
Interest and other.................... 5,878 848 11,223 3,831 1,524 981 880
--------- -------- --------- --------- --------- -------- --------
Total revenues.................... 78,410 49,785 280,315 149,422 67,343 29,824 18,008
--------- -------- --------- --------- --------- -------- --------
Costs and expenses:
Production expenses and taxes......... 5,180 2,530 15,107 8,303 4,256 3,647 2,890
Oil and gas marketing expenses........ 26,690 11,866 75,140 27,452 -- -- --
Oil and gas service operations........ -- -- -- 4,895 7,747 5,199 3,653
Impairment of oil and gas
properties.......................... -- -- 236,000 -- -- -- --
Oil and gas depreciation, depletion
and amortization.................... 28,550 17,029 103,264 50,899 25,410 8,141 4,184
Depreciation and amortization of other
assets.............................. 1,142 952 3,782 3,157 1,765 1,871 557
General and administrative............ 2,760 1,671 8,802 4,828 3,578 3,135 3,620
Provision for legal and other
settlements......................... -- -- -- -- -- -- 1,286
Interest and other.................... 8,575 2,817 18,550 13,679 6,627 2,676 2,282
--------- -------- --------- --------- --------- -------- --------
Total costs and expenses.......... 72,897 36,865 460,645 113,213 49,383 24,669 18,472
--------- -------- --------- --------- --------- -------- --------
Income (loss) before income taxes and
extraordinary item.................... 5,513 12,920 (180,330) 36,209 17,960 5,155 (464)
Provision (benefit) for income taxes.... -- 4,716 (3,573) 12,854 6,299 1,250 (99)
--------- -------- --------- --------- --------- -------- --------
Income (loss) before extraordinary
item.................................. 5,513 8,204 (176,757) 23,355 11,661 3,905 (365)
Extraordinary item:
Loss on early extinguishment of debt,
net of applicable income taxes of
$3,804.............................. -- -- (6,620) -- -- -- --
--------- -------- --------- --------- --------- -------- --------
Net income (loss)....................... $ 5,513 $ 8,204 $(183,377) $ 23,355 $ 11,661 $ 3,905 $ (365)
========= ======== ========= ========= ========= ======== ========
Earnings (loss) per common and common
equivalent share:
Income (loss) before extraordinary
item................................ $ 0.08 $ 0.13 $ (2.69) $ 0.40 $ 0.21 $ 0.08 $ (0.02)
Extraordinary item.................... -- -- (0.10) -- -- -- --
--------- -------- --------- --------- --------- -------- --------
Net income (loss) per common share.... $ 0.08 $ 0.13 $ (2.79) $ 0.40 $ 0.21 $ 0.08 $ (0.02)
========= ======== ========= ========= ========= ======== ========
CASH FLOW DATA:
Cash provided by (used in) operating
activities............................ $ 42,624 $ 25,953 $ 84,089 $ 120,972 $ 54,731 $ 19,423 $ (1,499)
Cash used in investing activities....... 114,265 83,123 523,854 344,389 112,703 29,211 15,142
Cash provided by (used in) financing
activities............................ (1,194) 7,976 512,144 219,520 97,282 21,162 20,802
BALANCE SHEET DATA (at the end of period):
Total assets............................ $ 931,669 $595,551 $ 949,068 $ 572,335 $ 276,693 $125,690 $ 78,707
Long-term debt, net of current
maturities............................ 508,971 277,323 508,950 268,431 145,754 47,878 14,051
Shareholders' equity.................... 291,208 186,657 286,889 177,767 44,975 31,260 31,432
</TABLE>
8
<PAGE> 15
HUGOTON SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following table sets forth, for the periods indicated, selected
financial data for Hugoton. The selected financial data should be read in
conjunction with Hugoton's financial statements and the notes thereto
incorporated by reference in this Joint Proxy Statement/Prospectus. See "Where
You Can Find More Information" on page 58. This information should not be
considered indicative of future operating results of Hugoton.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------- ----------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Oil and gas........................... $ 57,618 $ 46,211 $ 66,292 $ 35,906 $ 23,696 $ 17,349 $ 6,731
Gas plant............................. 923 1,384 1,914 1,638 1,945 1,172 2,177
Other(1).............................. (103) 10 10 (3,315) (11) 16 547
-------- -------- -------- -------- -------- -------- --------
Total revenues.................... 58,438 47,605 68,216 34,229 25,630 18,537 9,455
-------- -------- -------- -------- -------- -------- --------
Expenses:
Production............................ 18,816 16,477 21,667 11,570 7,528 7,178 4,671
Gas plant............................. 775 1,046 1,420 978 1,189 934 1,320
Exploration........................... 3,304 1,034 1,711 2,239 3,036 587 137
General and administrative............ 7,361 4,876 6,872 4,346 3,117 1,883 1,761
Compensatory stock option
expense(2).......................... -- -- -- -- -- 3,289 --
Depreciation, depletion and
amortization........................ 24,590 18,207 23,423 15,234 8,677 5,582 1,452
-------- -------- -------- -------- -------- -------- --------
Total expenses.................... 54,846 41,640 55,093 34,367 23,547 19,453 9,341
-------- -------- -------- -------- -------- -------- --------
Operating income (loss)................. 3,592 5,965 13,123 (138) 2,083 (916) 114
Other income (expenses):
Interest.............................. (4,884) (4,542) (6,070) (5,108) (3,077) (2,371) (502)
Other................................. 151 94 466 319 252 199 44
-------- -------- -------- -------- -------- -------- --------
Total other income (expenses)..... (4,733) (4,448) (5,604) (4,789) (2,825) (2,172) (458)
-------- -------- -------- -------- -------- -------- --------
Income (loss) before income taxes and
extraordinary item.................... (1,141) 1,517 7,519 (4,927) (742) (3,088) (344)
(Provision) benefit for income taxes.... 200 (576) (3,316) 1,394 66 582 (86)
-------- -------- -------- -------- -------- -------- --------
Income (loss) before extraordinary
item.................................. (941) 941 4,203 (3,533) (676) (2,506) (430)
Extraordinary item-loss from early
extinguishment of debt, net of tax.... -- -- -- (136) -- -- --
-------- -------- -------- -------- -------- -------- --------
Net income (loss)................. $ (941) $ 941 $ 4,203 $ (3,669) $ (676) $ (2,506) $ (430)
======== ======== ======== ======== ======== ======== ========
Net income (loss) per common share.... $ (0.05) $ 0.05 $ 0.21 $ (0.27) $ (0.07) $ (0.41) $ (0.09)
======== ======== ======== ======== ======== ======== ========
Weighted average number of common shares
outstanding........................... 19,795 19,697 19,698 13,460 10,310 6,071 5,000
CASH FLOW DATA:
Net cash provided by operating
activities............................ $ 26,900 $ 18,436 $ 29,484 $ 11,367 $ 10,431 $ 5,931 $ 1,928
Net cash (used) in investing
activities............................ (41,145) (26,247) (36,706) (36,869) (39,116) (78,765) (3,685)
Net cash provided by financing
activities............................ 10,999 7,000 7,040 27,750 28,683 73,755 1,865
BALANCE SHEET DATA (at end of period):
Working capital (deficit)............... $ 2,548 $ 7,418 $ 8,545 $ 6,083 $ 11,551 $ 1,732 $ (2,234)
Property and equipment, net............. 248,853 225,782 232,778 217,635 96,436 78,842 12,342
Total assets............................ 261,790 251,929 251,929 234,655 116,634 88,329 16,309
Long-term debt.......................... 105,000 95,000 95,000 88,000 60,000 62,500 9,062
Total shareholders' equity.............. 131,660 131,527 131,527 127,324 50,225 19,995 1,184
</TABLE>
- ---------------
(1) The year ended December 31, 1995 includes a charge of $2.7 million relating
to Hugoton's natural gas hedging activities resulting from a loss of basis
correlation for certain contracts.
(2) Reflects a non-cash charge for compensatory stock options granted to certain
employees that have been or will be satisfied by Hugoton's Chairman of the
Board, President and Chief Executive Officer.
9
<PAGE> 16
COMPARATIVE PER SHARE DATA
(UNAUDITED)
The following table summarizes the per share information for Chesapeake and
Hugoton on a historical, pro forma combined, and equivalent pro forma combined
basis. The pro forma information gives effect to the merger accounted for by
Chesapeake as a purchase business combination. You should read this information
together with the historical financial statements (and related notes) included
in the annual reports on Form 10-K and other information that each of Chesapeake
and Hugoton has filed with the Securities and Exchange Commission. See "Where
You Can Find More Information" on page 58. You should not rely on the pro forma
combined information as being indicative of the results that would have been
achieved had the companies been combined or the future results that the combined
company will experience after the merger.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, JUNE 30,
1997 1997
------------- ----------
<S> <C> <C>
HISTORICAL PER COMMON SHARE-HUGOTON:
Income (loss) from continuing operations(1)............... $(0.11) $ 0.22
Book value(2)............................................. 6.64 6.74
Dividends declared........................................ -- --
EQUIVALENT PRO FORMA COMBINED-PER HUGOTON COMMON SHARE(3):
Income from continuing operations......................... $ 0.07 $(2.52)
Book value................................................ 6.75 6.70
Dividends declared........................................ -- --
HISTORICAL PER COMMON SHARE-CHESAPEAKE(4):
Income (loss) from continuing operations(1)............... $ 0.08 $(2.69)
Book value(2)............................................. 4.14 4.08
Dividends declared........................................ 0.02 0.02
PRO FORMA COMBINED-PER CHESAPEAKE COMMON SHARE(4)(5):
Income (loss) from continuing operations (before
extraordinary items)(1)................................ $ 0.05 $(1.94)
Book value(2)............................................. 5.19 5.15
Dividends declared........................................ 0.02 0.02
</TABLE>
- ---------------
(1) This calculation uses the weighted average number of common shares
outstanding, including common share equivalents, if dilutive.
(2) Computed by dividing shareholders' equity by the number of shares of common
stock outstanding at the end of the period on a historical or pro forma
combined basis.
(3) Amounts are calculated by multiplying the respective unaudited pro forma
combined Chesapeake per share amounts by the exchange ratio of 1.3 shares of
Chesapeake common stock for each share of Hugoton common stock.
(4) Adjusted to reflect Chesapeake's three-for-two stock splits on December 15,
1995 and June 28, 1996 and a two-for-one stock split on December 31, 1996.
(5) Merger-related fees and expenses and termination payments to executives and
employees of Hugoton are estimated to be approximately $15 million. These
charges are not reflected in the pro forma combined statements of income
data and will be capitalized as part of the purchase.
INFORMATION REGARDING PENDING ACQUISITION BY CHESAPEAKE
On October 22, 1997, Chesapeake announced that it had agreed to acquire by
merger the Mid-Continent operations of DLB Oil & Gas, Inc. ("DLB"). Chesapeake
will pay $17.5 million in cash, issue 5,000,000 shares of common stock to the
shareholders of DLB plus incur costs of approximately $5 million to acquire DLB.
The acquisition of DLB is subject to shareholder approval and is expected to
close in March 1998. Shareholders of DLB owning approximately 78% of the
outstanding shares of DLB have granted to Chesapeake proxies to vote their
shares in favor of the merger of Chesapeake and DLB. Accordingly, the approval
of such merger is currently assured.
10
<PAGE> 17
RISK FACTORS
In addition to the other information included and incorporated by reference
in this Joint Proxy Statement/Prospectus (including the matters addressed in
"The Merger -- Forward-Looking Statements May Prove Inaccurate" on page 33), the
following risk factors should be considered carefully by Hugoton and Chesapeake
shareholders in determining whether to vote to approve the merger and the
related merger agreement and in the case of Chesapeake, the issuance of the
shares of Chesapeake common stock in exchange for Hugoton common stock.
FIXED MERGER CONSIDERATION DESPITE POTENTIAL CHANGES IN STOCK PRICES
Upon completion of the merger, each share of Hugoton common stock will be
converted into the right to receive 1.3 shares of Chesapeake common stock. This
exchange ratio is a fixed number and will not be adjusted in the event of any
increase or decrease in the price of either Hugoton common stock or Chesapeake
common stock. The prices of Hugoton common stock and Chesapeake common stock
when the merger takes place may vary from their prices at the date of this Joint
Proxy Statement/Prospectus and at the date of the Special Meetings. Such
variations may be the result of changes in the business, operations or prospects
of Hugoton or Chesapeake, market assessments of the likelihood that the merger
will be consummated, the timing thereof and the prospects of Hugoton, Chesapeake
or the combined company, regulatory considerations, general market and economic
conditions and other factors. Because the completion of the merger will occur at
a date later than the Special Meetings, there can be no assurance that the
prices of Hugoton common stock and Chesapeake common stock on the date of the
Special Meetings will be indicative of their respective prices at the completion
of the merger.
Shareholders of Hugoton are urged to obtain current market quotations for
Hugoton common stock and Chesapeake common stock.
INTEGRATION OF OPERATIONS
The merger involves the integration of two companies that have previously
operated independently. The integration of the operations of Chesapeake and
Hugoton will require substantial attention of management. No assurance can be
given that Chesapeake will be able to integrate the operations of Hugoton
without encountering difficulties or experiencing the loss of key Hugoton
employees, customers or suppliers, or that the benefits expected from such
integration will be realized.
STOCK OWNERSHIP IN CHESAPEAKE
Upon completion of the merger, Hugoton shareholders will become
shareholders of Chesapeake. Chesapeake's business is different from that of
Hugoton, and Chesapeake's results of operations, as well as the price of
Chesapeake common stock, will be affected by many factors different than those
affecting Hugoton's results of operations and the price of Hugoton common stock.
See "The Merger -- Forward-Looking Statements May Prove Inaccurate" on page 33
for a summary of many of the key factors that might affect Chesapeake and the
price at which the Chesapeake common stock may trade from time to time. See also
"Comparative Per Share Market Price and Dividend Information" on page 36 for a
chart depicting the prices at which Hugoton common stock and Chesapeake common
stock have traded in recent periods, and the dividend paid by Hugoton and
Chesapeake during such periods.
LOUISIANA TREND -- CONCENTRATION OF UNEVALUATED LEASEHOLD, POOR DRILLING RESULTS
IN 1997, IMPAIRMENT OF ASSET VALUE
Chesapeake's future performance is dependent on the development of its
existing proved undeveloped reserves and its inventory of unproved drilling
locations, particularly in the Louisiana Trend. As of September 30, 1997,
Chesapeake had an investment in total unevaluated and unproved leasehold of
approximately $131 million, of which approximately $70 million was located in
the Louisiana Trend. Approximately 40%, or $90 million, of Chesapeake's calendar
1998 drilling budget is associated with drilling, construction of production
facilities and seismic activity in the Louisiana Trend, including exploratory
drilling
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<PAGE> 18
in the Austin Chalk and Tuscaloosa formations. Failure of these drilling
activities to achieve anticipated quantities of economically attractive reserves
and production would have a material adverse impact on Chesapeake's liquidity,
operations and financial results and could result in future full-cost ceiling
writedowns. Any full-cost ceiling writedown negatively impacts shareholders'
equity and reported earnings.
Chesapeake reported a full cost ceiling writedown of $236 million in its
fiscal year ended June 30, 1997, a substantial portion of which was caused by
uneconomic drilling results in the Louisiana Trend during fiscal 1997. Beginning
in the quarter ended September 30, 1997, Chesapeake reduced its drilling budget
for the Austin Chalk in the Louisiana Trend overall and concentrated remaining
Austin Chalk drilling activity in the Masters Creek area. In addition,
Chesapeake began to pursue a strategy to replace and expand its oil and gas
reserves through acquisitions as a complement to its historical strategy of
adding reserves through drilling. Chesapeake has also reduced its emphasis on
acquiring unproved leasehold acreage to be developed through exploratory
drilling. While these actions are intended to mitigate the higher risks
associated with a growth strategy based on significant exploratory drilling,
there can be no assurance that this change in strategy will result in enhanced
future economic results or will prevent additional leasehold impairment and/or
full-cost ceiling writedowns. See "Primary Operating Areas" in Item 1.
"Business" of Chesapeake's Form 10-K, as amended, which is incorporated by
reference herein.
Following Chesapeake's announcement in late June 1997 of disappointing
drilling results in the Louisiana Trend and a full-cost ceiling writedown, a
number of purported class action lawsuits alleging violations of Sections
10(b)-5 and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5
thereunder were filed against the Company and certain of its officers and
directors. See "-- Patent and Securities Litigation."
NEED TO REPLACE RESERVES; SUBSTANTIAL CAPITAL REQUIREMENTS
As is customary in the oil and gas exploration and production industry,
Chesapeake's future success depends upon its ability to find, develop or acquire
additional oil and gas reserves that are economically recoverable. Unless
Chesapeake successfully replaces the reserves that it produces through
successful development, exploration or acquisition, Chesapeake's proved reserves
will decline. Further, approximately 56% of Chesapeake's estimated proved
reserves at September 30, 1997 were located in the Austin Chalk formation in
Texas and Louisiana, where wells are characterized by relatively rapid decline
rates. Additionally, approximately 51% of Chesapeake's total estimated proved
reserves at September 30, 1997 were undeveloped. Recovery of such reserves will
require significant capital expenditures and successful drilling operations.
Chesapeake was unsuccessful in its effort to develop and replace its proved
reserves economically during fiscal 1997. There can be no assurance that
Chesapeake will be successful in its efforts to find and produce reserves
economically in the future.
Chesapeake has made and intends to make substantial capital expenditures in
connection with the exploration and production of its oil and gas properties.
Historically, Chesapeake has funded its capital expenditures through a
combination of internally generated funds, equity and long-term debt financing,
and short-term financing arrangements. Future cash flows are subject to a number
of variables, such as the level of production from existing wells, prices of oil
and gas and Chesapeake's success in developing, acquiring and producing new
reserves. If revenue were to decrease as a result of lower oil and gas prices,
decreased production or otherwise, and Chesapeake's access to capital were
limited, Chesapeake would have a reduced ability to replace its reserves or to
maintain production at current levels, resulting in a decrease in production and
revenue over time. If Chesapeake's cash flow from operations is not sufficient
to satisfy its capital expenditure budget, there can be no assurance that
additional debt or equity financing will be available to meet these
requirements.
PATENT AND SECURITIES LITIGATION
On October 15, 1996, Union Pacific Resources Company ("UPRC") filed suit
against Chesapeake in the U.S. District Court for the Northern District of
Texas, Fort Worth Division alleging (a) infringement and inducing infringement
of UPRC's claim to a patent (the "UPRC Patent") for an invention involving a
method of maintaining a borehole in a stratigraphic zone during drilling, and
(b) tortious interference with
12
<PAGE> 19
certain business relations between UPRC and certain of its former employees.
UPRC's claims against Chesapeake are based on services provided by a third party
vendor to Chesapeake. UPRC is seeking injunctive relief, damages of an
unspecified amount, including actual, enhanced, consequential and punitive
damages, interest, costs and attorneys' fees. Chesapeake believes that it has
meritorious defenses to UPRC's allegations and has requested the court to
declare the UPRC Patent invalid. Chesapeake has also filed a motion to limit the
scope of UPRC's claims and for summary judgment. No prediction can be made as to
the outcome of this matter.
Certain class actions alleging violations of Sections 10(b)-5 and 20(a) of
the Securities Exchange Act of 1934 and Rule 10b-5 thereunder have been filed
against Chesapeake and certain of its officers and directors. The plaintiffs
assert that the defendants made materially false and misleading statements and
failed to disclose material facts about the success and future prospects of
Chesapeake's exploration efforts, principally in the Louisiana Trend. As a
result, the complaints allege, the price of Chesapeake's common stock was
artificially inflated during periods beginning as early as January 25, 1996 and
ending on June 27, 1997, when Chesapeake issued a press release announcing
disappointing drilling results in the Louisiana Trend and a full-cost ceiling
writedown to be reflected in its June 30, 1997 financial statements. The
plaintiffs further allege that certain of the named individual defendants sold
common stock during the class period when they knew or should have known adverse
nonpublic information. Each case seeks a determination that the suit is a proper
class action, certification of the plaintiff as a class representative and
damages in an unspecified amount, together with costs of litigation, including
attorneys' fees. Thirteen cases were ultimately filed. The U.S. District Court
for the Western District of Oklahoma ordered all cases consolidated on November
14, 1997. The Court concurrently appointed lead counsel and lead plaintiffs and
ordered that a consolidated amended complaint be filed. A consolidated class
action complaint was filed in accordance with the Court's order and the
defendants have until March 16, 1998 to file a motion to dismiss. Briefing on
such motion should be concluded by June 15, 1998. All discovery will be stayed
pending the Court's ruling on the motion to dismiss. Chesapeake and the
individual defendants believe that these actions 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.
Certain purported class actions alleging violations of Sections 11,
12(a)(2) and 15 of the Securities Act of 1933 and Section 408 of Title 71 of the
Oklahoma Statutes have been filed against Chesapeake, Bayard Drilling
Technologies, Inc. ("Bayard") and others in connection with the initial public
offering of Bayard common stock on November 4, 1997. As a selling shareholder,
Chesapeake received approximately $90 million of net proceeds from the sale of
Bayard stock in the offering. Plaintiffs allege that Chesapeake was a
controlling shareholder of Bayard and that the Bayard prospectus contained
material omissions and misstatements relating to Chesapeake's financial
situation, its drilling contracts with Bayard and certain related party
transactions. At present, Chesapeake is aware of three such class actions. Two
have been filed in the District Court of Oklahoma County, Oklahoma, and one in
the U.S. District Court for the Western District of Oklahoma. Chesapeake has not
yet filed a response in these actions. Chesapeake 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.
RELIANCE ON KEY PERSONNEL; CONTROL BY CERTAIN SHAREHOLDERS
Chesapeake is dependent upon its Chief Executive Officer, Aubrey K.
McClendon, and its Chief Operating Officer, Tom L. Ward. The unexpected loss of
the services of either of these executive officers could have a detrimental
effect on Chesapeake. Chesapeake maintains $20 million key man life insurance
policies on the life of each of Messrs. McClendon and Ward.
At February 6, 1998, Aubrey K. McClendon, Tom L. Ward, the Aubrey K.
McClendon Children's Trust and the Tom L. Ward Children's Trust beneficially
owned an aggregate of 24,572,666 shares of Chesapeake common stock (including
outstanding vested options) representing approximately 33% of the issued and
outstanding Chesapeake common stock, and members of Chesapeake's Board of
Directors and senior management, including Messrs. McClendon and Ward and their
respective children's trusts, beneficially owned an aggregate of 28,048,015
shares (including outstanding vested options) which represented approximately
36% of the issued and outstanding Chesapeake common stock. As a result, Messrs.
McClendon and
13
<PAGE> 20
Ward, together with other officers and directors of Chesapeake, are in a
position to effectively control Chesapeake through their ability to
significantly influence matters requiring the vote or consent of Chesapeake's
shareholders.
Assuming that Chesapeake issues approximately 25,791,000 shares of
Chesapeake common stock in the merger, the ownership of Messrs. McClendon and
Ward and their respective children's trusts, respectively, will decrease to
approximately 25% and the ownership of Chesapeake's Directors and Executive
Officers as a group will decrease to approximately 27% of the issued and
outstanding shares of Chesapeake common stock.
Assuming that Chesapeake issues 5,000,000 shares in the acquisition of DLB
Oil & Gas, Inc., the ownership of Chesapeake common stock by Messrs. McClendon
and Ward and their respective children's trusts will decrease to approximately
23% and the ownership of Chesapeake's Directors and Executive Officers as a
group will decrease to approximately 26% of the issued and outstanding shares of
Chesapeake common stock, respectively.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain members of the Hugoton Board (which has recommended that the
Hugoton shareholders vote in favor of the Hugoton proposal described in this
Joint Proxy Statement/Prospectus) have interests in the merger that are separate
from the interests of the Hugoton shareholders generally. Assuming an Effective
Time of January 31, 1998, Messrs. Wilson, Decker and Womble, Directors of
Hugoton, will be entitled to severance pay in the amounts of $2,000,000,
$272,057 and $553,500, respectively, upon consummation of the merger. See
"Interests of Certain Persons in the Merger and Related Matters" on page 37.
14
<PAGE> 21
INFORMATION REGARDING RECENT AND PENDING ACQUISITIONS BY CHESAPEAKE
On October 22, 1997, Chesapeake entered into an agreement to acquire by
merger (the "DLB Merger") the Mid-Continent operations of DLB Oil & Gas, Inc.
("DLB"). In its Mid-Continent division, DLB owns approximately 126 billion cubic
feet equivalent of proved reserves (based upon estimates reported by DLB as of
September 30, 1997), nine gas gathering systems and a gas marketing subsidiary
based in Houston, Texas. Chesapeake will pay $17.5 million in cash and will
issue a total of 5,000,000 shares of Chesapeake common stock as merger
consideration to the shareholders of DLB. During the nine months ended September
30, 1997, DLB reported total revenues, operating income and net income of $47.7
million, $5.1 million and $3.4 million, respectively. The closing of the DLB
acquisition which is expected to occur in March 1998 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 Chesapeake an irrevocable proxy to vote such shares (or execute a
written consent) in favor of the DLB Merger. Accordingly, the approval of the
DLB Merger is assured.
On December 16, 1997, Chesapeake acquired AnSon Production Company
("AnSon"), a privately owned oil and gas producer that owned approximately 30
Bcfe of proved reserves (based upon estimates reported by AnSon as of September
30, 1997), undeveloped mineral interests, and a gas marketing subsidiary based
in Oklahoma City. Consideration for the AnSon acquisition will be 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 5, 1997, Chesapeake purchased from Pan East Petroleum
Corporation, a Canadian exploration and production company ("Pan East"), 11.9
million treasury shares of Pan East's common stock at a price per share of $2.50
(Cdn) in a private placement. Based on Pan East's existing 48 million
outstanding shares, Chesapeake owns approximately 12 million shares, or 19.9% of
Pan East's outstanding common stock, for an investment of approximately $30
million (Cdn), or $22 million (U.S.). The purpose of Chesapeake's investment is
to assist Pan East in financing its share of the exploration, development and
acquisition activities under a proposed joint venture whereby Chesapeake will
have 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 next two years.
During the nine months ended September 30, 1997, Pan East reported total
revenues, operating and net losses of $10.5 million (Cdn), $2.4 million (Cdn)
and $2.6 million (Cdn), respectively.
On January 30, 1998, Chesapeake entered into an alliance with Calgary-based
Ranger Oil Company ("Ranger") 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, Chesapeake paid Ranger $50 million to acquire 67
Bcfe of reserves, 5.2 Bcfe of anticipated 1998 production, and approximately
160,000 net acres of leasehold. The effective date of the transaction is
December 1, 1997.
In February 1998, Chesapeake purchased the Mid-Continent properties of
privately owned EnerVest Management Company, L.C. for $38 million. The
properties include approximately 40 Bcfe of proved reserves and are expected to
produce approximately 4.5 Bcfe in 1998.
15
<PAGE> 22
THE MERGER
THE DISCUSSION IN THIS JOINT PROXY STATEMENT/PROSPECTUS OF THE MERGER AND
THE PRINCIPAL TERMS OF THE MERGER AGREEMENT IS SUBJECT TO, AND QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO, THE MERGER AGREEMENT, AS AMENDED, A COPY OF WHICH IS
ATTACHED TO THIS JOINT PROXY STATEMENT/PROSPECTUS AS ANNEX A, AND IS
INCORPORATED HEREIN BY REFERENCE. EXCEPT WHERE OTHERWISE NOTED, ALL REFERENCES
TO CHESAPEAKE COMMON STOCK, INCLUDING THE MARKET PRICE, NUMBER OF SHARES, PAR
VALUE, HISTORICAL EARNINGS PER SHARE AND RELATED INFORMATION CONTAINED IN THIS
JOINT PROXY STATEMENT/PROSPECTUS HAVE BEEN ADJUSTED TO REFLECT THE 3-FOR-2 STOCK
SPLITS ON DECEMBER 15, 1995 AND JUNE 28, 1996 AND TWO 2-FOR-1 STOCK SPLITS ON
DECEMBER 31, 1994 AND 1996.
GENERAL
Each of Hugoton Energy Corporation, a Kansas corporation ("Hugoton"), and
Chesapeake Energy Corporation, an Oklahoma corporation ("Chesapeake"), are
furnishing this Joint Proxy Statement/Prospectus to holders of common stock, no
par value, of Hugoton ("Hugoton Common Stock"), and to holders of common stock,
par value $0.01 per share, of Chesapeake ("Chesapeake Common Stock"),
respectively, in connection with the solicitation of proxies by the Hugoton
Board of Directors (the "Hugoton Board") and the Chesapeake Board of Directors
(the "Chesapeake Board"), respectively, in connection with the special meetings
of holders of Hugoton Common Stock (the "Hugoton Special Meeting") and of
holders of Chesapeake Common Stock (the "Chesapeake Special Meeting"),
respectively (together, the "Special Meetings"), to be held on March 10, 1998,
and at any adjournments or postponements thereof.
At the Hugoton Special Meeting, holders of Hugoton Common Stock, and at the
Chesapeake Special Meeting, holders of Chesapeake Common Stock will be asked to
vote upon a proposal to approve and adopt an Agreement and Plan of Merger, dated
as of November 12, 1997, as amended by Amendment No. 1 dated as of February 9,
1998 (the "Merger Agreement"), among Chesapeake, Chesapeake Acquisition Corp., a
Kansas corporation and a wholly owned subsidiary of Chesapeake ("Sub"), and
Hugoton, providing for the merger (the "Merger") of Sub with and into Hugoton
with Hugoton as the surviving corporation.
The Merger Agreement provides, on the terms and subject to the conditions
set forth therein, (i) for the Merger, and (ii) that each share of Hugoton
Common Stock outstanding immediately prior to the Effective Time (as defined
herein) will be converted into the right to receive 1.3 shares (the "Merger
Consideration") of Chesapeake Common Stock. The Merger will become effective at
the time of filing of a certificate of merger with the Secretary of State of the
State of Kansas (or at such later time as is specified in the certificate of
merger, the "Effective Time"), which is expected to occur as soon as practicable
after the last of the conditions precedent to the Merger set forth in the Merger
Agreement has been satisfied or waived.
BACKGROUND OF THE MERGER
The vast majority of Hugoton's growth has been achieved through
acquisitions of oil and gas properties and a major acquisition of another energy
company. In the summer of 1996, the Hugoton Board of Directors determined that
continued sustained growth would be difficult to achieve due to the extremely
high prices that were being paid for oil and gas properties and energy
companies. The Hugoton Board of Directors had discussed the possibility of
exploring strategic alternatives including possible business combinations or a
sale of the stock or assets of Hugoton. It was also perceived by the Hugoton
Board that Hugoton was not large enough to attract institutional investor
interest and adequate financial analyst following. If acquisitions could not be
economically made, the Board felt shareholder interest could be maximized by
seeking a transaction with another company which could involve a merger,
consolidation or outright sale of Hugoton.
During the spring of 1997, one of Hugoton's major shareholder groups, which
was controlled by First Reserve Corporation ("First Reserve"), attempted to
sell, through a secondary offering, a major portion of its Hugoton common stock.
First Reserve was unable to sell this stock in the secondary offering at a price
it deemed acceptable. Subsequent to the unsuccessful secondary offering,
contacts were made between First Reserve and Belco Oil & Gas Corp. ("Belco"),
and negotiations ensued. On June 18, 1997, Belco purchased 14.9% of the issued
and outstanding shares of Hugoton Common Stock from First Reserve. On that same
day, Hugoton and Belco signed a confidentiality agreement under the terms of
which the parties were to exchange
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<PAGE> 23
information in contemplation of a potential business combination. On June 19,
1997, representatives of Belco visited Hugoton's outside engineers and reviewed
Hugoton's reserve report.
When Aubrey K. McClendon, Chairman of the Board and Chief Executive Officer
of Chesapeake, learned of the Belco purchase, he contacted Mr. Wilson who
confirmed that the Hugoton Board was considering a sale of Hugoton and that some
discussions had occurred between Mr. Wilson and the Chairman of Belco. Mr.
McClendon indicated an interest in submitting a proposal and came to Wichita on
Friday, June 20, 1997, to meet with Mr. Wilson. This led to the submission that
same day of a written offer to purchase the common stock of Hugoton at $15.00
per share, subject to a short period of due diligence and several other
conditions, including the negotiation of definitive agreements. On June 20,
1997, Hugoton engaged Petrie Parkman as its financial advisor in connection with
one or more possible transactions involving the stock or assets of Hugoton. On
June 23, 1997, Chesapeake and Hugoton entered into a confidentiality agreement,
pursuant to which Chesapeake agreed to keep confidential any non-public
information regarding Hugoton that might be given to Chesapeake. Also, on June
23, 1997, employees of Hugoton and Petrie Parkman visited Belco's outside
engineering firm and reviewed Belco's reserve reports.
On June 24, 1997, representatives of Chesapeake conducted due diligence at
Hugoton's offices, submitted a draft tender offer merger agreement to Hugoton
and verbally confirmed their $15.00 per share of Hugoton common stock offer to
Hugoton. On the same day, the Hugoton Board held a conference call and attorneys
for Chesapeake and Hugoton began preparing and negotiating the definitive
agreements. Prior to the finalization of the definitive agreements, Belco's
investment advisor informed Petrie Parkman of Belco's verbal offer of
$15.00-$16.00 per share, subject to due diligence and Belco submitted a written
proposal to Hugoton of $15.00 per share to be paid $5.00 in cash and $10.00 in
Belco stock, subject to due diligence and the negotiation of definitive
agreements.
On June 25, 1997, Chesapeake through its attorneys notified Hugoton that
Chesapeake was withdrawing its offer to acquire Hugoton. Chesapeake's management
shifted its attention from the Hugoton acquisition to the mounting negative
operational developments occurring at Chesapeake. See "Risk Factors -- Louisiana
Trend -- Concentration of Unevaluated Leasehold, Poor Drilling Results in 1997,
Impairment of Asset Value."
On June 26, 1997, Belco submitted an exclusivity agreement to Hugoton. On
that same day, the Hugoton Board held a telephonic meeting to discuss several
matters including strategic alternatives for Hugoton and to ratify the
engagement of Petrie Parkman as Hugoton's financial advisor. On June 27, 1997,
Hugoton and Belco executed an exclusivity agreement, which provided that Hugoton
would deal exclusively with Belco until July 11, 1997. On July 1, 1997, Belco
conducted due diligence at Hugoton's offices. On July 3, 1997, Belco withdrew
its offer to acquire Hugoton.
After the Chesapeake and Belco offers were withdrawn, numerous inquiries
were received from and approaches were made by various other parties. On July
14, 1997, the Hugoton Board held a special telephonic meeting to respond to the
continuing inquiries that management and Petrie Parkman had received from
parties who were interested in acquiring Hugoton. At that meeting, the Board
authorized and directed Hugoton's management and Petrie Parkman to take
necessary action to seek a potential purchaser or merger candidate for Hugoton
and to establish a data room at Hugoton's corporate office to aid interested
parties in conducting an evaluation of Hugoton. For the next two months,
Hugoton, with Petrie Parkman's assistance, prepared a detailed brochure on
Hugoton and organized the data room.
On September 16, 1997, Hugoton's data room opened. Sixty-nine companies
were contacted, 50 confidentiality agreements were sent out and 36
confidentiality agreements were executed and received from interested parties.
Those companies received brochures and 13 of them visited the data room,
including Chesapeake, which first expressed a desire to visit the data room
during the week of September 29, 1997. On October 1, 1997, representatives of
Chesapeake conducted due diligence at Hugoton's offices in Wichita, Kansas. On
October 2, 1997, Chesapeake submitted a conditional offer to acquire Hugoton for
$13.00 per share in an all stock transaction, which offer was to expire October
15, 1997. Hugoton did not respond to Chesapeake's offer by the October 15, 1997
deadline. On October 16, 1997, representatives of Hugoton conducted due
diligence at Chesapeake's offices in Oklahoma City, Oklahoma. On October 31,
1997, the data
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<PAGE> 24
room closed and Petrie Parkman sent out bid procedures to companies that it
believed would be interested in acquiring or entering into a business
combination with Hugoton.
On November 5, 1997, the Hugoton Board held a conference call with
representatives of Petrie Parkman to discuss the various alternatives available
to Hugoton, including a possible transaction with Chesapeake. Various possible
transactions and potential suitors were discussed and positives and negatives
were listed for each. These dealt with the financial ability of the potential
acquiror, the possible terms of the acquisition and the time frame for closing a
deal with each. On November 7, 1997, Mr. McClendon and Mr. Wilson met in
Houston, Texas and agreed in principle to the terms of an all-stock merger. From
November 7, 1997 to November 12, 1997, negotiations regarding the definitive
agreements were conducted between Hugoton management and Chesapeake management
and their respective financial and legal advisors.
On November 12, 1997, a special telephonic meeting of the Chesapeake Board
was held to discuss the potential acquisition of Hugoton. At such meeting,
Chesapeake's management, together with its legal and financial advisors,
discussed with the Chesapeake Board their conclusions to date regarding due
diligence conducted on Hugoton. Following such presentation, a representative of
Bear Stearns gave its presentation regarding certain financial aspects of the
proposed transaction. A thorough discussion was then held among the members of
the Chesapeake Board, its advisors and members of Chesapeake's management with
respect to the terms of the proposed merger agreement, the negotiations
conducted to date, the AnSon and DLB transactions, the valuation methodologies
being utilized by Bear Stearns in connection with the financial analysis of the
proposed transaction and related matters. Bear Stearns then rendered to the
Chesapeake Board its oral opinion that the consideration proposed to be paid by
Chesapeake to the Hugoton shareholders pursuant to the proposed merger agreement
was fair, from a financial point of view, to the public shareholders of
Chesapeake. For a discussion of Bear Stearns' opinion, see "-- Opinions of
Financial Advisors -- Chesapeake's Financial Advisor." The Chesapeake Board then
reviewed its reasons for the Merger and based upon the information presented and
discussions held, the Chesapeake Board unanimously approved the Merger, the
Merger Agreement, the issuance of Chesapeake Common Stock as consideration
therefor and the consideration of the transactions related thereto.
On November 12, 1997, a special telephonic meeting of the Hugoton Board was
held to discuss the potential merger with Chesapeake. At such meeting, Hugoton's
management, together with its advisors, discussed with the Hugoton Board their
conclusions to date regarding due diligence conducted on Chesapeake.
Representatives of Hugoton's management presented a summary of Chesapeake from a
technical and geophysical point of view. A discussion ensued regarding the
trading prices and liquidity of the companies and the impact the DLB and AnSon
transactions may have on the proposed merger. Representatives of Petrie Parkman
made a presentation regarding its valuation analyses of Hugoton and Chesapeake
and of the proposed merger. Petrie Parkman then rendered to the Hugoton Board
its oral opinion (which was subsequently confirmed in writing) that, as of
November 12, 1997 and based upon and subject to the matters discussed with the
Hugoton Board, the per share consideration to be received by the holders of
Hugoton Common Stock in the Merger was fair from a financial point of view to
such holders. For a discussion of Petrie Parkman's opinion, see "-- Opinions of
Financial Advisors -- Hugoton's Financial Advisor." Also at such meeting,
Hinkle, Eberhart & Elkouri, L.L.C., Hugoton's legal counsel, discussed with the
Hugoton Board the terms of the proposed merger agreement, and various other
issues, including the fiduciary obligations of the Hugoton Board in the context
of the proposed merger, pooling of interests issues, stock option issues, the
"no solicitation" provisions, termination rights and the termination fee,
severance plan issues, conditions to the merger and terms of the related
agreements including certain affiliate letters, proxy agreements, registration
rights agreement and certain shareholder litigation filed against Chesapeake.
The Hugoton Board then reviewed its reasons for the Merger and, based upon the
information presented and presented earlier, the Hugoton Board unanimously
approved the Merger, the Merger Agreement and the consummation of the
transactions related thereto. Following such meeting of the Hugoton Board,
representatives of Chesapeake and Hugoton executed the Merger Agreement.
On November 13, 1997, Chesapeake and Hugoton issued a press release jointly
announcing the transaction.
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On December 5, 1997 Chesapeake and Hugoton agreed to use the purchase
accounting method instead of treating the Merger as a "pooling of interests" for
accounting purposes and on the same day Chesapeake issued a press release to
that effect. On February 9, 1998, Chesapeake, Sub and Hugoton entered into
Amendment No. 1 to the Merger Agreement to reflect their agreement to treat the
Merger for accounting purposes as a purchase of Hugoton by Chesapeake and to
change the structure of the Merger to provide that Sub, as an indirect wholly
owned subsidiary of Chesapeake, will be merged with and into Hugoton, with
Hugoton as the surviving corporation.
REASONS FOR THE MERGER; RECOMMENDATIONS OF THE BOARDS OF DIRECTORS
HUGOTON'S REASONS FOR THE MERGER; RECOMMENDATION OF HUGOTON BOARD. At its
special telephonic meeting held on November 12, 1997, the Hugoton Board, by
unanimous vote (a) determined that the Merger, the Merger Agreement and the
transactions contemplated thereby are advisable and fair to and in the best
interests of Hugoton and its shareholders, (b) directed that the proposed
transaction be submitted for consideration by Hugoton shareholders and (c)
recommended that Hugoton shareholders vote for approval and adoption of the
Merger, the Merger Agreement and the transactions contemplated thereby. In
reaching this conclusion, the Hugoton Board, consulted with Hugoton management
and its financial and legal advisors, considered and analyzed a number of
factors, including, without limitation, the following:
(i) The Hugoton Board analyzed information with respect to the
financial condition, results of operations, cash flow, business and
prospects of Hugoton on both a stand-alone basis as compared with those
available in combination with Chesapeake, and concluded that Hugoton's
shareholders would benefit substantially from a business combination with
Chesapeake. Such benefits would consist of the ability of Hugoton
shareholders to continue to own an interest in the combined company
("Combined Company") and thereby benefit from the enhanced prospects of the
Combined Company in terms of enhanced financial and operational resources
and flexibility, the combination of complementary skills and experience, as
well as the Combined Company's enhanced ability to take advantage of future
strategic opportunities.
(ii) The Hugoton Board took into account that the Merger should allow
the Combined Company to meet the challenges of the increasingly competitive
environment in the oil and gas industry more effectively than Hugoton could
on its own, thereby enabling the Combined Company to achieve Hugoton's
strategic objectives substantially earlier than it could independently.
(iii) The Hugoton Board considered the presentation of Petrie Parkman
and its oral opinion (which was subsequently confirmed in writing) that, as
of November 12, 1997 and based upon and subject to the matters discussed
with the Hugoton Board, the per share consideration to be received by the
holders of Hugoton Common Stock in the Merger was fair from a financial
point of view to such holders. See "-- Opinions of Financial
Advisors -- Hugoton's Financial Advisor" for a discussion of Petrie
Parkman's opinion. Petrie Parkman subsequently confirmed that opinion in a
written opinion dated the date of this Joint Proxy Statement/Prospectus. A
copy of such opinion, which is subject to certain limitations,
qualifications and assumptions, is included as Annex B hereto and should be
read carefully and in its entirety. The Hugoton Board views Petrie
Parkman's opinion dated November 12, 1997 as favorable to its determination
because Petrie Parkman is a nationally recognized investment banking firm
with special expertise in the oil and gas industry and has wide-ranging
experience in the valuation of businesses and securities in connection with
mergers and acquisitions, providing advisory services and raising capital
for companies.
(iv) The Hugoton Board considered the terms of the Merger Agreement,
the consideration to be received by Hugoton shareholders in the Merger and
the fact that the receipt of Chesapeake Common Stock by Hugoton's
shareholders upon consummation of the Merger will be a tax-free exchange
(other than taxes payable on cash received for fractional shares).
In reaching the determination that the Merger, the Merger Agreement and the
transactions contemplated thereby are advisable and fair to and in the best
interests of Hugoton and its shareholders, the Hugoton Board
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also considered a number of additional factors, including its discussions with
Hugoton's management concerning the results of Hugoton's investigation of
Chesapeake, the strategic, operational and financial opportunities available to
Hugoton, the historic and current market prices of Hugoton Common Stock and
Chesapeake Common Stock and the proposed structure of the transaction and the
other terms of the Merger Agreement and related agreements.
The Hugoton Board also considered certain risks and potential disadvantages
associated with the Merger, including the risk that anticipated positive
synergies will not be realized to the degree anticipated, the risk that the
business combination might not be completed as a result of a failure to satisfy
the conditions to the Merger Agreement and other matters described under "Risk
Factors" on page 11 and "-- Forward-Looking Statements May Prove Inaccurate" on
page 33. In the judgment of the Hugoton Board, the potential benefits of the
Merger outweighed these considerations.
The foregoing discussion of the information and factors that were given
weight by the Hugoton Board is not intended to be exhaustive, but is believed to
include all material factors considered by the Hugoton Board. In view of the
variety of factors considered in connection with its evaluation of the proposed
Merger and the terms of the Merger Agreement, the Hugoton Board did not deem it
practicable to, and did not, quantify or otherwise assign relative weights to
the specific factors considered in reaching its conclusion, and individual
directors may have given different weights to different factors.
THE HUGOTON BOARD UNANIMOUSLY RECOMMENDS TO ITS SHAREHOLDERS THAT THEY VOTE
"FOR" APPROVAL AND ADOPTION OF THE MERGER AND THE MERGER AGREEMENT.
In considering the recommendations of the Hugoton Board with respect to the
Merger, the Merger Agreement and the transactions contemplated thereby, Hugoton
shareholders should be aware that certain officers and directors of Hugoton have
certain interests in the proposed Merger that are different from and in addition
to the interests of Hugoton shareholders generally. The Hugoton Board was aware
of these interests and considered them in approving the Merger and Merger
Agreement. See "Interests of Certain Persons in the Merger and Related Matters."
CHESAPEAKE'S REASONS FOR THE MERGER; RECOMMENDATION OF CHESAPEAKE
BOARD. The Chesapeake Board has determined that the transactions contemplated by
the Merger Agreement are fair to and in the best interests of Chesapeake and its
shareholders and recommends that the holders of Chesapeake Common Stock vote
"FOR" approval of the Merger and the Merger Agreement and the issuance of
Chesapeake Common Stock pursuant to the Merger.
In its deliberations and in making its unanimous determination that the
transactions contemplated by the Merger Agreement are fair to and in the best
interests of Chesapeake and its shareholders, and in authorizing and approving
the Merger Agreement and the Merger on November 12, 1997, the Chesapeake Board
consulted with Bear Stearns and with Chesapeake's outside counsel. The
Chesapeake Board considered a number of factors including, among others, the
following principal factors:
(i) The Chesapeake Board reviewed the companies' respective historical
financial condition, results of operations and estimated future results,
current financial market conditions and historical market prices, trading
information for Chesapeake Common Stock and Hugoton Common Stock as well as
the proposed structure of the transaction and the other terms of the Merger
Agreement and related agreements. The Chesapeake Board also considered its
discussions with members of Hugoton's management regarding the past and
current business operations, financial condition and future prospects of
Hugoton, including Chesapeake's strategic interest in acquiring
longer-lived reserves. The Chesapeake Board concluded that Chesapeake's
shareholders would benefit substantially from a business combination with
Hugoton.
(ii) The Chesapeake Board took into account that the Merger should
allow the Combined Company to meet the challenges of the increasingly
competitive environment in the oil and gas industry more effectively than
Chesapeake independently. The Merger will provide Chesapeake shareholders
with an opportunity to benefit from Chesapeake's exploration program and
Hugoton's stable base of Mid-Continent oil and gas production. The Merger
will significantly increase proved reserves and extend
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Chesapeake's proved reserve life from approximately six years to
approximately eight years, based on June 30, 1997 reserve information and
the latest twelve months production as of June 30, 1997. Additionally, the
Merger will offer economies of scale in the Mid-Continent region, the
Austin Chalk region and the Williston Basin.
(iii) The Chesapeake Board considered the presentation of Bear Stearns
and its opinion that, as of November 12, 1997, and based upon and subject
to the matters discussed with the Chesapeake Board the Exchange Ratio
pursuant to the Merger Agreement was fair, from a financial point of view,
to the public shareholders of Chesapeake. See "Opinions of Financial
Advisors -- Chesapeake's Financial Advisor" for a discussion of Bear
Stearns' opinion. A copy of such opinion, which is subject to certain
limitations, qualifications and assumptions, is included as Annex C hereto
and should be read carefully and in its entirety.
The Chesapeake Board also considered certain risks and potential
disadvantages associated with the Merger, including the risk that anticipated
positive synergies will not be realized to the degree anticipated, the risk that
the business combination might not be completed as a result of a failure to
satisfy the conditions to the Merger Agreement and other matters described under
"Risk Factors" on page 11 and "-- Forward-Looking Statements May Prove
Inaccurate" on page 33. In the judgment of the Chesapeake Board, the potential
benefits of the Merger outweigh these considerations.
The foregoing discussion of the information and factors that were given
weight by the Chesapeake Board is not intended to be exclusive but is believed
to include all material factors considered by the Chesapeake Board. In view of
the variety of factors considered in connection with its evaluation of the
proposed Merger and the terms of the Merger Agreement, the Chesapeake Board did
not deem it practicable to, and did not, quantify or otherwise assign relative
weights to the specific factors considered in reaching its conclusion, and
individual directors may have given different weights to different factors.
THE CHESAPEAKE BOARD UNANIMOUSLY RECOMMENDS TO ITS SHAREHOLDERS THAT THEY
VOTE "FOR" APPROVAL AND ADOPTION OF THE MERGER AND THE MERGER AGREEMENT.
OPINIONS OF FINANCIAL ADVISORS
HUGOTON'S FINANCIAL ADVISOR. Hugoton engaged Petrie Parkman as its
financial advisor in connection with one or more possible transactions involving
the stock or assets of Hugoton. On November 12, 1997, Petrie Parkman rendered to
the Hugoton Board its oral opinion (which was subsequently confirmed in writing)
that, as of such date and based upon and subject to the matters set forth
therein, the per share consideration to be received by the holders of Hugoton
Common Stock in the Merger was fair from a financial point of view to such
holders. Petrie Parkman subsequently rendered to the Hugoton Board its written
opinion dated the date of this Joint Proxy Statement/Prospectus (the "Petrie
Parkman Opinion") that, as of such date and based upon and subject to the
matters set forth therein, the per share consideration to be received by the
holders of Hugoton Common Stock in the Merger was fair from a financial point of
view to such holders. No limitations were imposed by Hugoton upon Petrie Parkman
with respect to the investigations made or procedures followed by Petrie Parkman
in rendering its opinion.
THE FULL TEXT OF THE PETRIE PARKMAN OPINION, WHICH CONTAINS A DESCRIPTION
OF THE ASSUMPTIONS MADE, THE MATTERS CONSIDERED BY PETRIE PARKMAN AND THE LIMITS
OF ITS REVIEW, IS ATTACHED HERETO AS ANNEX B AND IS INCORPORATED HEREIN BY
REFERENCE. SHAREHOLDERS ARE ENCOURAGED TO READ THE PETRIE PARKMAN OPINION
CAREFULLY IN ITS ENTIRETY. PETRIE PARKMAN'S OPINIONS WERE PROVIDED TO THE
HUGOTON BOARD FOR ITS INFORMATION AND ARE DIRECTED TO THE FAIRNESS FROM A
FINANCIAL POINT OF VIEW TO THE HOLDERS OF THE HUGOTON COMMON STOCK OF THE PER
SHARE CONSIDERATION TO BE RECEIVED BY SUCH HOLDERS IN THE MERGER. PETRIE
PARKMAN'S OPINIONS DO NOT CONSTITUTE A RECOMMENDATION TO ANY HOLDER OF HUGOTON
COMMON STOCK AS TO HOW SUCH HOLDER SHOULD VOTE AT THE HUGOTON SPECIAL MEETING.
PETRIE PARKMAN EXPRESSED NO OPINION AS TO THE PRICE AT WHICH THE CHESAPEAKE
COMMON STOCK WILL TRADE FOLLOWING ANNOUNCEMENT OR CONSUMMATION OF THE MERGER.
PETRIE PARKMAN'S OPINION DATED NOVEMBER 12, 1997 AND PRESENTATION TO THE HUGOTON
BOARD ON SUCH DATE WERE AMONG MANY
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FACTORS TAKEN INTO CONSIDERATION BY THE HUGOTON BOARD IN MAKING ITS
DETERMINATION TO APPROVE AND RECOMMEND THE MERGER AS CONTEMPLATED IN THE MERGER
AGREEMENT.
In connection with the Petrie Parkman Opinion, Petrie Parkman, among other
things: (1) reviewed certain publicly available business and financial
information relating to Hugoton and Chesapeake, including (a) the Annual Reports
on Form 10-K and related audited financial statements for the fiscal years ended
December 31, 1996 and June 30, 1997, respectively, (b) the unaudited financial
statements of Hugoton for the fiscal quarters ended June 30, 1996, September 30,
1996, June 30, 1997 and September 30, 1997, (c) the unaudited financial
statements of Chesapeake for the fiscal quarters ended September 30, 1996 and
September 30, 1997, (d) a draft dated February 5, 1998 of the balance sheet of
Hugoton as of November 30, 1997 and the related income statement for the year
ended December 31, 1997, which includes a projected income statement for the
month of December 1997, prepared by the management of Hugoton and (e) a
preliminary draft dated February 6, 1998 of the consolidated balance sheet of
Chesapeake as of November 30, 1997 and the related consolidated income
statements for the months of October and November 1997 and for the five-month
period ended November 30, 1997 prepared by the management of Chesapeake; (2)
reviewed certain estimates of Hugoton's reserves, including (a) estimates of
proved oil and gas reserves prepared by Ryder Scott Company Petroleum Engineers
("Ryder Scott") as of July 1, 1997, (b) estimates of additional oil and gas
reserves prepared by the management and staff of Hugoton as of July 1, 1997, (c)
preliminary estimates of proved oil and gas reserves prepared by Ryder Scott as
of January 1, 1998 and (d) preliminary estimates of additional oil and gas
reserves prepared by the management and staff of Hugoton as of January 1, 1998;
(3) reviewed certain estimates of reserves, including (a) estimates of proved
oil and gas reserves of Chesapeake prepared by Williamson Petroleum Consultants,
Inc. as of June 30, 1997 and September 30, 1997, (b) estimates of proved oil and
gas reserves for the Mid-Continent operations of DLB to be acquired by
Chesapeake prepared by Gruy Engineering as of January 1, 1997 and DeGolyer &
MacNaughton as of December 31, 1996 and (c) estimates of proved oil and gas
reserves of AnSon to be acquired by Chesapeake prepared by AnSon as of January
1, 1998, (d) estimates of certain proved oil and gas reserves of Enervest
Management Company ("Enervest") to be acquired by Chesapeake prepared by
Enervest as of January 1, 1998 and (e) estimates of certain proved oil and gas
reserves of Ranger Oil Co. to be acquired by Chesapeake prepared by Chesapeake
as of January 1, 1998; (4) analyzed certain historical and projected financial
and operating data and drilling programs of Hugoton and Chesapeake prepared or
provided by the management of Hugoton and Chesapeake, respectively; (5)
discussed the current and projected operations and prospects of Hugoton and
Chesapeake with the management and operating staff of Hugoton and Chesapeake,
respectively; (6) reviewed the historical trading history of the Hugoton Common
Stock and the Chesapeake Common Stock; (7) compared recent stock market
capitalization indicators for Hugoton and Chesapeake with the recent stock
market capitalization indicators for certain other publicly traded independent
energy companies; (8) compared the financial terms of the Merger with the
financial terms of certain other transactions that Petrie Parkman deemed to be
relevant; (9) reviewed the Merger Agreement and the appended form of agreement
and limited irrevocable proxy entered into by Chesapeake and certain
shareholders of Hugoton; and (10) reviewed such other financial studies and
analyses and performed such other investigations and took into account such
other matters as Petrie Parkman deemed necessary or appropriate.
In rendering its opinions, Petrie Parkman assumed and relied upon, without
assuming any responsibility for verification, the accuracy and completeness of
any information supplied or otherwise made available to it by Hugoton and
Chesapeake. Petrie Parkman further relied upon the assurances of management of
Hugoton and Chesapeake that they were unaware of any facts that would make the
information provided to Petrie Parkman incomplete or misleading in any material
respect. With respect to projected financial and operating data and drilling
programs, Petrie Parkman assumed that they had been reasonably prepared on bases
reflecting the best currently available estimates and judgment of the management
of Hugoton and Chesapeake, respectively, relating to the future financial and
operational performance of Hugoton and Chesapeake. With respect to the estimates
of oil and gas reserves, Petrie Parkman assumed that they had been reasonably
prepared on bases reflecting the best available estimates and judgements of
Hugoton and Chesapeake or their respective engineering consultants relating to
the oil and gas properties of Hugoton and Chesapeake, respectively. Petrie
Parkman did not make an independent evaluation or appraisal of the assets or
liabilities of
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Hugoton or Chesapeake nor, except for the reserve estimates referred to in its
opinion, was Petrie Parkman furnished with any such evaluation or appraisal.
Consistent with the Merger Agreement, Petrie Parkman assumed that the Merger
will be treated for federal income tax purposes as a reorganization within the
meaning of Section 368 of the Code (as defined below).
The following is a brief summary of certain analyses performed by Petrie
Parkman in connection with the preparation of its opinion dated November 12,
1997 and reviewed with the Hugoton Board on that date. Petrie Parkman reviewed
and updated such analyses in connection with the preparation of the Petrie
Parkman Opinion.
Discounted Cash Flow Analysis -- Hugoton. Petrie Parkman calculated
estimates of future after-tax cash flows for the reserve assets based on the
reserve estimates referred to above and for the non-reserve assets utilizing
information provided by Hugoton. Petrie Parkman evaluated three scenarios in
which the principal variables were oil and gas prices. The three pricing
scenarios were based on benchmarks for posted prices for West Texas Intermediate
equivalent crude oil and for spot sales of Louisiana offshore gas delivered to
an interstate pipeline ("Pricing Case I", "Pricing Case II" and "Pricing Case
III"). Petrie Parkman applied appropriate quality and transportation adjustments
to these benchmarks. For Pricing Cases I, II and III, benchmark oil prices were
projected to be $18.00, $19.00 and $21.00 per barrel, respectively, for 1997 and
were escalated annually thereafter at the rates of 4.0%, 4.0% and 5.0%,
respectively; oil prices in each pricing case were capped at $50.00 per barrel.
For Pricing Cases I, II and III, benchmark gas prices were projected to be
$2.05, $2.20 and $2.35 per million British thermal units ("MMBtu"),
respectively, for 1997 and were escalated annually thereafter at the rates of
4.0%, 4.0% and 5.0%, respectively; gas prices in each pricing case were capped
at $6.00 per MMBtu. Operating and capital costs were escalated at 3.0% per year.
Other factors reflected in Petrie Parkman's analysis included the use of
after-tax discount rates ranging from 10.0% to 50.0% depending on reserve
category, a carry-over of Hugoton's existing tax positions and the evaluation of
certain non-reserve assets of Hugoton. This methodology resulted in asset
reference value ranges of $228.1 million to $265.7 million for Pricing Case I,
$254.4 million to $296.0 million for Pricing Case II and $308.6 million to
$363.0 million for Pricing Case III. After deducting long-term obligations of
Hugoton of $100 million from the asset reference value ranges and dividing by
the number of shares of Hugoton Common Stock outstanding, the equity reference
value ranges per share of Hugoton Common Stock outstanding were $6.46 to $8.35
for Pricing Case I, $7.78 to $9.88 for Pricing Case II and $10.51 to $13.26 for
Pricing Case III.
Comparable Transactions Analysis -- Hugoton. Petrie Parkman reviewed
certain publicly available information on 84 oil and gas property acquisition
transactions that provided for the payment of consideration in an amount in
excess of $5 million involving Permian, Rocky Mountain, Mid-Continent and East
Texas/ Gulf Coast assets that took place between January 1996 and October 1997
and one such transaction for which Petrie Parkman had non-public information.
Petrie Parkman calculated purchase price multiples of equivalent reserves for
the acquired assets in each transaction. The highest, average and lowest
multiples of equivalent reserves for the Permian transactions were $1.64, $0.83
and $0.23 per thousand cubic feet equivalent using a six thousand cubic feet of
gas to one barrel of oil conversion ratio ("Mcfe6"), respectively. The highest,
average and lowest multiples of Mcfe6 for the Rocky Mountain transactions were
$1.17, $0.66 and $0.30, respectively. The highest, average and lowest multiples
of Mcfe6 for the Mid-Continent transactions were $1.64, $0.80 and $0.34,
respectively. The highest, average and lowest multiples of Mcfe6 for the East
Texas/ Gulf Coast transactions were $1.51, $0.84 and $0.33, respectively. Petrie
Parkman determined that, with respect to Hugoton, the appropriate benchmark
multiples for equivalent proved reserves for the Permian, Rocky Mountain,
Mid-Continent and East Texas/Gulf Coast assets were in the ranges of $0.60 to
$0.70 per Mcfe6, $0.70 to $0.90 per Mcfe6, $0.80 to $1.00 per Mcfe6 and $0.90 to
$1.10 per Mcfe6, respectively. Petrie Parkman applied the benchmarks to
Hugoton's corresponding proved reserve figures for each of the geographic
regions to yield asset reference value ranges for Hugoton's reserves. Following
adjustments for Hugoton's non-reserve assets, Petrie Parkman determined from the
asset reference value ranges implied by these multiples a composite asset
reference value range under this method of $250.0 million to $300.0 million.
After deducting long-term obligations of Hugoton of $100.0 million from the
composite asset reference value range and dividing by the number of shares of
Hugoton Common Stock outstanding, the resulting composite equity reference value
range per share of Hugoton Common Stock outstanding was $7.56 to $10.08.
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In addition, Petrie Parkman reviewed certain publicly available information
on 23 company acquisition transactions and offers for control in the oil and gas
exploration and production industry that took place between January 1996 and
November 1997. Using publicly available information, Petrie Parkman calculated
total investment (purchase price of equity plus net obligations assumed)
multiples of gross pre-tax cash flow for the target company in each transaction.
For these 23 transactions, the highest, average and lowest multiples of gross
pre-tax cash flow were 29.8x, 8.8x and 2.8x, respectively. Petrie Parkman also
calculated purchase price multiples of discretionary cash flow and implied
purchase price of reserves (total investment less estimated values of
non-reserve assets) multiples of equivalent proved reserves and standardized
measure of discounted future net cash flows ("SEC Value") for the target company
in each transaction. The highest, average and lowest multiples of discretionary
cash flow were 24.6x, 8.5x and 3.1x, respectively. The highest, average and
lowest multiples of equivalent proved reserves were $2.25, $1.20 and $0.64 per
Mcfe6, respectively. The highest, average and lowest multiples of SEC Value for
21 of the 23 transactions for which data was available were 2.9x, 1.3x and 0.6x,
respectively. Petrie Parkman determined that, with respect to Hugoton, the
appropriate benchmark multiples for gross pre-tax cash flow, discretionary cash
flow, equivalent proved reserves and SEC Value were in the ranges of 6.0 to
7.0x, 6.0 to 7.5x, $0.90 to $1.10 per Mcfe6 and 1.0 to 1.3x, respectively.
Petrie Parkman applied these benchmark multiples to Hugoton's historical gross
pre-tax cash flow, discretionary cash flow, equivalent proved reserves and SEC
Value. Petrie Parkman also performed a premium analysis, which compared the
offer price per target company share with the target company's share price for
the periods of one day, 30 days and 60 days prior to public announcement of the
offer. The highest, average and lowest premiums (excess of offer price over
target company's price stated as a percentage above the target company's share
price) were 86.6%, 20.3% and 9.8% for one day prior, respectively, 75.6%, 35.9%
and 0.0% for 30 days prior, respectively, and 86.6%, 35.0% and 2.1% for 60 days
prior, respectively. Petrie Parkman determined that, with respect to Hugoton,
the appropriate benchmarks for premium to target company's price one day prior,
30 days prior, and 60 days prior were in the ranges of 15% to 25%, 30% to 40%,
and 30% to 40%, respectively. Petrie Parkman applied these premium benchmarks to
the corresponding stock prices of Hugoton. Petrie Parkman determined from the
asset reference value ranges implied by these multiples a composite asset
reference value range under this method of $325.0 million to $375.0 million.
After deducting long-term obligations of Hugoton of $100 million from the
composite asset reference value range and dividing by the number of shares of
Hugoton Common Stock outstanding, the resulting composite equity reference value
range per share of Hugoton Common Stock outstanding was $11.34 to $13.86.
The acquisitions and offers for control reviewed by Petrie Parkman were the
following: (1) the acquisition of Coda Energy, Inc. by Belco announced on
November 3, 1997, (2) the acquisition of Offshore Energy Development Corp. by
Titan Exploration, Inc. announced on September 9, 1997, (3) the acquisition of
Chauvco Resources Ltd. by Pioneer Natural Resources Company announced on
September 3, 1997, (4) the acquisition of Monterey Resources, Inc. by Texaco
Inc. announced on August 18, 1997, (5) the acquisition of Louisiana Land &
Exploration Company by Burlington Resources Inc. announced on July 17, 1997, (6)
the acquisition of Cairn Energy USA, Inc. by The Meridian Resource Corporation
announced on July 8, 1997, (7) the acquisition of American Exploration Company
by Louis Dreyfus Natural Gas Corp. announced on June 24, 1997, (8) the
acquisition of Pennzoil Company by Union Pacific Resources Group Inc. announced
on June 23, 1997, (9) the acquisition of Convest Energy Corporation by
Forcenergy Inc announced on June 20, 1997, (10) the acquisition of McFarland
Energy, Inc. by Monterey Resources, Inc. announced on June 17, 1997, (11) the
acquisition of Alamco, Inc. by The Columbia Gas System Inc. announced on May 27,
1997, (12) the acquisition of Parker & Parsley Petroleum Company by Mesa Inc.
announced on April 7, 1997, (13) the acquisition of Belden & Blake Corporation
by Texas Pacific Group announced on March 31, 1997, (14) the acquisition of
Great Western Resources Inc. by Forcenergy Inc announced on December 12, 1996,
(15) the acquisition of InterCoast Oil and Gas by KCS Energy, Inc. announced on
October 17, 1996, (16) the acquisition of Presidio Oil Company by Tom Brown,
Inc. announced on August 5, 1996, (17) the acquisition of Global Natural
Resources Inc. by Seagull Energy Corporation announced on July 22, 1996, (18)
the acquisition of Petrocorp Incorporated by Kaiser Francis Oil Company
announced on June 17, 1996, (19) the acquisition of Clinton Gas Systems, Inc. by
Enron Capital & Trade Resources Corp. announced on May 24, 1996, (20) the
acquisition of The Phoenix Resource Companies, Inc. by Apache Corporation
announced on March 28, 1996, (21) the acquisition of Ampolex
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Limited by Mobil Corporation announced on February 28, 1996, (22) the
acquisition of Tide West Oil Company by HS Resources, Inc. announced on February
26, 1996 and (23) the acquisition of Gerrity Oil and Gas Corporation by Snyder
Oil Corporation announced on January 17, 1996.
Common Stock Comparison -- Hugoton. Using publicly available information,
Petrie Parkman calculated adjusted capitalization multiples of historical
financial criteria for gross pre-tax cash flow, operating cash flow and SEC
Value and of equivalent proved reserves for 124 publicly traded independent oil
and gas companies. Petrie Parkman also calculated market capitalization (market
value of common equity) multiples of historical financial criteria for
discretionary cash flow for such companies. The adjusted capitalization of each
company was obtained by adding the sum of its long-term and short-term debt to
the sum of the market value of its common equity, the market value of its
preferred stock (if publicly traded, otherwise liquidation or book value) and
the book value of its minority interest in other companies and subtracting its
cash.
Petrie Parkman determined that 14 companies were relevant to an evaluation
of Hugoton in the context of reserve location and reserve life. Accordingly,
Petrie Parkman examined in greater detail Belco, Bellwether Exploration Company,
Comstock Resources, Inc., Cross Timbers Oil Company, DLB, HS Resources, Inc.,
KCS Energy, Inc., Lomak Petroleum, Inc., Louis Dreyfus Natural Gas Corp., St.
Mary Land & Exploration Company, Swift Energy Company, Titan Exploration, Inc.,
Unit Corporation and The Wiser Oil Company. For these 14 companies, the highest,
average and lowest adjusted capitalization multiples of gross pre-tax cash flow
were 15.5x, 8.3x and 4.2x, respectively. The highest, average and lowest
adjusted capitalization multiples of operating cash flow were 12.8x, 7.5x and
3.8x, respectively. The highest, average and lowest adjusted capitalization
multiples of equivalent proved reserves were $2.94, $1.57 and $0.77 per Mcfe6,
respectively. The highest, average and lowest adjusted capitalization multiples
of SEC Value were 5.2x, 1.7x and 0.8x, respectively. The highest, average and
lowest market capitalization multiples of discretionary cash flow were 19.9x,
7.9x and 2.2x, respectively. Petrie Parkman determined that, with respect to
Hugoton, the appropriate benchmarks for adjusted capitalization multiples for
gross pre-tax cash flow, operating cash flow, equivalent proved reserves and SEC
Value were in the ranges of 7.0 to 9.0x, 6.0 to 8.0x, $1.00 to $1.20 per Mcfe6
and 1.0 to 1.3x, respectively, and that the appropriate benchmark market
capitalization multiples for discretionary cash flow were in the range of 5.5 to
8.0x. Petrie Parkman applied these benchmark multiples to Hugoton's historical
gross pre-tax cash flow, operating cash flow, SEC Value, discretionary cash flow
and equivalent proved reserves based on the reserve estimates referred to above.
From the asset reference value ranges implied by these multiples, Petrie Parkman
determined a composite asset reference value range under this method of $325.0
million to $400.0 million. After subtracting long-term obligations of Hugoton of
$100.0 million and dividing by the number of shares of Hugoton Common Stock
outstanding, the composite equity reference value range per share of Hugoton
Common Stock outstanding was $11.34 to $15.00.
Going Concern Analysis -- Hugoton. Petrie Parkman projected the potential
financial performance of Hugoton without giving effect to the Merger for the
four and one-half year period beginning June 30, 1997 using Pricing Cases I, II
and III. Petrie Parkman prepared these projections utilizing certain information
and projections prepared or provided by Hugoton management as well as numerous
assumptions, including two capital cases. The first case (the "$0.75/Mcfe6
Finding Cost Case") was based on Hugoton's development plan as set forth in its
July 1, 1997 reserve report with capital in excess of the reserve report capital
reinvested for reserve additions at $0.75/Mcfe6. The second case (the
"$1.00/Mcfe Finding Cost Case") employed the same assumptions as the $0.75/Mcfe6
Finding Cost Case but assumed reinvestment for reserve additions based on a
finding cost of $1.00/Mcfe6. Capital expenditure levels were based on Hugoton's
1997 and 1998 estimated capital budget with 10% annual escalation thereafter.
Other factors reflected in the analysis include discount rates of 15.0% to
17.5%, terminal multiples of 5.0x, 6.0x and 7.0x projected 2001 discretionary
cash flow and utilization of Hugoton's existing tax position.
A terminal multiple of 5.0x projected 2001 discretionary cash flow yielded
equity reference values per share of Hugoton Common Stock outstanding under the
$0.75/Mcfe6 Finding Cost Case of $6.41 to $7.02 using Pricing Case I, $7.87 to
$8.62 using Pricing Case II and $10.59 to $11.61 using Pricing Case III, and
under the $1.00/Mcfe6 Finding Cost Case of $4.57 to $5.00 using Pricing Case I,
$5.85 to $6.41 using Pricing Case II and $8.25 to $9.04 using Pricing Case III.
A terminal multiple of 6.0x projected 2001 discretionary cash flow yielded
equity reference values per share of Hugoton Common Stock outstanding under the
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$0.75/Mcfe6 Finding Cost Case of $7.77 to $8.51 using Pricing Case I, $9.52 to
$10.43 using Pricing Case II and $12.79 to $14.02 using Pricing Case III, and
under the $1.00/Mcfe6 Finding Cost Case of $5.54 to $6.08 using Pricing Case I,
$7.08 to $7.76 using Pricing Case II and $9.96 to $10.92 using Pricing Case III.
A terminal multiple of 7.0x projected 2001 discretionary cash flow yielded
equity reference values per share of Hugoton Common Stock outstanding under the
$0.75/Mcfe6 Finding Cost Case of $9.13 to $10.00 using Pricing Case I, $11.17 to
$12.24 using Pricing Case II and $14.99 to $16.43 using Pricing Case III, and
under the $1.00/Mcfe6 Finding Cost Case of $6.52 to $7.15 using Pricing Case I,
$8.32 to $9.11 using Pricing Case II and $11.68 to $12.80 using Pricing Case
III. From these equity reference value ranges, Petrie Parkman determined a
composite equity reference value range per share of Hugoton Common Stock
outstanding of $11.00 to $14.00 for the $0.75/Mcfe6 Finding Cost Case and $9.00
to $11.00 for the $1.00/Mcfe6 Finding Cost Case.
Discounted Cash Flow Analysis -- Chesapeake. Petrie Parkman calculated
estimates of future after-tax cash flows for the reserve assets based on the
reserve estimates referred to above and for the non-reserve assets utilizing
information provided by Chesapeake under Pricing Cases I, II and III described
above. Other factors involved in Petrie Parkman's analysis included the use of
after-tax discount rates ranging from 10.0% to 25.0% depending on reserve
category and the evaluation of certain other assets of Chesapeake. This
methodology resulted in asset reference value ranges of $830.8 million to $879.7
million for Pricing Case I, $888.6 million to $939.4 million for Pricing Case II
and $992.8 million to $1,057.2 million for Pricing Case III. After deducting
long-term obligations of Chesapeake of $509.0 million from the asset reference
value ranges and dividing by the number of shares of Chesapeake Common Stock
outstanding, the equity reference value ranges per share of Chesapeake Common
Stock outstanding are $4.00 to $4.61 for Pricing Case I, $4.72 to $5.35 for
Pricing Case II and $6.02 to $6.82 for Pricing Case III.
Comparable Transactions Analysis -- Chesapeake. Petrie Parkman reviewed
certain publicly available information on the 84 oil and gas property
acquisition transactions described above and the one transaction for which
Petrie Parkman had non-public information. Petrie Parkman determined that, with
respect to Chesapeake, the appropriate benchmark multiples for equivalent proved
reserves for the Permian, Rocky Mountain, Mid-Continent and East Texas / Gulf
Coast assets were in the ranges of $0.60 to $0.70 per Mcfe6, $0.70 to $0.90 per
Mcfe6, $0.80 to $1.15 per Mcfe6 and $1.00 to $1.25 per Mcfe6, respectively.
Petrie Parkman applied these benchmarks to Chesapeake's corresponding proved
reserve figures for each of the geographic regions to yield asset reference
value ranges for Chesapeake's reserves. Following adjustments for Chesapeake's
non-reserve assets, Petrie Parkman determined from the asset reference value
ranges implied by these multiples a composite asset reference value range under
this method of $800.0 million to $900.0 million. After deducting long-term
obligations of Chesapeake of $509.0 million from the composite asset reference
value range and dividing by the number of shares of Chesapeake Common Stock
outstanding, the resulting composite equity reference value range per share of
Chesapeake Common Stock outstanding was $3.62 to $4.86.
In addition, Petrie Parkman reviewed certain publicly available information
on the 23 company acquisition transactions and offers for control described
above. Petrie Parkman determined that, with respect to Chesapeake, the
appropriate benchmark multiples for gross pre-tax cash flow, discretionary cash
flow, equivalent proved reserves and SEC Value were in the ranges of to 6.0 to
8.0x, 6.0 to 7.5x, $1.00 to $1.50 per Mcfe6 and 1.0 to 1.5x, respectively.
Petrie Parkman applied these benchmark multiples to Chesapeake's historical
gross pre-tax cash flow, discretionary cash flow, equivalent proved reserves and
SEC Value. Petrie Parkman determined from the asset reference value ranges
implied by these multiples a composite asset reference value range under this
method of $1,200.0 million to $1,500.0 million. After deducting long-term
obligations of Chesapeake of $509.0 million from the composite asset reference
value range and dividing by the number of shares of Chesapeake Common Stock
outstanding, the resulting composite equity reference value range per share of
Chesapeake Common Stock outstanding was $8.59 to $12.32.
Common Stock Comparisons -- Chesapeake. Using publicly available
information, Petrie Parkman calculated adjusted capitalization multiples of
historical financial criteria for gross pre-tax cash flow, operating cash flow
and SEC Value and of equivalent proved reserves for 124 publicly traded
independent oil and gas
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companies. Petrie Parkman also calculated market capitalization multiples of
historical financial criteria for discretionary cash flow for such companies.
Petrie Parkman determined that 17 companies were relevant to an evaluation
of Chesapeake in terms of reserve location and reserve life. Accordingly, Petrie
Parkman examined in greater detail Barrett Resources Corporation, Belco,
Bellwether Exploration Company, Box Energy Corporation, Clayton Williams Energy,
Inc., Comstock Resources, Inc., Forcenergy Inc., HS Resources, Inc., Hugoton,
KCS Energy, Inc., Lomak Petroleum, Inc., Louis Dreyfus Natural Gas Corp., Santa
Fe Energy Resources, Inc., Snyder Oil Corporation, Stone Energy Corporation, Tom
Brown, Inc. and Union Pacific Resources Group Inc. For these 17 companies, the
highest, average, and lowest adjusted capitalization multiples of gross pre-tax
cash flow were 11.4x, 7.0x, and 3.2x, respectively. The highest, average and
lowest adjusted capitalization multiples of operating cash flow were 10.9x, 6.4x
and 3.0x, respectively. The highest, average and lowest adjusted capitalization
multiples of SEC Value were 2.5x, 1.4x and 0.8x, respectively. The highest,
average and lowest adjusted capitalization multiples of equivalent proved
reserves were $2.74, $1.68 and $0.79 per Mcfe6, respectively. The highest,
average and lowest market capitalization multiples of discretionary cash flow
were 12.9x, 6.7x and 2.1x, respectively. Petrie Parkman determined that, with
respect to Chesapeake, the appropriate benchmark adjusted capitalization
multiples for gross pre-tax cash flow, operating cash flow, SEC Value, and
equivalent proved reserves were in the ranges of 7.0 to 9.0x, 5.5 to 7.5x, 1.5
to 2.0x and $1.90 to $2.10 per Mcfe6, respectively, and that the appropriate
benchmark market capitalization multiples for discretionary cash flow were in
the range of 7.0 to 9.0x. Petrie Parkman applied these benchmark multiples to
Chesapeake's historical gross pre-tax cash flow, operating cash flow, SEC Value,
discretionary cash flow and equivalent proved reserves based on the reserve
estimates referred to above. From the asset reference value ranges implied by
these multiples, Petrie Parkman determined a composite asset reference value
range under this method of $1,400.0 million to $1,700.0 million. After deducting
long-term obligations of Chesapeake of $509.0 million from the composite asset
reference value range and dividing by the number of shares of Chesapeake Common
Stock outstanding, the resulting composite equity reference value range per
share of Chesapeake Common Stock outstanding was $11.08 to $14.81.
Going Concern Analysis -- Chesapeake. Petrie Parkman projected the
potential financial performance of Chesapeake without giving effect to the
Merger for the two-year period beginning June 30, 1997 on a quarterly basis
using Pricing Cases I, II and III. Petrie Parkman prepared these projections
utilizing certain information and projections prepared or provided by
Chesapeake's management as well as numerous assumptions. Projections were based
on Chesapeake's proved developed reserves as set forth in the September 30, 1997
reserve report, the Gruy Engineering reserve report as of January 1, 1997 and
the DeGolyer & MacNaughton reserve report as of December 31, 1996 and certain
projections of drilling opportunities and associated capital expenditures
supplied by Chesapeake for the two-year period. No capital was assumed to be
spent beyond that identified in the projections described above. Other factors
reflected in the analysis include the use of multiples of discretionary cash
flow of 3.3x, 4.3x and 5.3x based on Chesapeake's estimated trailing twelve-
month historical multiple of discretionary cash flow of 4.3x and utilization of
Chesapeake's existing tax position.
Using a multiple of 3.3x projected June 30, 1998 and June 30, 1999
discretionary cash flow, this methodology resulted in ranges of equity reference
values per share of Chesapeake Common Stock outstanding of $6.79 to $9.21 using
Pricing Case I, $7.48 to $10.14 using Pricing Case II and $8.50 to $11.66 using
Pricing Case III. Using a multiple of 4.3x projected June 30, 1998 and June 30,
1999 discretionary cash flow yielded equity reference values per share of
Chesapeake Common Stock outstanding of $8.83 to $11.97 using Pricing Case I,
$9.72 to $13.17 using Pricing Case II and $11.04 to $15.15 using Pricing Case
III. Using a multiple of 5.3x projected June 30, 1998 and June 30, 1999
discretionary cash flow yielded equity reference values per share of Chesapeake
Common Stock outstanding of $10.86 to $14.72 using Pricing Case I, $11.95 to
$16.21 using Pricing Case II and $13.57 to $18.63 using Pricing Case III. From
these equity reference value ranges, Petrie Parkman determined a composite
equity reference value range per share of Chesapeake Common Stock outstanding
under this method of $11.00 to $15.00.
Pro Forma Merger Analysis. Petrie Parkman analyzed certain pro forma
financial effects of the Merger for the two-year period beginning June 30, 1997.
In connection with such analysis, Petrie Parkman assessed
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the past performance of the managements of Hugoton and Chesapeake, reviewed the
estimates and projections prepared or provided by the managements of Hugoton and
Chesapeake, and had discussions with members of the management of Hugoton and
Chesapeake with respect to the current operations and the future financial and
operating performance of Chesapeake on a stand-alone basis and after giving
effect to the Merger, but relied only to a limited degree on these estimates and
projections in conducting its pro forma merger analysis. This analysis indicated
that the Merger would be dilutive to projected Chesapeake earnings per share for
the fiscal year ending June 30, 1998, but accretive for the fiscal year ending
June 30, 1999 and that the Merger would be accretive to Chesapeake's
discretionary cash flow per share over the two-year period ending June 30, 1999.
The analysis also indicated that the Merger would result in lower total debt to
total book capitalization ratios than projected for Chesapeake on a stand-alone
basis for the two-year period ending June 30, 1999. Petrie Parkman concluded
that, based on these projections, the Merger would not be dilutive to
discretionary cash flow per share over the period analyzed and would not result
in higher financial leverage.
The description set forth above constitutes a summary of the material
analyses employed by Petrie Parkman in rendering its opinion dated November 12,
1997 to the Hugoton Board. Petrie Parkman believes that its analyses must be
considered as a whole and that selecting portions of its analyses considered by
it, without considering all analyses and factors, could create an incomplete
view of the process underlying its opinion. The preparation of a fairness
opinion is a complex, analytical process involving various determinations as to
the most appropriate and relevant methods of financial analysis and the
application of those methods to the particular circumstances and is not
necessarily susceptible to partial analysis or summary description. In arriving
at its opinion, Petrie Parkman did not attribute any particular weight to any
analysis considered by it, but rather made qualitative judgements as to the
significance and relevance of each analysis. Any estimates resulting therefrom
are not necessarily indicative of actual values, which may be significantly more
or less favorable than as set forth herein. In addition, analyses based on
forecasts of future results are not necessarily indicative of future results,
which may be significantly more or less favorable than suggested by such
analyses. Estimates of reference values of companies do not purport to be
appraisals or necessarily reflect the prices at which companies may actually be
sold. Because such estimates are inherently subject to uncertainty and based
upon numerous factors or events beyond the control of the parties or their
respective advisors, no assurances can be given that such estimates will prove
to be accurate.
No company used in the analysis of other publicly traded companies nor any
transaction used in the analyses of comparable transactions summarized above is
identical to Hugoton, Chesapeake or the Merger. Accordingly, such analyses must
take into account differences in the financial and operating characteristics of
the selected companies and the companies in the selected transactions and other
factors that would affect the public trading value and acquisition value of the
selected companies and the selected transactions, respectively.
Petrie Parkman, as part of its investment banking business, is continually
engaged in the evaluation of energy-related businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, secondary
distributions of listed and unlisted securities, private placements and
valuations for corporate and other purposes. Hugoton selected Petrie Parkman as
its financial advisor because it is a nationally recognized investment banking
firm that has substantial experience in transactions similar to the Merger.
Pursuant to the terms of the engagement letter between Petrie Parkman and
Hugoton dated June 20, 1997, as amended on November 12, 1997, Hugoton paid
Petrie Parkman an advisory fee of $100,000 and has agreed to pay Petrie Parkman
a transaction fee (the "Transaction Fee"), contingent and payable upon the
consummation of the Merger, in an amount equal to 1.00% of the equity
consideration to be received by Hugoton and/or its shareholders in the Merger.
The amount of such equity consideration will be calculated on the basis of the
average of the closing market price of Chesapeake Common Stock for the last ten
trading days prior to the public announcement of the Merger. As so calculated,
the Transaction Fee is estimated to be $2.8 million. Whether or not the Merger
is consummated, Hugoton has also agreed to reimburse Petrie Parkman for its
out-of-pocket expenses, including reasonable fees and expenses of counsel, and
to indemnify Petrie Parkman and certain related persons against certain
liabilities relating to or arising out of its engagement, including certain
liabilities under federal securities laws.
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CHESAPEAKE'S FINANCIAL ADVISOR. Bear, Stearns & Co. Inc. ("Bear Stearns")
has acted as one of Chesapeake's financial advisors in connection with the
Merger. Chesapeake's other financial advisor in connection with the Merger,
Donaldson, Lufkin & Jenrette Securities Corporation, was not asked to and did
not render a fairness opinion, make any other report, opinion or appraisal
materially relating to the Merger, or make any presentations to the Chesapeake
Board. In connection with Bear Stearns' engagement as financial advisor,
Chesapeake requested Bear Stearns to evaluate the fairness of the Exchange Ratio
in the Merger, from a financial point of view, to the public shareholders of
Chesapeake. On November 12, 1997, in connection with the Board's evaluation of
the Merger Agreement and the contemplated transaction, Bear Stearns delivered
its opinion that, as of such date and subject to certain assumptions, factors
and limitations stated therein and as described below, the Exchange Ratio in the
Merger was fair, from a financial point of view, to the public shareholders of
Chesapeake.
THE FULL TEXT OF THE OPINION OF BEAR STEARNS (THE "OPINION"), WHICH SETS
FORTH THE ASSUMPTIONS MADE, PROCEDURES FOLLOWED, MATTERS CONSIDERED AND
QUALIFICATIONS AND LIMITATIONS ON THE REVIEW UNDERTAKEN BY BEAR STEARNS IN
RENDERING THE OPINION, IS ATTACHED AS ANNEX C HERETO AND IS INCORPORATED HEREIN
BY REFERENCE. THE SUMMARY OF THE OPINION SET FORTH IN THIS JOINT PROXY
STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT
OF SUCH OPINION. SHAREHOLDERS OF CHESAPEAKE ARE URGED TO READ SUCH OPINION IN
ITS ENTIRETY. THE OPINION WAS PROVIDED TO THE CHESAPEAKE BOARD FOR ITS
INFORMATION IN CONNECTION WITH ITS CONSIDERATION OF THE MERGER AND IS DIRECTED
ONLY TO THE FAIRNESS, FROM A FINANCIAL POINT OF VIEW, OF THE EXCHANGE RATIO TO
THE PUBLIC SHAREHOLDERS OF CHESAPEAKE, DOES NOT ADDRESS THE MERITS OF THE
UNDERLYING DECISION BY CHESAPEAKE TO ENGAGE IN THE MERGER AND DOES NOT
CONSTITUTE A RECOMMENDATION TO CHESAPEAKE'S SHAREHOLDERS AS TO HOW SUCH
SHAREHOLDERS SHOULD VOTE ON THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT OR
ANY MATTER RELATED THERETO. BEAR STEARNS EXPRESSED NO OPINION AS TO THE PRICE OR
RANGE AT WHICH THE CHESAPEAKE COMMON STOCK MAY TRADE SUBSEQUENT TO THE
ANNOUNCEMENT OR CONSUMMATION OF THE MERGER.
No limitations were imposed by Chesapeake on the scope of its investigation
or the procedures to be followed by Bear Stearns in rendering the Opinion. Bear
Stearns was not requested to and did not make any recommendation to the
Chesapeake Board as to the form or amount of the consideration to be paid for
the Hugoton Common Stock in the Merger, which was determined through arm's
length negotiations between Chesapeake and Hugoton. In arriving at the Opinion,
Bear Stearns did not ascribe a specific range of values as to Chesapeake or
Hugoton, but made its determination on the basis of the financial and
comparative analyses summarized below. The Opinion does not address Chesapeake's
underlying business decision to pursue the Merger.
In rendering the Opinion, Bear Stearns reviewed, relied upon, assumed the
accuracy and completeness and did not assume any responsibility for independent
verification of various forecasts and estimates of cash flow, reserves and
production of Chesapeake and Hugoton prepared by or for the managements of
Chesapeake and Hugoton, including those prepared by Chesapeake with respect to
Hugoton. Bear Stearns' analyses were based upon various assumptions regarding
reserves, pricing and timing of production as of the dates on which such
forecasts and estimates were made, and there can be no assurance that actual
results of Chesapeake or Hugoton either alone or on a combined basis will not
vary materially from those forecasts and estimates. With respect to Chesapeake's
and Hugoton's projected financial results that would be achieved upon
consummation of the Merger (and the potential synergies that could be achieved
by Chesapeake and Hugoton upon consummation of the Merger), Bear Stearns assumed
that such projections were reasonably prepared on bases reflecting the best
currently available estimates and judgments of the respective senior managements
of Chesapeake and Hugoton as to the expected future performance of Chesapeake
and Hugoton. With respect to reserve estimates referred to in clauses (vi) and
(vii) in the paragraph below, Bear Stearns is not an expert in the engineering
evaluation of oil and gas properties and has relied solely upon the estimates
referred to herein. In arriving at its Opinion, Bear Stearns did not perform or
obtain any independent evaluation or appraisal of the assets or liabilities of
Chesapeake or Hugoton, nor was Bear Stearns furnished with any such appraisal.
In connection with rendering the Opinion, Bear Stearns, among other things:
(i) reviewed the principal financial terms of the Merger set forth in the Merger
Agreement; (ii) reviewed certain publicly available and other related
information concerning Chesapeake; (iii) reviewed certain publicly available and
other related information concerning Hugoton; (iv) reviewed certain publicly
available information concerning the industry
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in which Chesapeake and Hugoton operate; (v) reviewed certain operating and
financial information, including projections, relating to the businesses and
future prospects of Chesapeake and Hugoton that were provided to Bear Stearns by
the senior managements of Chesapeake and Hugoton, respectively; (vi) reviewed
certain estimates of proved oil and natural gas reserves of Hugoton as of
December 31, 1996, and July 1, 1997, prepared by Ryder Scott Company; (vii)
reviewed certain estimates of proved oil and natural gas reserves of Chesapeake
as of June 30, 1997, prepared by Williamson Petroleum Consultants, Inc., as well
as certain estimates of proved oil and natural gas reserves of DLB as of July
1997 prepared by DeGolyer & MacNaughton and certain estimates of proved oil and
natural gas reserves of AnSon as of December 31, 1997 prepared by management of
AnSon; (viii) met with certain members of Chesapeake's and Hugoton's senior
management to discuss each company's past and current operations, historical
financial statements and future prospects, including Chesapeake's strategic
interest in acquiring longer-lived reserves; (ix) reviewed and analyzed certain
publicly available information with respect to certain other companies that Bear
Stearns believed to be generally comparable to Chesapeake and Hugoton; (x)
reviewed certain information concerning the historical prices, trading volumes
and valuation parameters of the Chesapeake Common Stock and the Hugoton Common
Stock; (xi) reviewed the financial terms of certain recent business combination
transactions that Bear Stearns deemed generally comparable to Chesapeake and
Hugoton and the Merger; and (xii) conducted such other studies, analyses,
inquiries and investigations as Bear Stearns deemed appropriate. Bear Stearns
assumed that the Merger would qualify as a tax-free reorganization for U.S.
federal income tax purposes. In addition, certain information and estimates upon
which Bear Stearns reviewed and relied gave pro forma effect to the consummation
of the DLB and AnSon acquisitions by Chesapeake. The Opinion was necessarily
based on information available to Bear Stearns and on general economic,
financial, stock market, monetary and other conditions as they existed and could
be evaluated as of the date of the Opinion. Bear Stearns does not have any
obligation to update, revise or reaffirm its opinion.
In connection with its presentation to the Chesapeake Board on November 12,
1997, and in advising the Chesapeake Board of its Opinion, Bear Stearns
performed a variety of financial and comparative analyses, as summarized below.
The preparation of a fairness opinion involves various determinations as to the
most appropriate and relevant methods of financial analysis and the application
of those methods to the particular circumstances and, therefore, an opinion is
not readily susceptible to summary or partial description. Accordingly, Bear
Stearns believes that its analyses must be considered as a whole and that
considering any portion of such analyses and of the factors considered, without
considering all analyses and factors, could create a misleading or incomplete
view of the process underlying its analysis and the Opinion. In its analyses,
Bear Stearns made numerous assumptions with respect to industry performance,
general business and economic conditions and other matters, many of which are
beyond the control of Chesapeake and Hugoton. Any estimates contained in its
analyses are not necessarily indicative of actual values or predictive of future
results or values, which may be significantly more or less favorable than as set
forth therein.
Comparable Company Analysis. As part of this analysis, Bear Stearns
compared certain financial information of Hugoton to a group of seven publicly
traded independent oil and gas exploration and production companies: Comstock
Resources Inc., Devon Energy Corporation, HS Resources, Inc., National Energy
Group, Inc., Plains Resources, Inc., Swift Energy Corporation and Vintage
Petroleum, Inc. (the "Comparable Companies"). This comparison of financial
information included analyses of multiples such as stock price to forecasted
calendar 1997 and 1998 operating cash flow (defined as net income less preferred
stock dividends, plus deferred taxes, depreciation, depletion, amortization,
impairments and exploration costs) per share ("CFPS"), and multiples of
Enterprise Value (defined as equity value plus debt, preferred stock and
minority interests less cash and cash equivalents) to (i) the latest twelve
months ("LTM") EBITDAX (defined as earnings before interest, income taxes,
depreciation, depletion, amortization, impairments and exploration expense) as
of June 30, 1997, (ii) proved reserves as of December 31, 1996 and (iii) pre-tax
standardized measure of discounted estimated future net cash flows related to
proved reserves ("PV 10 values") as of December 31, 1996. Bear Stearns
calculated a range of implied equity values per share of Hugoton Common Stock
(based upon an implied offer price per share determined by multiplying the
Exchange Ratio times the trading price of the Chesapeake Common Stock as of
November 11, 1997) by performing an analysis that applied indicative multiples,
selected based upon considerations such as the observed multiples for the
Comparable Companies and Bear Stearns' knowledge of Hugoton and the industry.
Bear Stearns noted that
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based upon a compilation of CFPS projections obtained from equity research
analysts and on share prices as of November 11, 1997, the Comparable Companies
traded at multiples of share price to forecasted 1997 CFPS in an indicative
multiple range of 6.5 times to 7.5 times and to forecasted 1998 CFPS in an
indicative multiple range of 5.4 times to 6.4 times, compared to 6.8 times and
5.9 times the Hugoton implied offer price to forecasted 1997 CFPS and 1998 CFPS,
respectively. In addition, Bear Stearns noted that based upon publicly available
information and implied market valuations as of November 11, 1997, the
Comparable Companies traded at multiples of Enterprise Value to LTM EBITDAX in
an indicative multiple range of 7.6 times to 8.6 times, compared to 8.5 times
for Hugoton based upon Hugoton's implied offer price. Bear Stearns also noted
that the analyses of multiples of Enterprise Value to estimated proved reserves
and PV 10 values resulted in (a) an indicative multiple range of $1.15 -- $1.40
per thousand cubic feet of natural gas equivalents (based on a six-to-one
natural gas to oil conversion ratio) ("Mcfe") for the Comparable Companies,
compared to $1.16 per Mcfe for Hugoton based upon Hugoton's implied offer price,
and (b) an indicative multiple range of 0.7 times to 1.0 times PV 10 values for
the Comparable Companies, compared to 0.8 times for Hugoton based upon Hugoton's
implied offer price. These indicative ranges of multiples were applied to each
such respective financial measure relative to Hugoton providing the following
implied equity values per share: (i) $12.94 per share to $14.93 per share based
on forecasted 1997 CFPS; (ii) $12.37 per share to $14.66 per share based on
forecasted 1998 CFPS; (iii) $11.55 per share to $13.71 per share based on LTM
EBITDAX (after subtracting $98.8 million of net debt); (iv) $13.26 per share to
$17.19 per share based on estimated proved reserves as of December 31, 1996
(after subtracting $98.8 million of net debt); and (v) $11.04 per share to
$17.84 per share based on PV 10 values as of December 31, 1996 (after
subtracting $98.8 million of net debt).
No company utilized in the comparable company analysis is identical to
Hugoton. In evaluating the Comparable Companies, Bear Stearns made judgments and
assumptions with regard to industry performance, general business, economic,
market and financial conditions and other matters, many of which are beyond the
control of Hugoton such as the impact of competition on the business of Hugoton
and the industry generally, industry growth and the absence of any material
adverse change in the financial condition and prospects of Hugoton or the
industry or in financial markets in general. An analysis of comparable companies
is not purely mathematical; rather it involves complex considerations and
judgments concerning similarities and differences in financial, operational and
other characteristics of potentially comparable companies.
Comparable Acquisitions Analysis. Bear Stearns reviewed the transaction
values in selected business combination transactions which involved certain oil
and gas exploration and production companies similar to Hugoton and which were
announced or completed during 1997. Bear Stearns included in its review the
following transactions: Louis Dreyfus Natural Gas Corp./American Exploration
Co., Burlington Resources Inc./Louisiana Land & Exploration Co., The Meridian
Resource Corporation/Cairn Energy USA, Inc., Chesapeake/DLB, Chesapeake/AnSon,
Comstock Resources, Inc./Bois D'Arc Resources, Lomak Petroleum, Inc./Cometra
Energy, L.P. and Belco/Coda Energy, Inc. (the "Comparable Transactions"). For
purposes of this analysis, these companies' lines of business and operations, or
locations of their properties, made them, in the judgment of Bear Stearns, as
nearly comparable to Hugoton as practicable. Bear Stearns calculated a range of
implied equity values per share of Hugoton Common Stock by performing an
analysis that applied indicative multiples, selected based upon considerations
such as the observed ranges of values for the Comparable Transactions and Bear
Stearns' knowledge of Hugoton and the industry. Bear Stearns reviewed the
multiples in the Comparable Transactions of transaction value to the acquired
companies' respective estimated proved reserves as of December 31, 1996,
expressed in terms of dollars per Mcfe ($/Mcfe), based on a six-to-one natural
gas to oil conversion ratio. An analysis of the ratio of transaction values to
proved reserves as of December 31, 1996 resulted in an indicative multiple range
for the Comparable Transactions of $1.20 to $1.65 per Mcfe, compared to the
implied multiple for Chesapeake/Hugoton of $1.16 per Mcfe based on the implied
offer price for the Hugoton Common Stock. Bear Stearns also reviewed the
multiples in the Comparable Transactions of transaction value to the acquired
companies' respective estimated PV 10 values as of December 31, 1996; this
analysis resulted in an indicative multiple range for the Comparable
Transactions of 0.9 times to 1.2 times, compared to the implied multiple for
Chesapeake/ Hugoton of 0.8 times based on the implied offer price for the
Hugoton Common Stock. Bear Stearns further reviewed the multiples in the
Comparable Transactions of transaction values to the acquired companies'
respective LTM EBITDAX as of June 30, 1997. An analysis of the ratio of
transaction values to LTM
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<PAGE> 38
EBITDAX resulted in an indicative multiple range for the Comparable Transactions
of 6.5 to 8.5 times, compared to the implied multiple for Chesapeake/Hugoton of
8.5 times based on the implied offer price for the Hugoton Common Stock. After
applying these indicative ranges of multiples to each such respective financial
measure relative to Hugoton and subtracting $98.8 million of net debt, Bear
Stearns arrived at the following implied equity values per share: (i) $14.05 per
share to $21.13 per share based on estimated proved reserves as of December 31,
1996; (ii) $15.58 per share to $22.38 per share based on PV 10 values as of
December 31, 1996; and (iii) $9.18 per share to $13.49 per share based on LTM
EBITDAX.
No transaction reviewed in the Comparable Transaction analysis is identical
to the Merger. In evaluating the Comparable Transactions, Bear Stearns made
judgments and assumptions with regard to industry performance, general business,
economic, market and financial conditions and other matters, many of which are
beyond the control of Chesapeake and Hugoton such as the impact of competition
on the business of Chesapeake and Hugoton and the industry generally, industry
growth and the absence of any material adverse change in the financial condition
and prospects of Chesapeake and Hugoton or the industry or in the financial
markets in general. An analysis of comparable transactions is not purely
mathematical; rather it involves complex considerations and judgments concerning
similarities and differences in financial, operational and other characteristics
of potentially comparable transactions.
Relative Contribution Analysis. Bear Stearns' analysis determined the
contribution to combined Enterprise Value by Chesapeake and Hugoton as 75.0% and
25.0%, respectively. Bear Stearns then compared the Enterprise Value
contributions to the contributions of each of Chesapeake and Hugoton to combined
EBITDAX, proved reserves and PV 10 values. For combined estimated EBITDAX for
calendar 1998, Bear Stearns determined that Chesapeake would contribute 82.2%
and Hugoton would contribute 17.8%; from combined estimated proved reserves as
of June 30, 1997, Bear Stearns determined that Chesapeake would contribute 66.5%
and that Hugoton would contribute 33.5%; and for combined PV 10 values as of
June 30, 1997, Bear Stearns determined that Chesapeake would contribute 75.4%
and Hugoton would contribute 24.6%. Bear Stearns' analysis also determined the
contribution to combined market equity value (based on share prices as of
November 11, 1997) by Chesapeake and Hugoton as 74.3% and 25.7%, respectively.
Bear Stearns then compared the equity value contributions to the contributions
of each of Chesapeake and Hugoton to combined net debt-free PV 10 values,
projected 1998 operating cash flow and projected 1998 net income. For combined
net debt-free PV 10 values as of June 30, 1997, Bear Stearns determined that
Chesapeake would contribute 74.2% and Hugoton would contribute 25.8%; for
combined projected 1998 operating cash flows, Bear Stearns determined that
Chesapeake would contribute 81.7% and Hugoton would contribute 18.3%; and for
combined projected 1998 net income, Bear Stearns determined that Chesapeake
would contribute 89.2% and Hugoton would contribute 10.8%. The analyses
involving projections and estimates were based upon projections and estimates
supplied to Bear Stearns by the managements of Chesapeake and Hugoton (including
those prepared by Chesapeake with respect to Hugoton). In making its analyses,
Bear Stearns took into account Chesapeake's strategic interest in acquiring
longer-lived reserves in connection with the Merger. This analysis did not
assume the realization of any cost savings or synergies from the Merger.
Discounted Cash Flow Analyses. Using a discounted cash flow analysis, Bear
Stearns estimated the present value (utilizing a discount rate of 10%) of the
future net cash flows that Hugoton could be expected to generate from July 1,
1997 and beyond, based upon certain reserve report information provided by
Hugoton for proved, probable and possible reserves and associated projected
production profiles and using escalated pricing and cost assumptions of 4.0% per
annum. Bear Stearns assigned risk factor ranges for recoveries of probable and
possible reserves of 40% to 60%, and 20% to 30%, respectively; no risk factor
was assigned to proved reserves. Assigning these risk factors, the estimated
present values of the future net cash flows that could be expected to be
generated from such reserves ranged from $359.9 million to $401.9 million. Using
this analysis and adding estimated values for undeveloped acreage and other
assets, and then deducting $98.8 million of net debt, Bear Stearns arrived at an
implied equity value range for Hugoton of $13.22 to $15.26 per share.
Bear Stearns is an internationally recognized investment banking firm that
provides financial services in connection with a wide range of business
transactions. As part of its business, Bear Stearns regularly engages in the
valuation of companies and their securities in connection with mergers and
acquisitions, negotiated
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<PAGE> 39
underwritings, competitive biddings, secondary distributions of listed and
unlisted securities, private placements and other purposes. Chesapeake retained
Bear Stearns based on Bear Stearns' experience and expertise in the valuation of
companies and because it is familiar with Chesapeake and its business.
Pursuant to a letter agreement dated June 20, 1997, Chesapeake engaged Bear
Stearns to serve as its financial advisor in connection with a possible business
combination with Hugoton. Pursuant to the terms of the letter agreement,
Chesapeake agreed to pay Bear Stearns the following fees as compensation for its
services in connection with the business combination: (i) $50,000 payable upon
its engagement, (ii) $200,000 payable upon the announcement of the transaction,
(iii) $300,000 payable at the time Bear Stearns rendered its Opinion, and (iv)
contingent and payable upon the consummation of the business combination, a
transaction fee in an amount equal to 0.75% of the value of the total
consideration paid by Chesapeake in the business combination up to $350 million
and 0.60% for any amounts greater than $350 million (less any fees previously
paid pursuant to (i), (ii) and (iii)). In addition, regardless of whether the
Merger is consummated, Chesapeake has agreed to reimburse Bear Stearns for
out-of-pocket expenses incurred in connection with the Merger, including legal
fees, and to indemnify Bear Stearns and certain related persons against certain
liabilities and expenses, including certain liabilities under federal securities
laws.
Bear Stearns has previously rendered certain investment banking services to
Chesapeake, including acting as managing underwriter of public offerings of
equity and debt of Chesapeake, for which it has received customary compensation.
In the ordinary course of its business, Bear Stearns may actively trade the
securities of Hugoton and Chesapeake for its account and for the accounts of its
customers and, accordingly, may at any time hold a long or short position in
such securities.
Donaldson, Lufkin & Jenrette Securities Corporation, Chesapeake's other
financial advisor in connection with the Merger, will receive a fee of $1.0
million for financial advisory services in connection with the Merger.
FORWARD LOOKING STATEMENTS MAY PROVE INACCURATE
This document (including documents that have been incorporated herein by
reference) includes various forward-looking statements about Hugoton, Chesapeake
and the Combined Company that are subject to risks and uncertainties.
Forward-looking statements include, but are not limited to, the information
concerning future results of operations of Hugoton, Chesapeake and the Combined
Company after the Effective Time, set forth under "Questions and Answers About
The Merger for Hugoton Shareholders," "Questions and Answers About The Merger
for Chesapeake Shareholders," "Summary," "Risk Factors," "-- Background of the
Merger," "-- Reasons for the Merger; Recommendations of Boards of Directors,"
"-- Opinions of Financial Advisors" and those preceded by, followed by or that
otherwise include words such as "expects," "anticipates," "intends," "plans,"
"predicts," "believes," "estimates," "should," "could" and variations of such
words and similar expressions. For these statements, Hugoton and Chesapeake
claim the protection of the safe harbor for forward-looking statements contained
in the Private Securities Litigation Reform Act of 1995.
The following important factors, in addition to those discussed elsewhere
in this document and the documents incorporated herein by reference (see "Where
You Can Find More Information" on page 58), could affect the future financial
results of Hugoton, Chesapeake and the Combined Company and could cause actual
results to differ from those expressed in forward-looking statements contained
or incorporated by reference in this document: fluctuations in prices for oil,
gas and natural gas liquids; increased drilling and development costs;
estimation of reserves; inaccurate seismic data; mechanical failures; decreased
demand for motor fuels, natural gas and other products; above-average
temperatures; pipeline failures; oil spills; increasing price and product
competition; higher or lower costs and expenses of exploring for, developing and
producing oil and natural gas; domestic and foreign governmental and public
policy changes, including environmental regulations; the outcome of pending and
future litigation and governmental proceedings, restrictions imposed by lenders
and continued availability of financing. In addition, such results could be
affected by general industry and market conditions and growth rates; general
domestic and international economic conditions including interest rate and
currency exchange rate fluctuations; and other factors.
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ACCOUNTING TREATMENT
The Merger will be treated for accounting purposes in accordance with the
rules for purchase accounting. Accordingly, the assets and liabilities of
Hugoton will be recorded on Chesapeake's books at their estimated fair market
values with the remaining purchase price reflected as an addition to oil and gas
properties. See the "Notes to Unaudited Pro Forma Combined Financial Statements"
included elsewhere in this Joint Proxy Statement/Prospectus.
CERTAIN MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES
Tax Opinions Regarding the Merger. In the opinion of Andrews & Kurth
L.L.P., counsel to Chesapeake, and Vinson & Elkins L.L.P., special tax counsel
to Hugoton, the Merger will be a reorganization within the meaning of Section
368(a) of the Internal Revenue Code of 1986, as amended (the "Code"), provided
that the representations contained in the Merger Agreement (and certain
customary factual representations made to counsel) are correct as of the
Effective Time, the Merger is consummated in the manner contemplated by the
Merger Agreement and this Joint Proxy Statement/Prospectus and there is no
change in the Code or applicable authority. If such representations are not
correct, the Merger is not so consummated or there is a change in the Code or
applicable authority, this opinion cannot be relied upon.
Provided that the representations contained in the Merger Agreement (and
certain customary factual representations made to counsel) are correct as of the
Effective Time, the Merger is consummated in the manner contemplated by the
Merger Agreement and this Joint Proxy Statement/Prospectus and there is no
change in the Code or applicable authority for U.S. federal income tax purposes:
(i) no gain or loss will be recognized by the shareholders of Hugoton upon the
receipt of Chesapeake Common Stock in exchange for Hugoton Common Stock in the
Merger; (ii) the aggregate adjusted tax basis of the shares of Chesapeake Common
Stock to be received by a shareholder of Hugoton in the Merger (including
fractional shares to be sold on behalf of the shareholder) will be the same as
the aggregated adjusted tax basis of the shares of Hugoton Common Stock
surrendered in exchange therefor; (iii) the holding period of the shares of
Chesapeake Common Stock received by a shareholder of Hugoton in exchange for the
Hugoton Common Stock will include the holding period of the shares of Hugoton
Common Stock surrendered in exchange therefor, provided that such shares of
Hugoton Common Stock are held as capital assets at the Effective Time; and (iv)
a shareholder of Hugoton who receives cash in lieu of a fractional share of
Chesapeake Common Stock would generally recognize gain or loss equal to the
difference, if any, between the amount of cash received and such shareholder's
adjusted tax basis in the fractional shares sold on his or her behalf.
Consummation of the Merger is conditioned upon the receipt of opinions of
Andrews & Kurth L.L.P. and Vinson & Elkins L.L.P., each dated as of the
Effective Time, to the effect that the Merger will qualify as a tax-free
reorganization under Section 368(a) of the Code. This condition to the
consummation of the Merger may, however, be waived, in which case the approval
of the Hugoton shareholders would be resolicited.
THE FOREGOING DISCUSSION DOES NOT ADDRESS ALL OF THE TAX CONSEQUENCES THAT
MAY BE RELEVANT TO PARTICULAR TAXPAYERS IN LIGHT OF THEIR PERSONAL CIRCUMSTANCES
OR TO TAXPAYERS SUBJECT TO SPECIAL TREATMENT UNDER THE CODE (FOR EXAMPLE,
INSURANCE COMPANIES, FINANCIAL INSTITUTIONS, DEALERS IN SECURITIES, TAX-EXEMPT
ORGANIZATIONS, FOREIGN CORPORATIONS, FOREIGN PARTNERSHIPS OR OTHER FOREIGN
ENTITIES AND INDIVIDUALS WHO ARE NOT CITIZENS OR RESIDENTS OF THE UNITED
STATES).
NO INFORMATION IS PROVIDED HEREIN WITH RESPECT TO THE TAX CONSEQUENCES, IF
ANY, OF THE MERGER UNDER APPLICABLE FOREIGN, STATE, LOCAL AND OTHER TAX LAWS.
THE FOREGOING DISCUSSION IS BASED UPON THE PROVISIONS OF THE CODE, APPLICABLE
TREASURY REGULATIONS THEREUNDER, INTERNAL REVENUE SERVICE RULINGS AND JUDICIAL
DECISIONS AS IN EFFECT AS OF THE DATE OF THIS JOINT PROXY STATEMENT/PROSPECTUS.
THERE CAN BE NO ASSURANCE THAT FUTURE LEGISLATIVE, ADMINISTRATIVE OR JUDICIAL
CHANGES OR INTERPRETATIONS WILL NOT AFFECT THE ACCURACY OF THE STATEMENTS OR
CONCLUSIONS SET FORTH HEREIN. ANY SUCH CHANGE COULD APPLY RETROACTIVELY AND
COULD AFFECT THE CONCLUSIONS REACHED IN SUCH DISCUSSION. NO RULINGS HAVE BEEN OR
WILL BE SOUGHT FROM THE INTERNAL REVENUE SERVICE CONCERNING THE TAX CONSEQUENCES
OF THE MERGER.
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<PAGE> 41
EACH SHAREHOLDER OF HUGOTON IS URGED TO CONSULT SUCH SHAREHOLDER'S OWN TAX
ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES TO SUCH SHAREHOLDER OF THE MERGER
UNDER U.S. FEDERAL, STATE, LOCAL OR ANY OTHER APPLICABLE TAX LAWS.
REGULATORY MATTERS; CERTAIN LEGAL MATTERS
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended
(the "HSR Act"), and the rules promulgated thereunder by the Federal Trade
Commission (the "FTC"), certain transactions may not be consummated until
notifications have been given and certain information has been furnished to the
FTC and the Antitrust Division of the United States Department of Justice (the
"Antitrust Division") and specified waiting period requirements have been
satisfied. Chesapeake and Hugoton believe that the Merger complies with certain
exemptions from the notification and waiting period requirements of the HSR Act
and the rules promulgated thereunder. However, notwithstanding the availability
of such exemptions, the FTC and the Antitrust Division have the authority to
challenge the Merger on antitrust grounds before or after the Merger is
completed. Each state in which Chesapeake or Hugoton has operations may also
review the Merger under state antitrust laws. Neither Chesapeake nor Hugoton is
aware of any other regulatory approvals or filings that are required in
connection with the Merger.
NO APPRAISAL RIGHTS
Section 17-6712 of the Kansas General Corporation Code (the "KGCC")
provides appraisal rights (sometimes referred to as "dissenters' rights") to
shareholders of Kansas corporations in certain situations. However, Section
17-6712 provides that appraisal rights are not available to shareholders of a
corporation such as Hugoton, (a) whose securities are registered on a national
securities exchange or are designated as a national market system security on an
interdealer quotation system by the National Association of Securities Dealers,
Inc. ("NASD") and (b) whose shareholders are not required to accept in exchange
for their stock anything other than stock of another corporation listed on a
national securities exchange or on an interdealer quotation system by the NASD
and cash in lieu of fractional shares. Because the Hugoton Common Stock is
designated as a national market system security on an interdealer quotation
system by the NASD, and because the Hugoton shareholders are being offered only
Chesapeake Common Stock, which is traded on the New York Stock Exchange (the
"NYSE"), and (in some cases) cash in lieu of fractional shares, shareholders of
Hugoton will not have appraisal rights with respect to the Merger.
Holders of Chesapeake Common Stock are not entitled to appraisal rights
under Oklahoma law in connection with the Merger.
FEDERAL SECURITIES LAWS CONSEQUENCES; RESALE RESTRICTIONS
This Joint Proxy Statement/Prospectus does not cover resales of the
Chesapeake Common Stock to be received by the shareholders of Hugoton upon
consummation of the Merger, and no person is authorized to make any use of this
Joint Proxy Statement/Prospectus in connection with any such resale.
All shares of Chesapeake Common Stock received by Hugoton shareholders in
the Merger will be freely transferable, except that shares of Chesapeake Common
Stock received by persons who are deemed to be "affiliates" (as such term is
defined under the Securities Act of 1933, as amended (the "1933 Act")) of
Hugoton may be resold by them only in transactions permitted by the resale
provisions of Rule 145 (or Rule 144 in the case of such persons who become
affiliates of Chesapeake) or as otherwise permitted under the 1933 Act. Persons
who may be deemed to be affiliates of Hugoton or Chesapeake generally include
individuals or entities that control, are controlled by, or are under common
control with, such party and may include certain officers and directors of
Hugoton or Chesapeake as well as significant shareholders. The Merger Agreement
requires Hugoton to use its reasonable efforts to cause each of its affiliates
to execute a written agreement to the effect that such persons will not offer or
sell or otherwise dispose of any of the shares of Chesapeake Common Stock issued
to them in the Merger in violation of the 1933 Act or the rules and regulations
promulgated by the Securities and Exchange Commission ("SEC") thereunder.
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COMPARATIVE PER SHARE MARKET PRICE AND DIVIDEND INFORMATION
Chesapeake Common Stock has been listed for trading under the ticker symbol
"CHK" on the NYSE since April 28, 1995. Prior to such date, Chesapeake Common
Stock was listed for quotation on the NASDAQ National Market. Hugoton Common
Stock is listed for quotation on the NASDAQ National Market. The Hugoton ticker
symbol is "HUGO."
The table below sets forth, for the calendar quarters indicated, the
reported high and low closing prices of Chesapeake Common Stock as reported on
the NYSE Composite Transaction Tape, and of Hugoton Common Stock as reported on
the NASDAQ National Market, in each case based on published financial sources.
Hugoton has not paid a cash dividend during any of the relevant periods.
Chesapeake initiated a quarterly dividend with the payment of $.02 per
share of Chesapeake Common Stock on July 15, 1997. The payment of future cash
dividends, if any, will be reviewed by the Chesapeake Board and will depend
upon, among other things, Chesapeake's financial condition, funds from
operations, the level of its capital and development expenditures, its business
prospects and any contractual restrictions. In addition, certain of the
indentures governing Chesapeake's indebtedness contain certain restrictions on
Chesapeake's ability to declare and pay dividends.
<TABLE>
<CAPTION>
HUGOTON COMMON CHESAPEAKE COMMON
STOCK STOCK(1)
---------------- ------------------
MARKET PRICE MARKET PRICE
---------------- ------------------
HIGH LOW HIGH LOW
------ ------ ------- -------
<S> <C> <C> <C> <C>
1995
First Quarter................................. $ 8.56 $ 6.00 $ 4.84 $ 2.22
Second Quarter................................ 9.25 7.50 6.70 4.67
Third Quarter................................. 10.50 8.00 7.28 4.53
Fourth Quarter................................ 9.75 8.25 11.08 6.20
1996
First Quarter................................. 9.25 7.25 16.50 10.67
Second Quarter................................ 8.75 7.00 30.38 15.50
Third Quarter................................. 9.38 7.38 34.00 21.00
Fourth Quarter................................ 11.63 8.25 34.13 25.69
1997
First Quarter................................. 12.50 9.50 31.50 19.88
Second Quarter................................ 13.88 9.25 22.38 9.25
Third Quarter................................. 14.06 11.25 11.50 6.31
Fourth Quarter................................ 13.00 8.75 12.94 7.00
1998
First Quarter (through February 6, 1998)...... 9.38 7.00 7.63 5.56
</TABLE>
- ---------------
(1) Gives effect to three-for-two stock splits on December 15, 1995 and June 28,
1996 and a two-for-one stock split on December 31, 1996.
On November 12, 1997, the last full trading day prior to the public
announcement of the proposed Merger, the closing price of Chesapeake Common
Stock on the NYSE Composite Transaction Tape was $10.25 per share and the
closing price of Hugoton Common Stock on the NASDAQ National Market was $12.50
per share. On February 6, 1998, the most recent practicable date prior to the
date of this Joint Proxy Statement/Prospectus, the closing price on the NYSE
Composite Transaction Tape for Chesapeake Common Stock was $6.00 per share and
the closing price on the NASDAQ National Market for Hugoton Common Stock was
$7.75 per share.
HUGOTON AND CHESAPEAKE SHAREHOLDERS ARE URGED TO OBTAIN CURRENT MARKET
QUOTATIONS PRIOR TO MAKING ANY DECISION WITH RESPECT TO THE MERGER.
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INTERESTS OF CERTAIN PERSONS IN THE MERGER AND RELATED MATTERS
Hugoton shareholders should note that a number of directors and executive
officers of Hugoton have interests in the Merger as employees and directors that
are different from, or in addition to, yours as a shareholder, as described
below.
Employment Agreements. Four of Hugoton's key executives, Floyd C. Wilson,
W. Mark Womble, Jay W. Decker and David M. Drummond, have entered into
employment agreements with Hugoton. Each such employment agreement provides that
the employee will be entitled to certain severance pay if (i) Hugoton terminates
the employee without "Cause" (as defined in such agreements) or (ii) if the
employee terminates the agreement for "Good Reason" after a "Change of Control"
has occurred. Under such agreements, "Good Reason" is defined as the occurrence,
without the employee's express written consent, of any one or more of the
following events: (i) a change in the employee's duties or a change in the title
or offices held by the employee; (ii) a reduction in the employee's compensation
or the failure by Hugoton to continue to provide prompt payment (or
reimbursement to the employee) of all reasonable expenses incurred by the
employee in connection with the employee's professional and business activities;
(iii) a failure by Hugoton to waive any and all restrictions that might exist on
the exercise of any stock options held by the employee under Hugoton's stock
option plans as of the date of a Change of Control; and (iv) the failure of
Hugoton to obtain the assumption of the employment agreement without limitation
or reduction, by any successor to Hugoton. In addition to the above, Good Reason
also is deemed to exist if a Change of Control in Hugoton has occurred and the
employee agrees to stay employed by Hugoton for a reasonable transition period
after the Change of Control, not to exceed three (3) months. In such case the
employee would give thirty (30) days' notice to Hugoton, and such notice period
may begin prior to the date of the Change of Control if an agreement is in place
that would have the effect of causing a Change of Control. Under the terms of
the employment agreements, a "Change of Control" shall have occurred if: (i)
fifty percent (50%) or more of the outstanding common stock of Hugoton has been
acquired by any person or persons (as defined in Section 3(a)(9) of the
Securities Exchange Act of 1934 (the "Exchange Act")), provided such person(s)
is not a current shareholder(s) of Hugoton currently holding ten percent (10%)
or more of the outstanding common stock of Hugoton; (ii) there has been a merger
or equivalent combination involving Hugoton after which fifty percent (50%) or
more of the voting stock of the surviving corporation is held by persons other
than those persons who were shareholders holding ten percent (10%) or more of
the outstanding stock of Hugoton immediately prior to the date of such merger or
equivalent combination; or (iii) there has been a merger or equivalent
combination or stock sale involving Hugoton and after such transaction fifty
percent (50%) or more of the members of the Board elected by shareholders are
persons who were not directors immediately prior to such transaction.
The severance pay to be paid to each such employee if Hugoton terminates
the employee without "Cause" or if the employee terminates the agreement for
"Good Reason" is as follows: Mr. Wilson would be entitled to five (5) times his
annual salary; Mr. Decker would be entitled to the amount of his entire salary
for the remaining term of his agreement (which agreement expires September 7,
1999); Mr. Womble would be entitled to three times his annual compensation (as
defined in his employment agreement); and Mr. Drummond would be entitled to an
amount equal to (i) two times his annual salary if such termination occurs
during the first six (6) months of his employment, (ii) two and one-half times
his annual salary if such termination occurs during the second six (6) months of
his employment, and (iii) three (3) times his annual salary if such termination
occurs after the first year of his employment. Mr. Drummond's employment with
Hugoton commenced on April 17, 1997. Assuming an Effective Time of January 31,
1998 which constitutes a "Change of Control," Messrs. Wilson, Decker, Womble and
Drummond would be entitled to severance payments in the amount of $2,000,000,
$272,057, $553,500, and $437,500, respectively. Mr. Womble's employment
agreement also provides that he will continue to participate in all of Hugoton's
welfare benefit plans, including health and medical plans, for six (6) months
following termination and is entitled to reimbursement of COBRA payments to
maintain medical and dental insurance up to twelve (12) additional months for
said coverage.
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Option Agreements. Several of the executive officers and directors of
Hugoton hold options exercisable for shares of Hugoton Common Stock. Upon
consummation of the Merger, such options shall be converted into the right to
purchase shares of Chesapeake Common Stock.
Severance Plan. Under the terms of Hugoton's Severance Plan, in the event
of a Corporate Change, employees, including certain executive officers, will be
offered severance pay based upon the time of service with Hugoton and other
factors. A "Corporate Change" is defined as follows: (i) Hugoton is not the
surviving entity in any merger, consolidation or the reorganization (or survives
only as a subsidiary of an entity other than a previously wholly owned
subsidiary of Hugoton), (ii) Hugoton sells, leases or exchanges substantially
all of its assets to any other person or entity (other than a wholly owned
subsidiary of Hugoton), (iii) Hugoton is to be dissolved and liquidated, (iv)
any person or entity, including a "group" as contemplated by Section 13(d)(3) of
the Exchange Act acquires or gains ownership or control (including, without
limitation, power to vote) of more than 50% of the outstanding shares of
Hugoton's voting stock (based upon voting power), or (v) as a result of or in
connection with a contested election of directors, the persons who were
directors of Hugoton before such election cease to constitute a majority of the
Board.
Under the terms of the Hugoton Severance Plan, if an employee is offered a
comparable position with equal or better salary at his or her present location
and accepts employment in such present location, no severance will be paid by
Hugoton. If the employee is offered employment somewhere other than the city of
their current principal place of employment, the employee will have the option
of accepting such employment or accepting the severance package from Hugoton. In
order to be entitled to severance, the employee must agree to remain with
Hugoton and perform the assigned work duties during any transition period, not
to exceed a period of three (3) months, if requested by the acquiring company.
Each of the officers, except those officers with employment agreements,
will be entitled to an amount of severance pay equal to two to three times his
annual salary upon a Corporate Change, assuming he is not offered a comparable
position.
401(k) Plan. Several of the executive officers of Hugoton participate in
the Hugoton Energy Corporation 401(k) Profit Sharing Plan ("401(k) Plan"). Upon
a Corporate Change, Hugoton is obligated to terminate the 401(k) Plan. Under the
terms of such 401(k) Plan, upon termination all participants will be 100%
vested.
Registration Rights Agreement. Pursuant to the terms of the Merger
Agreement, Chesapeake and Floyd C. Wilson, Wilvest, L.P., The Wilson Foundation,
Comdisco, Inc., and American Gas & Oil Investors, Limited Partnership, AmGO II,
Limited Partnership, First Reserve Fund V, Limited Partnership and those other
holders of Hugoton Common Stock who are deemed "affiliates" of Hugoton within
the meaning of the Securities Act, and who, as a result of the Merger, will hold
in excess of three percent (3%) of the issued and outstanding shares of
Chesapeake Common Stock at closing have agreed to enter into a certain
Registration Rights Agreement. Under the terms of such Registration Rights
Agreement, such shareholders will be granted certain registration rights with
respect to the shares of Chesapeake Common Stock received in the Merger.
Proxy Agreements. Pursuant to the terms of the Merger Agreement, certain
shareholders of Hugoton, Wilvest, L.P., The Wilson Foundation, Comdisco, Inc.,
American Gas & Oil Investors Limited Partnership, AmGO II, Limited Partnership,
First Reserve Fund V, Limited Partnership and Jay W. Decker each entered into an
Agreement and Limited Irrevocable Proxy with Chesapeake. Under the terms of each
of such proxy agreements, such Hugoton shareholders have granted Chesapeake
their proxy to vote in favor of the Merger. Such shareholders hold an aggregate
of 8,631,512 shares or 48.6% of the issued and outstanding shares of Hugoton
Common Stock as of December 1, 1997.
Affiliate Letters. Under the terms of the Merger Agreement, Hugoton has
agreed to use its best efforts to cause each person who is an affiliate of
Hugoton to execute and deliver to Chesapeake an Affiliate Letter, whereby each
such affiliate of Hugoton will, among other things, agree that certificates
representing the shares of Chesapeake which he will receive in the Merger will
contain certain legends. The officers and directors of Hugoton will be deemed
affiliates of Hugoton.
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Data Room Bonuses. On September 12, 1997, management of Hugoton notified
nine of its employees (including two officers, Randy Click and Jimmy Gowens)
involved in the preparation and presentation of the data room that such
employees would be paid bonuses contingent upon the price at which Hugoton was
sold. Generally, such employees were told they would receive a bonus equal to
between 25% and 100% of their respective annual salaries based upon the final
sales price of Hugoton. The total amount paid or to be paid to such nine
employees equals $411,000, $140,000 of which has been paid or will be paid to
Randy Click and Jimmy Gowens, officers of Hugoton.
THE MERGER AGREEMENT
This section of the Joint Proxy Statement/Prospectus describes certain
aspects of the proposed Merger, including certain provisions of the Merger
Agreement. The description of the Merger Agreement contained in this Joint Proxy
Statement/Prospectus does not purport to be complete and is qualified in its
entirety by reference to the Merger Agreement, a copy of which is attached
hereto as Annex A and which is incorporated herein by reference. All Chesapeake
and Hugoton shareholders are urged to read carefully the Merger Agreement in its
entirety.
STRUCTURE; EFFECTIVE TIME
The Merger Agreement contemplates the Merger of Sub (an indirect wholly
owned subsidiary of Chesapeake) with and into Hugoton, with Hugoton surviving
the Merger. The Merger will become effective at the time the certificate of
merger is accepted for filing by the Secretary of State of the State of Kansas
(or such later time as is specified in the certificate of merger) (the
"Effective Time"), which is expected to occur as soon as practicable after the
last condition precedent to the Merger set forth in the Merger Agreement has
been satisfied or waived.
MERGER CONSIDERATION
The Merger Agreement provides that each share of Hugoton Common Stock that
is issued and outstanding immediately prior to the Effective Time (except as
described below) will, at the Effective Time, be converted into the right to
receive 1.3 shares of Chesapeake Common Stock (as to each such share, the
"Merger Consideration") (see "The Merger--General"). All shares of Hugoton
Common Stock that are owned by Hugoton as treasury stock will, at the Effective
Time, be canceled and no payment will be made for such shares. No certificate or
scrip representing fractional shares of Chesapeake Common Stock will be issued
in the Merger. Hugoton shareholders will instead receive a check in the amount
of the net proceeds from the sale of those fractional shares in the market.
EMPLOYEE STOCK OPTIONS
At the Effective Time, each option to purchase shares of Hugoton Common
Stock outstanding under any Hugoton stock option plan or agreement, whether or
not vested or exercisable, will be converted into an option to purchase shares
of Chesapeake Common Stock (a "Substitute Option"). The number of shares of
Chesapeake Common Stock subject to purchase under such Substitute Option will be
1.3 multiplied by the number of shares of Hugoton Common Stock originally
subject to such option, rounded to the nearest whole share. The exercise price
for each Substitute Option will be the original exercise price per share of
Hugoton Common Stock divided by 1.3, rounded up to the nearest full cent.
CONVERSION OF SHARES
Prior to the Effective Time, Chesapeake will appoint an exchange agent (the
"Exchange Agent") for the purpose of exchanging certificates representing shares
of Hugoton Common Stock for the Merger Consideration, which Chesapeake will make
available to the Exchange Agent. As soon as reasonably practicable after the
Effective Time, Chesapeake will cause the Exchange Agent to send each holder of
record of Hugoton Common Stock a letter of transmittal to be used to effect the
exchange of Hugoton Common Stock certificates for Chesapeake Common Stock
certificates, along with instructions explaining how to use such
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letter of transmittal. Holders of Hugoton Common Stock who surrender their
certificates to the Exchange Agent together with a properly completed letter of
transmittal will receive the Merger Consideration. Holders of unexchanged shares
of Hugoton Common Stock will not be entitled to receive any dividends or other
distributions payable by Chesapeake after the Effective Time until their
certificates are surrendered. Upon surrender, however, such holders will receive
accumulated dividends and distributions payable on the related shares of
Chesapeake Common Stock subsequent to the Effective Time, without interest,
together with (if applicable) cash in lieu of fractional shares of Chesapeake
Common Stock in the amount of the net proceeds from the sale of those fractional
shares by the Exchange Agent.
CERTAIN COVENANTS
Interim Operations of Hugoton. From the date of execution of the Merger
Agreement until the Effective Time, Hugoton and its subsidiaries are required to
conduct their business in the ordinary course consistent with past practice and
to use their reasonable best efforts to preserve substantially intact their
business organizations, to keep available the services of their officers,
employees and consultants and to preserve the goodwill of relationships with
certain third parties. In particular, during this period Hugoton may not,
without Chesapeake's prior written consent, amend its organizational documents
or those of its subsidiaries; and neither Hugoton nor its subsidiaries may,
without Chesapeake's prior written consent: issue capital stock (other than
pursuant to options outstanding on the date of execution of the Merger
Agreement); pay dividends (other than to Hugoton by a Hugoton subsidiary);
reclassify, combine, split, subdivide or redeem any of its capital stock;
acquire material assets (other than in the ordinary course of business);
increase officer or employee compensation (other than employee pay increases in
accordance with past practice); enter into employment or severance agreements;
adopt or amend collective bargaining, bonus, profit sharing, thrift,
compensation, stock option (other than as described above in "--Employee Stock
Options"), restricted stock, pension, retirement, deferred compensation,
employment, termination, severance or any other plan, agreement, trust, fund,
policy or arrangement for the benefit of any director, officer or employee; make
any material tax election or settle any material tax liability; pay any
liability (other than payment in the ordinary course of business and consistent
with past practice); undertake capital commitments individually exceeding
$250,000 or in the aggregate exceeding $2,500,000; take any action which would
disqualify the Merger as a Code Section 368 reorganization; impair any material
right of Hugoton or its subsidiaries; take, offer or propose to take any of the
foregoing actions or any action which would result in any of the conditions to
the Merger not being fulfilled; take any action that would make any
representation and warranty of Hugoton under the Merger Agreement materially
inaccurate in any respect; or agree or commit to any of the foregoing.
Interim Operations of Chesapeake. From the date of execution of the Merger
Agreement until the Effective Time, Chesapeake and its subsidiaries are required
to conduct their business in the ordinary course consistent with past practice
and to use their reasonable best efforts to preserve substantially intact their
business organizations, to keep available the services of their officers,
employees and consultants and to preserve the goodwill of relationships with
certain third parties. In particular, during this period, Chesapeake may not,
subject to certain limited exceptions: amend its organizational documents; issue
capital stock or securities convertible into capital stock (except for the
issuance of Chesapeake common stock issuable pursuant to outstanding options and
the issuance of options pursuant to option and incentive plans); reclassify,
combine, split, subdivide or redeem, purchase or otherwise acquire any of its
capital stock; acquire material assets other than in the ordinary course and
consistent with past practice; or take or cause to be taken any action which
would disqualify the Merger as a Code Section 368 reorganization.
Special Meetings; Proxy Material. Chesapeake and Hugoton have agreed to
cause the Special Meetings to be duly called and held as promptly as practicable
for the purpose of voting on the approval and adoption of the Merger Agreement.
No Solicitation by Hugoton. Hugoton has covenanted in the Merger Agreement
that it and its subsidiaries will not, and that it will cause the officers,
directors and financial and legal advisors of Hugoton and its subsidiaries not
to, directly or indirectly, take any action to solicit, initiate or encourage
any Alternative Proposal (as defined herein) or engage in negotiations with, or
disclose any non-public information relating to an Alternative Proposal, or
agree to, approve or recommend any effort to make or implement an Alternative
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Proposal, or withdraw its recommendation of the Merger. Notwithstanding the
foregoing, the Hugoton Board may take and disclose to the shareholders of
Hugoton a position contemplated by Rule 14e-2(a) promulgated under the Exchange
Act with regard to an Alternative Proposal and, following receipt of a bona fide
written Alternative Proposal from a third party without any solicitation,
initiation or encouragement by Hugoton or Hugoton's representatives, may engage
in negotiations with and disclose non-public information to such third party if
the third party executes a Confidentiality Agreement. "Alternative Proposal"
means any offer or proposal for the acquisition of 3% or more of the outstanding
shares of Hugoton Common Stock, or all or any material portion of the assets of
Hugoton or any transaction the consummation of which would or could reasonably
be expected to impede the consummation of the Merger, other than the
transactions contemplated by the Merger Agreement.
Hugoton must notify Chesapeake promptly after receipt of (i) any
Alternative Proposal, (ii) any indication that any person is considering making
an Alternative Proposal or (iii) any request for non-public information relating
to Hugoton. Hugoton has agreed to keep Chesapeake fully informed of the status
of any such Alternative Proposal or request. Hugoton has further agreed to, and
has agreed to cause its subsidiaries and the directors, officers and financial
and legal advisors of Hugoton and its subsidiaries to, cease immediately and
cause to be terminated all activities, discussions or negotiations, if any, with
any persons conducted with respect to any Alternative Proposal prior to the
execution of the Merger Agreement. Hugoton has further agreed to disclose the
terms and conditions of any Alternative Proposal to Chesapeake.
Hugoton Board's Covenant to Recommend. The Hugoton Board has agreed to
recommend the approval and adoption of the Merger Agreement to Hugoton
shareholders. Notwithstanding the foregoing, the Hugoton Board is permitted to
withdraw or modify its recommendation, but only if and to the extent the Hugoton
Board determines in good faith based on the advice of Hugoton's financial
advisor that the Alternative Proposal, if consummated, would result in a
transaction more favorable to Hugoton's shareholders from a financial point of
view than the Merger (a "Superior Proposal").
Certain Employee Benefits Matters. The Merger Agreement provides that or on
immediately prior to the Effective Time, Hugoton will pay severance to its
employees with written employment agreements if such employees terminate their
agreements prior to the Effective Time. Employees without written employments
shall receive severance only if they are not offered a substantially comparable
position by Chesapeake or Sub with equal or better base salary at such
employees' current locations. With respect to any employee who is not paid
severance because he or she is retained, the severance policy will continue in
full force and effect.
Indemnification and Insurance of Hugoton Directors and Officers. Chesapeake
has agreed that it will indemnify and hold harmless the present and former
directors and officers of Hugoton, to the fullest extent that Hugoton would have
been permitted under Kansas law, against certain liabilities.
Certain Other Covenants. The Merger Agreement contains certain mutual
covenants of the parties, including covenants relating to actions to be taken so
as not to jeopardize the intended tax treatment of the Merger; public
announcements; notification of certain matters; access to information; further
assurances; cooperation in connection with certain governmental filings and in
obtaining consents and approvals; and confidential treatment of non-public
information.
CERTAIN REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains substantial reciprocal representations and
warranties made by Hugoton and Chesapeake as to, among other things, due
organization and good standing; corporate authorization to enter into the
contemplated transactions; governmental approvals required in connection with
the contemplated transactions; absence of any breach of organizational documents
and certain material agreements as a result of the contemplated transactions;
capitalization; filings with the SEC; financial statements; absence of certain
material changes (including changes which would have a material adverse effect)
since June 30, 1997; absence of undisclosed material liabilities; compliance
with laws and court orders; litigation; tax matters; employee matters;
environmental matters; tax treatment of the Merger; and information included in
this Joint Proxy Statement/Prospectus.
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In addition, Hugoton has represented to Chesapeake as to, among other
things, advisors' fees and opinions, subsidiaries and status and operation of
oil and gas properties. Hugoton has further made certain representations
relating to certain provisions of Kansas corporate law.
The representations and warranties in the Merger Agreement do not survive
the Effective Time.
CONDITIONS TO THE MERGER
Conditions to Each Party's Obligations to Effect the Merger. The
obligations of Chesapeake, Hugoton and Sub to consummate the Merger are subject
to the satisfaction of the following conditions:
(i) receipt of the approval of Hugoton shareholders and Chesapeake
shareholders;
(ii) increase in Chesapeake's authorized capital stock as contemplated
by the Merger Agreement;
(iii) the applicable waiting period under the HSR Act having expired
or been terminated;
(iv) no applicable law or regulation, judgment, injunction, order or
decree prohibiting or enjoining the consummation of the Merger; and
(v) the registration statement of which this Joint Proxy
Statement/Prospectus is a part having become effective under the 1933 Act
and not being subject to any stop order or related proceedings by the SEC.
Conditions to the Obligations of Chesapeake and Sub. The obligations of
Chesapeake and Sub to effect the Merger are further subject to the satisfaction
of the following conditions:
(i) the performance in all material respects by Hugoton of its
obligations under the Merger Agreement at or prior to the Effective Time;
(ii) the representations and warranties of Hugoton contained in the
Merger Agreement being true as of the Closing Date as though made on and as
of such time, or if not true, such failure to be true having no material
adverse effect;
(iii) Chesapeake having received affiliate letters from affiliates of
Hugoton (as described under "The Merger -- Federal Securities Law
Consequences; Resale Restrictions");
(iv) Chesapeake having received the legal opinion of Andrews & Kurth
L.L.P. to the effect that the Merger will be treated for federal income tax
purposes as a reorganization qualifying under the provisions of Section
368(a) of the Code; and
(v) no change (with certain exceptions) having occurred that would
have or would be reasonably likely to have a material adverse effect on
Hugoton.
Conditions to the Obligation of Hugoton. The obligation of Hugoton to
effect the Merger is further subject to the satisfaction of the following
conditions:
(i) the performance in all material respects by Chesapeake of its
obligations under the Merger Agreement at or prior to the Closing Date;
(ii) the representations and warranties of Chesapeake contained in the
Merger Agreement being true as of the Closing Date as though made on and as
of such time, or if not true, such failure to be true having no material
adverse effect;
(iii) Hugoton having received the legal opinion of Vinson & Elkins
L.L.P. to the effect that the Merger will be treated for federal income tax
purposes as a reorganization qualifying under the provisions of Section
368(a) of the Code;
(iv) the shares of Chesapeake Common Stock issuable pursuant to the
Merger being authorized for listing on the NYSE or other exchange upon
which Chesapeake Common Stock is traded;
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(v) no change (with certain exceptions) having occurred that would
have or would be reasonably likely to have a material adverse effect on
Chesapeake; and
(vi) execution of the Registration Rights Agreement.
TERMINATION OF THE MERGER AGREEMENT
Right to Terminate. The Merger Agreement may be terminated at any time
prior to the Effective Time as follows:
(i) by mutual written consent of Chesapeake and Hugoton;
(ii) by either Hugoton or Chesapeake: (a) if the Merger has not been
consummated by April 30, 1998; (b) if the shareholders of Hugoton or
Chesapeake fail to approve and adopt the Merger Agreement at the Special
Meetings (or any adjournment or postponement thereof); or (c) any order,
decree or ruling enjoining the Merger is entered and such judgment,
injunction, order or decree has become final and non-appealable (but
neither Hugoton nor Chesapeake may terminate until such party has used all
reasonable efforts to remove such injunction, order or decree);
(iii) by Chesapeake: if (a) Hugoton has failed to comply in any
material respect with any of its covenants or agreements contained in the
Merger Agreement and such failure has not been, or cannot be, cured within
a reasonable time after notice and demand for cure thereof; (b) Hugoton has
breached its representations and warranties under the Merger Agreement such
that the aggregate of which would have a material adverse effect on
Hugoton, provided that Chesapeake has given Hugoton at least fifteen (15)
days prior written notice of such breach and Hugoton has failed to cure
such breach; or (c) the Hugoton Board accepts a Superior Proposal,
withdraws or modifies its recommendation or approval in a manner adverse to
Chesapeake, or fails to reaffirm such recommendation or approval upon
request by Chesapeake; or
(iv) by Hugoton: if (a) as a result of a Superior Proposal received by
Hugoton from a third party, the Hugoton Board determines in good faith that
its fiduciary obligations under applicable law require that such Superior
Proposal be accepted; provided that Chesapeake has been provided with the
opportunity to make adjustments in the terms and conditions of the Merger
Agreement as would enable Hugoton to proceed with the Merger, and provided
that Hugoton pays the applicable termination fee to Chesapeake; (b)
Chesapeake has breached its representations and warranties under the Merger
Agreement the aggregate of which would have a material adverse effect on
Chesapeake; provided that Hugoton has given Chesapeake at least fifteen
(15) days prior written notice of such breach and Chesapeake has failed to
cure such breach; or (c) Chesapeake has failed to comply in any material
respect with any of its covenants or agreements contained in the Merger
Agreement and such failure has not been, or cannot be, cured within a
reasonable time after notice and demand for cure thereof.
If the Merger Agreement is validly terminated, no provision thereof will
survive (except for the provisions relating to termination fees and expenses)
and such termination shall be without any liability on the part of any party,
unless such party is in breach of any provision of the Merger Agreement
occurring prior to such termination. The confidentiality agreement entered into
between Chesapeake and Hugoton on June 23, 1997 will continue in effect
notwithstanding termination of the Merger Agreement.
Termination Fee and Expenses Payable by Hugoton. Hugoton has agreed to pay
Chesapeake $8 million if the Merger Agreement is terminated in the circumstances
described above under "-- Right to Terminate" in paragraph (iv)(a) or (iii)(c),
or under paragraph (ii)(b) if the shareholders of Hugoton fail to approve the
Merger Agreement and at the time of such failure to so approve the Merger
Agreement there exists an Alternative Proposal with respect to Hugoton and,
within seven months of the termination of the Merger Agreement, Hugoton enters
into a definitive agreement with any third party with respect to such
Alternative Proposal.
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AMENDMENTS
The Merger Agreement may be amended by a written instrument signed by each
of the parties to the Merger Agreement at any time before or, after the approval
of the Merger, by the shareholders of Hugoton, provided that no such amendment
shall be made that by law requires further approval by such shareholders without
such further approval.
HUGOTON SPECIAL MEETING
This Joint Proxy Statement/Prospectus is furnished in connection with the
solicitation of proxies from the holders of Hugoton Common Stock by the Hugoton
Board for use at the Hugoton Special Meeting. This Joint Proxy
Statement/Prospectus and accompanying form of proxy are first being mailed to
the shareholders of Hugoton on or about February 17, 1998.
TIME AND PLACE; PURPOSE
The Hugoton Special Meeting will be held at 10:00 A.M., Kansas time, on
Tuesday, March 10, 1998 at Hugoton Energy Corporation, 301 N. Main, Suite 1900,
Wichita, Kansas 67202. At the Hugoton Special Meeting (and any adjournment or
postponement thereof), the shareholders of Hugoton will be asked to consider and
vote upon the approval and adoption of the Merger Agreement and the Merger and
such other matters as may properly come before the Hugoton Special Meeting.
Hugoton shareholder approval and adoption of the Merger and the Merger
Agreement are required by the KGCC.
THE HUGOTON BOARD HAS UNANIMOUSLY APPROVED THE TERMS OF THE MERGER
AGREEMENT AND THE CONSUMMATION OF THE MERGER CONTEMPLATED THEREBY, UNANIMOUSLY
BELIEVES THAT THE TERMS OF THE MERGER AND THE MERGER AGREEMENT ARE FAIR TO, AND
IN THE BEST INTERESTS OF, HUGOTON AND ITS SHAREHOLDERS, AND UNANIMOUSLY
RECOMMENDS THAT HOLDERS OF HUGOTON COMMON STOCK VOTE "FOR" APPROVAL AND ADOPTION
OF THE MERGER AND THE MERGER AGREEMENT.
RECORD DATE; VOTING RIGHTS AND PROXIES
Only holders of record of Hugoton Common Stock at the close of business on
February 18, 1998 (the "Hugoton Record Date") are entitled to notice of and to
vote at the Hugoton Special Meeting. As of the Hugoton Record Date, there were
19,838,574 shares of Hugoton Common Stock outstanding, each of which entitled
the holder thereof to one vote. There were approximately 81 holders or record on
the Hugoton Record Date.
All shares of Hugoton Common Stock represented by properly executed proxies
will, unless such proxies have been previously revoked, be voted in accordance
with the instructions indicated in such proxies. If no instructions are
indicated, such shares of Hugoton Common Stock will be voted "for" approval and
adoption of the Merger and the Merger Agreement. Hugoton does not know of any
matters other than the approval of the Merger and the Merger Agreement that are
to come before the Hugoton Special Meeting. If any other matter or matters are
properly presented for action at the Hugoton Special Meeting, the persons named
in the enclosed form of proxy and acting thereunder will have the discretion to
vote on such matters in accordance with their best judgment. A shareholder who
has given a proxy may revoke it at any time prior to its exercise by giving
written notice of revocation to Hugoton by signing and returning a later dated
proxy, or by voting in person at the Hugoton Special Meeting. Votes cast by
proxy or in person at the Hugoton Special Meeting will be tabulated by the
inspector of election appointed for the meeting.
SOLICITATION OF PROXIES
Proxies are being solicited by and on behalf of the Hugoton Board. In
addition to solicitation by use of the mails, proxies may be solicited by
directors, officers and employees of Hugoton in person or by telephone, telegram
or other means of communication. Such directors, officers and employees will not
be additionally
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compensated, but may be reimbursed for out-of-pocket expenses incurred in
connection with such solicitation. Arrangements have also been made with
brokerage firms, banks, custodians, nominees and fiduciaries for the forwarding
of proxy solicitation materials to owners of Hugoton Common Stock held of record
by such persons and in connection therewith such firms will be reimbursed for
reasonable expenses incurred in forwarding such materials.
HUGOTON SHAREHOLDERS SHOULD NOT SEND ANY CERTIFICATES REPRESENTING HUGOTON
COMMON STOCK WITH THEIR PROXY CARDS. FOLLOWING THE EFFECTIVE TIME, HUGOTON
SHAREHOLDERS WILL RECEIVE INSTRUCTIONS FOR THE SURRENDER AND EXCHANGE OF SUCH
STOCK CERTIFICATES.
QUORUM
The presence in person or by properly executed proxy of a majority of the
issued and outstanding shares of Hugoton Common Stock entitled to vote is
necessary to constitute a quorum at the Hugoton Special Meeting.
REQUIRED VOTE, FAILURE TO VOTE AND BROKER NON-VOTES
Approval and adoption of the Merger and the Merger Agreement requires the
affirmative vote of a majority of the outstanding shares of Hugoton Common
Stock. On February 6, 1998, Hugoton directors, executive officers, and their
affiliates owned and were entitled to vote 9,442,102 shares of Hugoton Common
Stock, or approximately 47.6% of the shares of Hugoton Common Stock outstanding
on that date.
Hugoton shareholders holding approximately 45.9% of the outstanding shares
of Hugoton Common Stock have granted Chesapeake proxies to vote such shares at
the Hugoton Special Meeting in favor of the Merger and the Merger Agreement.
Any failure to vote will have the effect of a vote against the Merger and
the Merger Agreement.
Brokers who hold shares in street name for customers have the authority to
vote on certain "routine" proposals when they have not received instructions
from beneficial owners. However, such brokers are precluded from exercising
their voting discretion with respect to the approval and adoption of non-routine
matters such as the Merger and the Merger Agreement and, thus, absent specific
instructions from the beneficial owner of such shares, brokers are not empowered
to vote such shares with respect to the Merger and the Merger Agreement. These
"broker non-votes" will therefore have the effect of a vote against the Merger
and the Merger Agreement.
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CHESAPEAKE SPECIAL MEETING
This Joint Proxy Statement/Prospectus is furnished in connection with the
solicitation of proxies from the holders of Chesapeake Common Stock by the
Chesapeake Board for use at the Chesapeake Special Meeting. This Joint Proxy
Statement/Prospectus and accompanying form of proxy are first being mailed to
the shareholders of Chesapeake on or about February 17, 1998.
TIME AND PLACE; PURPOSE
The Chesapeake Special Meeting will be held at 10:00 a.m., Oklahoma time,
on Tuesday, March 10, 1998 at Chesapeake Energy Corporation, 6100 North Western
Avenue, Oklahoma City, Oklahoma 73118. At the Chesapeake Special Meeting (and
any adjournment or postponement thereof), the shareholders of Chesapeake will be
asked to consider and vote upon the approval and adoption of the Merger
Agreement and the Merger and such other matters as may properly come before the
Chesapeake Special Meeting.
Chesapeake shareholder approval and adoption of the Merger and the Merger
Agreement and the related issuance of shares of Chesapeake Common Stock are
required by the Oklahoma General Corporation Act ("OGCA") and the rules of the
New York Stock Exchange.
THE CHESAPEAKE BOARD HAS UNANIMOUSLY APPROVED THE TERMS OF THE MERGER
AGREEMENT, THE CONSUMMATION OF THE MERGER CONTEMPLATED THEREBY AND THE ISSUANCE
OF CHESAPEAKE COMMON STOCK, UNANIMOUSLY BELIEVES THAT THE TERMS OF THE MERGER
AND THE MERGER AGREEMENT ARE FAIR TO, AND IN THE BEST INTERESTS OF, CHESAPEAKE
AND ITS SHAREHOLDERS, AND UNANIMOUSLY RECOMMENDS THAT HOLDERS OF CHESAPEAKE
COMMON STOCK VOTE "FOR" APPROVAL AND ADOPTION OF THE MERGER, THE MERGER
AGREEMENT AND THE ISSUANCE OF CHESAPEAKE COMMON STOCK PURSUANT TO THE MERGER
AGREEMENT.
One or more representatives of Bear Stearns are expected to be present at
the Special Meeting to answer appropriate questions of shareholders of
Chesapeake and to make a statement if so desired.
RECORD DATE; VOTING RIGHTS AND PROXIES
Only holders of record of Chesapeake Common Stock at the close of business
on February 18, 1998 (the "Chesapeake Record Date") are entitled to notice of
and to vote at the Chesapeake Special Meeting. As of the Chesapeake Record Date,
there were 74,304,811 shares of Chesapeake Common Stock outstanding, each of
which entitled the holder thereof to one vote. There were approximately 575
holders of record on the Chesapeake Record Date.
All shares of Chesapeake Common Stock represented by properly executed
proxies will, unless such proxies have been previously revoked, be voted in
accordance with the instructions indicated in such proxies. If no instructions
are indicated, such shares of Chesapeake Common Stock will be voted "for"
approval and adoption of the Merger and the Merger Agreement and the issuance of
Chesapeake Common Stock in the Merger. Chesapeake does not know of any matters
other than the approval of the Merger and the Merger Agreement that are to come
before the Chesapeake Special Meeting. If any other matter or matters are
properly presented for action at the Chesapeake Special Meeting, the persons
named in the enclosed form of proxy and acting thereunder will have the
discretion to vote on such matters in accordance with their best judgment. A
shareholder who has given a proxy may revoke it at any time prior to its
exercise by giving written notice of revocation to Chesapeake by signing and
returning a later dated proxy, or by voting in person at the Chesapeake Special
Meeting. Votes cast by proxy or in person at the Chesapeake Special Meeting will
be tabulated by the inspector of election appointed for the meeting.
SOLICITATION OF PROXIES
Proxies are being solicited by and on behalf of the Chesapeake Board. In
addition to solicitation by use of the mails, proxies may be solicited by
directors, officers and employees of Chesapeake in person or by telephone,
telegram or other means of communication. Such directors, officers and employees
will not be additionally compensated, but may be reimbursed for out-of-pocket
expenses incurred in connection with such solicitation. Arrangements have also
been made with brokerage firms, banks, custodians, nominees and
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<PAGE> 53
fiduciaries for the forwarding of proxy solicitation materials to owners of
Chesapeake Common Stock held of record by such persons and in connection
therewith such firms will be reimbursed for reasonable expenses incurred in
forwarding such materials. Chesapeake has retained to assist in
the solicitation of proxies from its shareholders. The total fees and expenses
of are estimated to aggregate $ and will be paid by
Chesapeake.
QUORUM
The presence in person or by properly executed proxy of a majority of the
issued and outstanding shares of Chesapeake Common Stock entitled to vote is
necessary to constitute a quorum at the Chesapeake Special Meeting.
REQUIRED VOTE, FAILURE TO VOTE AND BROKER NON-VOTES
Approval and adoption of the Merger and the Merger Agreement and the
issuance of Chesapeake Common Stock in the Merger requires the affirmative vote
of a majority of the outstanding shares of Chesapeake Common Stock. On February
6, 1998, Chesapeake directors, executive officers, and their affiliates owned
and were entitled to vote 28,048,015 shares of Chesapeake Common Stock, or
approximately 36% of the shares of Chesapeake Common Stock outstanding on that
date.
Officers and directors of Chesapeake and their affiliates holding 33% of
the outstanding shares of Chesapeake Common Stock have granted Hugoton proxies
to vote such shares at the Chesapeake Special Meeting in favor of the Merger and
the Merger Agreement.
Any failure to vote will have the effect of a vote against the Merger and
the Merger Agreement.
Under NYSE rules, brokers who hold shares in street name for customers have
the authority to vote on certain "routine" proposals when they have not received
instructions from beneficial owners. However, such brokers are precluded from
exercising their voting discretion with respect to the approval and adoption of
non-routine matters such as the Merger and the Merger Agreement and, thus,
absent specific instructions from the beneficial owner of such shares, brokers
are not empowered to vote such shares with respect to the Merger and the Merger
Agreement. These "broker non-votes" will therefore have the effect of a vote
against the Merger and the Merger Agreement.
DIRECTORS AND OFFICERS OF CHESAPEAKE FOLLOWING THE MERGER
It is not anticipated that the Board of Directors or the executive officers
of Chesapeake will change as a result of the Merger. The names of the current
directors and executive officers of Chesapeake who will be the directors and
officers of Chesapeake following the Merger are set forth below:
Directors
E.F. Heizer, Jr.
Breene M. Kerr
Aubrey K. McClendon
Shannon T. Self
Tom L. Ward
Frederick B. Whittemore
Walter C. Wilson
Executive Officers
Aubrey K. McClendon, Chairman of the Board and Chief Executive Officer
Tom L. Ward, President and Chief Operating Officer
Marcus C. Rowland, Senior Vice President -- Finance and Chief Financial
Officer
Steven C. Dixon, Senior Vice President -- Operations
J. Mark Lester, Senior Vice President -- Exploration
Henry J. Hood, Senior Vice President -- Land and Legal
Ronald A. Lefaive -- Controller and Chief Accounting Officer
Martha A. Burger -- Treasurer and Human Resources Manager
47
<PAGE> 54
BUSINESS OF HUGOTON
Hugoton is an independent oil and natural gas company engaged in the
exploration for and the development, exploitation, production and acquisition of
oil and natural gas reserves and properties. Hugoton has historically been one
of the most active independent operators in the Hugoton Field located in
southwest Kansas and has expanded its operations throughout the Mid-Continent
area in Kansas, Oklahoma and Texas, and into the Permian Basin in West Texas and
New Mexico, the Austin Chalk Trend of Texas and Louisiana and the Williston
Basin in Montana and North Dakota. Hugoton focuses on exploring and developing
properties that it believes possess significant upside potential, which can be
realized through the application of 3-D seismic technology and traditional
geologic studies, as well as advanced drilling and completion techniques.
Hugoton has increased its proved reserves from 22 Bcfe at December 31, 1991
to 322 Bcfe at December 31, 1996. The proved reserves are 70% natural gas and
are 77% proved developed producing, with a reserve-to-production ratio of 11
years, based on 1996 production. Hugoton at December 1, 1997 operated
approximately 1,300 active producing wells, representing 87% of its reserves.
During the five years ended December 31, 1996, Hugoton added proved reserves
equal to 500% of production at an average cost of $.66 per Mcfe. Hugoton's
average net daily production has increased from 2.6 MMcfe during 1991 to 81.6
MMcfe during the first nine months of 1997.
Hugoton's rapid growth is a result of its aggressive drilling and
acquisition programs. During the last five years, Hugoton has drilled a total of
242 wells and completed 176 of them for a success ratio of 73%. This drilling
program has added approximately 106 Bcfe of proved reserves, or 141% of
production, at an average cost of $.37 per Mcfe. During the five year period
ended December 31, 1996, Hugoton's acquisitions added over 270 Bcfe to proved
reserves, or 359% of production, at an average cost of $.78 per Mcfe.
For additional information regarding Hugoton, see Hugoton's Annual Report
on Form 10-K which is incorporated by reference in this document and "Where You
Can Find More Information" on page 58.
BUSINESS OF CHESAPEAKE
Chesapeake is an independent oil and gas company engaged in the
exploration, production, development and acquisition of oil and natural gas in
major onshore producing areas of the United States and Canada.
Despite its overall favorable record of growth since its inception in 1989,
in the fiscal year ended June 30, 1997, Chesapeake incurred a net loss of $183
million primarily as a result of a $236 million impairment of its oil and gas
properties. The impairment was the result of its capitalized costs of oil and
gas properties exceeding the estimated present value of future net revenue from
Chesapeake's proved reserves at June 30, 1997.
In response to the fiscal 1997 loss, Chesapeake revised its fiscal 1998
business strategy to slow its exploration pace in the Louisiana Trend and
concentrate its Louisiana Trend drilling activities in Masters Creek; utilize
more extensively 3-D technology prior to conducting drilling operations; reduce
the acquisition of additional unproven leasehold; and selectively acquire proved
reserves as a complement to its primary strategy of developing reserves through
the drillbit.
For additional information concerning Chesapeake and its subsidiaries, see
Chesapeake's Annual Report on Form 10-K which is incorporated by reference in
this document and "Where You Can Find More Information" on page 58.
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<PAGE> 55
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS, DIRECTORS
AND EXECUTIVE OFFICERS
CHESAPEAKE. The table below sets forth as of February 6, 1998 (i) the name
and address of each person beneficially owning 5% or more of outstanding
Chesapeake Common Stock, the number of shares beneficially owned by each such
shareholder and the percentage of outstanding shares owned and (ii) the number
and percentage of outstanding shares of Chesapeake Common Stock beneficially
owned by each of the directors and executive officers and by all directors and
executive officers of Chesapeake as a group. Unless otherwise noted, the persons
named below have sole voting and investment power with respect to such shares.
<TABLE>
<CAPTION>
CHESAPEAKE
COMMON STOCK
----------------------------
NUMBER OF PERCENT OF
BENEFICIAL OWNER SHARES CLASS
---------------- ---------- ----------
<S> <C> <C>
Tom L. Ward*+............................................. 11,263,135(a)(b) 15%
6100 North Western Avenue
Oklahoma City, OK 73118
Aubrey K. McClendon*+..................................... 11,001,831(b)(c) 15%
6100 North Western Avenue
Oklahoma City, OK 73118
Pilgrim Baxter & Associates, Ltd. ........................ 6,083,088(d) 8%
825 Duportail Road
Wayne, PA 19087-1590
Shannon T. Self*.......................................... 2,735,748(e) 4%
E. F. Heizer, Jr.*........................................ 1,058,150(f) 1%
Frederick B. Whittemore*.................................. 902,750(g) 1%
Steven C. Dixon+.......................................... 407,597(b)(h) **
Breene M. Kerr*........................................... 204,500(i) **
Walter C. Wilson*......................................... 251,750(j) **
Marcus C. Rowland+........................................ 59,085(b) **
J. Mark Lester+........................................... 106,467(b)(k) **
Henry J. Hood+............................................ 21,943(b)(l) **
All directors and executive officers as a group........... 28,048,015(m) 36%
</TABLE>
- ---------------
* Director
+ Executive officer of Chesapeake
** Less than 1%
(a) Includes 1,846,860 shares held by TLW Investments, Inc., an Oklahoma
corporation of which Mr. Ward is sole shareholder and chief executive
officer, and 841,500 shares which may be acquired pursuant to currently
exercisable stock options granted by Chesapeake.
(b) Includes shares purchased on behalf of the executive officer in the
Chesapeake Energy Corporation Savings and Incentive Stock Bonus Plan (Tom
L. Ward, 3,585 shares; Aubrey K. McClendon, 1,639 shares; Steven C. Dixon,
950 shares; Marcus C. Rowland, 979 shares; J. Mark Lester, 1,081 shares and
Henry J. Hood, 1,187 shares).
(c) Includes 508,560 shares held by Chesapeake Investments, an Oklahoma limited
partnership of which Mr. McClendon is sole general partner, and 526,500
shares which may be acquired pursuant to currently exercisable stock
options granted by Chesapeake.
(d) Based on information provided in the January 31, 1998 Schedule 13G as filed
with the SEC.
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<PAGE> 56
(e) Includes 2,382 shares held by Pearson Street Limited Partnership, an
Oklahoma limited partnership of which Mr. Self is a general partner and the
remaining partners are members of Mr. Self's immediate family sharing the
same household; 1,098,600 shares held by Mr. Self as trustee of the Aubrey
K. McClendon Children's Trust, 1,209,100 shares held by Mr. Self as trustee
of the Tom L. Ward Children's Trust and 425,666 shares which Mr. Self has
the right to acquire pursuant to currently exercisable stock options
granted by Chesapeake.
(f) Includes 348,500 shares subject to currently exercisable stock options
granted to Mr. Heizer by Chesapeake.
(g) Includes 377,750 shares subject to currently exercisable stock options
granted to Mr. Whittemore by Chesapeake.
(h) Includes 306,292 shares subject to currently exercisable stock options
granted to Mr. Dixon by Chesapeake.
(i) Includes 31,250 shares subject to currently exercisable stock options
granted to Mr. Kerr by Chesapeake.
(j) Includes 251,750 shares subject to currently exercisable stock options
granted to Mr. Wilson by Chesapeake.
(k) Includes 100,886 shares subject to currently exercisable stock options
granted to Mr. Lester by Chesapeake.
(l) Includes 18,562 shares subject to currently exercisable stock options
granted to Mr. Hood by Chesapeake.
(m) Includes shares subject to options which are currently exercisable.
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<PAGE> 57
HUGOTON. The following table sets forth certain information regarding the
beneficial ownership of Hugoton Common Stock as of February 6, 1998 by (i) each
person who is known by Hugoton to be the beneficial owner (as determined in
accordance with Rule 13d-3 under the Exchange Act) of more than 5% of the
outstanding Hugoton Common Stock; (ii) each director, (iii) each of the named
executive officers as defined in Item 402(a)(3) of Regulation S-K; and (iv) all
executive officers and directors of Hugoton as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT
NAME AND ADDRESS BENEFICIALLY OWNED BENEFICIALLY
OF BENEFICIAL OWNER AT SEPTEMBER 1, 1997 OWNED
------------------- -------------------- ------------
<S> <C> <C>
Floyd C. Wilson...................................... 4,272,540(1) 21.4%
301 North Main, Suite 1900
Wichita, Kansas 67202
Comdisco, Inc........................................ 3,859,820(2) 19.5%
6111 N. River Road
Rosemont, IL 60018
Belco Energy, L.P.................................... 2,940,000(3) 14.8%
14300 Cornerstone Village Drive, Suite 421
Houston, TX 77104
First Reserve Corporation............................ 1,143,441(4) 5.8%
475 Steamboat Road
Greenwich, CT 06830
Cramer Rosenthal McGlynn, Inc........................ 1,155,834(5) 5.8%
707 Westchester Avenue
White Plains, NY 10604
Alan J. Andreini..................................... 70,000(6) *
David S. Elkouri..................................... 44,000(7) *
Jonathan S. Linker................................... 16,500(8) *
William E. Macaulay.................................. 10,000(4)(9) *
John T. McNabb, II................................... 60,000(10) *
W. Mark Womble....................................... 55,997(11) *
Jay W. Decker........................................ 329,890(12) 1.7%
David M. Drummond.................................... 25,000(13) *
Randall K. Click..................................... 9,387(14) *
Dallas W. Dobbs...................................... 17,715(15) *
Directors and executive officers as a group (14
persons)........................................... 10,007,713(16) 49.4%
</TABLE>
- ---------------
* Represents less than 1%
(1) Does not include 131,750 shares currently owned by Mr. Wilson but which are
subject to an agreement with Hugoton pursuant to which Mr. Wilson is
required to contribute to Hugoton the number of shares necessary to satisfy
the exercise of certain of the options previously granted by Hugoton in
exchange for receipt of the exercise price therefor. Includes 100,000
shares held by Mr. Wilson's wife and 100,000 shares held by a family
limited partnership, of which Mr. Wilson and his wife are general partners
and his children are limited partners. Also includes 202,426 shares held by
The Wilson Foundation, 7,565 shares allocated to Mr. Wilson pursuant to
Hugoton's 401(k) Profit Sharing Plan (based on a plan statement dated as of
6/30/97), and 140,625 shares issuable pursuant to presently exercisable
options granted to Mr. Wilson pursuant to stock option agreements with
Hugoton.
(2) As an executive officer of Comdisco, Inc., Mr. Andreini shares voting and
investment power of the shares owned by Comdisco, Inc. Mr. Andreini
disclaims beneficial ownership of Hugoton Common Stock owned by Comdisco,
Inc.
(3) As disclosed on a joint filing of Schedule 13D, filed with the SEC on July
3, 1997, by Belco Energy, L.P., Belco Operating Corp., Belco Oil & Gas
Corp. and Mr. Robert A. Belfer. Belco Energy, L.P. is the direct beneficial
owner of the shares of Hugoton Common Stock. Belco Operating Corp., as
general
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<PAGE> 58
partner of Belco Energy, L.P., Belco Oil & Gas Corp., as sole shareholder
of Belco Operating Corp., and Robert A. Belfer, as a shareholder of Belco
Oil & Gas Corp., may be deemed beneficial owners of the shares of Hugoton
Common Stock owned by Belco Energy, L.P. However, Belco Operating Corp.,
Belco Oil & Gas Corp. and Mr. Belfer disclaim beneficial ownership of such
shares.
(4) First Reserve Corporation owns no shares of Hugoton's Common Stock directly
but, as the managing general partner of the entities named below, it shares
voting and investment power over such shares with such entities. First
Reserve Corporation is the managing general partner of First Reserve Fund
V, Limited Partnership ("Fund V") and American Gas & Oil Investors, Limited
Partnership ("AmGO"). The address of each of such entities is the address
of First Reserve Corporation. Through their ownership of shares of First
Reserve Corporation, Mr. Macaulay and Mr. John A. Hill may be deemed to
share beneficial ownership of the shares shown as owned by First Reserve
Corporation. Messrs. Macaulay and Hill disclaim beneficial ownership of
such shares. The following table sets forth certain information regarding
the beneficial ownership of Hugoton's Common Stock as of February 6, 1998:
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT
BENEFICIALLY OWNED BENEFICIALLY
NAME AT DECEMBER 1, 1997 OWNED
---- ------------------- ------------
<S> <C> <C>
Fund V................................... 891,698 4.5%
AmGO..................................... 251,743 1.3%
</TABLE>
(5) As disclosed on the latest Schedule 13G, filed with the SEC on March 4,
1997.
(6) Includes 20,000 shares issuable upon exercise of options granted to Mr.
Andreini pursuant to stock option agreements with Hugoton.
(7) Includes 40,000 shares issuable upon exercise of options granted to Mr.
Elkouri pursuant to stock option agreements with Hugoton. Includes 3,000
shares owned by The David S. and Debbi C. Elkouri Foundation and 1,000
shares owned by The David S. Elkouri Rollover IRA.
(8) Includes 10,000 shares issuable upon exercise of options granted to Mr.
Linker pursuant to stock option agreements with Hugoton.
(9) Represents 10,000 shares issuable upon exercise of options granted to Mr.
Macaulay pursuant to stock option agreements with Hugoton.
(10) Represents 60,000 shares issuable upon exercise of options granted to Mr.
McNabb pursuant to stock option agreements with Hugoton.
(11) Includes 51,875 shares issuable upon exercise of options granted to Mr.
Womble pursuant to stock option agreements with Hugoton. Includes 4,122
shares acquired pursuant to Hugoton's 401(k) Profit Sharing Plan (based on
a plan statement dated as of 6/30/97).
(12) Includes 93,750 shares issuable upon exercise of options granted to Mr.
Decker pursuant to stock option agreements with Hugoton.
(13) Represents 25,000 shares issuable upon exercise of options granted to Mr.
Drummond pursuant to a stock option agreement with Hugoton.
(14) Includes 6,875 shares issuable upon exercise of options granted to Mr.
Click pursuant to stock option agreements with Hugoton. Includes 2,512
shares acquired pursuant to Hugoton's 401(k) Profit Sharing Plan (based on
a plan statement dated as of 6/30/97).
(15) Includes 14,063 shares issuable upon exercise of options granted to Mr.
Dobbs pursuant to stock option agreements with Hugoton. Includes 3,652
shares acquired pursuant to Hugoton's 401(k) Profit Sharing Plan (based on
a plan statement dated as of 6/30/97).
(16) Includes 560,751 shares issuable upon exercise of options under Hugoton's
stock option plans and nonstatutory stock option agreements, including
131,750 of the shares referenced in (1) above. Also includes shares held by
Comdisco, Inc. and partnerships for which First Reserve Corporation is the
managing general partner.
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<PAGE> 59
COMPARISON OF SHAREHOLDER RIGHTS
GENERAL
The rights of Chesapeake shareholders are currently governed by the OGCA
and the certificate of incorporation and the bylaws of Chesapeake (the
"Chesapeake Charter" and the "Chesapeake Bylaws," respectively). The rights of
Hugoton shareholders are currently governed by the Kansas General Corporation
Code (the "KGCC") and the articles of incorporation and the bylaws of Hugoton
(the "Hugoton Charter" and the "Hugoton Bylaws," respectively). Accordingly,
upon consummation of the Merger, the rights of Chesapeake shareholders and of
Hugoton shareholders who become Chesapeake shareholders in the Merger will be
governed by the OGCA, the Chesapeake Charter and the Chesapeake Bylaws. The
following is a summary of the principal differences between the current rights
of Hugoton shareholders and those of Chesapeake shareholders following the
Merger.
The following summary is not intended to be complete and is qualified in
its entirety by reference to the OGCA, the KGCC, the Chesapeake Charter, the
Chesapeake Bylaws, the Hugoton Charter and the Hugoton Bylaws. Copies of the
Chesapeake Charter, the Chesapeake Bylaws, the Hugoton Charter and the Hugoton
Bylaws are incorporated by reference in this document. Copies of the Hugoton
Charter, the Hugoton Bylaws and the Chesapeake Charter and the Chesapeake Bylaws
will be sent to holders of shares of Chesapeake Common Stock and Hugoton Common
Stock upon request. See "Where You Can Find More Information" on page 58.
COMPARISON OF CURRENT HUGOTON SHAREHOLDER RIGHTS AND RIGHTS OF CHESAPEAKE
SHAREHOLDERS FOLLOWING THE MERGER
Neither the Chesapeake Charter nor the Chesapeake Bylaws is being amended
in connection with the Merger.
The rights of Hugoton shareholders under the KGCC and the Hugoton Charter
and Hugoton Bylaws prior to the Merger are substantially the same as the rights
of Chesapeake shareholders (including Hugoton shareholders who become Chesapeake
shareholders as a result of the Merger) under the OGCA and the Chesapeake
Charter and Chesapeake Bylaws with the following principal exceptions:
Authorized Capital Stock. The authorized capital stock of Hugoton consists
of 100,000,000 shares of Hugoton Common Stock, without par value and 10,000,000
shares of preferred stock, without par value (the "Hugoton Preferred Stock").
The authorized capital of Chesapeake is set forth under "Description of
Chesapeake Capital Stock -- Authorized Capital Stock" on page 57.
Board of Directors. The Hugoton Bylaws provide that the number of directors
shall be not fewer than one nor greater than 20. Hugoton currently has eight
directors. Pursuant to the Hugoton Bylaws, the Hugoton Board is classified into
three classes, designated Class I, Class II and Class III. Each director serves
for a term ending on the date of the third annual meeting of shareholders
following the annual meeting at which such director was elected. However, each
director in Class III appointed pursuant to an Agreement and Plan of Merger,
dated as of May 26, 1995, as amended (the "Agreement"), among Hugoton, Hugoton
Exploration Corporation and Consolidated Oil & Gas, Inc., will hold office until
the first annual meeting of shareholders after his election; each director in
Class II appointed pursuant to the Agreement shall hold office until the second
annual meeting of shareholders after his election; and each director in Class I
appointed pursuant to the Agreement shall hold office until the third meeting of
shareholders after his election. Cumulative voting is expressly prohibited in
the Hugoton Charter and Bylaws.
Pursuant to the Hugoton Bylaws, vacancies and newly created directorships
in the Hugoton Board may be filled by a majority of the remaining directors,
although less than a quorum (or by a sole director, if applicable), and any
director so appointed will hold office until his successor is elected at an
annual or a special meeting of shareholders. Additionally, the Hugoton Bylaws
provide that a director may be removed from office, for cause, by majority vote
of the shareholders then entitled to vote at an election for directors.
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<PAGE> 60
The Chesapeake Charter and Bylaws provide that the number of directors
shall not be less than three nor more than 15, with the exact number to be
determined by resolution adopted by a vote of two-thirds ( 2/3) of the entire
Chesapeake Board or at an annual or special meeting of shareholders by the
affirmative vote of sixty-six and two-thirds percent (66 2/3%) of the
outstanding stock entitled to vote. Chesapeake currently has seven directors.
Pursuant to the Chesapeake Charter and Bylaws, the Chesapeake Board is
classified into three classes, designated Class I, Class II and Class III, with
directors of each class serving until the third annual meeting of shareholders
after the annual meeting at which that class was elected. Neither the Chesapeake
Charter nor the Chesapeake Bylaws provide for cumulative voting for election of
directors. Nominations of persons for election to the Chesapeake Board may be
made by or at the direction of the Chesapeake Board, or by Chesapeake
shareholders according to the procedures described in the Chesapeake Bylaws.
Under the Chesapeake Charter and Bylaws, vacancies and newly created
directorships resulting from any increase in the authorized number of directors
may be filled by a majority of the directors then in office, though less than a
quorum. Additionally, any director elected to fill a vacancy will hold office
for a term coterminous with the term of the class to which such director is
elected and until his successor is duly elected and qualified, or until his
earlier resignation or removal. Pursuant to the Chesapeake Bylaws, no director
may be removed from office by the shareholders except for cause with the
affirmative vote of the holders of not less than a majority of the total voting
power of all outstanding securities then entitled to vote generally in the
election of directors, voting together as a single class.
Special Meetings of Shareholders. The Hugoton Bylaws provide that special
meetings of shareholders may be called by the president, the Hugoton Board or
one or more shareholders holding not less than one-fifth ( 1/5) of the voting
power of Hugoton. The Chesapeake Bylaws provide that special meetings of
shareholders may be called by the chairman of the Chesapeake Board, by the
president or secretary at the request, in writing, of a majority of the
Chesapeake Board or by shareholders who are the record owners of ten percent
(10%) or more of the outstanding shares of Chesapeake's stock entitled to vote
at the election of directors.
Advance Notice Procedures. The Hugoton Bylaws do not contain any advance
notice procedures. The Chesapeake Bylaws establish advance notice procedures in
connection with the nomination of candidates for election as directors and with
regard to certain matters to be brought before an annual meeting of
shareholders. These procedures provide that nominations of persons for election
to the Chesapeake Board may be made by the Chesapeake Board or, upon timely
notice in writing to the Secretary of Chesapeake prior to the meeting at which
the directors are to be elected, by a shareholder of record at the time of
giving of notice who is entitled to vote for the election of directors at the
meeting. The procedures also provide that at any annual meeting and subject to
any other applicable requirements, only such business may be conducted as has
been brought before the meeting by, or at the direction of, the Chesapeake Board
or by a shareholder who has given timely prior written notice to the Secretary
of Chesapeake of such shareholders' intention to bring such business before the
meeting. In all cases, to be timely, notice must be received by the Secretary of
Chesapeake at the principal executive offices of Chesapeake not later than 60
days nor more than 90 days prior to the meeting; provided, however, that in the
event that less than 70 days' notice or prior public disclosure of the date of
the meeting is given or made to the shareholders, notice by the shareholder to
be timely must be received no later than the close of business on the tenth day
following the day on which notice of the date of the meeting was mailed or
public disclosure thereof was made, whichever occurred first. The notices must
contain certain information specified in the Chesapeake Bylaws.
Amendment of Corporate Charter and Bylaws. The Hugoton Charter contains no
provisions relating to the amendment of the Hugoton Charter but vests the power
to adopt, amend or repeal the Hugoton Bylaws upon the directors. The Chesapeake
Charter provides that the amendment or adoption of any provision contrary to
certain provisions contained in the Chesapeake Charter relating to, among
others, limitation of director liability, certain stock purchases from
interested shareholders, the composition of the Chesapeake Board, amendment of
the Chesapeake Charter and Bylaws, the Oklahoma Control Shares Act (defined
below) and action by written consent may only be amended by the affirmative vote
of at least sixty-six and two-thirds percent (66 2/3%) of the voting power of
the then outstanding stock, voting together as a single class. Amendment of any
other provision of the Hugoton Charter or the Chesapeake Charter is governed by
the
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<PAGE> 61
KGCC and the OGCA, respectively. Each of the KGCC and the OGCA provide that an
amendment to the articles of incorporation of a corporation requires that the
board of directors adopt a resolution setting forth the amendment proposed,
declaring its advisability and either calling a special meeting of the
shareholders entitled to vote or directing that the amendment proposed be
considered at the next annual meeting of the shareholders. At such meeting, an
amendment to the articles of incorporation must be approved by a majority of the
outstanding stock entitled to vote and a majority of the outstanding stock of
each class entitled to vote as a class.
The Hugoton Bylaws and Charter state that, generally, the Hugoton Bylaws
may be amended, altered or repealed by a majority vote of the Hugoton Board at
any regular or special meeting. Such directorial power to amend the bylaws
neither divests nor limits the power of the shareholders to adopt, amend or
repeal the Hugoton Bylaws per the KGCC. Specifically, however, pursuant to the
Hugoton Bylaws, the provision in the Hugoton Bylaws relating to the
classification of directors may only be amended by an 80 percent vote of the
Hugoton Board or by a 2/3 vote of the shareholders at any regular or special
meeting. The Chesapeake Bylaws provide that they may be amended in accordance
with the Chesapeake Charter, pursuant to which the Chesapeake Board is
authorized to amend the Chesapeake Bylaws. In addition, the Chesapeake Bylaws
may be amended by the affirmative vote of 66 2/3 percent of the outstanding
stock of Chesapeake entitled to vote thereon. Each of the KGCC and the OGCA
provide that the power to adopt, amend or repeal bylaws shall be in the
shareholders, except that any corporation, in its articles of incorporation, may
confer the power to adopt, amend or repeal bylaws upon the directors.
Voting Rights. The Hugoton Common Stock is the only outstanding class of
Hugoton capital stock entitled to vote generally on all matters submitted to
Hugoton shareholders, including the election of directors and the approval of
the Merger and the Merger Agreement. Each outstanding share of Hugoton Common
Stock is entitled to one vote on all matters submitted to Hugoton shareholders.
All corporate action taken by a vote of shareholders is decided by a majority of
the votes cast, subject to any other applicable requirements. There are
currently no shares of Hugoton Preferred Stock outstanding.
The Chesapeake Common Stock is the only outstanding class of Chesapeake
capital stock entitled to vote generally on all matters presented to the
Chesapeake shareholders, including the approval of the Merger and the Merger
Agreement. The holders of shares of Chesapeake Common Stock are entitled to one
vote, in person or by proxy, for each share of such stock upon all matters
submitted to Chesapeake shareholders. All elections and questions are decided by
a plurality of the votes cast, subject to any other applicable requirements.
There are currently no shares of Chesapeake Preferred Stock outstanding.
Removal of Officers. The Hugoton Bylaws permit removal of officers, with or
without cause, by an affirmative vote of a majority of the Hugoton Board or,
except in the case of an officer chosen by the Hugoton Board, by an officer upon
whom such power of removal is vested by the Hugoton Board. The Chesapeake Bylaws
permit removal by an affirmative vote of the majority of the Chesapeake Board if
it is in the best interests of Chesapeake.
Indemnification of Officers and Directors. The KGCC and the OGCA permit a
corporation to indemnify officers, directors, employees and agents for actions
taken in good faith and in a manner they reasonably believed to be in, or not
opposed to, the best interest of the corporation, and with respect to any
criminal action, which they had no reasonable cause to believe was unlawful. The
KGCC and the OGCA also provide that a corporation may advance expenses of
defense (upon receipt of a written undertaking to reimburse the corporation if
indemnification is not appropriate) and must reimburse a successful defendant
for expenses, including attorney's fees, actually and reasonably incurred, and
permit a corporation to purchase and maintain liability insurance for its
directors and officers.
The Hugoton and the Chesapeake Charter and Bylaws provide that the
corporation shall indemnify any person who is or was made, or threatened to be
made, a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative (other than
an action by or in the right of the corporation) by reason of the fact that such
person is or was a director, officer, employee or agent of the corporation, or
is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture or other
enterprise, against expenses, judgments, fines and
55
<PAGE> 62
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding, including attorney fees, if
such person acted in good faith and in a manner such person reasonably believed
to be in or not opposed to the best interests of the corporation; and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
such person's conduct was unlawful. The termination of any action, suit or
proceeding by judgment, order, settlement, conviction, or upon a plea of nolo
contendere or its equivalent, shall not, of itself, create a presumption that
the person did not act in good faith and in a manner which such person
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action proceeding, had reasonable
cause to believe that such person's conduct was unlawful.
Additionally, pursuant to the Hugoton Bylaws with respect to all
proceedings other than an action by or in the right of the corporation and,
pursuant to the Chesapeake Bylaws with respect to derivative proceedings, no
indemnification shall be made in respect to any claim, issue or matter as to
which such person shall have been adjudged to be liable to such corporation
unless and only to the extent that the court in which such action or suit was
brought shall determine upon application that, despite the adjudication of
liability, but, in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which the court
shall deem proper. The Hugoton Bylaws, the KGCC and the OGCA also provide that
any indemnification, unless ordered by a court, shall be made by the corporation
upon a determination that indemnification of such party is proper because such
party has met the applicable standard of conduct. Such determination may be made
(1) by the board by a majority vote of a quorum consisting of directors who were
not parties to such action, suit or proceeding; (2) if such quorum is not
obtainable (or even if obtainable) and a quorum of disinterested directors so
directs, by independent legal counsel in a written opinion; or (3) by the
shareholders.
Director Liability. The KGCC and the OGCA permit a corporation to include a
provision in its certificate of incorporation eliminating or limiting the
personal liability of a director to the corporation or its shareholders for
damages for breach of the director's fiduciary duty subject to certain
limitations. The Chesapeake Charter includes such a provision, as set forth
below.
The Chesapeake Charter provides that a director will not be personally
liable to the corporation or its shareholders for damages for breach of
fiduciary duty as director, except for personal liability (i) for acts or
omissions by such director not in good faith or which involve intentional
misconduct or a knowing violation of law; (ii) under Section 1053 of the OGCA,
which concerns unlawful payments of dividends, stock purchases or redemption;
(iii) for any breach of the director's duty of loyalty to the corporation or its
shareholders; or (iv) for any transaction from which the director derived
improper benefit. While these provisions provide directors with protection from
liability for monetary damages for breaches of their duty of care, they do not
eliminate such duty. Accordingly, these provisions will have no effect on the
availability of equitable remedies such as an injunction or rescission based on
a director's breach of his or her duty of care. The provisions described above
apply to an officer of the corporation only if he or she is a director of the
corporation and is acting in his or her capacity as director, and do not apply
to officers of the corporation who are not directors.
Certain Business Combinations and Stock Purchases. Pursuant to the
Chesapeake Charter, certain stock purchases by Chesapeake require the
affirmative vote of no less than sixty-six and two-thirds percent (66 2/3%) of
the votes cast by holders of the outstanding shares of capital stock of
Chesapeake, voting together as a single class (excluding the selling
shareholder). Additionally, the OGCA prohibits for three years certain business
combinations between certain Oklahoma corporations and their "interested
shareholders" unless (1) prior to the date such person became an interested
shareholder, the board of directors approved either the business combination or
the transaction which resulted in the person becoming an interested shareholder;
(2) the acquirer is able to obtain in the transaction that results in his
becoming an interested shareholder, eighty-five percent (85%) of the voting
stock that was outstanding when the transaction commenced (excluding votes
attributable to shares (i) owned by officers who are also directors and (ii)
held in employee benefit plans in which the employees do not have the
confidential right to vote whether plan shares will be tendered in a tender or
exchange offer); or (3) the combination is approved by the board and by a
two-thirds ( 2/3) vote of the voting shares not owned by the interested
shareholder (at a meeting and not pursuant to a written consent). Interested
shareholders are defined as shareholders who, on or after September 1, 1991,
acquire of record or
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<PAGE> 63
beneficially outstanding stock of the corporation having fifteen percent (15%)
or more of all voting power of the corporation. A corporation's original
certificate of incorporation may contain a provision electing not to be governed
by this provision, or, by the affirmative vote of a majority of all voting power
of the corporation, the corporation may adopt an amendment to its certificate of
incorporation or its bylaws opting-out of such provision. Chesapeake has not
made such an election.
DESCRIPTION OF CHESAPEAKE CAPITAL STOCK
The summary of the terms of the capital stock of Chesapeake set forth below
does not purport to be complete and is qualified by reference to the Chesapeake
Charter and Chesapeake Bylaws. Copies of the Chesapeake Charter and Chesapeake
Bylaws are incorporated by reference herein and will be sent to holders of
shares of Chesapeake Common Stock and Hugoton Common Stock upon request. See
"Where You Can Find More Information" on page 58. For a comparison of certain
provisions of the Chesapeake Charter and the Hugoton Charter, see "Comparison of
Shareholder Rights" on page 53.
AUTHORIZED CAPITAL STOCK
Under the Chesapeake Charter, Chesapeake's authorized capital stock
consists of 250,000,000 shares of Chesapeake Common Stock, par value $0.01 per
share, and 10,000,000 shares of Preferred Stock, par value $0.01 per share (the
"Chesapeake Preferred Stock").
COMMON STOCK
The holders of Chesapeake Common Stock are entitled to one vote for each
share held of record on all matters submitted to a vote of shareholders. Subject
to preferences that may be applicable to any outstanding Chesapeake Preferred
Stock, holders of Chesapeake Common Stock are entitled to receive ratably such
dividends as may be declared by the Chesapeake Board out of funds legally
available therefor. In the event of a liquidation or dissolution of Chesapeake,
holders of Chesapeake Common Stock are entitled to share ratably in all assets
remaining after payment of liabilities and the liquidation preference of any
outstanding Chesapeake Preferred Stock.
Holders of Chesapeake Common Stock have no preemptive rights and have no
rights to convert their Chesapeake Common Stock into any other securities. All
of the outstanding shares of Chesapeake Common Stock are, and the shares of
Chesapeake Common Stock issued pursuant to the Merger will be, duly authorized,
validly issued, fully paid and nonassessable.
PREFERRED STOCK
The Chesapeake Board is authorized to designate any series of Chesapeake
Preferred Stock and the powers, preferences and rights of the shares of such
series and the qualifications, limitations or restrictions thereof without
further action by the holders of Chesapeake Common Stock. There are no shares of
Preferred Stock outstanding.
TRANSFER AGENT AND REGISTRAR
UMB Bank, N.A. is the transfer agent and registrar for the Chesapeake
Common Stock.
STOCK EXCHANGE LISTING; DELISTING AND DEREGISTRATION OF HUGOTON COMMON STOCK
It is a condition to the Merger that the shares of Chesapeake Common Stock
issuable in the Merger be approved for listing on the NYSE on or prior to the
Closing Date, subject to official notice of issuance. If the Merger is
consummated, Hugoton Common Stock will cease to be listed on the NASDAQ National
Market.
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<PAGE> 64
LEGAL MATTERS
The validity of the Chesapeake Common Stock to be issued to Hugoton
shareholders pursuant to the Merger will be passed upon by Andrews & Kurth
L.L.P., counsel to Chesapeake. It is a condition to the consummation of the
Merger that Hugoton and Chesapeake receive opinions from Vinson & Elkins L.L.P.
and Andrews & Kurth L.L.P., respectively, with respect to certain tax matters.
See "The Merger -- Certain Material U.S. Federal Income Tax Consequences" and
"The Merger Agreement -- Conditions to the Merger" on pages 33 and 42,
respectively.
EXPERTS
The consolidated financial statements of Chesapeake as of June 30, 1997 and
1996 incorporated by reference in this Joint Proxy Statement/Prospectus, have
been incorporated herein in reliance on the report of Coopers & Lybrand L.L.P.,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
The consolidated financial statements of Chesapeake for the year ended June
30, 1995, incorporated by reference in this Joint Proxy Statement/Prospectus,
have been so incorporated in reliance on the report of Price Waterhouse LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
The consolidated financial statements of Hugoton for the years ended
December 31, 1996, 1995 and 1994 incorporated by reference in this Joint Proxy
Statement/Prospectus have been audited by Ernst & Young LLP, independent
accountants, as indicated in their report with respect thereto, and are
incorporated herein in reliance on their report given upon their authority as
experts in accounting and auditing in giving such reports.
FUTURE SHAREHOLDER PROPOSALS
Any Chesapeake shareholder who intends to submit a proposal for inclusion
in the proxy materials for the 1998 annual meeting of Chesapeake shareholders
must submit such proposal to the Secretary of Chesapeake by , 1998.
Hugoton expects to hold an annual meeting of shareholders in the second calender
quarter of 1998 unless the Merger is completed prior thereto. Any Hugoton
shareholder who intends to submit a proposal for inclusion in the proxy
materials for the 1998 annual meeting of Hugoton, if any, should have submitted
such proposal to the Secretary of Hugoton by December 17, 1997.
SEC rules set forth standards as to what shareholder proposals are required
to be included in a proxy statement for an annual meeting.
WHERE YOU CAN FIND MORE INFORMATION
Each of Hugoton and Chesapeake file annual, quarterly and special reports,
proxy statements and other information with the SEC. You may read and copy any
reports, statements or other information filed by either company at the SEC's
public reference rooms in Washington, D.C., New York, New York and Chicago,
Illinois. Please call the SEC at 1-800-SEC-0330 for further information on the
public reference rooms. The companies' SEC filings are also available to the
public from commercial document retrieval services and at the web site
maintained by the SEC at "http://www.sec.gov." In the case of Chesapeake, such
material should also be available for inspection at the library of the NYSE, 20
Broad Street, New York, New York 10005. In the case of Hugoton, such material
should also be available at the offices of the NASD, 1735 K Street, N.W.,
Washington, DC 20006-1500.
Chesapeake filed a Registration Statement on Form S-4 to register with the
SEC the Chesapeake Common Stock to be issued to Hugoton shareholders in the
Merger. This Joint Proxy Statement/Prospectus is a part of that Registration
Statement and constitutes a prospectus of Chesapeake in addition to being a
joint proxy statement of each of Hugoton and Chesapeake for the Hugoton Special
Meeting and the Chesapeake Special Meeting, respectively. As allowed by SEC
rules, this Joint Proxy Statement/Prospectus does not
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<PAGE> 65
contain all the information you can find in the Registration Statement or the
exhibits to the Registration Statement.
The SEC rules allow each of Hugoton and Chesapeake to "incorporate by
reference" information into this Joint Proxy Statement/Prospectus, which means
important information may be disclosed to you by referring you to another
document filed separately with the SEC. The information incorporated by
reference is deemed to be part of this Joint Proxy Statement/Prospectus, except
for any information superseded by information in (or incorporated by reference
in) this Joint Proxy Statement/Prospectus. This Joint Proxy Statement/Prospectus
incorporates by reference the documents set forth below that have been
previously filed with the SEC. These documents contain important information
about Hugoton and its finances and Chesapeake and its finances.
<TABLE>
<CAPTION>
HUGOTON SEC FILINGS (FILE NO. 0-23166) PERIOD
-------------------------------------- ------
<S> <C>
Annual Report on Form 10-K Year ended December 31, 1996.
Quarterly Reports on Form 10-Q Quarters ended June 30, 1997, March 31, 1997 and
September 30, 1997.
Current Report on Form 8-K Filed November 20, 1997.
Proxy Statement on Schedule 14A for 1997 Annual Dated April 30, 1997.
Meeting
Proxy Statement on Schedule 14A for the Special Dated September 30, 1997.
Meeting held October 16, 1997
</TABLE>
<TABLE>
<CAPTION>
CHESAPEAKE SEC FILINGS (FILE NO. 1-13726) PERIOD
----------------------------------------- ------
<S> <C>
Annual Report on Form 10-K Year ended June 30, 1997.
Quarterly Reports on Form 10-Q Quarter ended September 30, 1997.
Current Reports on Form 8-K Filed September 9, 1997, October 1, 1997, October 31,
1997, November 5, 1997, November 6, 1997, November
20, 1997, December 11, 1997, December 24, 1997,
January 15, 1998, January 26, 1998 and February 5,
1998.
Proxy Statement on Schedule 14A for 1997. Annual Dated November 12, 1997.
Meeting
Supplement to Proxy Statement on Schedule 14A for Dated November 28, 1997.
1997 Annual Meeting
</TABLE>
Each of Hugoton and Chesapeake is also incorporating by reference
additional documents that it may file with the SEC between the date of this
Joint Proxy Statement/Prospectus and the date of each of the Hugoton Special
Meeting and the Chesapeake Special Meeting.
Chesapeake has supplied all information contained or incorporated by
reference in this Joint Proxy Statement/Prospectus relating to Chesapeake, and
Hugoton has supplied all such information relating to Hugoton.
You can obtain copies of any of the documents described above through
Hugoton, Chesapeake or the SEC. Shareholders may obtain documents incorporated
by reference in this Joint Proxy Statement/ Prospectus by requesting them in
writing or by telephone from each of Hugoton and Chesapeake at the addresses set
forth below. Documents incorporated by reference will be provided from each of
Hugoton and Chesapeake without charge, excluding all exhibits unless they have
been specifically incorporated by reference as an exhibit in this Joint Proxy
Statement/Prospectus, to each person to whom a Joint Proxy Statement/
59
<PAGE> 66
Prospectus is delivered, by first class mail or other equally prompt means,
within one business day of receipt of such request.
Hugoton Energy Corporation
301 North Main, Suite 1900
Wichita, Kansas 67202
Telephone: (316) 262-1522
Attn: Secretary
Chesapeake Energy Corporation
6100 North Western Avenue
Oklahoma City, Oklahoma 73118
Telephone: (405) 848-8000, extension 212
Attn: Corporate Secretary
If you would like to request documents from Hugoton, please do so by
, 1998 to receive them before the Hugoton Special Meeting. If you
would like to request documents from Chesapeake, please do so by ,
1998 to receive them before the Chesapeake Special Meeting.
IN YOUR DECISION AS TO HOW TO VOTE ON THE APPROVAL OF THE MERGER AGREEMENT
AND THE MERGER AND, IF APPLICABLE, THE ISSUANCE OF CHESAPEAKE SHARES IN THE
MERGER, YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS JOINT PROXY STATEMENT/PROSPECTUS. NEITHER HUGOTON NOR
CHESAPEAKE HAS AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS
DIFFERENT FROM WHAT IS CONTAINED IN THIS JOINT PROXY STATEMENT/PROSPECTUS. THIS
JOINT PROXY STATEMENT/PROSPECTUS IS DATED FEBRUARY , 1998. YOU SHOULD NOT
ASSUME THAT THE INFORMATION CONTAINED IN THE JOINT PROXY STATEMENT/PROSPECTUS IS
ACCURATE AS OF ANY DATE OTHER THAN SUCH DATE, AND NEITHER THE MAILING OF THIS
JOINT PROXY STATEMENT/ PROSPECTUS TO SHAREHOLDERS NOR THE ISSUANCE OF CHESAPEAKE
COMMON STOCK IN THE MERGER SHALL CREATE ANY IMPLICATION TO THE CONTRARY.
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<PAGE> 67
INDEX TO PRO FORMA FINANCIAL STATEMENTS
CHESAPEAKE ENERGY CORPORATION & SUBSIDIARIES
<TABLE>
<S> <C>
Pro Forma Consolidated Financial Data
Unaudited Pro Forma Combined Balance Sheet as of September
30, 1997............................................... F-3
Unaudited Pro Forma Combined Statement of Operations for
the Quarter Ended September 30, 1997................... F-4
Unaudited Pro Forma Combined Statement of Operations for
the Year Ended June 30, 1997........................... F-5
Notes to Unaudited Pro Forma Consolidated Financial
Data................................................... F-6
</TABLE>
F-1
<PAGE> 68
PRO FORMA CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma financial statements are derived from the
historical financial statements of Chesapeake and Hugoton incorporated by
reference in this Joint Proxy Statement/Prospectus as further adjusted to
reflect the planned acquisition of DLB. The Pro Forma Combined Statements of
Operations for the quarter ended September 30, 1997 and for the year ended June
30, 1997 reflect the Hugoton acquisition (accounted for as a purchase) and the
DLB acquisition (accounted for as a purchase) as if the acquisitions occurred on
July 1, 1996. The Pro Forma Balance Sheet at September 30, 1997 reflects the
consummation of the Hugoton acquisition and the DLB acquisition as if they had
occurred on September 30, 1997. The unaudited pro forma combined financial
information should be read in conjunction with the notes thereto and the
historical financial statements of Chesapeake and Hugoton, including the notes
thereto, which are incorporated by reference in this Joint Proxy
Statement/Prospectus.
The unaudited pro forma combined financial statements do not purport to be
indicative of the results of operations that would actually have occurred if the
transactions described had occurred as presented in such statements or that may
occur in the future. In addition, future results may vary significantly from the
results reflected in such statements due to general economic conditions, oil and
gas commodity prices, Chesapeake's ability to successfully integrate the
operations of Hugoton and DLB with its current business and several other
factors, many of which are beyond Chesapeake's control. See "Risk Factors" on
page 11.
The Hugoton acquisition and the DLB acquisition will be accounted for using
the purchase method. After the acquisitions, the purchase cost will be allocated
to the Hugoton and DLB assets and liabilities based on their respective fair
values. The final allocation of the actual purchase price for each acquisition
is subject to the final valuation of the acquired assets, but that allocation is
not expected to differ materially from the preliminary allocation.
F-2
<PAGE> 69
CHESAPEAKE ENERGY CORPORATION & SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA HISTORICAL PRO FORMA
--------------------- --------------------------------------- ---------- -----------
HUGOTON BAYARD DLB
CHESAPEAKE HUGOTON ADJUSTMENTS ADJUSTMENTS AS ADJUSTED DLB ADJUSTMENTS
---------- -------- ----------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current Assets................. $ 223,773 $ 11,262 $ -- $ 73,611(j) $ 308,646 $ 24,589 $(13,866)(e)
(17,500)(b)
Property, Plant & Equipment
Proved....................... 960,741 291,249 7,192(a) 1,259,182 200,682 14,000(b)
(76,222)(e)
Unproved..................... 131,194 26,512 -- 157,706 20,672 (5,014)(e)
Accumulated DD&A............. (460,534) (71,657) 71,657(a) (460,534) (37,943) 34,826(b)
3,117(e)
--------- -------- ------- -------- ---------- -------- --------
Net Proved and Unproved
Properties................. 631,401 246,104 78,849 956,354 183,411 (29,293)
Other, net................... 57,898 2,749 -- 60,647 24,977 (21,423)(e)
--------- -------- ------- -------- ---------- -------- --------
Total Property, Plant &
Equipment, net........... 689,299 248,853 78,849 1,017,001 208,388 (50,716)
--------- -------- ------- -------- ---------- -------- --------
Other.......................... 18,597 1,675 -- 20,272 6,176 (4,403)(e)
--------- -------- ------- -------- ---------- -------- --------
Total assets........... $ 931,669 $261,790 $78,849 $ 73,611 $1,345,919 $239,153 $(86,485)
========= ======== ======= ======== ========== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities............ $ 123,949 $ 8,714 $15,000(a) $ (229)(j) $ 147,434 $ 16,387 $ 5,000(b)
(10,845)(e)
Long-Term Debt................. 508,971 105,000 -- 613,971 100,631 (15,631)(e)
Deferred income tax
liabilities.................. -- 15,941 (12,816)(a) 3,125 18,502 9,184(b)
(560)(e)
Other Liabilities.............. 7,541 475 -- 8,016 35,967 (35,967)(e)
Stockholders' Equity
Common Stock................. 704 198 60(a) 962 13 37(b)
Paid-in Capital.............. 433,201 135,615 72,452(a) 641,268 57,729 23,772(b)
(51,551)(e)
Accumulated Earnings
(deficit).................. (142,697) (4,153) 4,153(a) 73,840(j) (68,857) 9,924 (9,924)(b)
--------- -------- ------- -------- ---------- -------- --------
Total Stockholders'
Equity................... 291,208 131,660 76,665 73,840 573,373 67,666 (37,666)
--------- -------- ------- -------- ---------- -------- --------
Total liabilities and
stockholders'
equity............... $ 931,669 $261,790 $78,849 $ 73,611 $1,345,919 $239,153 $(86,485)
========= ======== ======= ======== ========== ======== ========
<CAPTION>
PRO FORMA
----------
AS FURTHER
ADJUSTED
----------
<S> <C>
Current Assets................. $ 301,869
Property, Plant & Equipment
Proved....................... 1,397,642
Unproved..................... 173,364
Accumulated DD&A............. (460,534)
----------
Net Proved and Unproved
Properties................. 1,110,472
Other, net................... 64,201
----------
Total Property, Plant &
Equipment, net........... 1,174,673
----------
Other.......................... 22,045
----------
Total assets........... $1,498,587
==========
Current Liabilities............ $ 157,976
Long-Term Debt................. 698,971
Deferred income tax
liabilities.................. 30,251
Other Liabilities.............. 8,016
Stockholders' Equity
Common Stock................. 1,012
Paid-in Capital.............. 671,218
Accumulated Earnings
(deficit).................. (68,857)
----------
Total Stockholders'
Equity................... 603,373
----------
Total liabilities and
stockholders'
equity............... $1,498,587
==========
</TABLE>
The accompanying notes are an integral part of these pro forma financial
statements.
F-3
<PAGE> 70
CHESAPEAKE ENERGY CORPORATION & SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
QUARTER ENDED SEPTEMBER 30, 1997
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA HISTORICAL PRO FORMA
-------------------- --------------------------------------- ---------- -------------------------
HUGOTON BAYARD DLB AS FURTHER
CHESAPEAKE HUGOTON ADJUSTMENTS ADJUSTMENTS AS ADJUSTED DLB ADJUSTMENTS ADJUSTED
---------- ------- ----------- ----------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Oil and gas sales.... $45,667 $16,970 $ -- $ -- $62,637 $12,038 $(4,330)(e) $ 70,345
Oil and gas marketing
sales.............. 26,865 -- -- -- 26,865 -- -- 26,865
Interest and other... 5,878 135 -- (495)(j) 5,518 6,011 (5,510)(e) 6,019
------- ------- ------ ----- ------- ------- ------- --------
Total
revenues.... 78,410 17,105 -- (495) 95,020 18,049 (9,840) 103,229
------- ------- ------ ----- ------- ------- ------- --------
Costs and expenses:
Operating costs...... 31,870 7,541 (756)(f) 38,655 4,990 (2,162)(e) 41,483
Depreciation,
depletion and
amortization....... 29,692 8,839 (1,640)(g) 36,891 6,970 (3,872)(e) 40,940
951(g)
General and
administrative..... 2,760 2,289 (579)(f) 4,470 1,696 (904)(e) 5,262
Interest............. 8,575 1,753 (394)(f) 9,934 2,059 (356)(e) 11,637
Other................ -- (67) (67) 2,890 (2,890)(e) (67)
------- ------- ------ ----- ------- ------- ------- --------
Total costs
and
expenses.... 72,897 20,355 (3,369) 89,883 18,605 (9,233) 99,255
------- ------- ------ ----- ------- ------- ------- --------
Income (loss) before
income taxes......... 5,513 (3,250) 3,369 (495) 5,137 (556) (607) 3,974
Income tax expense
(benefit)............ -- (1,065) 1,348(h) (198)(j) 85 146 (243)(h) (12)
------- ------- ------ ----- ------- ------- ------- --------
Net income (loss)...... $ 5,513 $(2,185) $2,021 $(297) $ 5,052 $ (702) $ (364) $ 3,986
======= ======= ====== ===== ======= ======= ======= ========
Earnings per share,
primary and fully
diluted.............. $ 0.08 $ 0.05 $ 0.04
======= ======= ========
Weighted average shares
outstanding, primary
and fully diluted
(i).................. 72,699 98,490 103,490
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these pro forma financial
statements.
F-4
<PAGE> 71
CHESAPEAKE ENERGY CORPORATION & SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED JUNE 30, 1997
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA HISTORICAL PRO FORMA
----------------------- ---------------------------------------- ---------- -----------
HUGOTON BAYARD DLB
CHESAPEAKE HUGOTON(C) ADJUSTMENTS ADJUSTMENTS AS ADJUSTED DLB(D) ADJUSTMENTS
---------- ---------- ----------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues
Oil and gas sales.......... $ 192,920 $75,466 $ -- $ -- $ 268,386 $38,732 $ (859)(e)
Oil and gas marketing
sales.................... 76,172 -- -- -- 76,172 -- --
Interest and other......... 11,223 2,140 -- (330)(j) 13,033 8,679 (7,245)(e)
--------- ------- -------- ------- --------- ------- -------
Total revenues...... 280,315 77,606 -- (330) 357,591 47,411 (8,104)
--------- ------- -------- ------- --------- ------- -------
Costs and expenses:
Operating costs............ 90,247 28,160 (3,753)(f) 114,654 10,378 (408)(e)
Writedown.................. 236,000 -- -- 236,000 -- --
Depreciation, depletion and
amortization............. 107,046 26,902 15,852(g) 149,800 12,541 (1,109)(e)
4,780(g)
General and
administrative........... 8,802 8,587 (2,198)(f) 15,191 3,062 (415)(e)
Interest................... 18,550 6,220 (1,391)(f) 23,379 4,063 (28)(e)
Other...................... -- -- -- -- -- 5,031 (5,031)(e)
--------- ------- -------- ------- --------- ------- -------
Total costs and
expenses.......... 460,645 69,869 8,510 539,024 35,075 (2,211)
--------- ------- -------- ------- --------- ------- -------
Income (loss) before income
taxes and extraordinary
item....................... (180,330) 7,737 (8,510) (330) (181,433) 12,336 (5,893)
Income tax expense
(benefit).................. (3,573) 3,462 (3,404)(h) (132)(j) (3,647) 4,655 (2,357)(h)
--------- ------- -------- ------- --------- ------- -------
Net income (loss) before
extraordinary item......... $(176,757) $ 4,275 $ (5,106) $ (198) $(177,786) $ 7,681 $(3,536)
========= ======= ======== ======= ========= ======= =======
Earnings (loss) per share
before extraordinary
item -- primary and fully
diluted.................. $ (2.69) $ (1.94)
========= =========
Weighted average shares
outstanding, primary and
fully diluted(i)......... 65,767 91,558
========= =========
<CAPTION>
PRO FORMA
----------
AS FURTHER
ADJUSTED
----------
<S> <C>
Revenues
Oil and gas sales.......... $ 306,259
Oil and gas marketing
sales.................... 76,172
Interest and other......... 14,467
---------
Total revenues...... 396,898
---------
Costs and expenses:
Operating costs............ 124,624
Writedown.................. 236,000
Depreciation, depletion and
amortization............. 166,012
General and
administrative........... 17,838
Interest................... 27,414
Other...................... --
---------
Total costs and
expenses.......... 571,888
---------
Income (loss) before income
taxes and extraordinary
item....................... (174,990)
Income tax expense
(benefit).................. (1,349)
---------
Net income (loss) before
extraordinary item......... $(173,641)
=========
Earnings (loss) per share
before extraordinary
item -- primary and fully
diluted.................. $ (1.80)
=========
Weighted average shares
outstanding, primary and
fully diluted(i)......... 96,558
=========
</TABLE>
The accompanying notes are an integral part of these pro forma financial
statements.
F-5
<PAGE> 72
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS)
(a) Chesapeake will issue approximately 25.8 million shares of common stock at
an estimated $8 per share, give effect to the exchange and immediate vesting
of Hugoton stock options for Chesapeake stock options by recording a $2
million purchase price adjustment related to the estimated fair value of
such options and incur costs of approximately $15 million (including $7.5
million estimated termination costs for Hugoton executives and employees) to
acquire Hugoton. The following is the allocation of the purchase price:
<TABLE>
<S> <C>
Issuance of Common Stock.................................... $ 206,325
Fair value of converted Hugoton stock options............... 2,000
Other Acquisition Costs..................................... 15,000
---------
Purchase Price.................................... $ 223,325
=========
Current Assets.............................................. $ 11,262
PP&E -- Proved Properties................................... 298,441
PP&E -- Unevaluated Properties.............................. 26,512
Other PP&E.................................................. 2,749
Other Assets................................................ 1,675
Current Liabilities......................................... (8,714)
Debt........................................................ (105,000)
Deferred Income Taxes....................................... (3,125)
Other Liabilities........................................... (475)
---------
Purchase Price.................................... $ 223,325
=========
</TABLE>
(b) Chesapeake will pay $17.5 million in cash, issue 5 million shares of common
stock at an estimated $6 per share plus incur costs of approximately $5
million to acquire DLB. The following is the allocation of the purchase
price:
<TABLE>
<S> <C>
Issuance of Common Stock.................................... $ 30,000
Cash payment................................................ 17,500
Other Acquisition Costs..................................... 5,000
--------
Purchase Price.................................... $ 52,500
========
Current Assets.............................................. $ 10,723
PP&E -- Proved Properties................................... 138,460
PP&E -- Unevaluated Properties.............................. 15,658
Other PP&E.................................................. 3,554
Other Assets................................................ 1,773
Current Liabilities......................................... (5,542)
Debt........................................................ (85,000)
Deferred Income Taxes....................................... (27,126)
--------
Purchase Price.................................... $ 52,500
========
</TABLE>
(c) Hugoton reports its financial information on a calendar year basis which
must be converted to a June 30 year end to conform to Chesapeake's
presentation. The following is a reconciliation of financial information, as
reported, to the Hugoton historical financial data included in this pro
forma information:
F-6
<PAGE> 73
<TABLE>
<CAPTION>
HUGOTON (AS REPORTED)
----------------------------------------
TWELVE TWELVE
MONTHS SIX MONTHS MONTHS
SIX MONTHS ENDED ENDED ENDED
JUNE 30, DECEMBER 31, JUNE 30, JUNE 30,
1997 1996 1996 1997
---------- ------------ ---------- --------
<S> <C> <C> <C> <C>
Revenues..................... $41,417 $68,682 $(32,493) $77,606
Costs & expenses............. 39,309 61,163 (30,603) 69,869
Income tax................... 864 3,316 (718) 3,462
------- ------- -------- -------
Net income................... $ 1,244 $ 4,203 $ (1,172) $ 4,275
======= ======= ======== =======
</TABLE>
(d) DLB reports its financial information on a calendar year basis which must be
converted to a June 30 year end to conform to Chesapeake's presentation. The
following is a reconciliation of financial information, as reported, to the
DLB historical financial data included in this pro forma information:
<TABLE>
<CAPTION>
DLB (AS REPORTED)
------------------------------------
SIX TWELVE SIX TWELVE
MONTHS MONTHS MONTHS MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, DECEMBER 31, JUNE 30, JUNE 30,
1997 1996 1996 1997
-------- ------------ -------- --------
<S> <C> <C> <C> <C>
Revenues........................... $29,675 $28,415 $(10,679) $47,411
Costs & expenses................... 23,031 20,595 (8,551) 35,075
Income tax......................... 2,507 2,951 (803) 4,655
------- ------- -------- -------
Net income......................... $ 4,137 $ 4,869 $ (1,325) $ 7,681
======= ======= ======== =======
</TABLE>
(e) Concurrent with the acquisition of DLB, DLB will dividend its shares of
certain investments to its shareholders. The following adjustments
deconsolidate these investments for the periods presented:
BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
-------------
<S> <C>
Current Assets.............................................. $ (13,866)
PP&E
Proved.................................................... (76,222)
Unproved.................................................. (5,014)
Accumulated DD&A.......................................... 3,117
---------
Net............................................... (78,119)
Other, Net................................................ (21,423)
---------
Total PP&E, net................................... (99,542)
Other Assets.............................................. (1,146)
---------
Total Assets...................................... $(114,554)
=========
Current Liabilities......................................... $ (10,845)
Long Term Debt.............................................. (15,631)
Deferred income taxes....................................... (560)
Other liabilities........................................... (35,967)
---------
Total Liabilities................................. (63,003)
---------
Stockholders' Equity........................................ (51,551)
---------
Total Liabilities and Stockholders' Equity........ $(114,554)
=========
</TABLE>
F-7
<PAGE> 74
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, JUNE 30,
1997 1997
------------- ----------
<S> <C> <C>
REVENUES...................................... $ (9,840) $(8,104)
COSTS AND EXPENSES
Operating Costs............................. (2,162) (408)
Depreciation, Depletion and Amortization.... (3,872) (1,109)
General and Administrative.................. (904) (415)
Interest.................................... (356) (28)
Other....................................... (2,890) (5,031)
-------- -------
Total Costs and Expenses............ (10,184) (6,991)
-------- -------
Income (Loss) before income taxes............. $ 344 $(1,113)
======== =======
</TABLE>
(f) Hugoton accounted for its oil and gas properties and results of operations
on the successful efforts method. The following reflects the entries to
convert Hugoton to the full cost method. The entries were derived from the
historical accounting records of Hugoton.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, JUNE 30,
1997 1997
------------- ----------
<S> <C> <C>
COSTS AND EXPENSES:
Exploration................................. $(756) $(3,753)
Internal Costs(1)........................... $(579) $(2,198)
Interest.................................... $(394) $(1,391)
</TABLE>
-----------------------
(1) Internal Costs, consisting of costs directly related to acquisition,
exploration and development activities, were previously reported as
General and Administrative.
(g) To record DD&A expense of oil and gas properties using a $1.34 rate per Mcfe
for Chesapeake and Hugoton, and a rate of $1.33 per Mcfe for Chesapeake,
Hugoton and DLB.
(h) To record the tax effects of the pro forma adjustments at a statutory rate
of 40%.
(i) EPS has been calculated using the weighted average shares outstanding
assuming the transaction had been consummated at the beginning of the period
and is calculated as follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, JUNE 30,
1997 1997
------------- ----------
<S> <C> <C>
Chesapeake's weighted average shares
outstanding, as reported.................... 72,699 65,767
Issuance of common stock to Hugoton........... 25,791 25,791
------- ------
Subtotal -- As Adjusted....................... 98,490 91,558
------- ------
Issuance of common stock to DLB............... 5,000 5,000
------- ------
Total -- As Further Adjusted.................. 103,490 96,558
======= ======
</TABLE>
As of September 30, 1997, common shares outstanding for Hugoton and DLB
were 19,838,000 and 12,975,000, respectively.
F-8
<PAGE> 75
(j) In November 1997, Chesapeake received proceeds of approximately $90 million
in connection with the initial public offering of Bayard common stock. After
underwriting fees, Chesapeake received approximately $21.40 per share for
the 4,194,000 shares of Bayard it sold in the offering. In addition,
Chesapeake received $18 million as repayment of a loan made to Bayard during
fiscal 1997. The following adjustment is necessary to reflect the Bayard
transactions on a pro forma basis:
<TABLE>
<S> <C>
Total cash received......................................... $107,611
Less: Carrying value of Bayard investment................... (16,000)
Note receivable....................................... (18,000)
--------
Adjustment to current assets................................ 73,611
Other....................................................... 229
--------
Adjustment to stockholder's equity.......................... $ 73,840
========
</TABLE>
(k) Estimated total proved pro forma reserves at September 30, 1997 were as
follows:
<TABLE>
<CAPTION>
PROVED
RESERVES
(MMCFE)
--------
<S> <C>
Chesapeake.................................................. 401,521
Hugoton..................................................... 297,378
-------
As adjusted....................................... 698,899
DLB......................................................... 126,407
-------
As further adjusted............................... 825,306
=======
</TABLE>
(l) On March 17, 1997, the Company issued $150 million principal amount of
7.875% Senior Notes due 2004 and $150 million principal amount of 8.5%
Senior Notes due 2012. Had the Company issued the notes on July 1, 1996, the
Company would have incurred additional interest costs of $17.4 million.
F-9
<PAGE> 76
ANNEX A
AGREEMENT AND PLAN OF MERGER
AMONG
CHESAPEAKE ENERGY CORPORATION,
CHESAPEAKE ACQUISITION CORP.,
AND
HUGOTON ENERGY CORPORATION
DATED AS OF NOVEMBER 12, 1997
As Modified by Amendment No. 1 to
Agreement and Plan of Merger dated as of February 9, 1998
<PAGE> 77
AGREEMENT AND PLAN OF MERGER
AMONG
CHESAPEAKE ENERGY CORPORATION,
CHESAPEAKE ACQUISITION CORP.,
AND
HUGOTON ENERGY CORPORATION
DATED AS OF NOVEMBER 12, 1997
<PAGE> 78
AGREEMENT AND PLAN OF MERGER
<TABLE>
<CAPTION>
Table of Contents
Page
<S> <C> <C>
ARTICLE I
DEFINITIONS..............................................................................................2
1.1 Defined Terms...................................................................................2
ARTICLE II
THE MERGER..............................................................................................10
2.1 The Merger.....................................................................................10
2.2 Effect of the Merger...........................................................................10
2.3 Governing Instruments, Directors and Officers of the Surviving Corporation.....................10
2.4 Effect on Securities...........................................................................11
2.5 Exchange of Certificates.......................................................................12
2.6 Closing........................................................................................16
2.7 Effective Time of the Merger...................................................................16
2.8 Taking of Necessary Action; Further Action.....................................................16
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF HUGOTON...............................................................16
3.1 Corporate Organization.........................................................................16
3.2 Authority and Enforceability...................................................................17
3.3 No Violations..................................................................................17
3.4 Consents and Approvals.........................................................................17
3.5 SEC Documents..................................................................................18
3.6 Financial Statements...........................................................................18
3.7 Capital Structure..............................................................................19
3.8 Governmental Regulation........................................................................19
3.9 Litigation.....................................................................................19
3.10 Brokers........................................................................................20
3.11 Absence of Certain Changes or Events...........................................................20
3.12 Compliance with Laws, Material Agreements and Permits..........................................20
3.13 No Restrictions................................................................................21
3.14 Taxes..........................................................................................21
3.15 Employee Benefit Plans.........................................................................23
3.16 Environmental Matters..........................................................................25
3.17 Vote Required..................................................................................26
i
</TABLE>
<PAGE> 79
<TABLE>
<S> <C> <C>
3.18 Hugoton Act; State Takeover Statutes Inapplicable..............................................26
3.19 Employment Contracts and Benefits..............................................................26
3.20 Labor Matters..................................................................................26
3.21 Insurance......................................................................................27
3.22 Intangible Property............................................................................27
3.23 Title to Assets................................................................................27
3.24 Opinion of Financial Advisor...................................................................28
3.25 [Reserved].....................................................................................28
3.26 Oil and Gas Operations.........................................................................28
3.27 Financial and Commodity Hedging................................................................28
3.28 Books and Records..............................................................................28
3.29 Other Entities.................................................................................28
3.30 Dissenters' Rights.............................................................................29
3.31 Pooling; Tax Treatment.........................................................................29
3.32 No Knowledge of Breach of Representations......................................................29
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB........................................................30
4.1 Corporate Organization.........................................................................30
4.2 Authority and Enforceability...................................................................30
4.3 No Violations..................................................................................30
4.4 Consents and Approvals.........................................................................31
4.5 SEC Documents..................................................................................31
4.6 Financial Statements...........................................................................32
4.7 Capital Structure..............................................................................32
4.8 Governmental Regulation........................................................................33
4.9 Litigation.....................................................................................33
4.10 Interim Operations of Sub......................................................................33
4.11 Brokers........................................................................................33
4.12 Absence of Certain Changes.....................................................................34
4.13 Compliance with Laws, Material Agreements and Permits..........................................34
4.14 No Restrictions................................................................................34
4.15 Taxes..........................................................................................35
4.16 Environmental Matters..........................................................................37
4.17 Vote Required..................................................................................38
4.18 Employment Contracts and Benefits..............................................................38
4.19 Labor Matters..................................................................................38
4.20 Insurance......................................................................................39
4.21 Intangible Property............................................................................39
4.22 Opinion of Financial Advisor...................................................................39
4.23 [Reserved].....................................................................................39
4.24 Financial and Commodity Hedging................................................................39
</TABLE>
ii
<PAGE> 80
<TABLE>
<S> <C> <C>
4.25 Books and Records..............................................................................39
4.26 Pooling; Tax Treatment.........................................................................40
4.27 Other Parent Entities..........................................................................40
4.28 Employee Benefit Plans.........................................................................40
4.29 Oil and Gas Operations.........................................................................41
4.30 No Knowledge of Breach of Representations......................................................41
ARTICLE V
COVENANTS...............................................................................................41
5.1 Conduct of Hugoton Business Pending Closing....................................................41
5.2 Conduct of Parent Business Pending Closing.....................................................43
5.3 Access to Information..........................................................................44
5.4 No Solicitation................................................................................45
5.5 Hugoton Stockholders Meeting...................................................................46
5.6 Parent Stockholders Meeting....................................................................47
5.7 Registration Statement and Proxy Statement/Prospectus..........................................47
5.8 Stock Exchange Listing.........................................................................49
5.9 Additional Arrangements........................................................................49
5.10 Agreements of Affiliates.......................................................................49
5.11 Public Announcements...........................................................................50
5.12 Notification of Certain Matters................................................................50
5.13 Indemnification; Directors' and Officers' Insurance............................................51
5.14 Employee and Severance Matters.................................................................52
5.15 Restructuring of Merger........................................................................52
5.16 Registration Rights Agreement..................................................................52
5.17 Payment of Expenses............................................................................53
ARTICLE VI
CONDITIONS..............................................................................................54
6.1 Conditions to Each Party's Obligation to Effect the Merger.....................................54
6.2 Conditions to Obligations of Parent and Sub....................................................54
6.3 Conditions to Obligation of Hugoton............................................................55
ARTICLE VII
TERMINATION.............................................................................................56
7.1 Termination Rights.............................................................................56
7.2 Effect of Termination..........................................................................58
</TABLE>
iii
<PAGE> 81
<TABLE>
<S> <C> <C>
ARTICLE VIII
MISCELLANEOUS...........................................................................................58
8.1 Nonsurvival of Representations, Warranties, Covenants and Agreements...........................58
8.2 Amendment......................................................................................58
8.3 Notices........................................................................................58
8.4 Counterparts...................................................................................60
8.5 Severability...................................................................................60
8.6 Entire Agreement; No Third Party Beneficiaries.................................................60
8.7 Applicable Law.................................................................................60
8.8 No Remedy in Certain Circumstances.............................................................61
8.9 Enforcement of Agreement.......................................................................61
8.10 Assignment.....................................................................................61
8.11 Waivers........................................................................................61
8.12 References and Titles..........................................................................62
8.13 Confidentiality Agreement......................................................................62
8.14 Incorporation..................................................................................62
</TABLE>
iv
<PAGE> 82
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger (this "AGREEMENT") is made and entered
into this 12th day of November, 1997, by and among Chesapeake Energy Corporation
("PARENT"), an Oklahoma corporation, Chesapeake Acquisition Corp. ("SUB"), a
Kansas corporation, and Hugoton Energy Corporation ("HUGOTON"), a Kansas
corporation.
RECITALS
WHEREAS, the board of directors of each of Parent, Sub and Hugoton has
determined that it is in the best interest of its respective stockholders for
Parent to acquire Hugoton by means of the merger of Hugoton with and into Sub
upon the terms and subject to the conditions set forth in this Agreement; and
WHEREAS, for federal income tax purposes, the parties hereto intend that
such merger qualify as a tax free "reorganization" within the meaning of Section
368 of the Internal Revenue Code of 1986, as amended; and
WHEREAS, for accounting purposes it is intended that such merger be
accounted for as a pooling of interests in accordance with APB Opinion 16 and,
in connection therewith, Parent and Hugoton have received an opinion in form and
substance acceptable to such parties from Ernst & Young LLP, dated of even date
herewith; and
WHEREAS, the Board of Directors of Hugoton has approved the execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby and have resolved and agreed to recommend that the stockholders of
Hugoton approve the same; and
WHEREAS, Parent has advised Hugoton that it will not enter into this
Agreement unless the Hugoton Specified Stockholders (defined herein) execute and
deliver to Parent an Agreement and Irrevocable Proxy in the form set forth as
Annex A to this Agreement; and
WHEREAS, Hugoton has advised Parent that it will not enter into this
Agreement unless the Parent Specified Stockholders (as defined herein) execute
and deliver to Hugoton an Agreement and Irrevocable Proxy in the form set forth
as Annex B to this Agreement; and
WHEREAS, Parent, Sub and Hugoton desire to make certain representations,
warranties, covenants and agreements in connection with such merger and also to
prescribe various conditions to such merger; and
WHEREAS, Hugoton has delivered to Parent an opinion of Vinson & Elkins
L.L.P. in form and substance acceptable to Parent and has agreed to deliver an
opinion to Parent of Shearman &
<PAGE> 83
Sterling as soon as practicable after the execution of this agreement if certain
representations and warranties have been made by the officers and directors of
Hugoton to such law firm; and
NOW, THEREFORE, for and in consideration of the recitals and the mutual
covenants and agreements set forth in this Agreement, the parties hereto hereby
agree as follows:
ARTICLE I
DEFINITIONS
1.1 Defined Terms. As used in this Agreement, each of the following terms
has the meaning given in this Section 1.1 or in the Sections referred to below:
"AFFILIATE(S)" means, with respect to any Person, each other Person that
directly or indirectly (through one or more intermediaries or otherwise)
controls, is controlled by, or is under common control with such Person.
"AGREEMENT" means this Agreement and Plan of Merger, as amended,
supplemented or modified from time to time.
"ALTERNATIVE PROPOSAL" has the meaning specified in Section 5.4(b).
"ANSON AGREEMENT" means that certain Merger Agreement and Plan of
Reorganization, dated as of October 22, 1997, among Parent, Chesapeake Merger II
Corp., AnSon Partners Limited Partnership and AnSon Production Company.
"BANK CREDIT AGREEMENT" means the Loan Agreement dated September 7, 1995,
by and among Hugoton, the Hugoton Subsidiaries, Bank One, Texas, N.A., Texas
Commerce Bank National Association, Bank of Montreal, Wells Fargo Bank, National
Association, Meespierson N.V., Credit Lyonnais Cayman Island Branch and Bank of
Scotland, and Bank One, Texas N.A. as Agent and Texas Commerce Bank National
Association as Co-Agent, as amended on January 22, 1996 and on June 11, 1996.
"CERCLA" means the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended.
"CERTIFICATE OF MERGER" means the Certificate of Merger, prepared and
executed in accordance with the applicable provisions of the KCL, filed with the
Secretary of State of Kansas to reflect the consummation of the Merger.
"CLOSING" means the Closing of the Merger and the consummation of the other
transactions contemplated by this Agreement.
2
<PAGE> 84
"CLOSING DATE" means the date on which the Closing occurs, which date shall
be the first business day following the day on which the Hugoton Stockholder
Meeting and the Parent Stockholder Meeting are held (or such other later date as
is agreed upon by the parties).
"CODE" means the Internal Revenue Code of 1986, as amended.
"CONFIDENTIALITY AGREEMENT" means the letter of agreement, dated June 23,
1997, between Hugoton and Parent or its Affiliate relating to Hugoton's
furnishing of information to Parent or such Affiliate in connection with
Parent's or such Affiliate's evaluation of a possible transaction between Parent
and Hugoton.
"CONTRACT EMPLOYEE" has the meaning set forth in Section 5.14(a).
"DEFENSIBLE TITLE" means such right, title and interest that is (a)
evidenced by an instrument or instruments filed of record in accordance with the
conveyance and recording laws of the applicable jurisdiction to the extent
necessary to prevail against competing claims of bona fide purchasers for value
without notice and (b) subject to Permitted Encumbrances, free and clear of all
Liens, claims, infringements, burdens or other defects.
"DLB MERGER AGREEMENT" means the Agreement and Plan of Merger dated as of
October 22, 1997, by and among Parent, Chesapeake Merger Corp. and DLB Oil &
Gas, Inc.
"EFFECTIVE TIME" has the meaning specified in Section 2.7.
"ENVIRONMENTAL LAW" means any federal, state, local or foreign statute,
code, ordinance, rule, regulation, policy, guideline, permit, consent, approval,
license, judgment, order, writ, decree, injunction or other authorization in
effect on the date hereof relating to (a) emissions, discharges, releases or
threatened releases of Hazardous Materials into the natural environment,
including into ambient air, soil, sediments, land surface or subsurface,
buildings or facilities, surface water, groundwater, publicly-owned treatment
works, septic systems or land, (b) the generation, treatment, storage, disposal,
use, handling, manufacturing, transportation or shipment of Hazardous Materials,
or (c) otherwise relating to the pollution of the environment, solid waste
handling treatment or disposal, or operation or reclamation of mines.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"EXCHANGE" means the New York Stock Exchange, Inc.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"EXCHANGE AGENT" means UMB Bank, N.A., the transfer agent for shares of
Parent Common Stock.
3
<PAGE> 85
"EXCHANGE FUND" means the meaning specified in Section 2.5(a).
"GAAP" means generally accepted accounting principles, as recognized by the
U.S. Financial Accounting Standards Board (or any generally recognized
successor).
"GOVERNMENTAL AUTHORITY" means any national, state, county, municipal
government, domestic or foreign, any agency, board, bureau, commission, court,
department or other instrumentality of any such government, or any arbitrator in
any case that has jurisdiction over any Hugoton Companies, Parent or Sub or any
of their respective properties or assets.
"HAZARDOUS MATERIAL" means (a) any "hazardous substance" as defined by
CERCLA, (b) any "hazardous waste" as defined by the Resource Conservation and
Recovery Act, as amended, (c) any hazardous, dangerous or toxic chemical,
material, waste or substance, within the meaning of and regulated by any
Environmental Law, (d) any radioactive material, including any naturally
occurring radioactive material, and any source, special or byproduct material as
defined in 42 U.S.C. 2011 et seq. and any amendments or authorizations thereof,
(e) any asbestos-containing materials in any form or condition, or (f) any
polychlorinated biphenyls in any form or condition.
"HSR ACT" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended.
"HUGOTON" means Hugoton Energy Corporation, a Kansas corporation.
"HUGOTON CERTIFICATE" means a certificate representing shares of Hugoton
Common Stock.
"HUGOTON COMMON STOCK" means the common stock, no par value, of Hugoton.
"HUGOTON COMPANIES" means Hugoton and the Hugoton Subsidiaries.
"HUGOTON DISCLOSURE SCHEDULE" means the disclosure schedule attached hereto
entitled Hugoton Disclosure Schedule and any documents listed on such disclosure
schedule and expressly incorporated therein by reference.
"HUGOTON EMPLOYEE(S)" has the meaning specified in Section 5.14(a).
"HUGOTON EMPLOYEE BENEFIT PLANS" has the meaning specified in Section
3.15(a).
"HUGOTON FINANCIAL STATEMENTS" means the audited and unaudited consolidated
financial statements of Hugoton and its subsidiaries (including the related
notes) included (or incorporated by reference) in Hugoton's Annual Report on
Form 10-K for the year ended December 31, 1996, and Quarterly Report on Form
10-Q for the quarter ended June 30, 1997, in each case as filed with the SEC.
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"HUGOTON MATERIAL AGREEMENT(S)" means (a) any written or oral agreements,
contracts, commitments or understandings to which any of the Hugoton Companies
is a party, by which any of the Hugoton Companies is directly or indirectly
bound, or to which any asset of any of the Hugoton Companies may be subject,
involving total value or consideration in excess of $1,000,000 and (b) the Bank
Credit Agreement.
"HUGOTON PERMITS" has the meaning specified in Section 3.12.
"HUGOTON PROPOSAL" means the proposal to approve this Agreement and the
Merger, which proposal is to be presented to the stockholders of Hugoton in the
Proxy Statement/Prospectus.
"HUGOTON REPRESENTATIVE" means any director, officer, employee, agent,
advisor (including legal, accounting and financial advisors), Affiliate or other
representative of any of the Hugoton Companies.
"HUGOTON SEC DOCUMENTS" has the meaning specified in Section 3.5.
"HUGOTON SEVERANCE POLICY" has the meaning set forth in Section 5.14(a).
"HUGOTON SPECIFIED STOCKHOLDERS" means Floyd C. Wilson, Wilvest, L.P., The
Wilson Foundation, Comdisco, Inc., American Gas & Oil Investors, Limited
Partnership, AmGO II, Limited Partnership, First Reserve Fund V, Limited
Partnership and Jay W. Decker.
"HUGOTON STOCK OPTION(S)" has the meaning specified in Section 2.4(b)(iii).
"HUGOTON STOCK OPTION PLANS AND AGREEMENTS" means those stock option plans
and agreements listed on Schedule 2.4(b)(iii) of the Hugoton Disclosure
Schedule.
"HUGOTON STOCKHOLDER MEETING" means the meeting of the stockholders of
Hugoton for the purpose of voting on this Agreement and the Merger.
"HUGOTON SUBSIDIARY(IES)" means AmGas Corporation, Hugoton Exploration
Corporation, HEC Trading Company and Tiffany Gathering, Inc.
"HYDROCARBONS" means oil, condensate, gas, casinghead gas and other liquid
or gaseous Hydrocarbons.
"INDEMNIFIED PARTIES" has the meaning specified in Section 5.13(a).
"KCL" means the Kansas Corporation Law.
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"LIEN(S)" means any Lien, mortgage, security interest, pledge, deposit,
production payment, restriction, burden, encumbrance, rights of a vendor under
any title retention or conditional sale agreement, or lease or other arrangement
substantially equivalent thereto.
"MAJOR HUGOTON STOCKHOLDER(S)" means Floyd C. Wilson, Wilvest, L.P., The
Wilson Foundation, Comdisco, Inc., and American Gas & Oil Investors, Limited
Partnership, AmGO II, Limited Partnership, First Reserve Fund V, Limited
Partnership and those other holders of Hugoton Common Stock who are "affiliates"
of Hugoton, within the meaning of the Securities Act, and who, as a result of
the Merger, will hold in excess of three percent (3%) of the issued and
outstanding shares of Parent Common Stock.
"MATERIAL ADVERSE EFFECT" means (a) when used with respect to Hugoton, a
result or consequence that would materially adversely affect the condition
(financial or otherwise), results of operations or business of the Hugoton
Companies (taken as a whole) or the aggregate value of their assets, would
materially impair the ability of the Hugoton Companies (taken as a whole) to
own, hold, develop and operate their assets, or would impair Hugoton's ability
to perform its obligations hereunder or consummate the transactions contemplated
hereby; and (b) when used with respect to Parent, a result or consequence that
would materially adversely affect the condition (financial or otherwise),
results of operations or business of the Parent Companies (taken as a whole) or
the aggregate value of their assets, would materially impair the ability of the
Parent Companies (taken as a whole) to own, hold, develop and operate their
assets, or would impair Parent's or Sub's ability to perform its obligations
hereunder or consummate the transactions contemplated hereby.
"MERGER" has the meaning specified in Section 2.1.
"NASDAQ" means the Nasdaq National Market.
"NET REVENUE INTERESTS" means Hugoton's overall interest in Hydrocarbons
produced from or attributable to Hugoton's oil and gas properties, after
deducting all lessor's royalties, overriding royalties, production payments, and
other interests or burdens on Hydrocarbons produced from Hugoton's oil and gas
properties or any well thereon.
"OIL AND GAS INTEREST(S)" means (a) direct and indirect interests in and
rights with respect to oil, gas, mineral and related properties and assets of
any kind and nature, direct or indirect, including working, royalty and
overriding royalty interests, production payments, operating rights, net profits
interests, other non-working interests and non-operating interests; (b)
interests in and rights with respect to Hydrocarbons and other minerals or
revenues therefrom and contracts in connection therewith and claims and rights
thereto (including oil and gas leases, operating agreements, unitization and
pooling agreements and orders, division orders, transfer orders, mineral deeds,
royalty deeds, oil and gas sales, exchange and processing contracts and
agreements and, in each case, interests thereunder), surface interests, fee
interests, reversionary interests, reservations and concessions; (c) easements,
rights of way, licenses, permits, leases, and other interests associated with,
appurtenant to, or necessary for the operation of any of the foregoing; and (d)
interests in
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equipment and machinery (including well equipment and machinery), oil and gas
production, gathering, transmission, compression, treating, processing and
storage facilities (including tanks, tank batteries, pipelines and gathering
systems), pumps, water plants, electric plants, gasoline and gas processing
plants, refineries and other tangible personal property and fixtures associated
with, appurtenant to, or necessary for the operation of any of the foregoing.
"OWNERSHIP INTERESTS" means the Ownership Interests of Hugoton in its
assets, as set forth on Schedule 1.1(b).
"PARENT" means Chesapeake Energy Corporation, an Oklahoma corporation.
"PARENT BENEFIT PLANS" means the "employee benefit plans" within the
meaning of Section 3(3) of ERISA, which Parent or any of its subsidiaries
maintains or sponsors or with respect to which Parent or any of its subsidiaries
has any material liability (actual or contingent, primary or secondary), and
(ii) all other (A) director or employee compensation or benefit plans, programs
or arrangements, (B) stock purchase, stock option, severance, bonus, incentive
and deferred compensation plans, (C) written employment or consulting contracts,
and (D) change-in-control agreements which Parent or any of its subsidiaries
maintains, sponsors or is a party to or with respect to which Hugoton or any of
its subsidiaries has or could have any material liability.
"PARENT CERTIFICATE" means a certificate representing shares of Parent
Common Stock.
"PARENT COMMON STOCK" means the common stock, par value $0.01 per share, of
Parent.
"PARENT COMPANY(IES)" means Parent and the Parent Subsidiaries.
"PARENT DISCLOSURE SCHEDULE" means the disclosure schedule attached hereto
entitled Parent Disclosure Schedule and any documents listed on such disclosure
schedule and expressly incorporated therein by reference.
"PARENT EMPLOYEE BENEFIT PLAN(S)" has the meaning specified in Section
4.18(a).
"PARENT FINANCIAL STATEMENTS" means the audited and unaudited consolidated
financial statements of Parent and its subsidiaries (including the related
notes) included (or incorporated by reference) in Parent's Annual Report on Form
10-K for the year ended June 30, 1997.
"PARENT MATERIAL AGREEMENT(S)" means (a) any written or oral agreements,
contract, commitment or understanding to which any of the Parent Companies is a
party, by which any of the Parent Companies is directly or indirectly bound, or
to which any asset of any of the Parent Companies may be subject, involving
total value or consideration in excess of $2,500,000 and (b) the credit
agreement of Parent or the Parent Companies.
"PARENT PERMITS" has the meaning specified in Section 4.13.
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"PARENT PREFERRED STOCK" means the 10,000,000 shares of authorized
preferred stock, par value $0.01 per share, of Parent.
"PARENT REPRESENTATIVE" means any director, officer, employee, agent,
advisor (including legal, accounting and financial advisors), Affiliate or other
representative of Parent or its subsidiaries.
"PARENT SEC DOCUMENTS" has the meaning specified in Section 4.5.
"PARENT SPECIFIED STOCKHOLDERS" means Tom L. Ward and TLW Investments,
Inc., a corporation controlled by Mr. Ward, Aubrey K. McClendon and Chesapeake
Investments, an Oklahoma limited partnership of which Mr. McClendon is the sole
general partner and Shannon T. Self in his capacity as a trustee of the Aubrey
K. McClendon Children's Trust and as trustee of the Tom L. Ward Children's
Trust.
"PARENT STOCKHOLDER MEETING" means the meeting of the stockholders of
Parent for the purpose of voting on this Agreement and the Merger.
"PARENT SUBSIDIARY(IES)" means Sub and Chesapeake Operating, Inc.,
Chesapeake Exploration Limited Partnership and Chesapeake Louisiana, L.P.
"PERMITTED ENCUMBRANCES" means (a) Liens for Taxes, assessments or other
governmental charges or levies if the same shall not at the particular time in
question be due and delinquent or (if foreclosure, distraint, sale or other
similar proceedings shall not have been commenced or if commenced, shall have
been stayed) are being contested in good faith by appropriate proceedings and if
any of the Hugoton Companies shall have set aside on its books such reserves
(segregated to the extent required by sound accounting practices) as may be
required by GAAP or otherwise determined by its board of directors to be
adequate with respect thereto; (b) Liens of carriers, warehousemen, mechanics,
laborers, materialmen, landlords, vendors, workmen and operators arising by
operation of law in the ordinary course of business or by a written agreement
existing as of the date hereof and necessary or incident to the exploration,
development, operation and maintenance of Hydrocarbon properties and related
facilities and assets for sums not yet due or being contested in good faith by
appropriate proceedings, if any of the Hugoton Companies shall have set aside on
its books such reserves (segregated to the extent required by sound accounting
practices) as may be required by GAAP or otherwise determined by its board of
directors to be adequate with respect thereto; (c) Liens incurred in the
ordinary course of business in connection with worker's compensation,
unemployment insurance and other social security legislation (other than ERISA);
(d) Liens incurred in the ordinary course of business to secure the performance
of bids, tenders, trade contracts, leases, statutory obligations, surety and
appeal bonds, performance and repayment bonds and other obligations of a like
nature; (e) Liens, easements, rights-of-way, restrictions, servitudes, permits,
conditions, covenants, exceptions, reservations and other similar encumbrances
incurred in the ordinary course of business or existing on property and not (i)
reducing the Hugoton Net Revenue Interest below that set forth on Schedule
1.1(b) of the Hugoton Disclosure Schedule,
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(ii) increase the Hugoton Working Interests in any Oil and Gas Interest above
that set forth on Schedule 1.1(b) of the Hugoton Disclosure Schedule or (iii) in
the aggregate materially impair the value of the assets of any of the Hugoton
Companies or interfering with the ordinary conduct of the business of any of the
Hugoton Companies or rights to any of their assets; (f) Liens created or arising
by operation of law to secure a party's obligations as a purchaser of oil and
gas; (g) all rights to consent by, required notices to, filings with, or other
actions by Governmental Authorities to the extent customarily obtained
subsequent to Closing; (h) farmout, carried working interest, joint operating,
unitization, royalty, overriding royalty, sales and similar agreements relating
to the exploration or development of, or production from, Hydrocarbon properties
entered into in the ordinary course of business; (i) any defects, irregularities
or deficiencies in title to easements, rights-of-way or other surface use
agreements that do not (x) reduce the Hugoton Net Revenue Interests below that
set forth on Schedule 1.1(b) of the Hugoton Disclosure Schedule, (y) increase
the Hugoton Working Interests in any Oil and Gas Interest above that set forth
in Schedule 1.1(b) of the Hugoton Disclosure Schedule or (z) materially
adversely affect the value of any asset of any of the Hugoton Companies; (j)
preferential rights to purchase and Third-Party Consents; (k) Liens arising
under or created pursuant to the Bank Credit Agreement; and (l) Liens described
on the Hugoton Disclosure Schedule.
"PERSON(S)" means any natural Person, corporation, company, limited or
general partnership, joint stock company, joint venture, association, limited
liability company, limited liability partnership, trust, bank, trust company,
land trust, business trust or other entity or organization, whether or not a
Governmental Authority.
"PETRIE PARKMAN" means Petrie Parkman & Co., Inc.
"PROXY STATEMENT/PROSPECTUS" means a proxy statement in a definitive form
relating to the Hugoton Stockholder Meeting and the Parent Stockholder Meeting,
which proxy statement will be included as a prospectus in the Registration
Statement.
"REGISTRATION RIGHTS AGREEMENT" means the Registration Rights Agreement in
the form attached hereto as Annex D.
"REGISTRATION STATEMENT" means the Registration Statement on Form S-4 to be
filed by Parent in connection with the issuance of Parent Common Stock pursuant
to the Merger.
"RETURNS" has the meaning specified in Section 3.14(a).
"SEC" means the Securities and Exchange Commission.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SUB" means Chesapeake Acquisition Corp., a Kansas corporation and a
wholly-owned subsidiary of Parent.
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"SUB COMMON STOCK" means the common stock, par value $0.01 per share, of
Sub.
"SUPERIOR PROPOSAL" has the meaning specified in Section 5.4(b).
"SURVIVING CORPORATION" has the meaning specified in Section 2.2.
"TAX" or "TAXES" means any and all Taxes, fees, levies, duties, tariffs,
imposts, and other charges of any kind (together with any and all interest,
penalties, additions to Tax and additional amounts imposed with respect thereto)
imposed by any government or taxing authority, including, without limitation;
Taxes or other charges on or with respect to income, franchises, windfall other
profits, gross receipts, property, sales, use, capital stock, payroll,
employment, social security, workers' compensation, unemployment compensation,
or net worth; Taxes or other charges in the nature of excise, withholding, ad
valorem, stamp, transfer, value added, or gains Taxes; license, registration and
documentation fees; and custom duties, tariffs, and similar charges.
"THIRD-PARTY CONSENT" means the consent or approval of any Person other
than Hugoton, Parent, Sub or any Governmental Authority.
"WORKING INTEREST" means Hugoton's share of all of the costs, expenses,
burdens, and obligations of any type or nature attributable to Hugoton's
interests in its oil and gas properties or any well thereon.
ARTICLE II
THE MERGER
2.1 The Merger. Subject to the terms and conditions set forth in this
Agreement, at the Effective Time, Hugoton shall be merged with and into Sub in
accordance with the provisions of this Agreement and the KCL. Such merger is
referred to herein as the "Merger."
2.2 Effect of the Merger. Upon the effectiveness of the Merger, the
separate existence of Hugoton shall cease and Sub, as the Surviving Corporation
in the Merger (the "Surviving Corporation"), shall continue its corporate
existence under the laws of the State of Kansas. The Merger shall have the
effects specified in the KCL.
2.3 Governing Instruments, Directors and Officers of the Surviving
Corporation.
(a) The articles of incorporation of Sub, as in effect immediately
prior to the Effective Time, shall be the articles of incorporation of the
Surviving Corporation until duly amended in accordance with their terms and
applicable law.
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(b) The bylaws of Sub, as in effect immediately prior to the Effective
Time, shall be the bylaws of the Surviving Corporation until duly amended in
accordance with their terms and applicable law.
(c) The directors and officers of Sub at the Effective Time shall be
the directors and officers, respectively, of the Surviving Corporation from the
Effective Time until their respective successors have been duly elected or
appointed in accordance with the articles of incorporation and bylaws of the
Surviving Corporation and applicable law.
2.4 Effect on Securities.
(a) Sub Stock. At the Effective Time, by virtue of the Merger and
without any action on the part of any holder thereof, each share of Sub Common
Stock outstanding immediately prior to the Effective Time shall remain
outstanding and continue as one share of capital stock of the Surviving
Corporation and each certificate evidencing ownership of any such shares shall
continue to evidence ownership of the same number of shares of the capital stock
of the Surviving Corporation.
(b) Hugoton Securities.
(i) Hugoton Common Stock. At the Effective Time, by virtue of the
Merger and without any action on the part of any holder thereof (but
subject to the provisions of Section 2.5(e)), each share of Hugoton
Common Stock that is issued and outstanding immediately prior to the
Effective Time shall be converted into the right to receive 1.3 shares
of validly issued, fully paid and non-assessable Parent Common Stock.
Each share of Hugoton Common Stock, when so converted, shall
automatically be canceled and retired, shall cease to exist and shall no
longer be outstanding; and the holder of any certificate representing
any such shares shall cease to have the rights with respect thereto,
except the right to receive the shares of Parent Common Stock to be
issued in exchange therefor (along with any cash in lieu of fractional
shares of Parent Common Stock as provided in Section 2.5(e) and any
unpaid dividends and distributions with respect to such shares of Parent
Common Stock as provided in Section 2.5(c)), without interest, upon the
surrender of such certificate in accordance with Section 2.5.
(ii) Hugoton Treasury Stock. At the Effective Time, by virtue of the
Merger, all shares of Hugoton Common Stock that are issued and held as
treasury stock, if any, shall be canceled and retired and shall cease to
exist, and no shares of Parent Common Stock or other consideration shall
be paid or payable in exchange therefor.
(iii) Hugoton Stock Options. Section 2.4(b)(iii) of the Hugoton
Disclosure Schedule lists each Hugoton Stock Option Plans and Agreements
(collectively, the
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"Hugoton Plans") and identifies the number of options outstanding under
each of the Hugoton Plans and the exercise prices thereof. Each Hugoton
Plan and all such options which are outstanding immediately prior to the
Effective Date, whether vested or unvested (each, a "Hugoton Option" and
collectively, the "Hugoton Options"), shall be assumed by Parent at the
Effective Time subject to receipt by Parent of the consents required, if
any, under the Hugoton Plans, and each such Hugoton Option shall become
an option to purchase a number of shares of Parent Common Stock (a
"Substitute Option") equal to the number of shares of Hugoton Common
Stock subject to purchase pursuant to such Hugoton Option multiplied by
1.3 (rounded to the nearest whole share). The per share exercise price
for each Substitute Option shall be the current exercise price per share
of Hugoton Common Stock divided by 1.3 (rounded up to the nearest full
cent), and each Substitute Option otherwise shall be subject to all of
the other terms and conditions of the original Hugoton Option to which
it relates. Prior to the Effective Time, Hugoton, subject to Parent's
review and consent, which will not be unreasonably withheld, shall take
such additional actions as are necessary under applicable law and the
applicable agreements and Hugoton Plans to ensure that each outstanding
Hugoton Option shall, from and after the Effective Time, represent only
the right to purchase, upon exercise, shares of Parent Common Stock and,
subject to Parent's consent, which will not be unreasonably withheld,
shall take such other actions as are necessary or appropriate to assure
that the Hugoton Plans and Hugoton Options conform to the assumptions
made by Ernst & Young LLP in the opinion of even date herewith delivered
to Hugoton and Parent. There shall not occur as a result of the Merger
any acceleration of vesting or exercisability with respect to any
Option, or any lapse of vesting restrictions with respect to any share
of restricted stock, other than pursuant to the terms of the original
grant agreement and changes thereto implemented prior to the date of
this Agreement, and any such acceleration shall occur without the
exercise of discretion by any person or entity. As soon as reasonably
practicable after the Effective Time, Parent shall cause to be included
under a registration statement on Form S-8 of Parent all shares of
Parent Common Stock which are subject to Substitute Options, and shall
maintain the effectiveness of such registration statement until all
Substitute Options have been exercised, expired or forfeited.
2.5 Exchange of Certificates.
(a) Exchange Fund. Immediately after the Effective Time, Parent shall
deposit with the Exchange Agent, for the benefit of the holders of shares of
Hugoton Common Stock and for exchange in accordance with this Agreement,
certificates representing the shares of Parent Common Stock to be issued in
exchange for shares of Hugoton Common Stock pursuant to Section 2.4(b)(i). Such
shares of Parent Common Stock together with any dividends or distributions with
respect thereto (as provided in Section 2.5(c)) and such funds, are referred to
herein as the "Exchange Fund." The Exchange Agent, pursuant to irrevocable
instructions consistent with the terms of this Agreement, shall deliver the
Parent Common Stock to be issued or paid pursuant to
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Section 2.4(b)(i) out of the Exchange Fund, and the Exchange Fund shall not be
used for any other purpose whatsoever. The Exchange Fund shall not be entitled
to vote or exercise any rights of ownership with respect to the Parent Common
Stock held by it from time to time hereunder, except that it shall receive and
hold all dividends or other distributions paid or distributed with respect
thereto for the account of Persons entitled thereto.
(b) Exchange Procedures.
(i) As soon as reasonably practicable after the Effective Time,
Parent shall cause the Exchange Agent to mail to each holder of record of
a Hugoton Certificate that, immediately prior to the Effective Time,
represented shares of Hugoton Common Stock which was converted into the
right to receive Parent Common Stock pursuant to Section 2.4(b)(i), a
letter of transmittal to be used to effect the exchange of such Hugoton
Certificate for a Parent Certificate (and cash in lieu of fractional
shares), along with instructions for using such letter of transmittal to
effect such exchange. The letter of transmittal (or the instructions
thereto) shall specify that delivery of any Hugoton Certificate shall be
effected, and the risk of loss and title thereto shall pass, only upon
delivery of such Hugoton Certificate to the Exchange Agent and shall be in
such form and have such other provisions as Parent may reasonably specify.
(ii) Upon surrender to the Exchange Agent of a Hugoton Certificate
for cancellation, together with a duly completed and executed letter of
transmittal and any other required documents (including, in the case of
any Person constituting an "affiliate" of Hugoton for purposes of Rule
145(c) and (d) under the Securities Act, a written agreement from such
Person as described in Section 5.10, if not previously delivered to
Parent), (A) the holder of such Hugoton Certificate shall be entitled to
receive in exchange therefor a Parent Certificate representing the number
of whole shares of Parent Common Stock that such holder has the right to
receive pursuant to Section 2.4 (b)(i), any cash in lieu of fractional
shares of Parent Common Stock as provided in Section 2.5(e), and any
unpaid dividends and distributions that such holder has the right to
receive pursuant to Section 2.5(c) (after giving effect to any required
withholding of Taxes); and (B) the Hugoton Certificate so surrendered
shall forthwith be canceled. No interest shall be paid or accrued on the
cash in lieu of fractional shares and unpaid dividends and distributions,
if any, payable to holders of Hugoton Certificates.
(iii) In the event of a transfer of ownership of Hugoton Common
Stock that is not registered in the transfer records of Hugoton, a Parent
Certificate representing the appropriate number of shares of Parent Common
Stock (along with any cash in lieu of fractional shares and any unpaid
dividends and distributions that such holder has the right to receive) may
be issued or paid to a transferee if the Hugoton Certificate representing
such shares of Hugoton Common Stock is presented
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to the Exchange Agent accompanied by all documents required to evidence
and effect such transfer and to evidence that any applicable stock
transfer Taxes have been paid.
(iv) Until surrendered as contemplated by this Section 2.5(b), each
Hugoton Certificate shall be deemed at any time after the Effective Time
to represent only the right to receive upon such surrender a Parent
Certificate representing shares of Parent Common Stock as provided in
Section 2.4(b)(i) (along with any cash in lieu of fractional shares and
any unpaid dividends and distributions to the extent specified herein).
(c) Distributions With Respect to Unexchanged Shares. No dividends or
other distributions with respect to Parent Common Stock declared or made after
the Effective Time with a record date after the Effective Time shall be paid to
the holder of any unsurrendered Hugoton Certificate. Subject to the effect of
applicable laws, (i) at the time of the surrender of a Hugoton Certificate for
exchange in accordance with the provisions of this Section 2.5, there shall be
paid to the surrendering holder, without interest, the amount of dividends or
other distributions (having a record date after the Effective Time but on or
prior to surrender and a payment date on or prior to surrender) theretofore paid
with respect to the number of whole shares of Parent Common Stock that such
holder is entitled to receive (less the amount of any withholding Taxes that may
be required with respect thereto); and (ii) at the appropriate payment date,
there shall be paid to the surrendering holder, without interest, the amount of
dividends or other distributions (having a record date after the Effective Time
but on or prior to surrender and a payment date subsequent to surrender) payable
with respect to the number of whole shares of Parent Common Stock that such
holder receives (less the amount of any withholding Taxes that may be required
with respect thereto).
(d) No Further Ownership Rights in Hugoton Common Stock. All shares of
Parent Common Stock issued upon the surrender for exchange of shares of Hugoton
Common Stock in accordance with the terms hereof (including any cash paid
pursuant to Section 2.5(c) or (e)) shall be deemed to have been issued in full
satisfaction of all rights pertaining to such shares of Hugoton Common Stock.
After the Effective Time, there shall be no further registration of transfers on
the Surviving Corporation's stock transfer books of the shares of Hugoton Common
Stock that were outstanding immediately prior to the Effective Time. If, after
the Effective Time, a Hugoton Certificate is presented to the Surviving
Corporation for any reason, it shall be canceled and exchanged as provided in
this Section 2.5.
(e) Treatment of Fractional Shares. No Parent Certificate or scrip
representing fractional shares of Parent Common Stock shall be issued in the
Merger and, except as provided in this Section 2.5(e), no dividend or other
distribution, stock split or interest shall relate to any such fractional
shares, and such fractional share shall not entitle the owner thereof to vote or
to any other rights of a stockholder of Parent. In lieu of any fractional
security, each holder of shares of Hugoton Common Stock who would otherwise have
been entitled to a fraction of a share of Parent Common Stock upon surrender of
the certificate(s) for such Hugoton Common Stock for exchange pursuant to this
Section 2.5 will be paid an amount in cash (without interest) equal to such
holder's
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proportionate interest in the amount of the net proceeds from the sale or sales
by the Exchange Agent in accordance with the provisions of this Section 2.5(e),
on behalf of all such holders, of the aggregate fractional shares of Parent
Common Stock issued pursuant to Section 2.4. As soon as practicable following
the Effective Time, the Exchange Agent shall determine the excess of (A) the
number of whole shares of Parent Common Stock delivered to the Exchange Agent by
Parent pursuant to Section 2.4(a) over (B) the aggregate number of whole shares
of Parent Common Stock to be distributed to holders of Hugoton Common Stock
pursuant to Section 2.4(b)(ii) (such excess being herein called the "Excess
Securities") and the Exchange Agent, as agent for the former holders of Hugoton
Common Stock, shall sell the Excess Securities at the prevailing prices on the
Exchange. The sale of the Excess Securities by the Exchange Agent shall be
executed on the Exchange through one or more member firms of the Exchange and
shall be executed in round lots to the extent practicable. Parent shall pay all
commissions, transfer taxes and other out-of-pocket transaction costs, including
the expenses and compensation of the Exchange Agent, incurred in connection with
such sale of Excess Securities. Until the net proceeds of such sale of Excess
Securities have been distributed to the former stockholders of Hugoton, the
Exchange Agent will hold such proceeds and dividends in trust for such former
stockholders. As soon as practicable after the determination of the amount of
cash to be paid to former stockholders of Hugoton in lieu of any fractional
interests, the Exchange Agent shall make available in accordance with this
Agreement such amounts to any such former stockholders.
(f) Termination of Exchange Fund. Any portion of the Exchange Fund and
cash held by the Exchange Agent in accordance with the terms of this Section 2.5
that remains unclaimed by the former stockholders of Hugoton for a period of one
(1) year following the Effective Time shall be delivered to Parent, upon demand.
Thereafter, any former stockholders of Hugoton who have not theretofore complied
with the provisions of this Section 2.5 shall look only to Parent for payment of
their claim for Parent Common Stock, any cash in lieu of fractional shares of
Parent Common Stock and any dividends or distributions with respect to Parent
Common Stock (all without interest).
(g) No Liability. Neither Parent, Hugoton, the Surviving Corporation, the
Exchange Agent nor any other Person shall be liable to any former holder of
shares of Hugoton Common Stock for any amount properly delivered to any public
official pursuant to any applicable abandoned property, escheat or similar law.
Any amounts remaining unclaimed by former holders of Hugoton Common Stock for a
period of three (3) years following the Effective Time (or such earlier date
immediately prior to the time at which such amounts would otherwise escheat to
or become property of any governmental entity) shall, to the extent permitted by
applicable law, become the property of Parent, free and clear of any claims or
interest of any such holders or their successors, assigns or personal
representatives previously entitled thereto.
(h) Lost, Stolen, or Destroyed Hugoton Certificates. If any Hugoton
Certificate shall have been lost, stolen or destroyed, upon the making of an
affidavit of that fact by the Person claiming such Hugoton Certificate to be
lost, stolen or destroyed and, if required by Parent, the posting by such Person
of a bond, in such reasonable amount as Parent may direct, as indemnity
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against any claim that may be made against it with respect to such Hugoton
Certificate, the Exchange Agent shall issue in exchange for such lost, stolen or
destroyed Hugoton Certificate the shares of Parent Common Stock (along with any
cash in lieu of fractional shares pursuant to Section 2.5(e) and any unpaid
dividends and distributions pursuant to Section 2.5(c)) deliverable with respect
thereto pursuant to this Agreement.
2.6 Closing. The Closing shall take place on the Closing Date at such time
and place as is agreed upon by Parent and Hugoton.
2.7 Effective Time of the Merger. The Merger shall become effective
immediately when the Certificate of Merger is accepted for filing by the
Secretary of State of Kansas or at such time thereafter as is provided in the
Certificate of Merger (the "Effective Time"). The Certificate of Merger shall be
filed on the Closing Date and as soon as practicable after the Closing;
provided, however, that the Certificate of Merger may be filed prior to the
Closing Date or prior to the Closing so long as it provides for an Effective
Time that occurs after the Closing.
2.8 Taking of Necessary Action; Further Action. Each of Parent, Sub and
Hugoton shall use all reasonable efforts to take all such actions as may be
necessary or appropriate in order to effectuate the Merger under KCL as promptly
as commercially practicable. If, at any time after the Effective Time, any
further action is necessary or desirable to carry out the purposes of this
Agreement and to vest the Surviving Corporation with full right, title and
possession to all assets, property, rights, privileges, powers and franchises of
either Sub or Hugoton, the officers and directors of the Surviving Corporation
are fully authorized, in the name of the Surviving Corporation or otherwise to
take, and shall take all such lawful and necessary action.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF HUGOTON
Except as set forth in the Hugoton Disclosure Schedule, Hugoton hereby
represents and warrants to Parent and Sub that:
3.1 Corporate Organization. Each of the Hugoton Companies (a) is a
corporation duly organized, validly existing and in good standing under the laws
of its state of incorporation, (b) has all requisite corporate power and
authority to own, lease and operate its properties and assets and to carry on
its business as it is presently being conducted, and (c) is duly qualified to do
business as a foreign corporation, and is in good standing, in each jurisdiction
where the character of the properties owned or leased by it or the nature of its
activities makes such qualification necessary (except where any failure to be so
qualified as a foreign corporation or to be in good standing would not,
individually or in the aggregate, have a Material Adverse Effect on Hugoton).
Copies of the certificate or articles of incorporation and bylaws of each of the
Hugoton Companies have heretofore been delivered to Parent and such copies are
accurate and complete as of the date hereof.
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3.2 Authority and Enforceability. Hugoton has the requisite corporate
power and authority to execute and deliver this Agreement and (with respect to
consummation of this Agreement and the Merger, subject to the approval of the
stockholders of Hugoton) to consummate the transactions contemplated hereby. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly and validly authorized by all
necessary corporate action on the part of Hugoton, including approval by the
board of directors of Hugoton, and no other corporate proceedings on the part of
Hugoton are necessary to authorize the execution or delivery of this Agreement
or (with approval by the stockholders of Hugoton) to consummate the transactions
contemplated hereby. This Agreement has been duly and validly executed and
delivered by Hugoton (with respect to consummation of this Agreement and the
Merger, subject to the approval by the stockholders of Hugoton and assuming that
this Agreement constitutes a valid and binding obligation of Parent and Sub)
constitutes a valid and binding obligation of Hugoton, enforceable against
Hugoton in accordance with its terms.
3.3 No Violations. Except as set forth in Section 3.3 of the Hugoton
Disclosure Schedule, the execution and delivery of this Agreement does not, and
the consummation of the transactions contemplated hereby and compliance by
Hugoton with the provisions hereof will not, conflict with, result in any
violation of or default (with or without notice or lapse of time or both) under,
give rise to a right of termination, cancellation or acceleration of any
obligation or to the loss of a material benefit under, or result in the creation
of any Lien on any of the properties or assets of Hugoton or any Hugoton
Subsidiary under, any provision of (a) the articles of incorporation or bylaws
of Hugoton or any provision of the comparable charter or organizational
documents of any Hugoton Subsidiary, (b) any loan or credit agreement, note,
bond, mortgage, indenture, lease, permit, concession, franchise, license or
other agreement or instrument applicable to Hugoton or any Hugoton Subsidiary,
or (c) assuming the consents, approvals, authorizations or permits and filings
or notifications referred to in Section 3.4 are duly and timely obtained or
made, any judgment, order, decree, statute, law, ordinance, rule or regulation
applicable to Hugoton or any Hugoton Subsidiary or any of their respective
properties or assets, other than, in the case of clause (b) or (c) above, any
such conflict, violation, default, right, loss or Lien that, individually or in
the aggregate, would not have a Material Adverse Effect on Hugoton.
3.4 Consents and Approvals. No consent, approval, order or authorization
of, registration, declaration, or filing with, or permit from, any Governmental
Authority is required by or with respect to Hugoton in connection with the
execution and delivery of this Agreement by Hugoton or the consummation by
Hugoton of the transactions contemplated hereby except for the following: (a)
any such consent, approval, order, authorization, registration, declaration,
filing or permit which the failure to obtain or make would not, individually or
in the aggregate, have a Material Adverse Effect on Hugoton or Hugoton's ability
to consummate the transactions contemplated hereby in accordance with this
Agreement; (b) the filing of the Certificate of Merger with the Secretary of
State of Kansas pursuant to the provisions of the KCL; (c) the filing, if
necessary, of a pre-merger notification report by Parent under the HSR Act and
the expiration or termination of the applicable waiting period; (d) the filing
with the SEC of the Proxy Statement/Prospectus and such other reports under
Section 13(a) of the Exchange Act and such other
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compliance with the Exchange Act and the Securities Act and the rules and
regulations of the SEC thereunder as may be required in connection with this
Agreement and the transactions contemplated hereby and the obtaining from the
SEC of such orders as may be so required; and (e) such filings and approvals as
may be required by any applicable state securities, "blue sky" or takeover laws
or Environmental Laws. No Third-Party Consent is required by or with respect to
Hugoton in connection with the execution and delivery of this Agreement or the
consummation of the transactions contemplated hereby, except for (i) any such
Third-Party Consent which the failure to obtain would not, individually or in
the aggregate, have a Material Adverse Effect on Hugoton or Hugoton's ability to
consummate the transactions contemplated hereby in accordance with this
Agreement; (ii) the valid approval of this Agreement and the Merger by the
stockholders of Hugoton; and (iii) any consent, approval or waiver requirement
by the terms of the Bank Credit Agreement, which consent, approval or waiver
Hugoton undertakes to seek and obtain promptly after the date of this Agreement.
3.5 SEC Documents. Parent has had available to it a true and correct
complete copy of each report, schedule, Registration Statement and definitive
proxy statement filed by Hugoton with the SEC since December 31, 1994, and prior
to the date of this Agreement (the "Hugoton SEC Documents"), which are all the
documents (other than preliminary material) that Hugoton was required to file
with the SEC since such date. As of their respective dates, the Hugoton SEC
Documents complied in all material respects with the requirements of the
Securities Act or the Exchange Act, as the case may be, and the rules and
regulations of the SEC thereunder applicable to such Hugoton SEC Documents, and
none of the Hugoton SEC Documents contained any untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
3.6 Financial Statements. The Hugoton Financial Statements were prepared
in accordance with the applicable published rules and regulations of the SEC
with respect thereto and in accordance with GAAP applied on a consistent basis
during the periods involved (except as may be indicated in the notes thereto or,
in the case of unaudited statements, as permitted by Rule 10-01 of Regulation
S-X of the SEC) and fairly present in all material respects, in accordance with
applicable requirements of GAAP (in the case of unaudited statements, subject to
normal, recurring adjustments), the consolidated financial position of Hugoton
and its subsidiaries as of their respective dates and the consolidated results
of operations and the consolidated cash flows of Hugoton and its subsidiaries
for the periods presented therein. There are no material imbalances of
production from the oil and gas properties of Hugoton and any of its
subsidiaries whether required to be disclosed pursuant to GAAP or otherwise.
3.7 Capital Structure.
(a) The authorized capital stock of Hugoton consists of 100,000,000
shares of Hugoton Common Stock and 10,000,000 shares of preferred stock without
par value ("Hugoton Preferred Stock").
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(b) As of the close of business on the business day immediately prior
to the date of this Agreement (a) 19,838,574 shares of Common Stock were validly
issued and outstanding, (b) 1,612,023 shares of Hugoton Common Stock were
reserved for issuance pursuant to the Hugoton Stock Option Plans and Agreements,
of which options to purchase a total of 1,058,625 shares of Hugoton Common Stock
were issued and outstanding, (c) there were no shares of Hugoton Preferred Stock
validly issued and outstanding and (d) no shares of Hugoton Common Stock or
Hugoton Preferred Stock were held by Parent as treasury stock.
(c) Except as described in Section 3.7(b) above or in Section
2.4(b)(iii) of the Hugoton Disclosure Schedule, there are outstanding (i) no
shares of capital stock or other voting securities of Hugoton, (ii) no
securities of Hugoton or any other Person convertible into or exchangeable or
exercisable for shares of capital stock or other voting securities of Hugoton or
any Hugoton Company, and (iii) no subscriptions, options, warrants, calls,
rights (including preemptive rights, commitments, understandings or agreements
to which Hugoton is a party or by which it is bound) obligating Hugoton to
issue, deliver, sell, purchase, redeem or acquire shares of capital stock or
other voting securities of Hugoton or any Hugoton Company (or securities of
Hugoton or any Hugoton Company) or obligating Hugoton to grant, extend or enter
into any such subscription, option, warrant, call, right, commitment,
understanding or agreement.
(d) All outstanding shares of Hugoton capital stock are validly
issued, fully paid and nonassessable and not subject to any preemptive right.
(e) Except as set forth in Section 3.7(e) of the Hugoton Disclosure
Schedule, as of the date hereof there is no, and at the Effective Time there
will not be any, stockholder agreement, voting trust or other agreement or
understanding to which Hugoton is a party or by which it is bound relating to
the voting of any shares of the capital stock of Hugoton.
3.8 Governmental Regulation. Neither Hugoton nor any of its subsidiaries
is subject to regulation under the Public Utility Holding Company Act of 1935,
the Federal Power Act, the Interstate Commerce Act, the Investment Company Act
of 1940 or any state public utilities laws.
3.9 Litigation. Except as set forth in Section 3.9 of the Hugoton
Disclosure Schedule, there is no litigation, arbitration, investigation or other
proceeding of any Governmental Authority pending or, to the knowledge of
Hugoton, threatened against Hugoton or its subsidiaries or their respective
assets which, if adversely determined, could reasonably be expected to have a
Material Adverse Effect on Hugoton or Hugoton's ability to consummate the
transactions contemplated hereby in accordance with this Agreement. Hugoton has
no knowledge of any facts that are likely to give rise to any litigation,
arbitration, investigation or other proceeding of any Governmental Authority
which, individually or in the aggregate, is reasonably likely to have a Material
Adverse Effect on Hugoton or Hugoton's ability to consummate the transactions
contemplated hereby in accordance with this Agreement. No Hugoton Company is
subject to any outstanding injunction, judgment, order, decree or ruling (other
than routine oil and gas field regulatory orders and any injunction, judgment,
order, decree or ruling that, either individually or in the aggregate, would not
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have a Material Adverse Effect on Hugoton or Hugoton's ability to consummate the
transactions contemplated hereby in accordance with this Agreement). There is no
litigation, investigation or other proceeding of any Governmental Authority
pending or, to the knowledge of Hugoton, threatened against or affecting Hugoton
or its subsidiaries that questions the validity or enforceability of this
Agreement or any other document, instrument or agreement to be executed and
delivered by Hugoton in connection with the transactions contemplated hereby.
3.10 Brokers. Other than Petrie Parkman and Growth Capital Partners, no
broker, finder, investment banker or other Person is or will be, in connection
with the transactions contemplated by this Agreement, entitled to any brokerage,
finder's or other fee or compensation based on any arrangement or agreement made
by or on behalf of Hugoton for which the Hugoton Companies or Parent or Sub will
have any obligation or liability. A copy of any agreement between Hugoton and
Petrie Parkman relating to the Merger has been provided to Parent and Hugoton
has informed Parent of the terms of its engagement of Growth Capital Partners.
3.11 Absence of Certain Changes or Events. Except as set forth in Section
3.11 of the Hugoton Disclosure Schedule, since June 30, 1997, Hugoton has
conducted its business only in ordinary course of business consistent with past
practices and, since such date, there has not been any event (financial or
otherwise, whether or not in the ordinary course of business), circumstances or
condition (a) that would be reasonably likely to have a Material Adverse Effect
on Hugoton or Hugoton's ability to consummate the transactions contemplated
hereby in accordance with this Agreement; or (b) that would have required the
consent of Parent pursuant to Section 5.1(a) through (i) had such event occurred
prior to the date of this Agreement (other than changes, including changes in
commodity prices, generally affecting the oil and gas industry, changes
resulting from exploration or development results reported in the ordinary
course of business and changes arising from the announcement of the Merger).
3.12 Compliance with Laws, Material Agreements and Permits. None of the
Hugoton Companies is in violation of, or in default under, and no event has
occurred that (with notice or the lapse of time or both) would constitute a
violation of or default under, (a) its certificate or articles of incorporation
or bylaws or partnership agreement or other governing document, (b) any
applicable law, rule, regulation, order, writ, decree or judgment of any
Governmental Authority, or (c) any Hugoton Material Agreement, except (in the
case of clause (b) or (c) above) for any violation or default that would not,
individually or in the aggregate, have a Material Adverse Effect on Hugoton or
its ability to consummate the transactions contemplated hereby in accordance
with this Agreement. Each of the Hugoton Companies has obtained and holds all
permits, licenses, variances, exemptions, orders, franchises, approvals and
authorizations of all Governmental Authorities necessary for the lawful conduct
of its business or the lawful ownership, use and operation of its assets
("Hugoton Permits"), except for Hugoton Permits which the failure to obtain or
hold would not, individually or in the aggregate, have a Material Adverse Effect
on Hugoton or its ability to consummate the transactions contemplated hereby in
accordance with this Agreement. Each of the Hugoton Companies is in compliance
with the terms of its Hugoton Permits, except where the failure to comply would
not, individually or in the aggregate, have a Material Adverse Effect on Hugoton
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or its ability to consummate the transactions contemplated hereby in accordance
with this Agreement. No investigation or review by any Governmental Authority
with respect to any of the Hugoton Companies is pending or, to the knowledge of
Hugoton, threatened, other than those the outcome of which would not,
individually or in the aggregate, have a Material Adverse Effect on Hugoton or
its ability to consummate the transactions contemplated hereby in accordance
with this Agreement. To the knowledge of Hugoton, no party to any Hugoton
Material Agreement is in material breach of the terms, provisions and conditions
of such Hugoton Material Agreement.
3.13 No Restrictions. Except as otherwise set forth in Section 3.13 of the
Hugoton Disclosure Schedule, none of the Hugoton Companies is a party to (a) any
agreement, indenture or other instrument that contains restrictions with respect
to the payment of dividends or other distributions with respect to its capital,
(b) any financial arrangement with respect to or creating any indebtedness to
any Person (other than indebtedness reflected in the Hugoton Financial
Statements or indebtedness incurred in the ordinary course of business), (c) any
agreement, contract or commitment relating to the making of any advance to, or
investment in, any Person (other than advances in the ordinary course of
business), (d) any guaranty or other contingent liability with respect to any
indebtedness or obligation of any Person (other than guaranties undertaken in
the ordinary course of business and other than the endorsement of negotiable
instruments for collection in the ordinary course of business), or (e) any
agreement, contract or commitment limiting in any respect its ability to compete
with any Person or otherwise conduct business of any line or nature.
3.14 Taxes.
(a) Except as set forth in Schedule 3.14(a) of the Hugoton Disclosure
Schedule, (i) Hugoton and each subsidiary, and any affiliated, combined or
unitary group of which Hugoton or any subsidiary is or was a member has properly
completed and timely (taking into account any extensions) filed all material
federal state, local and foreign returns, declarations, reports, estimates,
information returns and statements ("Returns") required to be filed in respect
of any Tax and has timely paid all Taxes that are shown by such Returns to be
due and payable and (ii) the Returns correctly and accurately (except for one or
more matters the aggregate effect of which is not material) reflect the facts
regarding the income, business and assets, operations, activities, status or
other matters of Hugoton required to be shown thereon or any other information
required to be shown thereon and are not subject to penalties under Section 6662
of the Internal Revenue Code of 1986, as amended (the "Code"), relating to
accuracy-related penalties, or any corresponding provision of applicable state,
local or foreign tax law or any predecessor provision, (iii) Hugoton and each
subsidiary has established reserves that are adequate in the aggregate for the
payment of all material Taxes not yet due and payable with respect to the
results of operations of Hugoton and each subsidiary through the date hereof,
and (iv) Hugoton and each subsidiary have complied in all material respects with
all applicable laws, rules and regulations relating to the payment and
withholding of Taxes and the filing of material federal state or local Returns.
(b) Section 3.14(b) of the Hugoton Disclosure Schedule sets forth the
last taxable period through which the federal income Tax Returns of Hugoton and
each subsidiary have been
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examined by the IRS. Except to the extent being contested in good faith, all
material deficiencies asserted as a result of such examinations and any
examination by any applicable state or local taxing authority have been paid,
fully settled or adequately provided for in Hugoton's most recent audited
financial statements. Except as provided for in Section 3.14(b) of the Hugoton
Disclosure Schedule, no material federal, state or local income or franchise tax
audits or other administrative proceedings or court proceedings are presently
pending with regard to any Taxes for which Hugoton or any of the subsidiaries
would be liable, and no material deficiency which has not yet been paid for any
such Taxes has been proposed, asserted or assessed against Hugoton or any of the
subsidiaries with respect to any period.
(c) Except as disclosed on Section 3.14(c) of the Hugoton Disclosure
Schedule, neither Hugoton nor any subsidiary has executed or entered into (or
prior to the close of business on the Closing Date will execute or enter into)
with the IRS or any taxing authority (i) any agreement extending the period for
assessment or collection of any Tax for which Hugoton or any subsidiary is
liable for any period that is open under the applicable statute of limitations
or (ii) a closing agreement pursuant to Section 7121 of the Code or any similar
provision of state or local income tax law that relates to Hugoton or any
subsidiary for the current or any future Taxable period. Neither Hugoton nor any
subsidiary has made an election under Section 341(f) of the Code or has agreed
to have Section 341(f)(2) of the Code apply to any disposition of a subsection
(f) asset (as such term is defined in Section 341(f)(4) of the Code) owned by
Hugoton or any subsidiary. Except as set forth in Section 3.14(c) of the Hugoton
Disclosure Schedule, neither Hugoton nor any subsidiary is a party to, is bound
by or has any obligation under any tax sharing agreement or similar agreement or
arrangement. Except as set forth on Section 3.14(c) of the Hugoton Disclosure
Schedule, neither Hugoton nor any subsidiary is a party to any agreement or
other arrangement that would result separately or in the aggregate in the
payment of any "excess parachute payments" within the meaning of Section 280G of
the Code.
(d) There are no liens for Taxes (other than for current Taxes not yet
due and payable) on the assets of Hugoton or any subsidiary.
(e) Except for the group of which Hugoton is presently a member,
neither Hugoton nor any subsidiary has ever been a member of an affiliated group
of corporations, within the meaning of Section 1504 of the Code, other than as a
common parent corporation.
(f) After the date hereof, no election which is inconsistent with past
practices with respect to Taxes will be made without the written consent of
Parent.
(g) None of the assets of Hugoton or any subsidiary is property that
Hugoton is required to treat as being owned by any other person pursuant to the
"safe harbor lease" provisions of former Section 168(f)(8) of the Code.
(h) None of the assets of Hugoton or any subsidiary directly or
indirectly secures any debt the interest on which is tax-exempt under Section
103(a) of the Code.
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(i) None of the assets of Hugoton or any subsidiary is "tax-exempt use
property" within the meaning of Section 168(h) of the Code.
(j) Neither Hugoton nor any subsidiary has agreed to make nor is it
required to make any adjustment under Section 481(a) of the Code by reason of a
change in accounting method or otherwise which will have any adverse effect on
any Tax for a period which ends after December 31, 1996.
(k) Neither Hugoton nor any subsidiary has participated in an
international boycott within the meaning of Section 999 of the Code.
(l) Neither Hugoton nor any subsidiary has nor has either had a
permanent establishment in any foreign country, as defined in any applicable tax
treaty or convention between the United States and such foreign country.
(m) Section 3.14(m) of the Hugoton Disclosure Schedule identifies each
arrangement to which Hugoton or a subsidiary is a party and which is a
partnership for federal income tax purposes and which was required to file an
income tax return for a taxable year of such partnership which ended in 1996
(taking into account any election which permitted such arrangement not to file
such a return).
(n) Hugoton did not have an excess loss account in any subsidiary
which had on December 31, 1996 assets with a fair market value in excess of
$500,000.
3.15 Employee Benefit Plans.
(a) Section 3.15(a) of the Hugoton Disclosure Schedule lists (i) the
"employee benefit plans" (within the meaning of Section 3(3) of ERISA), which
Hugoton or any of its subsidiaries maintains or sponsors or with respect to
which Hugoton or any of its subsidiaries has any material liability (actual or
contingent, primary or secondary), and (ii) all other (A) director or employee
compensation or benefit plans, programs or arrangements, (B) stock purchase,
stock option, severance, bonus, incentive and deferred compensation plans, (C)
written employment or consulting contracts, and (D) change-in-control agreements
which Hugoton or any of its subsidiaries maintains, sponsors or is a party to or
with respect to which Hugoton or any of its subsidiaries has or could have any
material liability. (The plans, programs, arrangements, contracts and agreements
referred to in the preceding sentence are collectively referred to herein as the
"Benefit Plans.")
(b) Except as set forth on Section 3.15(b) of the Hugoton Disclosure
Schedule, (i) the reserves reflected in the balance sheet contained in the
unaudited financial statements for the period ending June 30, 1997 (together
with all footnotes attached thereto, the "Balance Sheet") relating to any
unfunded benefits under the Benefit Plans were adequate in the aggregate under
GAAP as of June 30, 1997 and (ii) neither Hugoton nor any of its subsidiaries
has incurred any material unfunded liability in respect of any such plans since
that date.
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(c) There are no suits, investigations or claims (other than
undisputed claims for benefits) pending or, to the knowledge of Hugoton
threatened (or any basis therefor) relating to or for benefits under the Benefit
Plans, except for those suits or claims set forth in Section 3.15(c) of the
Hugoton Disclosure Schedule or which, individually or in the aggregate, are
immaterial.
(d) Each Benefit Plan has been established and administered in all
material respects in accordance with its terms, and in all material respects in
compliance with the applicable provisions of ERISA, the Code and other
applicable laws, rules and regulations and each Benefit Plan which is intended
to be qualified within the meaning of Code Section 401(a) is so qualified.
(e) Except as set forth in Section 3.15(e) of the Hugoton Disclosure
Schedule, (i) no Benefit Plan currently has any "accumulated funding deficiency"
as such term is defined in ERISA Section 302 and Code Section 412 (whether or
not waived); (ii) no event or condition exists or is expected to occur which is
a reportable event within the meaning of ERISA Section 4043 with respect to any
Benefit Plan that is subject to Title IV of ERISA and with respect to which the
30-day notice requirement has not been waived; (iii) each member of Hugoton's
Controlled Group (as defined below) has made all required premium payments when
due to the Pension Benefit Guaranty Corporation ("PBGC"); (iv) neither Hugoton
nor any member of its Controlled Group is subject to any liability to the PBGC
for any plan termination; (v) no amendment has occurred which requires Hugoton
or any member of its Controlled Group to provide security pursuant to Code
Section 401(a)(29); and (vi) neither Hugoton nor any member of its Controlled
Group has engaged in a transaction which is reasonably likely to subject it to
liability under ERISA Section 4069. For the purposes of this Section 3.15, the
term "Controlled Group" means all corporations, trades or businesses which,
together with Hugoton, are treated as a single employer under Section 414 of the
Code.
(f) No Benefit Plan is a multiemployer plan (within the meaning of
Section 3(37) of ERISA) and neither Hugoton nor any member of its Controlled
Group has incurred or is reasonably likely to incur any liability to any
multiemployer plan nor has or is engaged in a transaction which is reasonably
expected to subject Hugoton or any member of its Controlled Group to any
liability under ERISA Section 4212(c).
(g) Except as set forth in Section 3.15(g) of the Hugoton Disclosure
Schedule, each Benefit Plan described in Section 3.15(a)(i) can be unilaterally
terminated at any time by Hugoton or a subsidiary without material liability to
Hugoton or such subsidiary.
3.16 Environmental Matters.
(a) Except as set forth in Section 3.16 of the Hugoton Disclosure
Schedule, (i) the reserves reflected in the Hugoton Financial Statement relating
to environmental matters were adequate under GAAP as of June 30, 1997, and
neither Hugoton nor any Hugoton Company has incurred any material liability in
respect of any environmental matter since that date, and (ii) the SEC
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Documents include all information relating to environmental matters required to
be included therein under the rules and regulations of the Commission applicable
thereto.
(b) Except as set forth in Section 3.16 of the Hugoton Disclosure
Schedule, to the knowledge of Hugoton:
(i) Each of the Hugoton Companies has conducted its business and
operated its assets, and is conducting its business and operating its
assets, in material compliance with all Environmental Laws;
(ii) None of the Hugoton Companies has been notified by any
Governmental Authority that any of the operations or assets of any of
the Hugoton Companies is the subject of any investigation or inquiry
by any Governmental Authority evaluating whether any material remedial
action is needed to respond to a release of any Hazardous Material or
to the improper storage or disposal (including storage or disposal at
offsite locations) of any Hazardous Material;
(iii) None of the Hugoton Companies and no other Person has filed
any notice under any federal, state or local law indicating that (i)
any of the Hugoton Companies is responsible for the improper release
into the environment, or the improper storage or disposal of any
Hazardous Material, or (ii) any Hazardous Material is improperly
stored or disposed of upon any property of any of the Hugoton
Companies.
(iv) None of the Hugoton Companies has any material contingent
liability in connection with (i) release into the environment at or on
the property now or previously owned or leased by any of the Hugoton
Companies, or (ii) the storage or disposal of any Hazardous Material;
(v) None of the Hugoton Companies has received any claim,
complaint, notice, inquiry or request for information which remains
unresolved as of the date hereof with respect to any alleged violation
of any Environmental Law or regarding potential liability under any
Environmental Law relating to operations or conditions of any
facilities or property owned, leased or operated by any of the Hugoton
Companies;
(vi) There are no sites, locations or operations at which any of
the Hugoton Companies is currently undertaking, or has completed, any
remedial or response action relating to any such disposal or release,
as required by Environmental Laws; and
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(vii) All underground storage tanks and solid waste disposal
facilities owned or operated by the Hugoton Companies are used and
operated in material compliance with Environmental Laws.
3.17 Vote Required. The affirmative vote of the holders of a majority of
the outstanding shares of Hugoton Common Stock is the only vote of the holders
of any class or series of Hugoton capital stock or other voting securities
necessary to approve this Agreement, the Merger and the transactions
contemplated hereby.
3.18 Hugoton Act; State Takeover Statutes Inapplicable. (a) The board of
directors of Hugoton has by requisite vote of all directors present (a)
determined that the Merger is advisable and fair to and in the best interests of
Hugoton and its stockholders, (b) approved the Merger in accordance with the
provisions of Section 17-6702 of KCL and approved the Merger and the
transactions contemplated by this Agreement and any other "business combination"
(within the meaning of Section 17-12,101 of the KCL) with Parent and Sub in
accordance with Section 17- 12,101 of the KCL, and (c) recommended the approval
of this Agreement and the Merger by the holders of Hugoton Common Stock and
directed that the Merger be submitted for consideration by the holders of
Hugoton Common Stock at a meeting of such stockholders contemplated by Section
5.5 hereof; and (d) has amended its articles of incorporation to allow the board
of directors to amend the bylaws.
3.19 Employment Contracts and Benefits. Except as otherwise set forth in
Section 3.19 of the Hugoton Disclosure Schedule or otherwise provided for in any
Hugoton Employee Benefit Plan, (a) none of the Hugoton Companies is subject to
or obligated under any consulting, employment, severance, termination or similar
arrangement, any employee benefit, incentive or deferred compensation plan with
respect to any Person, or any bonus, profit sharing, pension, stock option,
stock purchase or similar plan or other arrangement or other fringe benefit plan
entered into or maintained for the benefit of employees or any other Person, and
(b) no employee of any of the Hugoton Companies or any other Person owns, or has
any rights granted by any of the Hugoton Companies to acquire, any interest in
any of the assets or business of any of the Hugoton Companies.
3.20 Labor Matters.
(a) No employees of any of the Hugoton Companies are represented by
any labor organization. No labor organization or group of employees of any of
the Hugoton Companies has made a demand for recognition or certification as a
union or other labor organization, and there are no representation or
certification proceedings or petitions seeking a representation proceeding
presently pending or threatened in writing to be brought or filed with the
National Labor Relations Board or any other labor relations tribunal or
authority. There are no organizing activities involving any of the Hugoton
Companies pending with any labor organization or group of employees of any of
the Hugoton Companies.
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(b) Each of the Hugoton Companies is in material compliance with all
laws, rules, regulations and orders relating to the employment of labor,
including all such laws, rules, regulations and orders relating to wages, hours,
collective bargaining, discrimination, civil rights, safety and health, workers'
compensation and the collection and payment of withholding or Social Security
Taxes and similar Taxes, except where the failure to comply would not,
individually or in the aggregate, have a Material Adverse Effect on Hugoton.
3.21 Insurance. Each of the Hugoton Companies maintains, and through the
Closing Date will maintain, insurance with reputable insurers (or pursuant to
prudent self-insurance programs) in such amounts and covering such risks as are
in accordance with normal industry practice for companies engaged in businesses
similar to those of the Hugoton Companies and owning properties in the same
general area in which the Hugoton Companies conduct their businesses. Each of
the Hugoton Companies may terminate each of its insurance policies or binders at
or after the Closing and will incur no penalties or other material costs in
doing so. None of the such policies or binders was obtained through the use of
false or misleading information or the failure to provide the insurer with all
information requested in order to evaluate the liabilities and risks insured.
There is no material default with respect to any provision contained in any such
policy or binder, nor has any of the Hugoton Companies failed to give any notice
or present any claim under any such policy or binder in due and timely fashion.
There are no billed but unpaid premiums past due under any such policy or
binder. Except as otherwise set forth in the Hugoton Disclosure Schedule, (a)
there are no outstanding claims under any such policies or binders and, to the
knowledge of Hugoton, there has not occurred any event that might reasonably
form the basis of any claim against or relating to any of the Hugoton Companies
that is not covered by any of such policies or binders; (b) no notice of
cancellation or non-renewal of any such policies or binders has been received;
and (c) there are no performance bonds outstanding with respect to any of the
Hugoton Companies.
3.22 Intangible Property. There are no material trademarks, trade names,
patents, service marks, brand names, computer programs, databases, industrial
designs, copyrights or other intangible property that are necessary for the
operation, or continued operation, of the business of any of the Hugoton
Companies or for the ownership and operation, or continued ownership or
operation, of any their assets, for which the Hugoton Companies do not hold
valid and continuing authority in connection with the use thereof.
3.23 Title to Assets. The Hugoton Companies (individually or collectively)
have Defensible Title to all Oil and Gas Interests of Hugoton included or
reflected in the Ownership Interests and all of their other assets, subject only
to Permitted Liens. Each Oil and Gas Interest included or reflected in the
Ownership Interests entitles the Hugoton Companies (individually or
collectively) to receive not less that the undivided interest set forth in (or
derived from) the Ownership Interests of all Hydrocarbons produced, saved and
sold from or attributable to such Oil and Gas Interest, and the portion of such
costs and expenses of operation and development of such Oil and Gas Interest
that is borne or to be borne by the Hugoton Companies (individually or
collectively) is not greater than the undivided interest set forth in (or
derived from) the Ownership Interests.
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3.24 Opinion of Financial Advisor. The Board of Directors of Hugoton has
received the opinion dated November 12, 1997 of Petrie Parkman that, as of such
date, the exchange ratio contemplated by Section 2.4(b) is fair from a financial
point of view to the holders of Hugoton Common Stock.
3.25 [Reserved].
3.26 Oil and Gas Operations. Except as otherwise set forth in the Hugoton
Disclosure Schedule:
(a) All wells included in the Oil and Gas Interests of Hugoton have
been drilled and (if completed) completed, operated and produced in accordance
with generally accepted oil and gas field practices and in compliance in all
material respects with applicable oil and gas leases and applicable laws, rules,
regulations, except where the failure or violation could not reasonably be
expected to have a Material Adverse Effect on Hugoton or Hugoton's ability to
consummate the transactions contemplated hereby in accordance with this
Agreement; and
(b) Proceeds from the sale of Hydrocarbons produced from Hugoton's Oil
and Gas Interests are being received by the Hugoton Companies in a timely manner
and are not being held in suspense for any reason (except for amounts,
individually or in the aggregate, not in excess of $250,000 and held in suspense
in the ordinary course of business).
3.27 Financial and Commodity Hedging. Section 3.27 of the Hugoton
Disclosure Schedule accurately summarizes the outstanding Hydrocarbon and
financial hedging positions of the Hugoton Companies (including fixed price
controls, collars, swaps, caps, hedges and puts) as of the date reflected on the
Hugoton Disclosure Schedule. Hugoton will not enter into any new hedging
positions without Parent's prior written consent, which will not be unreasonably
withheld.
3.28 Books and Records. All books, records and files of the Hugoton
Companies (including those pertaining to Hugoton's Oil and Gas Interests, wells
and other assets, those pertaining to the production, gathering, transportation
and sale of Hydrocarbons, and corporate, accounting, financial and employee
records) (a) have been prepared, assembled and maintained in accordance with
usual and customary policies and procedures and (b) fairly and accurately
reflect the ownership, use, enjoyment and operation by the Hugoton Companies of
their respective assets.
3.29 Other Entities. (a) Hugoton has no direct or indirect equity interest
in any corporation, partnership, limited liability company, joint venture,
business association or other entity other than the entities included in the
Hugoton Companies (other than joint venture, joint operating or ownership
arrangements entered into in the ordinary course of business or other
partnerships that, individually or in the aggregate, are not material to the
operations or business of the Hugoton Companies, taken as a whole).
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(b) Except as disclosed in Section 3.29(a) of the Hugoton Disclosure
Schedule, or as may be disclosed on the certificates representing the capital
stock of the Company Subsidiaries or provided pursuant to the terms of
partnership agreements, joint venture agreements or other constituent
documentation, copies of which have been provided or made available to
representatives of Parent, and except as may be required under the securities
laws of any jurisdiction, (i) all of the outstanding capital stock of, or other
ownership interests in, each subsidiary of the Hugoton, has been validly issued,
is (in the case of capital stock) fully paid and nonassessable and (in the case
of partnership interests) not subject to current or future capital calls, and is
owned by Hugoton, directly or indirectly, free and clear of any lien and free of
any other charge, claim, encumbrance, limitation or restriction (including any
restriction on the right to vote, sell or otherwise dispose of such capital
stock or other ownership interests) and (ii) there are not now, and at the
Effective Time there will not be, any outstanding subscriptions, options,
warrants, calls, rights, convertible securities or other agreements or
commitments of any character relating to the issued or unissued capital stock or
other securities of any of the Hugoton's subsidiaries, or otherwise obligating
the Company or any such subsidiary to issue, transfer or sell any such
securities or to make any payments in respect of any of its securities or its
equity.
3.30 Dissenters' Rights. The stockholders of Hugoton will not be entitled
to exercise dissenters' rights under the KCL in respect of the Merger.
3.31 Pooling; Tax Treatment. Hugoton intends that the Merger be accounted
for under the "pooling of interests" method under the requirements of Opinion
No. 16 (Business Combinations) of the Accounting Principles Board of the
American Institute of Certified Public Accountants (APB No. 16), as amended by
Statements of Financial Accounting Standards Board, and the related
interpretations of the American Institute of Certified Public Accountants, the
Financial Accounting Standards Board, and the rules and regulations of the SEC.
Neither Hugoton nor any of its affiliates has taken or agreed to take any action
that would prevent the Merger from qualifying (i) for "pooling of interests"
accounting treatment as described above or (ii) as a reorganization within the
meaning of Section 368 of the Code (a "368 Reorganization"). For purposes of
this paragraph, the only stockholders of Hugoton that shall be considered
Hugoton "affiliates" are the Hugoton Specified Stockholders.
3.32 No Knowledge of Breach of Representations. Hugoton has no actual
knowledge that any of the representations of Parent or Sub contained in this
Agreement are untrue as of the date of this Agreement. If and to the extent that
Hugoton has any such knowledge as of the date of this Agreement, Hugoton shall
not assert any remedy under this Agreement for breach of such representation
(including, but not limited to, any right to not close the Merger due to a
failure to satisfy the condition to closing set forth in Section 6.3(a) arising
solely as a result of any such breach).
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB
Except as set forth in the Parent Disclosure Schedule, Parent and Sub
hereby jointly and severally represent and warrant to Hugoton that:
4.1 Corporate Organization. Each of Parent and Sub (a) is a corporation
duly organized, validly existing and in good standing under the laws of its
state of incorporation, (b) has all requisite corporate power and authority to
own, lease and operate its properties and assets and to carry on its business as
it is presently being conducted, and (c) is duly qualified to do business as a
foreign corporation, and is in good standing, in each jurisdiction where the
character of the properties owned or leased by it or the nature of its
activities makes such qualification necessary (except where any failure to be so
qualified as a foreign corporation or to be in good standing would not,
individually or in the aggregate, have a Material Adverse Effect on Parent).
Copies of the certificate or articles of incorporation and bylaws of each of
Parent and Sub have heretofore been delivered to Hugoton, and such copies are
accurate and complete as of the date hereof.
4.2 Authority and Enforceability. Each of Parent and Sub has the requisite
corporate power and authority to execute and deliver this Agreement and (with
respect to consummation of this Agreement and the Merger, subject to the
approval of the stockholders of Parent) to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly and validly
authorized by all necessary corporate action on the part of Parent and Sub,
including approval by the respective boards of directors of Parent and Sub and
by Parent as the sole stockholder of Sub, and no other corporate proceedings on
the part of Parent or Sub are necessary to authorize the execution or delivery
of this Agreement or (with approval by the stockholders of Parent) to consummate
the transactions contemplated hereby. This Agreement has been duly and validly
executed and delivered by each of Parent and Sub and (with respect to
consummation of this Agreement and the Merger, subject to the approval by the
stockholders of Parent and assuming that this Agreement constitutes a valid and
binding obligation of Hugoton) constitutes a valid and binding obligation of
each of Parent and Sub, enforceable against Parent and Sub in accordance with
its terms.
4.3 No Violations. The execution and delivery of this Agreement does not,
and the consummation of the transaction contemplated hereby and compliance by
Parent and Sub with the provisions hereof will not, conflict with, result in any
violation of or default (with or without notice or lapse of time or both) under,
give rise to a right of termination, cancellation or acceleration of any
obligation or to the loss of a material benefit under, or result in the creation
of any Lien on any of the properties or assets of Parent or any Parent
Subsidiary under, any provision of (a) the articles or certificate of
incorporation or bylaws of Parent or Sub or any provision of the comparable
charter or organizational documents of any Parent Subsidiary, (b) any loan or
credit agreement, note, bond, mortgage, indenture, lease, permit, concession,
franchise, license or other agreement or instrument applicable to Parent or any
Parent Subsidiary, or (c) assuming the consents, approvals, authorizations
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or permits and filings or notifications referred to in Section 4.4 are duly and
timely obtained or made, any judgment, order, decree, statute, law, ordinance,
rule or regulation applicable to Parent or any Parent Subsidiary or any of their
respective properties or assets, other than, in the case of clause (b) or (c)
above, any such conflict, violation, default, right, loss or Lien that,
individually or in the aggregate, would not have a Material Adverse Effect on
Parent or Parent's or Sub's ability to consummate the transactions contemplated
hereby in accordance with this Agreement.
4.4 Consents and Approvals. No consent, approval, order or authorization
of, registration, declaration, or filing with, or permit from, any Governmental
Authority is required by or with respect to Parent or Sub in connection with the
execution and delivery of this Agreement by Parent or Sub or the consummation by
Parent and Sub of the transactions contemplated hereby except for the following:
(a) any such consent, approval, order, authorization, registration, declaration,
filing or permit which the failure to obtain or make would not, individually or
in the aggregate, have a Material Adverse Effect on Parent or Parent's or Sub's
ability to consummate the transactions contemplated hereby in accordance with
this Agreement; (b) the filing of the Certificate of Merger with the Secretary
of State of Kansas pursuant to the provisions of the KCL; (c) the filing, if
necessary, of a pre-merger notification report by Parent under the HSR Act and
the expiration or termination of the applicable waiting period; (d) the filing
with the SEC of the Proxy Statement/Prospectus and the Registration Statement
and such reports under Section 13(a) of the Exchange Act and such other
compliance with the Exchange Act and the Securities Act and the rules and
regulations of the SEC thereunder as may be required in connection with this
Agreement and the transactions contemplated hereby and the obtaining from the
SEC of such orders as may be so required; (e) the filing with the Exchange of a
listing application relating to the shares of Parent Common Stock to be issued
pursuant the Merger and the obtaining from the Exchange of its approval thereof;
(f) such filings and approvals as may be required by any applicable state
securities, "blue sky" or takeover laws or Environmental Laws; and (g) the valid
approval of this Agreement and the Merger by the stockholders of Parent and Sub.
No Third-Party Consent is required by or with respect to Parent, Sub or any
Parent Subsidiary in connection with the execution and delivery of this
Agreement or the consummation of the transactions contemplated hereby, except
for the requisite approval by the Stockholders of Parent and any such other
Third-Party Consent which the failure to obtain would not, individually or in
the aggregate, have a Material Adverse Effect on Parent or Parent's or Sub's
ability to consummate the transactions contemplated hereby in accordance with
this Agreement.
4.5 SEC Documents. Hugoton has had available to it a true and correct
complete copy of each report, schedule, Registration Statement and definitive
proxy statement filed by Parent with the SEC since December 31, 1994, and prior
to the date of this Agreement (the "Parent SEC Documents"), which are all the
documents (other that preliminary material) that Parent was required to file
with the SEC since such date. As of their respective dates, the Parent SEC
Documents complied in all material respects with the requirements of the
Securities Act or the Exchange Act, as the case may be, and the rules and
regulations of the SEC thereunder applicable to such Parent SEC Documents, and
none of the Parent SEC Documents contained any untrue statement of a
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material fact or omitted to state a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
4.6 Financial Statements. The Parent Financial Statements were prepared in
accordance with the applicable published rules and regulations of the SEC with
respect thereto and in accordance with GAAP applied on a consistent basis during
the periods involved (except as may be indicated in the notes thereto or, in the
case of unaudited statements, as permitted by Rule 10-01 of Regulation S-X of
the SEC) and fairly present in all material respects, in accordance with
applicable requirements of GAAP (in the case of unaudited statements, subject to
normal, recurring adjustments), the consolidated financial position of Parent
and its subsidiaries as of their respective dates and the consolidated results
of operations and the consolidated cash flows of Parent and its subsidiaries for
the periods presented therein. There are no material imbalances of production
from the oil and gas properties of any of Parent or Parent Subsidiary, whether
required to be disclosed pursuant to GAAP or otherwise.
4.7 Capital Structure.
(a) The authorized capital stock of Parent consists of 100,000,000
shares of Parent Common Stock and 10,000,000 shares of Parent Preferred Stock.
Parent is currently soliciting stockholder approval at the Parent 1997 Annual
Stockholders' Meeting to be held on December 12, 1997 to increase its authorized
shares of Parent Common Stock to 250,000,000 shares. The authorized capital
stock of Sub consists of 1,000 shares of Sub Common Stock.
(b) As of the close of business on the business day immediately prior
to the date of this Agreement there were issued and outstanding 70,477,893
shares of Parent Common Stock and 13,540,667 shares of Parent Common Stock were
issuable upon exercise of outstanding stock options. No shares of Parent Common
Stock are held by Parent as treasury stock. No shares of Parent Preferred Stock
are issued or outstanding.
(c) Except as set forth in Section 4.7(b) or disclosed in Section
4.7(c) of the Parent Disclosure Schedule, there are outstanding (i) no shares of
capital stock or other voting securities of Parent (other than shares issued
since September 30, 1997 upon the exercise of outstanding options referred to in
Section 4.7(b)), (ii) no securities of Parent or any other Person convertible
into or exchangeable or exercisable for shares of capital stock or other voting
securities of Parent, and (iii) no subscriptions, options, warrants, calls,
rights (including preemptive rights, commitments, understandings or agreements
to which Parent is a party or by which it is bound) obligating Parent to issue,
deliver, sell, purchase, redeem or acquire shares of capital stock or other
voting securities of Parent (or securities of Parent) or obligating Parent to
grant, extend or enter into any such subscription, option, warrant, call, right,
commitment, understanding or agreement.
(d) All outstanding shares of Parent capital stock are and (when
issued) the shares of Parent Common Stock to be issued pursuant to the Merger
will be, validly issued, fully paid and nonassessable and not subject to any
preemptive right.
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(e) 1,000 shares of Sub Common Stock are issued and outstanding, all of
which are owned by Parent. All outstanding shares of Sub Common Stock are
validly issued, fully paid and nonassessable and not subject to any preemptive
right.
(f) As of the date hereof there is no, and at the Effective Time there
will not be any, stockholder agreement, voting trust or other agreement or
understanding to which Parent is a party or by which it is bound relating to the
voting of any shares of the capital stock of Parent.
4.8 Governmental Regulation. Neither Parent nor any of its subsidiaries is
subject to regulation under the Public Utility Holding Company Act of 1935, the
Federal Power Act, the Interstate Commerce Act, the Investment Company Act of
1940 or any state public utilities laws.
4.9 Litigation. Except as set forth in Section 4.9 of the Parent Disclosure
Schedule, there is no litigation, arbitration, investigation or other proceeding
of any Governmental Authority pending or, to the knowledge of Parent, threatened
against Parent or a Parent Subsidiary or their respective assets which, if
adversely determined, could reasonably be expected to have a Material Adverse
Effect on Parent or Parent's ability to consummate the transactions contemplated
hereby in accordance with this Agreement. Parent has no knowledge of any facts
that are likely to give rise to any litigation, arbitration, investigation or
other proceeding of any Governmental Authority which, individually or in the
aggregate, is reasonably likely to have a Material Adverse Effect on Parent or
Parent's ability to consummate the transactions contemplated hereby in
accordance with this Agreement. No Parent Company is subject to any outstanding
injunction, judgment, order, decree or ruling (other than routine oil and gas
field regulatory orders and any injunction, judgment, order, decree or ruling
that, either individually or in the aggregate, would not have a Material Adverse
Effect) on Parent or Parent's ability to consummate the transactions
contemplated hereby in accordance with this Agreement. There is no litigation,
investigation or other proceeding of any Governmental Authority pending or, to
the knowledge of Parent, threatened against or affecting Parent, Sub or a Parent
Subsidiary that questions the validity or enforceability of this Agreement or
any other document, instrument or agreement to be executed and delivered by
Parent or Sub in connection with the transactions contemplated hereby.
4.10 Interim Operations of Sub. Sub was formed solely for the purpose of
engaging in the transactions contemplated by this Agreement and has not engaged
in any business or activity (or conducted any operations) of any kind, entered
into any agreement or arrangement with any person or entity, or incurred,
directly or indirectly, any material liabilities or obligations, except in
connection with its incorporation, the negotiation of this Agreement, the Merger
and transactions contemplated hereby.
4.11 Brokers. Other than Donaldson, Lufkin & Jenrette Securities
Corporation and Bear, Stearns & Co. Inc. (collectively, the "Financial
Advisors"), no broker, finder, investment banker or other person is or will be,
in connection with the transactions contemplated by this Agreement, entitled to
any brokerage, finder's or other fee or compensation based on any arrangement or
agreement made by or on behalf of Parent or Sub and for which Parent or Sub or
any of the Hugoton
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Companies will have any obligation or liability. A copy of any agreement between
Parent and each of the Financial Advisors relating to this Agreement or the
Merger has been provided to Hugoton.
4.12 Absence of Certain Changes. Except as set forth in Section 4.12 of the
Parent Disclosure Schedule, since June 30, 1997, the Parent Companies have
conducted their business only in the ordinary course of business consistent with
past practices and, since such date, there has not been any event (financial or
otherwise, whether or not in the ordinary course of business), circumstances or
condition (a) that would be reasonably likely to have a Material Adverse Effect
on Parent or Parent's ability to consummate the transactions contemplated hereby
in accordance with this Agreement; or (b) that would have required the consent
of Hugoton pursuant to Section 5.2 had such event occurred prior to the date of
this Agreement (other than changes, including changes in commodity prices
generally affecting the oil and gas industry, changes resulting from exploration
or development results reported in the ordinary course of business and changes
arising from the announcement of the Merger).
4.13 Compliance with Laws, Material Agreements and Permits. None of the
Parent Companies is in violation of, or in default under, and no event has
occurred that (with notice or the lapse of time or both) would constitute a
violation of or default under, (a) its certificate or articles of incorporation
or bylaws or partnership agreement or other governing document, (b) any
applicable law, rule, regulation, order, writ, decree or judgment of any
Governmental Authority, or (c) any Parent Material Agreement, except (in the
case of clause (b) or (c) above) for any violation or default that would not,
individually or in the aggregate, have a Material Adverse Effect on Parent or
Parent's or Sub's ability to consummate the transactions contemplated hereby in
accordance with this Agreement. Each of the Parent Companies has obtained and
holds all permits, licenses, variances, exemptions, orders, franchises,
approvals and authorizations of all Governmental Authorities necessary for the
lawful conduct of its business or the lawful ownership, use and operation of its
assets ("Parent Permits"), except for Parent Permits which the failure to obtain
or hold would not, individually or in the aggregate, have a Material Adverse
Effect on Parent or Parent's or Sub's ability to consummate the transactions
contemplated hereby in accordance with this Agreement. Each of the Parent
Companies is in compliance with the terms of its Parent Permits, except where
the failure to comply would not, individually or in the aggregate, have a
Material Adverse Effect on Parent or Parent's or Sub's ability to consummate the
transactions contemplated hereby in accordance with this Agreement. No
investigation or review by any Governmental Authority with respect to any of the
Parent Companies is pending or, to the knowledge of Parent, threatened, other
than those the outcome of which would not, individually or in the aggregate,
have a Material Adverse Effect on Parent or Parent's or Sub's ability to
consummate the transactions contemplated hereby in accordance with this
Agreement. To the knowledge of Parent, no party to any Parent Material Agreement
is in material breach of the terms, provisions and conditions of such Parent
Material Agreement.
4.14 No Restrictions. Except as otherwise set forth in Section 4.14 of the
Parent Disclosure Schedule, none of the Parent Companies is a party to (a) any
agreement, indenture or other instrument that contains restrictions with respect
to the payment of dividends or other
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distributions with respect to its capital, (b) any financial arrangement with
respect to or creating any indebtedness to any Person (other than indebtedness
reflected in the Parent Financial Statements or indebtedness incurred in the
ordinary course of business), (c) any agreement, contract or commitment relating
to the making of any advance to, or investment in, any Person (other than
advances in the ordinary course of business), (d) any guaranty or other
contingent liability with respect to any indebtedness or obligation of any
Person (other than guaranties undertaken in the ordinary course of business and
other than the endorsement of negotiable instruments for collection in the
ordinary course of business), or (e) any agreement, contract or commitment
limiting in any respect its ability to compete with any Person or otherwise
conduct business of any line or nature.
4.15 Taxes.
(a) Except as set forth in Schedule 4.15(a) of the Parent Disclosure
Schedule, (i) Parent and each subsidiary, and any affiliated, combined or
unitary group of which Parent or any subsidiary is or was a member has properly
completed and timely (taking into account any extensions) filed all material
federal state, local and foreign returns, declarations, reports, estimates,
information returns and statements ("Parent Returns") required to be filed in
respect of any Tax and has timely paid all Taxes that are shown by such Returns
to be due and payable and (ii) the Parent Returns correctly and accurately
(except for one or more matters the aggregate effect of which is not material)
reflect the facts regarding the income, business and assets, operations,
activities, status or other matters of Parent required to be shown thereon or
any other information required to be shown thereon and are not subject to
penalties under Section 6662 of the Code, relating to accuracy-related
penalties, or any corresponding provision of applicable state, local or foreign
tax law or any predecessor provision, (iii) Parent and each subsidiary has
established reserves that are adequate in the aggregate for the payment of all
material Taxes not yet due and payable with respect to the results of operations
of Parent and each subsidiary through the date hereof, and (iv) Parent and each
subsidiary have complied in all material respects with all applicable laws,
rules and regulations relating to the payment and withholding of Taxes and the
filing of material federal state or local Returns.
(b) Section 4.15(b) of the Parent Disclosure Schedule sets forth the
last taxable period through which the federal income Tax Returns of Parent and
each subsidiary have been examined by the IRS. Except to the extent being
contested in good faith, all material deficiencies asserted as a result of such
examinations and any examination by any applicable state or local taxing
authority have been paid, fully settled or adequately provided for in Parent's
most recent audited financial statements. Except as provided for in Section
4.15(b) of the Parent Disclosure Schedule, no material federal, state or local
income or franchise tax audits or other administrative proceedings or court
proceedings are presently pending with regard to any Taxes for which Parent or
any of the subsidiaries would be liable, and no material deficiency which has
not yet been paid for any such Taxes has been proposed, asserted or assessed
against Parent or any of the subsidiaries with respect to any period.
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(c) Except as disclosed on Section 4.15(c) of the Parent Disclosure
Schedule, neither Parent nor any subsidiary has executed or entered into (or
prior to the close of business on the Closing Date will execute or enter into)
with the IRS or any taxing authority (i) any agreement extending the period for
assessment or collection of any Tax for which Parent or any subsidiary is liable
for any period that is open under the applicable statute of limitations or (ii)
a closing agreement pursuant to Section 7121 of the Code or any similar
provision of state or local income tax law that relates to Parent or any
subsidiary for the current or any future Taxable period. Neither Parent nor any
subsidiary has made an election under Section 341(f) of the Code or has agreed
to have Section 341(f)(2) of the Code apply to any disposition of a subsection
(f) asset (as such term is defined in Section 341(f)(4) of the Code) owned by
Parent or any subsidiary. Except as set forth in Section 4.15(c) of the Parent
Disclosure Schedule, neither Parent nor any subsidiary is a party to, is bound
by or has any obligation under any tax sharing agreement or similar agreement or
arrangement. Except as set forth on Section 4.15(c) of the Parent Disclosure
Schedule, neither Parent nor any subsidiary is a party to any agreement or other
arrangement that, as a consequence of the Merger or the merger with DLB Oil &
Gas, Inc., would result separately or in the aggregate in the payment of any
"excess parachute payments" within the meaning of Section 280G of the Code.
(d) There are no liens for Taxes (other than for current Taxes not yet
due and payable) on the assets of Parent or any subsidiary.
(e) Except for the group of which Parent is presently a member,
neither Parent nor any subsidiary has ever been a member of an affiliated group
of corporations, within the meaning of Section 1504 of the Code, other than as a
common parent corporation.
(f) After the date hereof, no election which is inconsistent with past
practices with respect to Taxes will be made without the written consent of
Hugoton.
(g) None of the assets of Parent or any subsidiary is property that
Parent is required to treat as being owned by any other person pursuant to the
"safe harbor lease" provisions of former Section 168(f)(8) of the Code.
(h) None of the assets of Parent or any subsidiary directly or
indirectly secures any debt the interest on which is tax-exempt under Section
103(a) of the Code.
(i) None of the assets of Parent or any subsidiary is "tax-exempt use
property" within the meaning of Section 168(h) of the Code.
(j) Neither Parent nor any subsidiary has agreed to make nor is it
required to make any adjustment under Section 481(a) of the Code by reason of a
change in accounting method or otherwise which will have any adverse effect on
any Tax for a period which ends after December 31, 1996.
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(k) Neither Parent nor any subsidiary has participated in an
international boycott within the meaning of Section 999 of the Code.
(l) Neither Parent nor any subsidiary has nor has either had a
permanent establishment in any foreign country, as defined in any applicable tax
treaty or convention between the United States and such foreign country.
4.16 Environmental Matters.
(a) Except as set forth in Schedule 4.16 of the Parent Disclosure
Schedule or the Parent SEC Documents, (i) the reserves reflected in the Parent
Financial Statements relating to environmental matters were adequate under GAAP
as of June 30, 1997, and neither Parent nor any of its subsidiaries has incurred
any material liability in respect of any environmental matter since that date,
and (ii) the SEC Documents include all information relating to environmental
matters required to be included therein under the rules and regulations of the
Commission applicable thereto.
(b) Except as set forth in Schedule 4.16 of the Parent Disclosure
Schedule or the Parent SEC Documents, to the knowledge of Parent:
(i) Each of the Parent Companies has conducted its business and
operated its assets, and is conducting its business and operating its
assets, in material compliance with all Environmental Laws;
(ii) None of the Parent Companies has been notified by any
Governmental Authority that any of the operations or assets of any of
the Parent Companies is the subject of any investigation or inquiry by
any Governmental Authority evaluating whether any material remedial
action is needed to respond to a release of any Hazardous Material or
to the improper storage or disposal (including storage or disposal at
offsite locations) of any Hazardous Material;
(iii) None of the Parent Companies and no other Person has filed
any notice under any federal, state or local law indicating that (i)
any of the Parent Companies is responsible for the improper release
into the environment, or the improper storage or disposal of any
Hazardous Material, or (ii) any Hazardous Material is improperly
stored or disposed of upon any property of any of the Parent
Companies.
(iv) None of the Parent Companies has any material contingent
liability in connection with (i) release into the environment at or on
the property now or previously owned or leased by any of the Parent
Companies, or (ii) the storage or disposal of any Hazardous Material;
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(v) None of the Parent Companies has received any claim,
complaint, notice, inquiry or request for information which remains
unresolved as of the date hereof with respect to any alleged violation
of any Environmental Law or regarding potential liability under any
Environmental Law relating to operations or conditions of any
facilities or property owned, leased or operated by any of the Parent
Companies;
(vi) There are no sites, locations or operations at which any of
the Parent Companies is currently undertaking, or has completed, any
remedial or response action relating to any such disposal or release,
as required by Environmental Laws; and
(vii) All underground storage tanks and solid waste disposal
facilities owned or operated by the Parent Companies are used and
operated in material compliance with Environmental Laws.
4.17 Vote Required. The affirmative vote of the holders of a majority of
the outstanding shares of Parent Common Stock is required to approve the
increase in the Company's authorized capital stock referred to in Section 4.7(a)
(and the Parent 1997 Annual Stockholders' Meeting is to be held on December 12,
1997), and is the only vote of the holders of any class or series of Parent
capital stock or other voting securities necessary to approve this Agreement,
the Merger and the transactions contemplated hereby.
4.18 Employment Contracts and Benefits. Except as otherwise set forth in
the Parent Disclosure Schedule or otherwise provided for in any Parent Employee
Benefit Plan, (a) none of the Parent Companies is subject to or obligated under
any consulting, employment, severance, termination or similar arrangement, any
employee benefit, incentive or deferred compensation plan with respect to any
Person, or any bonus, profit sharing, pension, stock option, stock purchase or
similar plan or other arrangement or other fringe benefit plan entered into or
maintained for the benefit of employees or any other Person, and (b) no employee
of any of the Parent Companies or any other Person owns, or has any rights
granted by any of the Parent Companies to acquire, any interest in any of the
assets or business of any of the Parent Companies.
4.19 Labor Matters.
(a) No employees of any of the Parent Companies are represented by any
labor organization. No labor organization or group of employees of any of the
Parent Companies has made a demand for recognition or certification as a union
or other labor organization, and there are no representation or certification
proceedings or petitions seeking a representation proceeding presently pending
or threatened in writing to be brought or filed with the National Labor
Relations Board or any other labor relations tribunal or authority. There are no
organizing activities involving any of the Parent Companies pending with any
labor organization or group of employees of any of the Parent Companies.
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(b) Each of the Parent Companies is in material compliance with all
laws, rules, regulations and orders relating to the employment of labor,
including all such laws, rules, regulations and orders relating to wages, hours,
collective bargaining, discrimination, civil rights, safety and health, workers'
compensation and the collection and payment of withholding or Social Security
Taxes and similar Taxes, except where the failure to comply would not,
individually or in the aggregate, have a Material Adverse Effect on Parent.
4.20 Insurance. Each of the Parent Companies maintains, and through the
Closing Date will maintain, insurance with reputable insurers (or pursuant to
prudent self-insurance programs) in such amounts and covering such risks as are
in accordance with normal industry practice for companies engaged in businesses
similar to those of the Parent Companies and owning properties in the same
general area in which the Parent Companies conduct their businesses. None of the
policies or binders was obtained through the use of false or misleading
information or the failure to provide the insurer with all information requested
in order to evaluate the liabilities and risks insured. There is no material
default with respect to any provision contained in any such policy or binder,
nor has any of the Parent Companies failed to give any notice or present any
claim under any such policy or binder in due and timely fashion. Except as
otherwise set forth in the Parent Disclosure Schedule, (a) no notice of
cancellation or non-renewal of any such policies or binders has been received;
and (b) there are no performance bonds outstanding with respect to any of the
Parent Companies.
4.21 Intangible Property. Except as set forth in Section 4.21 of the Parent
Disclosure Schedule, there are no material trademarks, trade names, patents,
service marks, brand names, computer programs, databases, industrial designs,
copyrights or other intangible property that are necessary for the operation, or
continued operation, of the business of any of the Parent Companies or for the
ownership and operation, or continued ownership or operation, of any their
assets, for which the Parent Companies do not hold valid and continuing
authority in connection with the use thereof.
4.22 Opinion of Financial Advisor. The Board of Directors of Parent has
received the opinion dated as of the date hereof of Bear, Stearns & Co. Inc.
addressed to such Board that the Merger is fair from a financial point of view
to the holders of Parent Common Stock.
4.23 [Reserved].
4.24 Financial and Commodity Hedging. Section 4.24 of the Parent SEC
Documents accurately summarizes the outstanding Hydrocarbon and financial
hedging positions of the Parent Companies (including fixed price controls,
collars, swaps, caps, hedges and puts) as of the date reflected in Section 4.24
of the Parent SEC Documents.
4.25 Books and Records. All books, records and files of the Parent
Companies (including those pertaining to Parent's Oil and Gas Interests, wells
and other assets, those pertaining to the production, gathering, transportation
and sale of Hydrocarbons, and corporate, accounting, financial
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and employee records) (a) have been prepared, assembled and maintained in
accordance with usual and customary policies and procedures and (b) fairly and
accurately reflect the ownership, use, enjoyment and operation by the Parent
Companies of their respective assets.
4.26 Pooling; Tax Treatment. Parent and Sub intend that the Merger be
accounted for under the "pooling of interests" method under the requirements of
Opinion No. 16 (Business Combinations) of the Accounting Principles Board of the
American Institute of Certified Public Accountants (APB No. 16), as amended by
Statements of Financial Accounting Standards Board, and the related
interpretations of the American Institute of Certified Public Accountants, the
Financial Accounting Standards Board, and the rules and regulations of the SEC.
Neither Parent nor any of its affiliates has taken or agreed to take any action
that would prevent the Merger from qualifying (i) for "pooling of interests"
accounting treatment as described above or (ii) as a 368 Reorganization.
4.27 Other Parent Entities. Except as set forth in Section 4.27 of the
Parent Disclosure Schedule, Parent has no direct or indirect equity interest in
any corporation, partnership, limited liability company, joint venture, business
association or other entity other than the entities included in the Parent
Companies (other than joint venture, joint operating or ownership arrangements
entered into in the ordinary course of business or other partnerships that,
individually or in the aggregate, are not material to the operations or business
of the Parent Companies, taken as a whole).
4.28 Employee Benefit Plans. (a) Each Parent Benefit Plan has been
established and administered in all material respects in accordance with its
terms, and in all material respects in compliance with the applicable provisions
of ERISA, the Code and other applicable laws, rules and regulations and (ii)
each Parent Benefit Plans which is intended to be qualified within the meaning
of Code Section 401(a) is so qualified.
(b) Except as set forth in Section 4.28(b) of the Parent Disclosure
Schedule, (i) no Parent Benefit Plans currently has any "accumulated funding
deficiency" as such term is defined in ERISA Section 302 and Code Section 412
(whether or not waived); (ii) no event or condition exists or is expected to
occur which is a reportable event within the meaning of ERISA Section 4043 with
respect to any Parent Benefit Plans that is subject to Title IV of ERISA and
with respect to which the 30-day notice requirement has not been waived; (iii)
each member of Parent's Controlled Group (as defined below) has made all
required premium payments when due to the Pension Benefit Guaranty Corporation
("PBGC"); (iv) neither Parent nor any member of its Controlled Group is subject
to any liability to the PBGC for any plan termination; (v) no amendment has
occurred which requires Parent or any member of its Controlled Group to provide
security pursuant to Code Section 401(a)(29); and (vi) neither Parent nor any
member of its Controlled Group has engaged in a transaction which is reasonably
likely to subject it to liability under ERISA Section 4069. For the purposes of
this Section 4.28, the term "Controlled Group" means all corporations, trades or
businesses which, together with Parent, are treated as a single employer under
Section 414 of the Code.
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4.29 Oil and Gas Operations. Except as otherwise set forth in the Parent
Disclosure Schedule:
(a) All wells included in the Oil and Gas Interests of Parent have
been drilled and (if completed) completed, operated and produced in accordance
with generally accepted oil and gas field practices and in compliance in all
material respects with applicable oil and gas leases and applicable laws, rules,
regulations, except where the failure or violation could not reasonably be
expected to have a Material Adverse Effect on Parent or Parent's or Sub's
ability to consummate the transactions contemplated hereby in accordance with
this Agreement; and
(b) Proceeds from the sale of Hydrocarbons produced from Parent's Oil
and Gas Interests are being received by the Parent Companies in a timely manner
and are not being held in suspense for any reason (except for amounts,
individually or in the aggregate, not in excess of $250,000 and held in suspense
in the ordinary course of business).
4.30 No Knowledge of Breach of Representations. Parent has no actual
knowledge that any of Hugoton's representations contained in this Agreement are
untrue as of the date of this Agreement. If and to the extent that Parent has
any such knowledge as of the date of this Agreement, Parent shall not assert any
remedy under this Agreement for breach of such representation (including, but
not limited to, any right to not close the Merger due to a failure to satisfy
the condition to closing set forth in Section 6.2(a) arising solely as a result
of any such breach).
ARTICLE V
COVENANTS
5.1 Conduct of Hugoton Business Pending Closing. From the date hereof until
the Effective Time, Hugoton covenants and agrees that, unless Parent shall
otherwise agree in writing, the businesses of Hugoton and the Hugoton
Subsidiaries shall be conducted only in, and Hugoton and the Hugoton
Subsidiaries shall not take any action except in, the ordinary course of
business and in a manner consistent with past practice; and Hugoton shall use
its reasonable best efforts to preserve substantially intact the business
organization of Hugoton and the Hugoton Subsidiaries, to keep available the
services of the current officers, employees and consultants of Hugoton and the
Hugoton Subsidiaries and to preserve the goodwill of those current relationships
of Hugoton and the Hugoton Subsidiaries with customers, suppliers and other
persons with which Hugoton or any Hugoton Subsidiary has significant business
relations. By way of amplification and not limitation, except as contemplated by
this Agreement, Hugoton shall not, between the date of this Agreement and the
Effective Date, directly or indirectly do, or propose to do, any of the
following without the prior written consent of the Parent:
(a) amend or otherwise change the articles of incorporation or by-laws
or equivalent organizational documents of Hugoton or the Hugoton Subsidiaries;
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(b) issue, sell, pledge, dispose of, grant, encumber, or authorize the
issuance, sale, pledge, disposition, grant or encumbrance of, (i) any shares of
capital stock of any class of Hugoton or any Hugoton Subsidiary, or any options,
warrants, convertible securities or other rights of any kind to acquire any
shares of such capital stock, or any other ownership interest (including,
without limitation, any phantom interest), of Hugoton or any Hugoton Subsidiary
(except for the issuance of shares of Hugoton Common Stock issuable pursuant to
Options outstanding on the date hereof) or (ii) any assets of Hugoton or any
Hugoton Subsidiary, except for sales of products in the ordinary course of
business;
(c) declare, set aside, make or pay any dividend or other
distribution, payable in cash, stock, property or otherwise, with respect to any
of its capital stock (except for such declarations, set asides, dividends and
other distributions made from any Hugoton Subsidiary to Hugoton);
(d) reclassify, combine, split, subdivide or redeem, purchase or
otherwise acquire, directly or indirectly, any of its capital stock;
(e) (i) acquire (including, without limitation, by merger,
consolidation, or acquisition of stock or assets) any corporation, partnership,
other business organization or any division thereof or any material amount of
assets other than in the ordinary course of business; (ii) incur any
indebtedness for borrowed money in excess of the existing borrowing base under
the current Bank Credit Agreement or issue any debt securities or assume,
guarantee or endorse, or otherwise as an accommodation become responsible for,
the obligations of any Person, or make any loans, advances or capital
contribution to, or investments in, any other Person (other than such of the
foregoing as are made by Hugoton to or in a wholly-owned subsidiary of Hugoton),
except in the ordinary course of business and consistent with past practice, but
in no event in excess of $1.0 million; or (iii) enter into or amend any
contract, agreement, commitment or arrangement with respect to any matter set
forth in this Section 5.1(e);
(f) increase the compensation payable or to become payable to its
officers or employees, except for increases in accordance with past practices in
salaries or wages of employees of Hugoton or any Hugoton Subsidiary who are not
officers of Hugoton or any Hugoton Subsidiary, or grant any severance or
termination pay to, or enter into any employment or severance agreement with,
any director, officer or other employee of Hugoton or any Hugoton Subsidiary, or
establish, adopt, enter into or amend any collective bargaining, bonus, profit
sharing, thrift, compensation, stock option except as set forth in Section
2.4(b)(iii), restricted stock, pension, retirement, deferred compensation,
employment, termination, severance or other plan, agreement, trust, fund, policy
or arrangement for the benefit of any director, officer or employee;
(g) make any material Tax election or settle or compromise any
material federal, state, local or foreign income Tax liability;
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(h) pay, discharge or satisfy any claim, liability or obligation
(absolute, accrued, asserted or unasserted, contingent or otherwise), other than
the payment, discharge or satisfaction, in the ordinary course of business and
consistent with past practice, of liabilities reflected or reserved against in
the Hugoton Financial Statement or subsequently incurred in the ordinary course
of business and consistent with past practice;
(i) settle or compromise any pending or threatened suit, action or
claim which is material or which relates to any of the transactions contemplated
hereby, except if such settlement or compromise would not have a Material
Adverse Effect;
(j) undertake any capital commitment not reflected in the Hugoton's
budget in an individual amount greater than $250,000 or, when aggregated with
all other capital commitments not reflected in the Hugoton's budget, in an
aggregate amount greater than $2,500,000;
(k) take or cause to be taken any action which would disqualify the
Merger as a pooling of interests transaction for accounting purposes or as a 368
Reorganization for Tax purposes;
(l) amend, modify, terminate, waive or permit to lapse any material
right of first refusal, preferential right, right of first offer or any other
material right of Hugoton or any of the Hugoton Companies; or
(m) take or offer or propose to take, or agree to take in writing, or
otherwise, any of the actions described in paragraphs (a) through (l) of this
Section 5.1 or any action which would result in any of the conditions to the
Merger not being satisfied.
5.2 Conduct of Parent Business Pending Closing. From the date hereof until
the Effective Time, Parent covenants and agrees that, except to the extent
contemplated in the Parent SEC Documents, as set forth below, or as otherwise
agreed to in writing, the businesses of Parent and the Parent Subsidiaries shall
be conducted only in, and Parent and the Parent Subsidiaries shall not take any
action except in, the ordinary course of business and in a manner consistent
with past practice; and Parent shall use its reasonable best efforts to preserve
substantially intact the business organization of Parent and the Parent
Subsidiaries, to keep available the services of the current officers, employees
and consultants of Parent and the Parent Subsidiaries and to preserve the
goodwill of those current relationships of Parent and the Parent Subsidiaries
with customers, suppliers and other Persons with which Parent or any Parent
Subsidiary has significant business relations. By way of amplification and not
limitation, except as contemplated by this Agreement, Parent shall not, between
the date of this Agreement and the Effective Date, directly or indirectly do, or
propose to do, any of the following without the prior written consent of the
Hugoton:
(a) amend or otherwise change the articles of incorporation or by-laws
or equivalent organizational documents of Parent, except as referred to in
Section 4.7(a).
(b) issue, sell, pledge, dispose of, grant, encumber, or authorize the
issuance, sale, pledge, disposition, grant or encumbrance of, (i) any shares of
capital stock of any class of Parent
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or any Parent Subsidiary, or any options, warrants, convertible securities or
other rights of any kind to acquire any shares of such capital stock, or any
other ownership interest (including, without limitation, any phantom interest),
of Parent or any Parent Subsidiary (except for the issuance of shares of Parent
Common Stock issuable (A) pursuant to Options outstanding on the date hereof and
the grant of Options outstanding under the Parent stock option plans or any
other employee benefit plans, (B) pursuant to the DLB Merger Agreement, (C)
pursuant to the AnSon Agreement and (in connection with the acquisition(s) of,
or investment(s) in, other oil and gas businesses or assets, in each case unless
the purchase price paid therefor, or investment made therein, by Chesapeake does
not individually exceed 20% of Chesapeake's total consolidated assets as
determined immediately prior to such purchase or investment or (ii) any assets
of Parent or any Parent Subsidiary, except for sales of products in the ordinary
course of business;
(c) reclassify, combine, split, subdivide or redeem, purchase or
otherwise acquire, directly or indirectly, any of its capital stock;
(d) acquire (including, without limitation, by merger, consolidation,
or acquisition of stock or assets) any corporation, partnership, other business
organization or any division thereof or any material amount of assets other than
in the ordinary course of business and other than the acquisition of (i) DLB Oil
and Gas, Inc. pursuant to the DLB Merger Agreement, and provided that Parent may
exercise the cash election as provided therein, (ii) AnSon Production Company
pursuant to the AnSon Agreement and (iii) the possible acquisition(s) of, or
investment(s) in, other oil and gas businesses or assets provided that the
purchase price paid therefor, or investment made therein, by Chesapeake does not
individually exceed 20% of Chesapeake's total consolidated assets as determined
immediately prior to such purchase or investment; (iii) incur any indebtedness
for borrowed money or issue any debt securities or assume, guarantee or endorse,
or otherwise as an accommodation become responsible for, the obligations of any
Person, or make any loans, advances or capital contribution to, or investments
in, any other Person (other than such of the foregoing as are made by Parent to
or in a wholly-owned subsidiary of Parent), except in the ordinary course of
business and consistent with past practice and other than investments of up to
$100 million, individually or in the aggregate, in other oil and gas businesses;
or (iv) enter into or amend any contract, agreement, commitment or arrangement
with respect to any matter set forth in this Section 5.2(d); or
(e) take or cause to be taken any action which would disqualify the
Merger as a pooling of interests transaction for accounting purposes or as a 368
Reorganization for Tax purposes.
5.3 Access to Information.
(a) Hugoton will (and will cause each of its subsidiaries to) afford
to Parent and its Representatives (including without limitation directors,
officers and employees of Parent and its affiliates, and counsel, accountants
and other professionals retained by Parent) such access, during normal business
hours throughout the period prior to the Effective Time, to Hugoton's books,
records (including without limitation Tax returns and non-restricted work papers
of Hugoton's independent auditors), properties, personnel and to such other
information as Parent reasonably requests and will permit Parent to make such
inspections as Parent may reasonably request and will cause the officers of
Hugoton and those of its subsidiaries to furnish Parent with such financial and
operating data and other information with respect to the business, properties
and personnel of
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Hugoton and its subsidiaries as Parent may from time to time reasonably
request, provided, however, that no investigation pursuant to this Section 5.3
will affect or be deemed to modify any of the representations or warranties
made by Hugoton in this Agreement.
(b) Parent will (and will cause each of its subsidiaries to) afford to
Hugoton and its representatives (including without limitation directors,
officers and employees of Hugoton and its affiliates, and counsel, accountants
and other professionals retained by Hugoton) such access, during normal business
hours throughout the period prior to the Effective Time, to Parent's books,
records (including without limitation Tax returns and non-restricted work papers
of Parent's independent auditors), properties, personnel and to such other
information as Hugoton reasonably requests and will permit Hugoton to make such
inspections as Hugoton may reasonably request and will cause the officers of
Parent and those of its subsidiaries to furnish Hugoton with such financial and
operating data and other information with respect to the business, properties
and personnel of Parent and its subsidiaries as Hugoton may from time to time
reasonably request, provided, however, that no investigation pursuant to this
Section 5.3 will affect or be deemed to modify any of the representations or
warranties made by Parent and Sub in this Agreement.
5.4 No Solicitation.
(a) Immediately following the execution of this Agreement, Hugoton
will (and will cause each of the Hugoton Representatives to) terminate any and
all existing activities, discussions and negotiations with third parties (other
than Parent) with respect to any possible transaction involving any proposal to
acquire all or any part of Hugoton Common Stock or all or a material portion of
the assets, business or equity interest of Hugoton (other than the transactions
contemplated by this Agreement), whether by merger, purchase of assets, tender
offer, exchange offer or otherwise.
(b) Hugoton will not (and will cause the Hugoton Representatives not
to), directly or indirectly (i) solicit, initiate or encourage the submission
of, any offer or proposal to acquire all or more than three percent (3%) of
Hugoton Common Stock or all or any material portion of the assets, business or
equity interests of Hugoton or any other transaction the consummation of which
would or could reasonably be expected to impede, interfere with, prevent or
materially delay the consummation of the Merger (other than the transactions
contemplated by this Agreement), whether by merger, purchase of assets, tender
offer, exchange offer or otherwise (an "Alternative Proposal"); (ii) engage in
negotiations or discussions concerning or provide any non-public information to
any Person relating to an Alternative Proposal; or (iii) agree to, approve or
recommend, or otherwise facilitate any effort or attempt to make or implement,
any Alternative Proposal, or withdraw its recommendation of the Merger,
provided, however, that (i) Hugoton's board of directors may take and disclose
to the stockholders of Hugoton a position contemplated by Rule 14e-2(a)
promulgated under the Exchange Act with regard to an Alternative Proposal and
(ii) following receipt from a third party (without any solicitation, initiation
or encouragement, directly or indirectly, by Hugoton or any Hugoton
Representatives) of a bona fide written Alternative Proposal, (x) Hugoton may
engage in discussions or negotiations with such third party and may furnish such
third party non-public
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information concerning it, and its business, properties and assets if, prior to
furnishing such information to such third party, such third party executes a
Confidentiality Agreement in reasonably customary form and on terms, including
so called "standstill" provisions, at least as restrictive as those contained in
the Confidentiality Agreement and (y) the board of directors of Hugoton may
recommend such Alternative Proposal or withdraw, modify or not make its
recommendation referred to in Section 3.18, if and only to the extent that
Hugoton's board of directors determines in good faith based on the advice of
Hugoton's financial advisor that such Alternative Proposal, if consummated,
would result in a transaction more favorable to Hugoton's stockholders from a
financial point of view than the transaction contemplated by this Agreement (a
"Superior Proposal") and that the Person making such Superior Proposal has the
financial means, or the ability to obtain the necessary financing, to conclude
such transaction.
(c) Hugoton shall promptly notify Parent after receipt by Hugoton or
the Hugoton Representatives of any Alternative Proposal, any inquiries
indicating that any Person is considering making or wishes to make an
Alternative Proposal or any requests for nonpublic information and the terms and
conditions of any proposals or offer and the status of any actions, including
any discussions, taken pursuant to such Alternative Proposal. Hugoton agrees
that it shall keep Parent informed, on a current basis, of the status and terms
of any such Alternative Proposal and of any discussions or negotiations
regarding same.
(d) Nothing in this Section 5.4 shall permit Hugoton to terminate this
Agreement or to change or withdraw its recommendation except as specifically
provided in Section 7.1.
5.5 Hugoton Stockholders Meeting. Hugoton shall take all action necessary
in accordance with applicable law and its articles of incorporation and bylaws
to convene a meeting of its stockholders as promptly as practicable after the
date hereof for the purpose of voting on this Agreement and the Merger. The
board of directors of Hugoton shall recommend approval of this Agreement and the
Merger (unless Hugoton's board of directors determines in good faith based on
the advice of Hugoton's financial advisor that Hugoton has received a Superior
Proposal from a Person with the financial means or ability to obtain the
necessary financing to conclude such transaction, subject, however, to the
provisions of Article VII hereof) and shall take all lawful action to solicit
such approval, including timely mailing the Proxy Statement/Prospectus to the
stockholders of Hugoton. Notwithstanding the above, however, the following shall
be conditions to the mailing of the Proxy Statement/Prospectus:
(a) Hugoton shall have received an opinion (acceptable in form and
substance to Hugoton) from Vinson & Elkins, L.L.P. (or such other firm as is
acceptable to Hugoton) to the effect that (i) the Merger will be treated for
federal income Tax purposes as a reorganization within the meaning of Section
368(a) of the Code, (ii) each of Parent, Hugoton and Sub will be a party to such
reorganization within the meaning of Section 368(b) of the Code, (iii) no gain
or loss will be recognized by Hugoton as a result of the Merger, and (iv) no
gain or loss, will be recognized by the stockholders of Hugoton to the extent
that they receive Parent Common Stock solely in exchange
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for their Hugoton Common Stock in the Merger, and such opinion shall not have
been withdrawn, revoked or modified.
5.6 Parent Stockholders Meeting. Parent shall take all action necessary in
accordance with applicable law and its certificate or articles of incorporation
and bylaws to convene a meeting of its stockholders as promptly as practicable
after the date hereof for the purpose of voting on this Agreement and the
Merger. The board of directors of Parent shall recommend approval of this
Agreement and the Merger and shall take all lawful action to solicit such
approval, including timely mailing the Proxy Statement/Prospectus to the
stockholders of Parent. Notwithstanding the above, however, the following shall
be conditions to the mailing of the Proxy Statement/Prospectus: Parent shall
have received an opinion (acceptable in form and substance to Parent) from
Andrews & Kurth L.L.P. (or such other firm as is acceptable to Parent) to the
effect that (i) the Merger will be treated for federal income Tax purposes as a
reorganization within the meaning of Section 368(a) of the Code, (ii) each of
Parent and Sub will be a party to such reorganization within the meaning of
Section 368(b) of the Code, and (iii) no gain or loss will be recognized by
Parent or Sub as a result of the Merger.
5.7 Registration Statement and Proxy Statement/Prospectus
(a) Parent and Hugoton shall cooperate and promptly prepare (i) a
Preliminary Proxy Statement, which shall be initially filed with the SEC
requesting confidential treatment and (ii) the Registration Statement, and
Parent shall file the Preliminary Proxy Statement and the Registration Statement
with the SEC as soon as practicable after the date hereof. Parent shall use its
commercially reasonable efforts, and Hugoton shall cooperate with Parent
(including furnishing all information concerning Hugoton and the holders of
Hugoton Common Stock as may be reasonably requested by Parent), to have the
Registration Statement declared effective under the Securities Act as promptly
as practicable after such filing. Parent shall use its best efforts, and Hugoton
shall cooperate with Parent, to obtain all necessary state securities laws or
"blue sky" permits, approvals and registrations in connection with the issuance
of Parent Common Stock pursuant to the Merger.
(b) Parent will cause the Registration Statement (including the Proxy
Statement/Prospectus), at the time it becomes effective under the Securities
Act, to comply as to form in all material respects with the applicable
provisions of the Securities Act, the Exchange Act and the rules and regulations
of the SEC thereunder.
(c) Hugoton hereby covenants and agrees with Parent that (i) the
Registration Statement (at the time it becomes effective under the Securities
Act and at the Effective Time) will not contain an untrue statement of material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein not misleading (provided, however, that this
clause (i) shall apply only to information contained in the Registration
Statement that was supplied by Hugoton specifically for inclusion therein), and
(ii) the Proxy Statement/Prospectus (at the time it is first mailed to
stockholders of Hugoton, at the time of the Hugoton Stockholder Meeting, and
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at the Effective Time) will not contain an untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they are made, not misleading (provided, however, that this clause (ii) shall
only apply to any information contained in the Proxy Statement/Prospectus that
was supplied by Hugoton specifically for inclusion therein). If, at any time
prior to the Effective Time, any event with respect to Hugoton, or with respect
to other information supplied by Hugoton specifically for inclusion in the
Registration Statement, occurs and such event is required to be described in an
amendment to the Registration Statement, Hugoton shall promptly notify Parent of
such occurrence and shall cooperate with Parent in the preparation and filing of
such amendment. If, at any time prior to the Effective Time, any event with
respect to Hugoton, or with respect to other information included in the Proxy
Statement/Prospectus, occurs and such event is required to be described in a
supplement to the Proxy Statement/Prospectus, such event shall be so described
and such supplement shall be promptly prepared, filed and disseminated.
(d) Parent hereby covenants and agrees with Hugoton that (i) the
Registration Statement (at the time it becomes effective under the Securities
Act and at the Effective Time) will not contain an untrue statement of material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein not misleading (provided, however, that this
clause (i) shall apply only to information contained in the Registration
Statement that was supplied by Parent specifically for inclusion therein), and
(ii) the Proxy Statement/Prospectus (at the time it is first mailed to
stockholders of Hugoton, at the time of the Hugoton Stockholder Meeting, and at
the Effective Time) will not contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they are made, not misleading (provided, however, that this clause (ii) shall
only apply to any information contained in the Proxy Statement/Prospectus that
was supplied by Parent specifically for inclusion therein). If, at any time
prior to the Effective Time, any event with respect to Parent, or with respect
to other information supplied by Parent specifically for inclusion in the
Registration Statement, occurs and such event is required to be described in an
amendment to the Registration Statement, Parent shall promptly notify Hugoton of
such occurrence and shall cooperate with Hugoton in the preparation and filing
of such amendment. If, at any time prior to the Effective Time, any event with
respect to Parent, or with respect to other information included in the Proxy
Statement/Prospectus, occurs and such event is required to be described in a
supplement to the Proxy Statement/Prospectus, such event shall be so described
and such supplement shall be promptly prepared, filed and disseminated.
(e) Neither the Registration Statement nor the Proxy
Statement/Prospectus nor any amendment or supplement thereto will be filed or
disseminated to the stockholders of Hugoton without the approval of both Parent
and Hugoton which approval will not be unreasonably withheld. Parent shall
advise Hugoton, promptly after it receives notice thereof, of the time when the
Registration Statement has become effective under the Securities Act, the
issuance of any stop order with respect to the Registration Statement, the
suspension of the qualification of the Parent Common Stock issuable in
connection with the Merger for offering or sale in any jurisdiction or any
comments or requests for additional information by the SEC with respect to the
Registration Statement.
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5.8 Stock Exchange Listing. Parent shall use its best efforts to list on
the Exchange or such other exchange on which Parent Common Stock is then
primarily traded, upon notice of issuance, the Parent Common Stock to be issued
pursuant to the Merger.
5.9 Additional Arrangements. Subject to the terms and conditions herein
provided, each of Hugoton and Parent shall take, or cause to be taken, all
action and shall do, or cause to be done, all things necessary, appropriate or
desirable under applicable laws and regulations or under applicable governing
agreements to consummate and make effective the transactions contemplated by
this Agreement, including using its best efforts to obtain all necessary
waivers, consents and approvals and effecting all necessary registrations and
filings. Each of Hugoton and Parent shall take, or cause to be taken, all action
or shall do, or cause to be done, all things necessary, appropriate or desirable
to cause the covenants and conditions applicable to the transactions
contemplated hereby to be performed or satisfied as soon as practicable. In
addition, if any Governmental Authority shall have issued any order, decree,
ruling or injunction, or taken any other action that would have the effect of
restraining, enjoining or otherwise prohibiting or preventing the consummation
of the transactions contemplated hereby, each of Hugoton and Parent shall use
its reasonable efforts to have such order, decree, ruling or injunction or other
action declared ineffective as soon as practicable.
5.10 Agreements of Affiliates; Pooling of Interests. (a) At least 30 days
prior to the Effective Time, Hugoton shall cause to be prepared and delivered to
Parent a list identifying all Persons who, at the time of the Hugoton
Stockholders Meeting, may be deemed to be "affiliates" of Hugoton as that term
is used in paragraphs (c) and (d) of Rule 145 under the Securities Act. Hugoton
shall use its best efforts to cause each Person who is identified as an
"affiliate" of Hugoton in such list to execute and deliver to Parent, on or
prior to the Closing Date, a written agreement, in the form attached hereto as
Annex C (if such Person has not executed and delivered an agreement
substantially to the same effect contemporaneously with the execution of this
Agreement). Parent shall be entitled to place legends as specified in such
agreements on the Parent Certificates representing any Parent Common Stock to be
issued to such Persons in the Merger.
(b) Each of Parent and Hugoton shall use their respective commercially
reasonable efforts to cause the Merger to qualify for "pooling of interests"
accounting treatment. Hugoton shall request, and shall use commercially
reasonable efforts to obtain, a letter from Ernst & Young LLP, dated the Closing
Date, with respect to the eligibility of Hugoton for "pooling of interests"
accounting treatment. Parent shall request, and shall use commercially
reasonable efforts to obtain, a letter from Coopers & Lybrand, L.L.P., dated the
date of Closing, to the effect that the merger qualifies for "pooling of
interests" accounting treatment if consummated in accordance with this
Agreement; provided that the delivery of such letters shall not be a condition
to the Closing.
(c) Parent agrees to use its commercially reasonable efforts to
publish, or cause to be published, within 75 days after the Closing a quarterly
earnings report, an effective registration statement filed with the Commission,
a report to the Commission on Form 10-K, 10-Q or 8-K, or any other public filing
or announcement which includes the results of at least 30 days of combined
operations of Chesapeake and Hugoton.
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(d) Provided both parties to this Agreement shall intend for this
transaction to qualify as a "pooling of interests", Hugoton will, if necessary,
take the following actions prior to the mailing of the Registration Statement to
the Stockholders:
(i) rescind the resolution made in the Hugoton Board of Directors
meeting dated June 26, 1997, which automatically vests all options under
the Hugoton Stock Option Plans and Agreements at the time of a Corporate
Change (as defined therein);
(ii) rescind the resolution made in the Hugoton Board of Directors
meeting dated June 26, 1997, which extends the expiration date of all
options under the Hugoton Stock Option Plans and Agreements until
December 31, 1997;
(iii) rescind the resolution made in the Hugoton Board of
Directors meeting dated June 26, 1997, that provided that it be mandatory
that all optionees under the Hugoton Stock Option Plan and Agreements
surrender to Hugoton all outstanding options in exchange for an amount of
cash equal to the excess of the Change of Control Value as defined in the
Hugoton Stock Option Plans and Agreements over the exercise prices under
such options; and
(iv) rescind the resolution made in the Hugoton Board of Directors
meeting dated June 26, 1997, that gave Floyd C. Wilson, Jay W. Decker, W.
Mark Womble and David C. Drummond the option of terminating their
employment upon a change of control and rescind the provisions of the
June 26, 1997 Amendment to Employment Agreement for each of the four
employees relating to such option.
5.11 Public Announcements. Prior to Closing, Hugoton and Parent will
consult with each other before issuing any press release or otherwise making any
public statements with respect to the transactions contemplated by this
Agreement and shall not issue any press release or make any such public
statement prior to obtaining the written approval of the other party; provided,
however, that such approval shall not be required where such release or
announcement is required by applicable law; and provided further, that either
Hugoton or Parent may respond to inquiries by the press or others regarding the
transactions contemplated by this Agreement, so long as such responses are
consistent with such party's previously issued press releases.
5.12 Notification of Certain Matters. Hugoton shall give prompt notice to
Parent of (a) any representation or warranty contained in Article III being
untrue or inaccurate when made, (b) the occurrence of any event or development
that would cause (or could reasonably be expected to cause) any representation
or warranty contained in Article III to be untrue or inaccurate on the Closing
Date, or (c) any failure of Hugoton to comply with or satisfy any covenant,
condition, or agreement to be complied with or satisfied by it hereunder. Parent
shall give prompt notice to Hugoton of (x) any representation or warranty
contained in Article IV being untrue or inaccurate when made, (y) the occurrence
of any event or development that would cause (or could reasonably be expected to
cause) any representation or warranty contained in Article IV to be untrue or
inaccurate on the Closing Date,
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or (z) any failure of Parent to comply with or satisfy any covenant, condition,
or agreement to be complied with or satisfied by it hereunder.
5.13 Indemnification; Directors' and Officers' Insurance.
(a) From and after the Effective Time, Parent agrees that it will
indemnify and hold harmless each present and former director and/or officer of
Hugoton, determined as of such effective time (the "Indemnified Parties"), that
is made a party or threatened to be made a party to any threatened, pending or
completed, action, suit, proceeding or claim, whether civil, criminal,
administrative or investigative, by reason of the fact that he or she was a
director or officer of Hugoton or any Hugoton Subsidiary prior to the Effective
Time and arising out of actions or omissions of the Indemnified Party in any
such capacity occurring at or prior to such Effective Time (a "Claim") against
any costs or expenses (including reasonable attorneys's fees), judgments, fines,
losses, claims, damages or liabilities reasonably incurred in connection with
any Claim, whether asserted or claimed prior to, at or after such Effective
Time, to the fullest extent that Hugoton would have been permitted under Kansas
law, the articles of incorporation or bylaws of Hugoton or written
indemnification agreements in effect at the date hereof, including provisions
therein relating to the advancement of expenses incurred in the defense of any
action or suit.
(b) Any Indemnified Party wishing to claim indemnification under
paragraph (a) of this Section upon learning of any such Claim, shall promptly
notify Parent thereof, but the failure to so notify shall not relieve Parent of
any liability it may have to such Indemnified Party if such failure does not
materially prejudice the indemnifying party. In the event of any such Claim
(whether arising before or after the Effective Time), (A) Parent shall have the
right to assume the defense thereof and Parent shall not be liable to such
Indemnified Parties for any legal expenses of other counselor any other expenses
subsequently incurred by such Indemnified Parties in connection with the defense
thereof, except that if Parent elects not to assume such defense, the
Indemnified Parties may retain counsel reasonably satisfactory to Parent, and
Parent shall pay reasonable fees and expenses of such counsel for the
Indemnified Parties; provided, however, that Parent shall be obligated pursuant
to this paragraph (b) to pay for only one firm or counsel for all Indemnified
Parties unless the use of one counsel for such Indemnified Parties would present
such counsel with a conflict of interest, (B) the Indemnified Parties will
cooperate in the defense of any such matter and (C) Parent shall not be liable
for any settlement effected without its prior written consent, which consent
will not be unreasonably withheld; and provided, further, however, that Parent
shall not have any obligation hereunder to any Indemnified Party when and if a
court of competent jurisdiction shall ultimately determine, and such
determination shall have become final and non-appealable, that the
indemnification of such Indemnified Party in the manner contemplated hereby is
prohibited by applicable law. If such indemnity is not available with respect to
any Indemnified Party, then Parent and the Indemnified Party shall contribute to
the amount payable in such proportion as is appropriate to reflect relative
faults and benefits, with any respect of "fault" otherwise allocable to Hugoton
being allocated to Parent.
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(c) For a period of three (3) years after the Effective Time, Parent
and Sub shall maintain Hugoton's existing directors and officers liability
insurance or equivalent liability insurance from similarly rated underwriters,
which will provide coverage for those persons who are directors and officers of
Hugoton as of the Effective Time, so long as the total cost thereof is not in
excess of $750,000.
(d) The obligations of Parent and Sub under this Section are intended
to benefit, and be enforceable against Parent and Sub directly by the
Indemnified Parties, and shall be binding on all respective successors of Parent
and Sub.
5.14 Employee and Severance Matters.
(a) Attached as Schedule 5.14(a) of the Hugoton Disclosure Schedule is
a current list of Hugoton's (and the Hugoton Companies') employees (the "Hugoton
Employees"), a copy of Hugoton's Severance Policy, a Severance Package Table
which lists the cost of all severance pay to be paid to Hugoton Employees and a
list of Hugoton Employees with written employment agreements ("Contract
Employees").
(b) On or immediately prior to the Effective Date, Hugoton shall pay
the severance pay as indicated on the Severance Package Table to the Hugoton
Employees.
(c) Notwithstanding subparagraph (b) above, Hugoton shall not pay such
severance pay to (i) any Hugoton Employee who is not a Contract Employee and to
whom Parent or Sub offers a substantially comparable job (as determined by
Parent in its reasonable discretion) with equal or better base salary at such
employee's current location, or (ii) any Contract Employee who chooses not to
terminate his employment agreement with Hugoton on the Effective Date.
(d) With respect to any Hugoton Employee who is not paid severance pay
on or immediately prior to the Effective Date, all the terms and provisions of
the Severance Policy and the Contract Employees' employment agreements shall
continue in full force and effect.
5.15 Restructuring of Merger. Upon the mutual agreement of Parent and
Hugoton, the Merger may be restructured in the form of a reverse subsidiary
merger of Sub into Hugoton, with Hugoton being the Surviving Corporation, or as
a merger of Hugoton into Parent, with Parent being the Surviving Corporation. In
such event, this Agreement shall be deemed appropriately modified to reflect
such form of merger. Regardless of the form of the Merger, Hugoton, Parent and
Sub acknowledge and agree that the effect of the Merger is that Hugoton is being
acquired by Parent.
5.16 Registration Rights Agreement. Concurrently with the Closing, Parent
and the Major Hugoton Stockholders will enter into the Registration Rights
Agreement.
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5.17 Payment of Expenses.
(a) Except as set forth in this Section 5.17, all expenses incurred in
connection with this Agreement shall be paid by the party incurring such
expenses, whether or not the Merger is consummated, except that Parent and
Hugoton each shall pay one-half of all Expenses (as defined below) relating to
printing, filing and mailing the Registration Statement and the Proxy
Statement/Prospectus and all SEC and other regulatory filing fees incurred in
connection with the Registration Statement and the Proxy Statement/Prospectus.
"Expenses" as used in this Agreement shall include all reasonable out-of-pocket
expenses (including, without limitation, all fees and expenses of counsel,
accountants, experts and consultants to a party hereto and its affiliates)
incurred by a party or on its behalf in connection with or related to the
authorization, preparation, negotiation, execution and performance of this
Agreement, the preparation, printing, filing and mailing of the Registration
Statement and the Proxy Statement/Prospectus, the solicitation of stockholder
approvals and all other matters related to the closing of the Merger.
(b) Parent and Hugoton agree that
(i) if Hugoton shall terminate this Agreement pursuant to Section
7.1(d)(i); or
(ii) if Parent shall terminate this Agreement pursuant to Section
7.1(e); or
(iii) if (A) Hugoton or Parent shall terminate this Agreement pursuant
to Section 7.1(b)(iii) due to the failure of Hugoton's stockholders to approve
and adopt this Agreement, the Merger and the transactions contemplated hereby,
and (B) at the time of such failure to so approve and adopt this Agreement, the
Merger and the transactions contemplated hereby, there shall exist an
Alternative Proposal with respect to Hugoton and, within seven months of the
termination of this Agreement, Hugoton enters into a definitive agreement with
any third party with respect to such Alternative Proposal with respect to
Hugoton;
then Hugoton shall pay to Parent an amount equal to $8,000,000 (the "Hugoton
Termination Fee").
(c) The Hugoton Termination Fee required to be paid pursuant to Section
5.17(b)(i) shall be paid prior to, and shall be a pre-condition to effectiveness
of termination of this Agreement pursuant to Section 7.1(d) and the Hugoton
Termination Fee required to be paid pursuant to Section 5.17(b)(iii) shall be
paid to Parent on the next Business Day after a definitive agreement is entered
into with a third party with respect to an Alternative Proposal with respect to
Hugoton. Any payment of a Hugoton Termination Fee otherwise required to be made
pursuant to Section 5.17 shall be made not later than two Business Days after
termination of this Agreement. All payments under this Section 5.17(b) shall be
made by wire transfer of immediately available funds to an account designated by
Parent.
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ARTICLE VI
CONDITIONS
6.1 Conditions to Each Party's Obligation to Effect the Merger. The
respective obligations of each party to effect the Merger shall be subject to
the satisfaction, at or prior to the Closing Date, of the following conditions:
(a) Stockholder Approval. This Agreement and the Merger shall have
been duly and validly approved and adopted by the requisite vote of the
stockholders of Hugoton and Parent and Parent's authorized capital stock shall
have been increased as contemplated in Section 4.7(a).
(b) Other Approvals. If applicable, the waiting period applicable to
the consummation of the Merger under the HSR Act shall have expired or been
terminated and all filings required to be made prior to the Effective Time with,
and all consents, approvals, permits and authorizations required to be obtained
prior to the Effective Time from, any Governmental Authority in connection with
the execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby by Hugoton, Parent and Sub shall have been made
or obtained (as the case may be), except where the failure to obtain such
consents, approvals, permits and authorizations would not be reasonably likely
to result in a Material Adverse Effect on Parent (assuming the Merger has taken
place) or to materially adversely affect the consummation of the Merger.
(c) Securities Law Matters. The Registration Statement shall have
become effective under the Securities Act and shall be effective at the
Effective Time, and no stop order suspending such effectiveness shall have been
issued, no action, suit, proceeding or investigation by the SEC to suspend such
effectiveness shall have been initiated and be continuing, and all necessary
approvals under state securities laws relating to the issuance or trading of the
Parent Common Stock to be issued in the Merger shall have been received.
(d) No Injunctions or Restraints. No temporary restraining order,
preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition preventing the
consummation of the Merger shall be in effect; provided, however, that prior to
invoking this condition, each party shall have complied fully with its
obligations under Section 5.9 and, in addition, shall use all reasonable efforts
to have any such decree, ruling, injunction or order vacated, except as
otherwise contemplated by this Agreement.
6.2 Conditions to Obligations of Parent and Sub. The obligations of Parent
and Sub to effect the Merger are subject to the satisfaction of the following
conditions, any or all of which may be waived in whole or in part by Parent and
Sub:
(a) Representations and Warranties. The representations and warranties
of Hugoton set forth in Article III shall be true and correct as of the Closing
Date as though made on
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and as of that time, and Parent shall have received a certificate signed by the
chief executive officer of Hugoton to such effect; provided, however, that the
condition set forth in this Section 6.2(a) shall be deemed to be satisfied even
if one or more of such representations and warranties are not true and correct,
so long as the failure of such representations and warranties to be true and
correct (in the aggregate) does not result in a Material Adverse Effect on
Hugoton. Notwithstanding the above, if Hugoton and Parent have made a decision
that this transaction will not be treated as a "pooling of interests" or the
Commission denies pooling of interests treatment for the transaction, the
representations set forth in Sections 3.31 and 4.26 shall be waived and not
apply.
(b) Performance of Covenants and Agreements by Hugoton. Hugoton shall
have performed in all material respects all covenants and agreements required to
be performed by it under this Agreement at or prior to the Closing Date, and
Parent shall have received a certificate signed by the chief executive officer
of Hugoton to such effect.
(c) Letters from Hugoton Affiliates. Parent shall have received from
each Person named in the list referred to in Section 5.10 an executed copy of
the agreement described in Section 5.10.
(d) Tax Opinion. The Tax Opinion described in Section 5.6 shall not
have been withdrawn, revoked or modified.
(e) No Adverse Change. From the date of this Agreement through the
Closing, there shall not have occurred any change in the condition (financial or
otherwise), operations or business of any of the Hugoton Companies that would
have or would be reasonably likely to have a Material Adverse Effect on Hugoton
(other than changes, including changes in commodity prices, generally affecting
the oil and gas industry, changes resulting from exploration or development
results reported in the ordinary course of business) and changes arising from
the announcement of the Merger.
6.3 Conditions to Obligation of Hugoton. The obligation of Hugoton to
effect the Merger is subject to the satisfaction of the following conditions,
any or all of which may be waived in whole or in part by Hugoton:
(a) Representations and Warranties. The representations and warranties
of Parent and Sub set forth in Article IV shall be true and correct as of the
Closing Date as though made on and as of that time, and Hugoton shall have
received a certificate signed by the chief executive officer or the chief
financial officer of Parent to such effect; provided, however, that the
condition set forth in this Section 6.3(a) shall be deemed to be satisfied even
if one or more of such representations and warranties are not true and correct,
so long as the failure of such representations and warranties to be true and
correct (in the aggregate) does not result in a Material Adverse Effect on
Parent and/or Sub.
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(b) Performance of Covenants and Agreements by Parent and Sub. Parent
and Sub shall have performed in all material respects all covenants and
agreements required to be performed by them under this Agreement at or prior to
the Closing Date, and Hugoton shall have received a certificate signed by the
chief executive officer or the chief financial officer of Parent to such effect.
(c) Tax Opinion. The Tax opinion described in Section 5.5(a) shall not
have been withdrawn, revoked, or modified.
(d) Listing. The shares of Parent Common Stock issuable pursuant to
the Merger shall have been authorized for listing on the Exchange or such other
exchange on which the Parent Common Stock is traded, subject to official notice
of issuance.
(e) No Adverse Change. From the date of this Agreement through the
Closing, there shall not have occurred any change in the condition (financial or
otherwise), operations or business of Parent and its subsidiaries that would
have or would be reasonably likely to have a Material Adverse Effect on Parent
(other than changes, including changes in commodity prices, generally affecting
the oil and gas industry changes resulting from exploration and development
results reported in the ordinary course of business and changes arising from the
announcement of the Merger).
(d) Registration Rights Agreement. The Registration Rights Agreement
shall have been validly executed by each of the parties thereto.
ARTICLE VII
TERMINATION
7.1 Termination Rights. This Agreement may be terminated and the Merger
may be abandoned at any time prior to the Effective Time, whether before or
after approval of this Agreement and the Merger by the stockholders of Hugoton
and Parent:
(a) By mutual written consent of Parent and Hugoton;
(b) By either Hugoton or Parent if (i) the Merger has not been
consummated by April 30, 1998 (provided, however, that the right to terminate
this Agreement pursuant to this clause (i) shall not be available to any party
whose breach of any representations or warranty or failure to perform any
covenant or agreement under this Agreement has been the cause of or resulted in
the failure of the Merger to occur on or before such date); (ii) any
Governmental Authority shall have issued an order, decree or ruling or taken any
other action permanently restraining, enjoining or otherwise prohibiting the
Merger and such order, decree, ruling or other action shall have become final
and nonappealable (provided, however, that the right to terminate this Agreement
pursuant to
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this clause (ii) shall not be available to any party until such party has used
all reasonable efforts to remove such injunction, order or decree); or (iii)
this Agreement and the Merger shall not have been approved by (A) the required
vote of Hugoton stockholders at the Hugoton Stockholders Meeting or at any
adjournment thereof, and (B) the required vote of Parent Stockholders at the
Parent Stockholders Meeting or at any adjournment thereof.
(c) By Parent if (i) there has been a breach of the representations
and warranties made by Hugoton in Article III of this Agreement the aggregate of
which would have a Material Adverse Effect on Hugoton (provided, however, that
Parent shall not be entitled to terminate this Agreement pursuant to this clause
(i) unless Parent has given Hugoton at least fifteen (15) days prior written
notice of such breach and Hugoton has failed to cure such breach within such
15-day period, and the condition described in Section 6.2(a), other than the
provision thereof relating to the certificate signed by the chief executive
officer of Hugoton, would not be satisfied if the Closing were to occur on the
day on which Parent gives Hugoton notice of such termination; or (ii) Hugoton
has failed to comply in any material respect with any of its covenants or
agreements contained in this Agreement and such failure has not been, or cannot
be, cured within a reasonable time after notice and demand for cure thereof;
(d) By Hugoton if (i) as a result of a Superior Proposal received by
Hugoton from a Person other than a party to this Agreement or any of its
Affiliates, Hugoton's Board of Directors determines in good faith that their
fiduciary obligations under applicable law require that such Superior Proposal
be accepted; provided, however, that prior to the effective date of any such
termination, Hugoton shall provide Parent with an opportunity (of not less than
three (3) full Business Days) to make such adjustments in the terms and
conditions of this Agreement or the Merger as would enable Hugoton to proceed
with the transactions contemplated hereby; provided, further, that it shall be a
condition to the effectiveness of termination by Hugoton pursuant to this
Section 7.1(d)(i) that Hugoton shall have made the payment of the Hugoton
Termination Fee to Parent required by Section 5.17(b)(i); or (ii) there has been
a breach of the representations and warranties made by Parent in Article IV of
this Agreement the aggregate of which would have a Material Adverse Effect on
Parent (provided, however, that Hugoton shall not be entitled to terminate this
Agreement pursuant to this clause (ii) unless Hugoton has given Parent at least
fifteen (15) days prior written notice of such breach (except at Closing, in
which case no notice need be given) and Parent has failed to cure such breach
within such 15-day period, and the condition described in Section 6.3(a), other
than the provision thereof relating to the certificate signed by the chief
executive officer of Hugoton, would not be satisfied if the Closing were to
occur on the day on which Hugoton gives Parent notice of such termination; or
(iii) Parent has failed to comply in any material respect with any of its
covenants or agreements contained in this Agreement and such failure has not
been, or cannot be, cured within a reasonable time after notice and demand for
cure thereof; or
(e) By Parent if the Board of Directors of Hugoton (i) accepts a
Superior Proposal in accordance with Section 5.4(b) or (ii) shall have withdrawn
or modified in a manner adverse to
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Parent its approval or recommendation of this Agreement or the Merger, or, upon
request by Parent, shall fail to reaffirm such approval or recommendation.
7.2 Effect of Termination. If this Agreement is terminated by either
Hugoton or Parent pursuant to the provisions of Section 7.1, this Agreement
shall forthwith become void and there shall be no further obligation on the part
of any party hereto or its respective Affiliates, directors, officers, or
stockholders except pursuant to, the provisions of this Section 7.2 and Sections
of 5.7(c), 5.7(d) and the Confidentiality Agreement (which shall continue
pursuant to their terms); provided, however, that a termination of this
Agreement shall not relieve any party hereto from any liability for damages
incurred as a result of a breach by such party of its representations,
warranties, covenants, agreements or other obligations hereunder occurring prior
to such termination.
ARTICLE VIII
MISCELLANEOUS
8.1 Nonsurvival of Representations, Warranties, Covenants and Agreements.
None of the representations, warranties, covenants or agreements contained in
this Agreement or in any instrument delivered pursuant to this Agreement, and no
agreements or obligations arising under the Confidentiality Agreement, shall
survive the consummation of the Merger (except for the agreements contained in
Article II, in Sections 5.13, 5.14 and 5.16 and in this Article VIII and the
agreements delivered pursuant to Section 5.10).
8.2 Amendment. This Agreement may be amended by the parties hereto at any
time before or after approval of the Hugoton Proposal by the stockholders of
Hugoton; provided, however, that after any such approval, no amendment shall be
made that by law requires further approval by such stockholders without such
further approval. This Agreement may not be amended except by a written
instrument signed on behalf of each of the parties hereto.
8.3 Notices. Any notice or other communication required or permitted
hereunder shall be in writing and either delivered personally, by facsimile
transmission or by registered or certified mail (postage prepaid and return
receipt requested) and shall be deemed given when received (or, if mailed, five
(5) business days after the date of mailing) at the following addresses or
facsimile transmission numbers (or at such other address or facsimile
transmission number for a party as shall be specified by like notice):
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(a) If to Parent or Sub:
Chesapeake Energy Corporation
6100 North Western Avenue
Oklahoma City, Oklahoma 73118
Attention: Aubrey K. McClendon
Telephone: 405-848-8000
Facsimile: 405-848-8588
with a copy (which shall not constitute notice) to:
Andrews & Kurth L.L.P.
600 Travis, Suite 4200
Houston, Texas 77002
Attention: G. Michael O'Leary
Telephone: 713-220-4360
Facsimile: 713-220-4285
and a copy to:
Self, Giddens & Lees, Inc.
2725 Oklahoma Tower
210 Park Avenue
Oklahoma City, Oklahoma 73102
Attention: Shannon Self
Telephone: 405-232-3001
Facsimile: 405-232-5553
(b) If to Hugoton:
Hugoton Energy Corporation
301 North Main, Suite 1900
Wichita, Kansas 67202
Attention: Mr. Floyd C. Wilson
Telephone: 316-262-1522
Facsimile: 316-269-6870
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with a copy (which shall not constitute notice) to:
Hinkle, Eberhart & Elkouri, L.L.C.
301 North Main, Suite 2000
Wichita, Kansas 67202
Attention: David S. Elkouri
Telephone: 316-267-2000
Facsimile: 316-264-1518
with a copy (which shall not constitute notice) to:
Vinson & Elkins L.L.P.
2300 First City Tower
1001 Fannin
Houston, Texas 77007
Attention: Robert H. Whilden, Jr., Esq.
Telephone: 713-758-2222
Facsimile: 713-758-2346
8.4 Counterparts. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when two or more counterparts have been signed by each of
the parties and delivered to the other parties, it being understood that all
parties need not sign the same counterpart.
8.5 Severability. Any term or provision of this Agreement that is invalid
or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of this
Agreement is so broad as to be unenforceable, such provision shall be
interpreted to be only so broad as is enforceable.
8.6 Entire Agreement; No Third Party Beneficiaries. This Agreement
(together with the Confidentiality Agreement and the documents and instruments
delivered by the parties in connection with this Agreement) (a) constitutes the
entire agreement and supersedes all other prior agreements and understandings,
both written and oral, among the parties with respect to the subject matter
hereof; and (b) except as provided in Article II or Section 5.13 or 5.14, is
solely for the benefit of the parties hereto and their respective successors,
legal representatives and assigns and does not confer on any other Person any
rights or remedies hereunder.
8.7 Applicable Law. This Agreement shall be governed in all respects,
including validity, interpretation and effect, by the laws of the State of
Kansas regardless of the laws that might otherwise govern under applicable
principles of conflicts of laws thereof.
60
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8.8 No Remedy in Certain Circumstances. Each party agrees that, should any
court or other competent authority hold any provision of this Agreement or part
hereof to be null, void or unenforceable, or order any party to take any action
inconsistent herewith or not to take an action consistent herewith or required
hereby, the validity, legality and enforceability of the remaining provisions
and obligations contained or set forth herein shall not in any way be affected
or impaired thereby, unless the foregoing inconsistent action or the failure to
take an action constitutes a material breach of this Agreement or makes this
Agreement impossible to perform, in which case this Agreement shall terminate
pursuant to Article VII. Except as otherwise contemplated by this Agreement, to
the extent that a party hereto took an action inconsistent herewith or failed to
take action consistent herewith or required hereby pursuant to an order or
judgment of a court or other competent Governmental Authority, such party shall
not incur any liability or obligation unless such party breached its obligation
under Section 5.9 or did not in good faith seek to resist or object to the
imposition or entering of such order or judgment.
8.9 Enforcement of Agreement. The parties hereto agree that irreparable
damage would occur in the event that any of the provisions of this Agreement
were not performed in accordance with the terms hereof or were otherwise
breached. Accordingly, the parties hereto hereby agree that each party hereto
shall be entitled to specific performance of the terms and provisions hereof in
addition to any other remedy at law or in equity.
8.10 Assignment. Neither this Agreement nor any of the rights, interest or
obligations hereunder shall be assigned by any of the parties hereto (whether by
operation of law or otherwise) without the prior written consent of the other
parties, except that Sub may assign, in its sole discretion, any or all of its
rights, interests and obligations hereunder to any newly-formed direct or
indirect wholly-owned corporate subsidiary of Parent. Subject to the preceding
sentence, this Agreement will be binding upon, inure to the benefit of and be
enforceable by the parties and their respective successors and assigns.
8.11 Waivers. At any time prior to the Effective Time, the parties hereto
may, to the extent legally allowed, (a) extend the time for the performance of
any of the obligations or other acts of the other parties hereto, (b) waive any
inaccuracies in the representations and warranties contained herein or in any
document delivered pursuant hereto, and (c) waive performance of any of the
covenants or agreements, or satisfaction of any of the conditions, contained
herein. Any agreement on the part of a party hereto to any such extension or
waiver shall be valid only if set forth in a written instrument signed on behalf
of such party. Except as provided in this Agreement, no action taken pursuant to
this Agreement, including any investigation by or on behalf of any party, shall
be deemed to constitute a waiver by the party taking such action of compliance
with any representations, warranties, covenants or agreements contained in this
Agreement. The waiver by any party hereto of a breach of any provision hereof
shall not operate or be construed as a waiver of any prior or subsequent breach
of the same or any other provisions hereof.
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8.12 References and Titles. All references in this Agreement to Exhibits,
Schedules, Articles, Sections, subsections and other subdivisions refer to the
corresponding Exhibits, Schedules, Articles, Sections, subsections and other
subdivisions of or to this Agreement unless expressly provided otherwise. Titles
appearing at the beginning of any Articles, Sections, subsections or other
subdivisions of this Agreement are for convenience only, do not constitute any
part of this Agreement, and shall be disregarded in construing the language
hereof.
8.13 Confidentiality Agreement. The Confidentiality Agreement shall remain
in full force and effect following the execution of this Agreement until
terminated according to its terms, is hereby incorporated herein by reference
and shall constitute a part of this Agreement for all purposes; provided,
however, that any standstill provisions contained therein will, effective as of
the Closing, be deemed to have been waived to the extent necessary for the
parties to consummate the Merger in accordance with the terms of this Agreement.
Any and all information received by Parent pursuant to the terms and provisions
of this Agreement shall be governed by the applicable terms and provisions of
the Confidentiality Agreement.
8.14 Incorporation. Exhibits and Schedules referred to herein are attached
to and by this reference incorporated herein for all purposes.
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<PAGE> 144
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by their duly authorized representatives, on the date first written above.
"Hugoton" "Parent"
HUGOTON ENERGY CORPORATION CHESAPEAKE ENERGY CORPORATION
By: /s/ Floyd C. Wilson By: /s/ Aubrey K. McClendon
------------------------------ -------------------------------
President and Chief Executive Chairman of the Board and Chief
Officer Executive Officer
"Sub"
CHESAPEAKE ACQUISITION CORP.
By: /s/ Aubrey K. McClendon
---------------------------
Chief Executive Officer
63
<PAGE> 145
ANNEX A
TO AGREEMENT AND
PLAN OF MERGER
AGREEMENT AND LIMITED IRREVOCABLE PROXY
This Agreement and Irrevocable Proxy, dated as of November 12, 1997
(the "Agreement"), is by and between Chesapeake Energy Corporation, an Oklahoma
corporation ("Chesapeake"), and the party identified as the "Stockholder" on the
signature page hereof (the "Stockholder").
R E C I T A L S:
WHEREAS, Chesapeake Acquisition Corp., a wholly owned subsidiary of
Chesapeake ("Merger Sub"), and Hugoton Energy Corporation, a Kansas corporation
("Hugoton") propose to enter into an Agreement and Plan of Merger, dated as of
the date hereof (the "Merger Agreement"), providing, among other things, for the
merger of Merger Sub with and into Hugoton in accordance with the terms and
provisions of, and subject to the conditions set forth in, the Merger Agreement
(the "Merger"); and
WHEREAS, the Stockholder is the owner, beneficially and of record, of
the number of shares of Hugoton Common Stock (the "Shares") identified on the
signature page of this Agreement; and
WHEREAS, the Stockholder has agreed to vote the Shares in favor of the
Merger Agreement and the consummation of the Merger at the Hugoton Special
Meeting;
NOW, THEREFORE, to induce Chesapeake and Merger Sub to enter into the
Merger Agreement and in consideration of the aforesaid and the representations,
warranties, covenants and agreements set forth herein and in the Merger
Agreement, including the benefits that the parties hereto expect to derive from
the Merger, the receipt and sufficiency of all of which are hereby acknowledged
by the parties, the parties hereto agree as follows:
1. Revocation of Prior Proxies. The Stockholder hereby revokes all
previous proxies granted with respect to any of the Shares owned by the
Stockholder that would conflict with the terms of the Proxy granted hereby.
2. Grant of Limited Irrevocable Proxy. The Stockholder hereby
irrevocably constitutes and appoints Chesapeake and Aubrey K. McClendon,
Chairman of the Board and Chief Executive Officer of Chesapeake, Tom L.
Ward, President and Chief Operating Officer of Chesapeake and Marcus C.
Rowland, Vice President - Finance and Chief Financial Officer of
Chesapeake, in their respective capacities as officers of Chesapeake, and
any individual, who shall hereafter succeed to the office of Chairman of
the Board and Chief Executive Officer, President or Chief Financial
Officer, respectively, of Chesapeake, and each of them
<PAGE> 146
individually, as its true and lawful proxy and attorney-in-fact, with full
power of substitution, for and in the name, place and stead of the
Stockholder, to call and attend any and all meetings of Hugoton's
stockholders, including the Hugoton Special Meeting, at which the Merger
Agreement or the Merger are to be considered and voted upon by Hugoton's
stockholders, and any adjournments thereof, to execute any and all written
consents of stockholders of Hugoton and to vote all of the Shares and any
and all shares of any other class of capital stock of Hugoton presently or
at any future time owned beneficially or of record by the Stockholder ,
including any and all securities having voting rights issued or issuable in
respect thereof, which the Stockholder is entitled to vote other than as
set forth on Exhibit A hereto (all of the foregoing being collectively
referred to as the "Subject Stock"), and to represent and otherwise act as
the Stockholder could act, in the same manner and with the same effect as
if the Stockholder were personally present, at any such annual, special or
other meeting of the stockholders of Hugoton (including the Hugoton Special
Meeting), and at any adjournment thereof (a "Meeting"), or pursuant to any
written consent in lieu of meeting or otherwise; provided, however, that
any such vote or consent in lieu thereof or any other action so taken shall
be solely for the purposes of voting in favor of the Merger and the Merger
Agreement and any transactions contemplated thereby. Such attorneys and
proxies are hereby authorized to vote the Subject Stock in accordance with
the terms of the Proxy contemplated hereby.
3. Vote in Favor of Merger and Merger Agreement. If Chesapeake is
unable or declines to exercise the power and authority granted by the Proxy
for any reason, the Stockholder covenants and agrees to vote all the
Subject Stock in favor of approval of the Merger and the Merger Agreement
at any Meeting at which such matters are considered and voted upon and,
upon request of Chesapeake, to provide the Stockholder's written consent
thereto.
4. No Action Without Chesapeake's Consent. The Stockholder hereby
covenants and agrees that it will not vote or take any action by written
consent of stockholders in lieu of meeting on any matter that is subject to
the Proxy without Chesapeake's prior written consent.
5. Negative Covenants of the Stockholder. Except to the extent
contemplated herein or in the Merger Agreement, the Stockholder hereby
covenants and agrees that the Stockholder will not, and will not agree to,
directly or indirectly, (a) sell, transfer, assign, cause to be redeemed or
otherwise dispose of any of the Subject Stock or enter into any contract,
option or other agreement or understanding with respect to the sale,
transfer, assignment, redemption or other disposition of any Subject Stock;
or (b) grant any proxy, power-of-attorney or other authorization or
interest in or with respect to such Subject Stock pertaining or relating to
the Merger Agreement, the Merger or any of the transactions contemplated
thereby; or (c) deposit such Subject Stock into a voting trust or enter
into a voting agreement or arrangement with respect to such Subject Stock,
unless and until, in the case of (a), (b) or (c) above, the Stockholder
shall have taken all actions (including, without
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<PAGE> 147
limitation, the endorsement of a legend on the certificates evidencing such
Subject Stock) reasonably necessary to ensure that such Subject Stock shall
at all times be subject to all the rights, powers and privileges granted or
conferred, and subject to all the restrictions, covenants and limitations
imposed, by this Agreement and shall have caused any transferee of any of
the Subject Stock to execute and deliver to Chesapeake, an Agreement and
Irrevocable Proxy, in substantially the form of this Agreement with respect
to the Subject Stock. Nothing contained herein shall be construed in any
way as (a) affecting the right of the Stockholder to grant a security
interest, by way of pledge, by hypothecation or otherwise, in the Subject
Stock in connection with bona fide credit arrangements or as requiring the
lender in such bona fide credit arrangement, including any lender involved
in the agreements described in Exhibit A, to be bound by the terms of this
Agreement, provided that the Stockholder shall promptly notify Chesapeake
of any such grant or (b) imposing any liability or obligation upon the
Stockholder if any such lender forecloses any such security interest or
sells the shares of Subject Stock in respect of which such foreclosure
occurs.
6. Stockholder's Representations and Warranties. The Stockholder
represents and warrants to Chesapeake that (a) the Stockholder has duly
authorized, executed and delivered this Agreement and this Agreement
constitutes a valid and binding agreement, enforceable in accordance with
its terms and neither the execution and delivery of this Agreement nor the
consummation by the Stockholder of the transactions contemplated hereby
will constitute a violation of, a default under, or conflict with any
contract, commitment, agreement, understanding, arrangement or restriction
of any kind to which the Stockholder is a party or by which the Stockholder
is bound; or (b) consummation by the Stockholder of the transactions
contemplated hereby will not violate, or require any consent, approval, or
notice under, any provision of law other than filing on Form 13D that may
be required under the Securities Exchange Act of 1934, as amended; (c)
except to the extent contemplated herein and except as described in the
final sentence of this Section 6, the Subject Stock and the certificates
representing same are now and at all times during the term of this
Agreement will be held by the Stockholder, or by a nominee or custodian for
the benefit of the Stockholder, free and clear of all liens, claims,
security interests, proxies, voting trusts or agreement or any other
encumbrances whatsoever ("Encumbrances") with respect to the ownership or
voting of the Subject Stock or otherwise, other than Encumbrances created
by or arising pursuant to this Agreement and other than as set forth on
Exhibit A; and there are no outstanding options, warrants or rights to
purchase or acquire, or proxies, powers-of-attorney, voting agreements,
trust agreements or other agreements relating to, the Subject Stock other
than this Agreement; (d) except as set forth on Exhibit A, such Subject
Stock constitutes all of the securities of Hugoton owned beneficially or of
record by the Stockholder on the date hereof; and (e) the Stockholder has
the present power and right to vote all of the Subject Stock as
contemplated herein. The Stockholder hereby advises Chesapeake that the
only agreements or arrangements pursuant to which the Shares are pledged as
security are described on Exhibit A, and that no default, event of default,
or event of acceleration has occurred under any of such agreements or
arrangements.
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<PAGE> 148
7. Certain Defined Terms. Unless otherwise expressly provided herein,
all capitalized terms used herein without definition shall have the
meanings assigned to them in the Merger Agreement.
8. Choice of Law. The terms and provisions of this Agreement shall be
governed by and construed in accordance with the laws of the State of
Oklahoma without giving effect to the provisions thereof relating to
conflicts of law.
9. Binding Effect; Assignability. The terms and provisions of this
Agreement shall be binding upon, inure to the benefit of, and be
enforceable by the successors and permitted assigns of the parties hereto.
This Agreement and the rights hereunder may not be assigned or transferred
by Chesapeake, except with the prior written consent of the Stockholder.
10. Term. This Agreement shall terminate at the earlier of (i) the
Effective Time, (ii) the termination of the Merger Agreement in accordance
with its terms or (iii) upon written notice of termination of this
Agreement given by Chesapeake to the Stockholder expressly referring to
this paragraph.
11. Irrevocable Proxy Coupled with an Interest. The Stockholder
acknowledges that Chesapeake will enter into the Merger Agreement in
reliance upon this Agreement, including the Proxy, and that the Proxy is
granted in consideration for the execution and delivery of the Merger
Agreement by Chesapeake. THE STOCKHOLDER AGREES THAT THE PROXY AND ALL
OTHER POWER AND AUTHORITY INTENDED TO BE CONFERRED HEREBY IS COUPLED WITH
AN INTEREST SUFFICIENT IN LAW TO SUPPORT AN IRREVOCABLE POWER AND, EXCEPT
AS PROVIDED IN SECTION 10 ABOVE, SHALL NOT BE TERMINATED BY ANY ACT OF THE
STOCKHOLDER BY LACK OF APPROPRIATE POWER OR AUTHORITY OR BY THE OCCURRENCE
OF ANY OTHER EVENT OR EVENTS.
12. Specific Performance. The parties acknowledge and agree that
performance of their respective obligations hereunder will confer a unique
benefit on the other and that a failure of performance will result in
irreparable harm to the other and will not be compensable by money damages.
The parties therefore agree that this Agreement, including the Proxy, shall
be specifically enforceable and that specific enforcement and injunctive
relief shall be a remedy properly available to Chesapeake and the
Stockholder for any breach of any agreement, covenant or representation of
the other hereunder.
13. Further Assurance. The Stockholder will, upon request, execute and
deliver any additional documents and take such further actions as may
reasonably be deemed by Chesapeake or its counsel to be necessary or
desirable to carry out the provisions hereof.
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<PAGE> 149
14. Severability. If any term, provision, covenant or restriction of
this Agreement, or the application thereof to any circumstance shall, to
any extent, be held by a court of competent jurisdiction to be invalid,
void or unenforceable, the remainder of the terms, provisions, covenants
and restrictions of this Agreement or the application thereof to any other
circumstance, shall remain in full force and effect, shall not in any way
be affected, impaired or invalidated and shall be enforced to the fullest
extent permitted by law.
15. Counterparts. This Agreement may be executed in counterparts, each
of which shall be deemed to be an original but all of which together shall
constitute one and the same document.
16. Notice. All notices, requests, claims, demands and other
communications under this Agreement shall be in writing and shall be deemed
given if delivered personally or sent by overnight courier (providing proof
of delivery) to the parties at the following addresses (or such other
address for a party as shall be specified by like notice): (i) if to
Chesapeake, to the address set forth in Section 8.3 of the Merger
Agreement; and (ii) if to a Stockholder, to the address set forth on the
signature page hereof, or such other address as may be specified in writing
by such Stockholder.
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<PAGE> 150
IN WITNESS WHEREOF, Chesapeake and the Stockholder have duly executed
this Agreement or caused this Agreement to be duly executed as of the date first
set forth above.
STOCKHOLDER
[NAME]
---------------------------------------------
Shares Owned:
______ shares of Hugoton Common Stock
Address:
---------------------------------------------
---------------------------------------------
---------------------------------------------
CHESAPEAKE ENERGY CORPORATION
By:
-----------------------------------------
Aubrey K. McClendon
Chairman of the Board and Chief Executive
Officer
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<PAGE> 151
ANNEX B
TO AGREEMENT AND
PLAN OF MERGER
AGREEMENT AND LIMITED IRREVOCABLE PROXY
This Agreement and Irrevocable Proxy, dated as of November 12, 1997
(the "Agreement"), is by and between Hugoton Energy Corporation, a Kansas
corporation ("Hugoton"), and the party identified as the "Stockholder" on the
signature page hereof (the "Stockholder").
R E C I T A L S:
WHEREAS, Chesapeake Energy Corporation, an Oklahoma corporation
("Chesapeake"), Chesapeake Acquisition Corp., a wholly owned subsidiary of
Chesapeake ("Merger Sub"), and Hugoton propose to enter into an Agreement and
Plan of Merger, dated as of the date hereof (the "Merger Agreement"), providing,
among other things, for the merger of Merger Sub with and into Hugoton in
accordance with the terms and provisions of, and subject to the conditions set
forth in, the Merger Agreement (the "Merger"); and
WHEREAS, the Stockholder is the owner, beneficially and of record, of
the number of shares of Chesapeake Common Stock (the "Shares") identified on the
signature page of this Agreement; and
WHEREAS, the Stockholder has agreed to vote the Shares in favor of the
Merger Agreement and the consummation of the Merger at the Chesapeake Special
Meeting;
NOW, THEREFORE, to induce Hugoton to enter into the Merger Agreement
and in consideration of the aforesaid and the representations, warranties,
covenants and agreements set forth herein and in the Merger Agreement, including
the benefits that the parties hereto expect to derive from the Merger, the
receipt and sufficiency of all of which are hereby acknowledged by the parties,
the parties hereto agree as follows:
1. Revocation of Prior Proxies. The Stockholder hereby revokes all
previous proxies granted with respect to any of the Shares owned by the
Stockholder that would conflict with the terms of the Proxy granted hereby.
2. Grant of Limited Irrevocable Proxy. The Stockholder hereby
irrevocably constitutes and appoints Hugoton and Floyd C. Wilson, President
and Chief Executive Officer and W. Mark Womble, Chief Financial Officer and
Vice President in their respective capacities as officers of Hugoton, and
any individual, who shall hereafter succeed to the office of President and
Chief Executive Officer or Chief Financial Officer and Vice President,
respectively, of Hugoton, and each of them individually, as its true and
lawful proxy and attorney-in-fact, with full power of substitution, for and
in the name, place and stead of the Stockholder, to call and attend any and
all meetings of Chesapeake's
<PAGE> 152
stockholders, including the Chesapeake Special Meeting, at which the Merger
Agreement or the Merger are to be considered and voted upon by Chesapeake's
stockholders, and any adjournments thereof, to execute any and all written
consents of stockholders of Chesapeake and to vote all of the Shares and
any and all shares of any other class of capital stock of Chesapeake
presently or at any future time owned beneficially or of record by the
Stockholder, including any and all securities having voting rights issued
or issuable in respect thereof, which the Stockholder is entitled to vote
other than as set forth on Exhibit A hereto (all of the foregoing being
collectively referred to as the "Subject Stock"), and to represent and
otherwise act as the Stockholder could act, in the same manner and with the
same effect as if the Stockholder were personally present, at any such
annual, special or other meeting of the stockholders of Chesapeake
(including the Chesapeake Special Meeting), and at any adjournment thereof
(a "Meeting"), or pursuant to any written consent in lieu of meeting or
otherwise; provided, however, that any such vote or consent in lieu thereof
or any other action so taken shall be solely for the purposes of voting in
favor of the Merger and the Merger Agreement and any transactions
contemplated thereby. Such attorneys and proxies are hereby authorized to
vote the Subject Stock in accordance with the terms of the Proxy
contemplated hereby.
3. Vote in Favor of Merger and Merger Agreement. If Hugoton is unable
or declines to exercise the power and authority granted by the Proxy for
any reason, the Stockholder covenants and agrees to vote all the Subject
Stock in favor of approval of the Merger and the Merger Agreement at any
Meeting at which such matters are considered and voted upon and, upon
request of Hugoton, to provide the Stockholder's written consent thereto.
In addition to the Proxy granted herein, the Stockholder hereby agrees that
it will vote the Subject Stock at Chesapeake's 1997 Annual Stockholders'
Meeting (scheduled for December 12, 1997) for approval on an amendment to
Chesapeake's certificate of incorporation to increase to 250,000,000 the
number of shares of authorized Chesapeake Common Stock.
4. No Action Without Hugoton's Consent. The Stockholder hereby
covenants and agrees that it will not vote or take any action by written
consent of stockholders in lieu of meeting on any matter that is subject to
the Proxy without Hugoton's prior written consent.
5. Negative Covenants of the Stockholder. Except to the extent
contemplated herein or in the Merger Agreement, the Stockholder hereby
covenants and agrees that the Stockholder will not, and will not agree to,
directly or indirectly, (a) sell, transfer, assign, cause to be redeemed or
otherwise dispose of any of the Subject Stock or enter into any contract,
option or other agreement or understanding with respect to the sale,
transfer, assignment, redemption or other disposition of any Subject Stock;
or (b) grant any proxy, power-of-attorney or other authorization or
interest in or with respect to such Subject Stock pertaining or relating to
the Merger Agreement, the Merger or any of the transactions contemplated
thereby; or (c) deposit such Subject Stock into a
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voting trust or enter into a voting agreement or arrangement with respect
to such Subject Stock, unless and until, in the case of (a), (b) or (c)
above, the Stockholder shall have taken all actions (including, without
limitation, the endorsement of a legend on the certificates evidencing such
Subject Stock) reasonably necessary to ensure that such Subject Stock shall
at all times be subject to all the rights, powers and privileges granted or
conferred, and subject to all the restrictions, covenants and limitations
imposed, by this Agreement and shall have caused any transferee of any of
the Subject Stock to execute and deliver to Hugoton, an Agreement and
Irrevocable Proxy, in substantially the form of this Agreement with respect
to the Subject Stock. Nothing contained herein shall be construed in any
way as (a) affecting the right of the Stockholder to grant a security
interest, by way of pledge, by hypothecation or otherwise, in the Subject
Stock in connection with bona fide credit arrangements or as requiring the
lender in such bona fide credit arrangement, including any lender involved
in the agreements described in Exhibit A, to be bound by the terms of this
Agreement, provided that the Stockholder shall promptly notify Hugoton of
any such grant or (b) imposing any liability or obligation upon the
Stockholder if any such lender forecloses any such security interest or
sells the shares of Subject Stock in respect of which such foreclosure
occurs.
6. Stockholder's Representations and Warranties. The Stockholder
represents and warrants to Hugoton that (a) the Stockholder has duly
authorized, executed and delivered this Agreement and this Agreement
constitutes a valid and binding agreement, enforceable in accordance with
its terms and neither the execution and delivery of this Agreement nor the
consummation by the Stockholder of the transactions contemplated hereby
will constitute a violation of, a default under, or conflict with any
contract, commitment, agreement, understanding, arrangement or restriction
of any kind to which the Stockholder is a party or by which the Stockholder
is bound; or (b) consummation by the Stockholder of the transactions
contemplated hereby will not violate, or require any consent, approval, or
notice under, any provision of law other than filing on Form 13D that may
be required under the Securities Exchange Act of 1934, as amended; (c)
except to the extent contemplated herein and except as described in the
final sentence of this Section 6, the Subject Stock and the certificates
representing same are now and at all times during the term of this
Agreement will be held by the Stockholder, or by a nominee or custodian for
the benefit of the Stockholder, free and clear of all liens, claims,
security interests, proxies, voting trusts or agreement or any other
encumbrances whatsoever ("Encumbrances") with respect to the ownership or
voting of the Subject Stock or otherwise, other than Encumbrances created
by or arising pursuant to this Agreement and other than as set forth on
Exhibit A; and there are no outstanding options, warrants or rights to
purchase or acquire, or proxies, powers-of-attorney, voting agreements,
trust agreements or other agreements relating to, the Subject Stock other
than this Agreement; (d) except as set forth on Exhibit A, such Subject
Stock constitutes all of the securities of Chesapeake owned beneficially or
of record by the Stockholder on the date hereof; and (e) the Stockholder
has the present power and right to vote all of the Subject Stock as
contemplated herein. The Stockholder hereby advises Chesapeake that the
only agreements or arrangements pursuant to which the Shares are pledged as
security are
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<PAGE> 154
described on Exhibit A, and that no default, event of default, or event of
acceleration has occurred under any of such agreements or arrangements.
7. Certain Defined Terms. Unless otherwise expressly provided herein,
all capitalized terms used herein without definition shall have the
meanings assigned to them in the Merger Agreement.
8. Choice of Law. The terms and provisions of this Agreement shall be
governed by and construed in accordance with the laws of the State of
Oklahoma without giving effect to the provisions thereof relating to
conflicts of law.
9. Binding Effect; Assignability. The terms and provisions of this
Agreement shall be binding upon, inure to the benefit of, and be
enforceable by the successors and permitted assigns of the parties hereto.
This Agreement and the rights hereunder may not be assigned or transferred
by Hugoton, except with the prior written consent of the Stockholder.
10. Term. This Agreement shall terminate at the earlier of (i) the
Effective Time, (ii) the termination of the Merger Agreement in accordance
with its terms or (iii) upon written notice of termination of this
Agreement given by Hugoton to the Stockholder expressly referring to this
paragraph.
11. Irrevocable Proxy Coupled with an Interest. The Stockholder
acknowledges that Hugoton will enter into the Merger Agreement in reliance
upon this Agreement, including the Proxy, and that the Proxy is granted in
consideration for the execution and delivery of the Merger Agreement by
Hugoton. THE STOCKHOLDER AGREES THAT THE PROXY AND ALL OTHER POWER AND
AUTHORITY INTENDED TO BE CONFERRED HEREBY IS COUPLED WITH AN INTEREST
SUFFICIENT IN LAW TO SUPPORT AN IRREVOCABLE POWER AND, EXCEPT AS PROVIDED
IN SECTION 10 ABOVE, SHALL NOT BE TERMINATED BY ANY ACT OF THE STOCKHOLDER
BY LACK OF APPROPRIATE POWER OR AUTHORITY OR BY THE OCCURRENCE OF ANY OTHER
EVENT OR EVENTS.
12. Specific Performance. The parties acknowledge and agree that
performance of their respective obligations hereunder will confer a unique
benefit on the other and that a failure of performance will result in
irreparable harm to the other and will not be compensable by money damages.
The parties therefore agree that this Agreement, including the Proxy, shall
be specifically enforceable and that specific enforcement and injunctive
relief shall be a remedy properly available to Hugoton and the Stockholder
for any breach of any agreement, covenant or representation of the other
hereunder.
13. Further Assurance. The Stockholder will, upon request, execute and
deliver any additional documents and take such further actions as may
reasonably be deemed by Hugoton or its counsel to be necessary or desirable
to carry out the provisions hereof.
-4-
<PAGE> 155
14. Severability. If any term, provision, covenant or restriction of
this Agreement, or the application thereof to any circumstance shall, to
any extent, be held by a court of competent jurisdiction to be invalid,
void or unenforceable, the remainder of the terms, provisions, covenants
and restrictions of this Agreement or the application thereof to any other
circumstance, shall remain in full force and effect, shall not in any way
be affected, impaired or invalidated and shall be enforced to the fullest
extent permitted by law.
15. Counterparts. This Agreement may be executed in counterparts, each
of which shall be deemed to be an original but all of which together shall
constitute one and the same document.
16. Notice. All notices, requests, claims, demands and other
communications under this Agreement shall be in writing and shall be deemed
given if delivered personally or sent by overnight courier (providing proof
of delivery) to the parties at the following addresses (or such other
address for a party as shall be specified by like notice): (i) if to
Hugoton, to the address set forth in Section 8.3 of the Merger Agreement;
and (ii) if to a Stockholder, to the address set forth on the signature
page hereof, or such other address as may be specified in writing by such
Stockholder.
-5-
<PAGE> 156
IN WITNESS WHEREOF, Hugoton and the Stockholder have duly executed this
Agreement or caused this Agreement to be duly executed as of the date first set
forth above.
STOCKHOLDER
[NAME]
---------------------------------------------
Shares Owned:
______ shares of Chesapeake Common Stock
Address:
---------------------------------------------
---------------------------------------------
---------------------------------------------
HUGOTON ENERGY CORPORATION
By:
----------------------------------------
Name: Floyd C. Wilson
Title: Chairman of the Board, President
and Chief Executive Officer
-6-
<PAGE> 157
ANNEX C TO THE
AGREEMENT AND PLAN OF MERGER
FORM OF AFFILIATE LETTER FOR
AFFILIATES OF HUGOTON ENERGY CORPORATION
[DATE]
CHESAPEAKE ENERGY CORPORATION
6100 North Western Avenue
Oklahoma City, OK 73118
Ladies and Gentlemen:
I have been advised that as of the date of this letter I may be deemed
to be an "affiliate" of Hugoton Energy Corporation, a Kansas corporation
("Hugoton"), as the term "Affiliate" is defined for purposes of paragraphs (c)
and (d) of Rule 145 of the rules and regulations (the "Rules And Regulations")
of the Securities and Exchange Commission (the "Commission") under the
Securities Act of 1933, as amended (the "Act"). Pursuant to the terms of the
Agreement and Plan of Merger dated as of November 12, 1997 (the "Merger
Agreement") among Chesapeake Energy Corporation, an Oklahoma corporation
("Chesapeake"), Chesapeake Acquisition Corp., a Kansas corporation ("Merger
Sub"), and Hugoton, Merger Sub will be merged with and into Hugoton (the
"Merger"). Capitalized terms used in this letter without definition shall have
the meanings assigned to them in the Merger Agreement.
As a result of the Merger, I may receive shares of common stock, par
value $0.01 per share, of Chesapeake ("Chesapeake Common Stock"). I would
receive such Chesapeake Common Stock (the "Shares") in exchange for shares (or
upon exercise of options for shares) owned by me of common stock, no par value,
of Hugoton ("Hugoton Common Stock").
1. I represent, warrant and covenant to Chesapeake that in the event I
receive any Shares as a result of the Merger:
A. I shall not make any sale, transfer or other disposition of the
Shares in violation of the Act or the Rules and Regulations.
B. I have carefully read this letter and the Merger Agreement and
discussed the requirements of such documents and other applicable limitations
upon my ability to sell, transfer or otherwise dispose of the Shares, to the
extent I felt necessary, with my counsel or counsel for Hugoton.
C. I have been advised that the issuance of the Shares to me pursuant
to the Merger has been registered with the Commission under the Act on a
Registration Statement on Form S-4. However, I have also been advised that,
because at the time the Merger is submitted for a vote of the stockholders of
Hugoton, (a) I may be deemed to be an affiliate of Hugoton and (b) distribution
by me of the Chesapeake Common Stock has not been registered under the Act, I
may not sell, transfer or otherwise dispose of the Chesapeake Common Stock
issued to me in the Merger unless (i) such sale, transfer or other disposition
is made in conformity with the volume and other limitations of Rule 145
promulgated by the Commission under the Act, (ii) such sale, transfer
<PAGE> 158
or other disposition has been registered under the Act or (iii) in the opinion
of counsel reasonably acceptable to Chesapeake, such sale, transfer or other
disposition is otherwise exempt from registration under the Act.
D. Except as provided in paragraph C, I understand that Chesapeake is
under no obligation to register the sale, transfer or other disposition of the
Shares by me or on my behalf under the Act or, except as provided in paragraph
2(A) below, to take any other action necessary in order to make compliance with
an exemption from such registration available.
E. I understand that there will be placed on the certificates for the
Shares issued to me, or any substitutions therefor, a legend stating in
substance:
"THE SHARES REPRESENTED BY THIS CERTIFICATE WERE ISSUED IN A TRANSACTION TO
WHICH RULE 145 PROMULGATED UNDER THE SECURITIES ACT OF 1933 APPLIES. THE
SHARES REPRESENTED BY THIS CERTIFICATE MAY ONLY BE TRANSFERRED IN
ACCORDANCE WITH THE TERMS OF AN AGREEMENT DATED , 1997 BETWEEN THE
REGISTERED HOLDER HEREOF AND CHESAPEAKE ENERGY CORPORATION, A COPY OF WHICH
AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICES OF CHESAPEAKE ENERGY
CORPORATION."
F. I understand that unless a sale or transfer is made in conformity
with the provisions of Rule 145, or pursuant to a registration statement,
Chesapeake reserves the right to put the following legend on the certificates
issued to my transferee:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933 AND WERE ACQUIRED FROM A PERSON WHO RECEIVED
SUCH SHARES IN A TRANSACTION TO WHICH RULE 145 PROMULGATED UNDER THE
SECURITIES ACT OF 1933 APPLIES. THE SHARES HAVE BEEN ACQUIRED BY THE HOLDER
NOT WITH A VIEW TO, OR FOR RESALE IN CONNECTION WITH, ANY DISTRIBUTION
THEREOF WITHIN THE MEANING OF THE SECURITIES ACT OF 1933 AND MAY NOT BE
SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT IN ACCORDANCE WITH AN
EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OF
1933."
G. I further represent to and covenant with Chesapeake that from the
date that is 30 days prior to the Effective Time (as defined in the Merger
Agreement) the undersigned will not sell, transfer or otherwise dispose of
shares of Company Stock held by the undersigned and that the undersigned will
not sell, transfer or otherwise dispose of any shares of Chesapeake Common Stock
received by the undersigned in the Merger or other shares of Chesapeake Common
Stock until after such time as results covering at least 30 days of combined
operations of Chesapeake and Hugoton have been published by Chesapeake, in the
form of a quarterly earnings report, an effective registration statement filed
with the Commission, a report to the Commission on Form 10-K, 10-Q or 8-K, or
any other public filing or announcement which includes the results of at least
30 days of combined operations. Chesapeake shall notify the undersigned of the
publication of such results. Notwithstanding the above, if Chesapeake and
Hugoton have made a decision that this transaction
<PAGE> 159
will not be treated as a "pooling of interests" or the Commission has not
approved pooling of interests treatment for the transaction, the provisions of
this paragraph G shall not apply.
H. Execution of this letter should not be considered an admission on
my part that I am an "affiliate" of Hugoton as described in the first paragraph
of this letter, nor as a waiver of any rights I may have to object to any claim
that I am such an affiliate on or after the date of this letter.
2. By Chesapeake's acceptance of this letter, Chesapeake hereby agrees
with me as follows:
A. For so long as and to the extent necessary to permit me to sell the
Shares pursuant to Rule 145 and, to the extent applicable, Rule 144 under the
Act, Chesapeake shall (a) use its reasonable efforts to (i) file, on a timely
basis, all reports and data required to be filed with the Commission by it
pursuant to Section 13 of the Securities Exchange Act of 1934, as amended (the
"1934 Act"), and (ii) furnish to me upon request a written statement as to
whether Chesapeake has complied with such reporting requirements during the 12
months preceding any proposed sale of the Chesapeake Common Stock by me under
Rule 145, and ( b) otherwise use its reasonable efforts to permit such sales
pursuant to Rule 145 and Rule 144. Chesapeake hereby represents to me that it
has filed all reports required to be filed with the Commission under Section 13
of the 1934 Act during the preceding 12 months.
B. It is understood and agreed that certificates with the legends set
forth in paragraphs E and F above will be substituted by delivery of
certificates without such legend if (i) one year shall have elapsed from the
date the undersigned acquired the Chesapeake Common Stock received in the Merger
and the provisions of Rule 145(d)(2) are then available to the undersigned, (ii)
two years shall have elapsed from the date the undersigned acquired the
Chesapeake Common Stock received in the Merger and the provisions of Rule
145(d)(3) are then applicable to the undersigned, or (iii) Chesapeake has
received either an opinion of counsel, which opinion and counsel shall be
reasonably satisfactory to Chesapeake, or a "no action" letter obtained by the
undersigned from the staff of the Commission, to the effect that the
restrictions imposed by Rule 145 under the Act no longer apply to the
undersigned.
Very truly yours,
Name:
----------------------------------
Agreed and accepted this ____ day of
____________, 199_, by
CHESAPEAKE ENERGY CORPORATION
By:
-------------------------
Name:
Title:
<PAGE> 160
ANNEX D
TO AGREEMENT AND
PLAN OF MERGER
Registration Rights Agreement
as amended by, and included
herein as Exhibit A to, Amendment No. 1
to Agreement and Plan of Merger
<PAGE> 161
AMENDMENT NO. 1
TO
AGREEMENT AND PLAN OF MERGER
This Amendment No. 1 to the Agreement and Plan of Merger ("Amendment No.
1") is made and entered this 9th day of February 1998 by and among Chesapeake
Energy Corporation, an Oklahoma corporation ("Parent"), Chesapeake Acquisition
Corp., a Kansas corporation and an indirect wholly owned subsidiary of Parent
("Sub"), and Hugoton Energy Corporation, a Kansas corporation ("Hugoton").
RECITALS
WHEREAS, Parent, Sub and Hugoton have previously entered into an
Agreement and Plan of Merger dated as of November 12, 1997 (the "Merger
Agreement") relating to the merger of Hugoton with and into Sub; and
WHEREAS, the parties hereto have agreed to alter the structure of the
merger to provide for the merger of Sub, as an indirect wholly owned subsidiary
of Parent, with and into Hugoton, with Hugoton as the surviving corporation;
and
WHEREAS, Parent and Hugoton have agreed to use the purchase accounting
method instead of treating the merger as a "pooling of interests" for
accounting purposes; and
WHEREAS, on October 22, 1997, Parent, Chesapeake Merger Corp., an
Oklahoma corporation and an indirect wholly owned subsidiary of Parent ("DLB
Merger Sub"), and DLB Oil & Gas, Inc., an Oklahoma corporation ("DLB"), entered
into an Agreement and Plan of Merger dated as of October 22, 1997, providing
for the merger (the "DLB Merger") of DLB Merger Sub with and into DLB, as
amended on December 22, 1997 to provide for the spin-off of the shares of WRT
Energy Corporation owned by DLB immediately prior to the effective time of the
DLB Merger, and as further amended on February 9, 1998 to change the
consideration to be paid by Parent to DLB to $17.5 million in cash and
5,000,000 shares of Parent common stock in exchange for the oil and gas assets
of DLB, but excluding DLB's Barbados properties; and
WHEREAS, Parent, Sub and Hugoton desire to amend the Merger Agreement as
set forth below.
NOW, THEREFORE, in consideration of the premises and the
representations, warranties, covenants and agreements contained herein and in
the Merger Agreement, the parties hereto, intending to be legally bound, agree
as follows:
<PAGE> 162
1. The Preamble of the Merger Agreement shall be
amended in its entirety to read as follows:
This Agreement and Plan of Merger (the "Agreement") is made and
entered into this 12th day of November, 1997, by and among Chesapeake
Energy Corporation, an Oklahoma corporation ("Parent"), Chesapeake
Acquisition Corp., a Kansas corporation and an indirect wholly owned
subsidiary of Parent ("Sub"), and Hugoton Energy Corporation, a Kansas
corporation ("Hugoton").
2. The first and third Recitals shall be amended in
their entirety to read as follows:
WHEREAS, the board of directors of each of Parent, Sub and
Hugoton has determined that it is in the best interest of its respective
stockholders for Parent to acquire Hugoton by means of the merger of Sub
with and into Hugoton upon the terms and subject to the conditions set
forth in this Agreement; and
WHEREAS, for accounting purposes it is intended that such merger
be accounted for as a purchase business combination; and
3. The eighth Recital shall be deleted in its
entirety.
4. The following definition in Article I shall be
amended as follows:
"DLB Merger Agreement" means the Agreement and Plan of Merger
dated as of October 22, 1997, as amended by Amendment No. 1 dated as of
December 22, 1997 and Amendment No. 2 dated as of February 9, 1998, by
and among Parent, Chesapeake Merger Corp. and DLB Oil & Gas, Inc.
5. SECTION 2.1 of the Merger Agreement shall be
amended in its entirety to read as follows:
2.1 The Merger. Subject to the terms and conditions set forth
in this Agreement, at the Effective Time, Sub shall be merged with and
into Hugoton in accordance with the provisions of this Agreement and the
KCL. Such merger is referred to herein as the "Merger."
6. SECTION 2.2 of the Merger Agreement shall be
amended in its entirety to read as follows:
2.2 Effect of the Merger. Upon the effectiveness of the
Merger, the separate existence of Sub shall cease and Hugoton, as the
Surviving Corporation in the Merger (the "Surviving Corporation"), shall
continue its corporate existence under the laws of the State of Kansas.
The Merger shall have the effects specified in the KCL.
<PAGE> 163
7. SECTION 2.4(b)(iii) of the Merger Agreement shall
be amended in its entirety to read as follows:
2.4(b)(iii) Hugoton Stock Options. Section 2.4(b)(iii) of the
Hugoton Disclosure Schedule lists each Hugoton Stock Option Plans and
Agreements (collectively, the "Hugoton Plans") and identifies the number
of options under each of the Hugoton Plans and the exercise prices
thereof. Each Hugoton Plan and all such options which are outstanding
immediately prior to the Effective Date (each, a "Hugoton Option" and
collectively, the "Hugoton Options"), shall be assumed by Parent at the
Effective Time subject to receipt by Parent of the consents required, if
any, under the Hugoton Plans, and each such Hugoton Option shall be
fully vested and exercisable and shall become an option to purchase a
number of shares of Parent Common Stock (a "Substitute Option") equal to
the number of shares of Hugoton Common Stock subject to purchase
pursuant to such Hugoton Option multiplied by 1.3 (rounded to the
nearest whole share). The per share exercise price for each Substitute
Option shall be the current exercise price per share of Hugoton Common
Stock divided by 1.3 (rounded to the nearest full cent), and each
Substitute Option otherwise shall be subject to all of the other terms
and conditions of the original Hugoton Option to which it relates. From
and after the Effective Time, a Hugoton Option shall represent only the
right to purchase, upon exercise, shares of Parent Common Stock. As
soon as reasonably practicable after the Effective Time, Parent shall
cause to be included under a registration statement on Form S-8 of
Parent all shares of Parent Common Stock which are subject to Substitute
Options, and shall maintain the effectiveness of such registration
statement until all Substitute Options have been exercised, expired or
forfeited. The parties hereto acknowledge and agree that as of the
Effective Date all outstanding options under the Hugoton Stock Option
Plans and Agreements are automatically vested and exercisable. The
parties hereto agree and acknowledge that at the Effective Time, the
Parent will assume all of Hugoton's rights and responsibilities under
that certain Agreement Regarding Options dated November 23, 1993, by and
between Hugoton and Floyd C. Wilson and recognize that Floyd C. Wilson
has consented to such assumption and to the Merger as it affects the
terms and provisions of such Agreement Regarding Options."
8. Section 2.4(b)(iii) of the Hugoton Disclosure
Schedule shall be updated to reflect the amendment to Section 2.4(b)(iii) of
the Merger Agreement.
9. SECTION 3.31 of the Merger Agreement shall be
amended in its entirety to read as follows:
3.31 Purchase Accounting; Tax Treatment. Hugoton intends that
the Merger be accounted for under the purchase method of accounting.
Neither Hugoton nor any of its affiliates has taken or agreed to take
any action that would prevent the Merger from qualifying as a
reorganization within the meaning of Section 368 of the Code (a "368
Reorganization"). For purposes of this paragraph, the only stockholders
of Hugoton that shall be considered Hugoton "affiliates" are the Hugoton
Specified Stockholders.
<PAGE> 164
10. SECTION 4.26 of the Merger Agreement shall be
amended in its entirety to read as follows:
4.26 Purchase Accounting; Tax Treatment. Parent and Sub intend
that the Merger be accounted for under the purchase method of
accounting. Neither Parent nor any of its affiliates has taken or
agreed to take any action that would prevent the Merger from qualifying
as a 368 Reorganization.
11. SECTION 5.1(k) of the Merger Agreement shall be
amended in its entirety to read as follows:
(k) take or cause to be taken any action which would
disqualify the Merger as a 368 Reorganization for Tax purposes;
12. SECTION 5.2(e) of the Merger Agreement shall be
amended in its entirety to read as follows:
(e) take or cause to be taken any action which would
disqualify the Merger as a 368 Reorganization for Tax purposes;
13. The Section Title and the first sentence of SECTION
5.10 shall be amended in their entirety to read as follows:
Agreement of Affiliates; Purchase Accounting. Prior to the
Hugoton Stockholders Meeting, Hugoton shall cause to be prepared and
delivered to Parent a list identifying all Persons who, at the time of
the Hugoton Stockholders Meeting, may be deemed to be "affiliates" of
Hugoton as that term is used in paragraphs (c) and (d) of Rule 145 under
the Securities Act.
14. The text of SECTION 5.10(b) whereby the parties
agree to use commercially reasonable efforts to cause the Merger to qualify for
"pooling of interests" accounting treatment shall be deleted in its entirety
and the following shall be inserted in its place: "[Reserved]."
15. The text of SECTION 5.10(d) whereby Hugoton agreed
to take certain actions to qualify the merger as a "pooling of interests" shall
be deleted in its entirety and the following shall be inserted in its place:
"[Reserved]."
16. The interoffice memo to all Hugoton employees from
Floyd C. Wilson dated June 27, 1997 regarding Status Report/Severance Policy
shall be attached to Schedule 5.14(a) of the Hugoton Disclosure Schedule.
<PAGE> 165
17. SECTION 5.14(c) of the Merger Agreement shall be
amended in its entirety to read as follows:
"(c) Notwithstanding subparagraph (b) above, Hugoton shall not
pay such severance pay to (i) any Hugoton Employee who is not a Contract
Employee and to whom Parent or Sub offers a comparable job with equal or
better salary at such employee's current locations."
18. SECTION 5.5 (a)(ii) shall be deleted in its
entirety and shall be amended to read as follows:
"(ii) each of Parent, Hugoton and Chesapeake Mid-Continent Corp.,
the parent of Sub and a wholly owned subsidiary of Parent will be a
party to such reorganization within the meaning of Section 368 (b) of
the Code,"
19. Subparagraph (ii) of SECTION 5.6 shall be deleted
in its entirety and shall be amended in its entirety to read as follows:
"each of Parent and Chesapeake Mid-Continent Corp. will be a
party to such reorganization within the meaning of Section 368(b) of the
Code, and"
20. The last sentence of SECTION 6.2(a) shall be
deleted in its entirety.
21. The text of paragraph G of Annex C to the Agreement
and Plan of Merger whereby the Affiliates agree not to sell any shares of
Chesapeake Common Stock 30 days prior to the Effective Date until 30 days after
combined operations of Chesapeake and Hugoton have been published shall be
deleted in its entirety and the following shall be inserted in its place:
"[Reserved]."
22. The Registration Rights Agreement attached to
Merger Agreement as Annex D will be replaced with the Registration Rights
Agreement attached hereto as Exhibit "A" which amends the original form to
delete all references to pooling of interests.
<PAGE> 166
IN WITNESS WHEREOF, the parties hereto have caused this Amendment
to be signed by their duly authorized representatives as of the day and
year first above written.
"Hugoton" "Parent"
HUGOTON ENERGY CORPORATION CHESAPEAKE ENERGY CORPORATION
By: By:
------------------------------- ---------------------------------
Name: Name:
----------------------------- -------------------------------
Title: Title:
---------------------------- ------------------------------
"Sub"
CHESAPEAKE ACQUISITION CORP.
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
<PAGE> 167
EXHIBIT "A"
TO AMENDMENT NO. 1
TO AGREEMENT AND
PLAN OF MERGER
REGISTRATION RIGHTS AGREEMENT
This REGISTRATION RIGHTS AGREEMENT (this "AGREEMENT"), dated as of ,
1998 (the "Effective Date"), is by and among Chesapeake Energy Corporation, an
Oklahoma corporation (the "COMPANY"), and those shareholders of Hugoton Energy
Corporation, a Kansas corporation ("HUGOTON") whose signatures appear on the
signature pages hereof (the "SHAREHOLDERS").
R E C I T A L S:
WHEREAS, the Company, Chesapeake Acquisition Corp. and Hugoton are
parties to that certain Agreement and Plan of Merger, dated November 12, 1997,
as amended by Amendment No. 1 dated February 9, 1998 (the "MERGER AGREEMENT");
WHEREAS, pursuant to the Merger Agreement, the Shareholders (as well as
certain other persons) will execute and deliver to the Company an Affiliate
Letter substantially in the Form of Annex C to the Merger Agreement pursuant to
which they will acknowledge that the shares of Common Stock, par value $0.01
per share, of the Company (the "COMMON STOCK") they receive in the merger (the
"MERGER") to be effected pursuant to the Merger Agreement will be subject to
certain transfer restrictions; and
WHEREAS, under the provisions of the Securities Act of 1933, as amended
(the "SECURITIES ACT"), and the General Rules and Regulations promulgated by
the Securities and Exchange Commission ("SEC") thereunder, such transfer
restrictions will include limitations on the manner in which the Shareholders
may sell the shares of Common Stock they receive in connection with the Merger,
absent registration under the Securities Act of the sale of such shares of
Common Stock or the availability of an exemption from the registration
requirements of the Securities Act; and
WHEREAS, the Company has agreed, on the terms and subject to the
conditions set forth herein, to grant the Shareholders certain rights to
register their shares of Common Stock for sale under the Securities Act;
A G R E E M E N T:
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements contained herein, the parties hereby agree as follows:
1. DEFINITIONS. The following terms, as used herein, have
the following meanings (all terms defined herein in the singular to have the
correlative meanings when used in the plural and vice versa):
<PAGE> 168
"COMMERCIALLY REASONABLE EFFORTS" when used with respect to any
obligation to be performed or term or provision to be observed hereunder, means
such efforts as a prudent Person seeking the benefits of such performance or
action would make, use, apply or exercise to preserve, protect or advance its
rights or interests, provided, that such efforts do not require such Person to
incur a material financial cost or a substantial risk of material liability
unless such cost or liability (i) would customarily be incurred in the course
of performance or observance of the relevant obligation, term or provision,
(ii) is caused by or results from the wrongful act or negligence of the Person
whose performance or observance is required hereunder or (iii) is not excessive
or unreasonable in view of the rights or interests to be preserved, protected
or advanced. Such efforts may include, without limitation, the expenditure of
such funds and retention by such Person of such accountants, attorneys or other
experts or advisors as may be necessary or appropriate to effect the relevant
action; the undertaking of any special audit or internal investigation that may
be necessary or appropriate to effect the relevant action; and the
commencement, termination or settlement of any action, suit or proceeding
involving such Person to the extent necessary or appropriate to effect the
relevant action.
"CLOSING DATE" has the meaning ascribed to such term in the
Merger Agreement.
"DEMAND REGISTRATION" means any registration of Shares under the
Securities Act effected in accordance with Section 2.1.
"DEMAND REGISTRATION STATEMENT" has the meaning ascribed to such
term in Section 2.1(c).
"EFFECTIVE TIME" has the meaning ascribed to such term in the
Merger Agreement.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended from time to time, or any successor statute, and the rules and
regulations promulgated thereunder.
"HOLDERS" means the Shareholders or any permitted assignee or
transferee of any Shares.
"INDEMNIFIED PARTY" has the meaning ascribed to it in Section
2.6(a).
"LOSS" has the meaning ascribed to it in Section 2.6(a).
"NOTICE OF DEMAND" means a request by a Shareholder pursuant to
Section 2.1(a) that the Company effect the registration under the Securities
Act of all or part of the Shares held by it and at its option, any direct or
indirect permitted transferee of Shares and any other Holder that requests to
have its securities included in such registration pursuant to Section 2.1(a).
A Notice of Demand shall specify an amount of Shares proposed to be registered,
which amount shall not be less than 1,000,000 Shares.
-2-
<PAGE> 169
"PARTICIPATING HOLDERS" means, with respect to any registration
of Shares by the Company pursuant to this Agreement, any Shareholders that are
entitled to participate in, or seeking to participate in, such registration.
"PERSON" means a natural person, a corporation, a limited
liability company, a partnership, a trust, a joint venture, or any other entity
or organization.
"PIGGYBACK REGISTRATION" means any registration of Shares under
the Securities Act effected in accordance with Section 2.2.
"PIGGYBACK REGISTRATION NOTICE" has the meaning ascribed to it in
Section 2.2(a).
"REGISTRATION EXPENSES" means all expenses incident to the
Company's performance of or compliance with this Agreement, including, without
limitation, (a) all registration, filing, securities exchange listing and
National Association of Securities Dealers fees, (b) all registration, filing,
qualification and other fees and expenses of complying with securities or blue
sky laws of all jurisdictions in which the securities are to be registered and
any legal fees and expenses incurred in connection with the blue sky
qualifications of the Shares and the determination of their eligibility for
investment under the laws of all such jurisdictions, (c) all word processing,
duplicating, printing, messenger and delivery expenses, (d) the fees and
disbursements of counsel for the Company and of its independent public
accountants, including, without limitation, the expenses of any special audits
or "cold comfort" letters required by or incident to such performance and
compliance, (e) the reasonable fees and disbursements incurred by the
Participating Holders (including, without limitation, the reasonable fees and
disbursements for one counsel or firm of counsel selected by the Participating
Holders), (f) any fees and disbursements of underwriters customarily paid by
issuers of securities (excluding underwriting discounts commissions and
transfer taxes, if any, relating to the Shares being registered) and (g) fees
and expenses of other Persons retained or employed by the Company.
Registration Expenses, to the extent payable by the Company, shall not include
underwriting discounts, commissions or transfer taxes payable in respect of the
sale of Shares by the Participating Holders.
"SHARES" means the shares of Common Stock received by each
Shareholder pursuant to the Merger Agreement and any shares of Common Stock
received in respect thereof pursuant to dividends, distributions or stock
splits.
"SUCCESSOR" means, with respect to any Person, a successor to
such Person by merger, consolidation, liquidation or other similar transaction.
"SUSPENSION NOTICE" has the meaning ascribed to it in Section
2.3(g).
"SUSPENSION PERIOD" has the meaning ascribed to it in Section
2.3(g).
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2. REGISTRATION UNDER THE SECURITIES ACT.
2.1 DEMAND REGISTRATION.
(a) REGISTRATION ON REQUEST. Upon receipt of a Notice of
Demand, the Company shall, subject to the provisions of Section 2.1(b), use
Commercially Reasonable Efforts to (i) effect [at the earliest practicable
date,] but in no event prior to the Effective Time, the registration under the
Securities Act of the Shares that the Company has been so requested to register
pursuant to the Notice of Demand and (ii) cause such registration to be
declared effective promptly thereafter. The Holders acknowledge that a
registration statement to be filed by the Company pursuant to a Notice of
Demand may not be filed with the Securities and Exchange Commission ("SEC"),
and the Shareholders shall not submit to the Company a Notice of Demand, prior
to the Effective Time.
(b) LIMITATIONS ON DEMAND REGISTRATION. The Company shall not
be obligated to take any action to effect any registration pursuant to this
Section 2.1 after the Company has, in accordance with the provisions of Section
2.3(c), effected three (3) registrations of Shares with respect to
registrations requested pursuant to Section 2.1.
(c) COMPANY UNDERTAKING REGARDING DEMAND REGISTRATION. The
Company will use its Commercially Reasonable Efforts to promptly prepare and
file but in no event prior to the Effective Time with the SEC a registration
statement (the "DEMAND REGISTRATION STATEMENT") for the Shares in respect of
which a Notice of Demand is given, as provided in this Section 2.1. Such
Demand Registration Statement shall relate to the offer and sale of the Shares
in respect of which the Notice of Demand is given in accordance with the
methods of distribution to be set forth in such registration statement as
directed by the Participating Holders. The Company further agrees to use its
Commercially Reasonable Efforts to take all steps necessary or appropriate so
that such Demand Registration Statement can be declared effective promptly and,
subject to the terms of Section 2.3, to keep it continuously effective in order
to permit the prospectus forming a part thereof to be used by the Holders until
the earlier of (i) 60 days after its effectiveness and (ii) the date that the
Holders sell all of the Shares subject to such registration statement, but in
no event prior to the expiration of the applicable period referred to in
Section 4(3) of the Securities Act and Rule 174 thereunder (the "SHELF
PERIOD"); provided, however, that (x) the Company may (no more than twice
during the pendency of such Demand Registration Statement and for a period not
to exceed forty-five (45) days on any one occasion suspend use of the Demand
Registration Statement at any time if the continued effectiveness thereof would
require the Company to disclose a material financing, acquisition or other
corporate transaction, which disclosure the Board of Directors of the Company
shall have determined in good faith is not in the best interests of the Company
and its shareholders.
(d) NOTICE TO CERTAIN NON-REQUESTING HOLDERS. Upon receipt of
any Notice of Demand from any Holder, the Company will give prompt (but in any
event within fifteen (15) days after such receipt) notice to all Holders of
such Notice of Demand and of such Holders' rights to have Shares included in
such registration (subject to priorities in registration rights set forth in
this Agreement). Upon the request of any such Holder made within fifteen (15)
days after the receipt by
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such Holder of any such notice given pursuant to this Section 2.1(d) (which
request shall specify the Shares intended to be disposed of by such Holder and
the intended method or methods of disposition thereof), the Company will
(subject to any priorities in registration rights among the various Holders)
use Commercially Reasonable Efforts to effect the registration of all Shares
which the Company has been so requested to register pursuant to the Notice of
Demand.
(e) PRIORITY IN DEMAND REGISTRATIONS. If (i) a registration
pursuant to this Section 2.2 involves an underwritten offering of the
securities being registered to be distributed (on a firm commitment basis) by
or through one or more underwriters of recognized standing under underwriting
terms appropriate for such a transaction and (ii) the managing underwriter of
such underwritten offering shall inform the Company and the Participating
Holders by letter of its belief that the amount of securities requested to be
included in such registration exceeds the amount which can be sold in (or
during the time of) such offering within a price range acceptable to the
Participating Holders, then the Company will include in such registration such
amount of securities which the Company is so advised can be sold in (or during
the time of) such offering as follows: first, such Shares requested to be
included in such registration by the Participating Holders pro rata on the
basis of the amount of such securities so proposed to be sold and so requested
to be included by such parties; second, such other securities of the Company;
and third such securities of other securities holders of the Company having
piggyback registration rights which would permit inclusion in such offering and
which are requested to be included in such registration by such other holders
pro rata on the basis of the amount of such securities so proposed to be sold
and so requested to be included by such holders.
2.2 PIGGYBACK REGISTRATION.
(a) RIGHT TO INCLUDE SHARES. If the Company at any time after
the Effective Time proposes to register any of its equity securities under the
Securities Act (other than by a registration on Form S-4 or Form S-8 or any
successor or similar form then in effect and other than pursuant to Section
2.1) on a form and in a manner that would permit registration of the Shares,
whether or not for sale for its own account, it will give prompt (but in no
event less than fifteen (15) days prior to the proposed date of filing the
registration statement relating to such registration) notice to the Holders of
the Shares of the Company's intention to do so and of the rights of such
Holders under this Section 2.2; provided, however, that no such notice need be
given to the Holders, and the Holders shall have no rights under this Section
2.2, if the Holders have therefore disposed of the Shares. Upon the request of
any Holders made within fifteen (15) days after such Holder's receipt of any
such notice (which request shall specify the Shares intended to be disposed of
by the Holders and the intended method or methods of disposition thereof) (the
"PIGGYBACK REGISTRATION NOTICE"), the Company will use Commercially Reasonable
Efforts to effect the registration under the Securities Act of all Shares which
the Company has been so requested to register by the Participating Holders, to
the extent required to permit the disposition (in accordance with the intended
method or methods thereof as aforesaid) of the Shares so to be registered,
provided that if, at any time after giving notice of its intention to register
any equity securities and prior to the effective date of the registration
statement filed in connection with such registration, the Company shall
determine for any reason not
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to register or to delay registration of such equity securities, the Company
may, at its election, give notice of such determination to each such Holder
and, thereupon, (i) in the case of a determination not to register, shall be
relieved of its obligation to register any Shares in connection with such
registration (but not from its obligation to pay all Registration Expenses in
connection therewith as provided in Section 2.3(b)), and (ii) in the case of a
determination to delay registering such other equity securities, shall be
permitted to delay registering any Shares for the same period as the delay in
registering such other equity securities.
(b) PRIORITY IN PRIMARY PIGGYBACK REGISTRATIONS. If (i) a
registration pursuant to this Section 2.2 involves an underwritten offering of
the Shares being registered for sale for the account of the Company to be
distributed (on a firm commitment basis) by or through one or more underwriters
of recognized standing under underwriting terms appropriate for such a
transaction and (ii) the managing underwriter of such underwritten offering
shall inform the Company and the Participating Holders of its belief that the
amount of Shares requested to be included in such registration exceeds the
amount which can be sold in (or during the time of) such offering within a
price range acceptable to the Company, then the Company will include in such
registration such amount of Shares which the Company is so advised can be sold
in (or during the time of) such offering as follows: first, if such
registration relates to Shares of the Company in respect of which a person is
exercising demand registration rights, all Shares of the Company held by such
other Person; second, all Shares proposed by the Company to be sold for its own
account; and third, such Shares requested to be included in such registration
by the Participating Holders and any other shareholder(s) of the Company then
exercising piggyback registration rights pro rata on the basis of the amount of
such Shares so proposed to be sold and so requested to be included by such
holders.
2.3 REGISTRATION TERMS AND PROCEDURES.
(a) REGISTRATION STATEMENT FORM. Registrations under Section
2.1 shall be on such appropriate registration forms of the SEC (i) as shall be
acceptable to the Company and (ii) as shall permit the disposition of such
Shares in accordance with the intended method or methods of disposition. The
Company agrees to include in any such registration statement all information
that any Participating Holders shall reasonably request (to the extent such
information relates to such Participating Holders).
(b) REGISTRATION EXPENSES. Subject to Section 2.3(e), the
Company will pay all Registration Expenses incurred in connection with a
registration to be effected (whether or not effected or deemed effected
pursuant to subsection (c) below) pursuant to Section 2.1 or 2.2.
(c) EFFECTIVENESS OF DEMAND REGISTRATION. A registration will
not be deemed to have been effected under Section 2.1 unless the registration
statement with respect thereto has been declared effective by the SEC and,
subject to Section 2.3(f)(vii) hereof, remains effective for the earlier of
forty-five (45) days or the distribution of the securities covered by such
registration statement; provided, however, that if (i) after such registration
statement has been declared effective, the marketing of Shares offered pursuant
to such registration statement is materially disrupted or
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adversely affected as a result of any stop order, injunction or other order or
requirement of the SEC or any other governmental agency or court (for reasons
other than a misrepresentation or omission by any Shareholder) or (ii) the
conditions to closing specified in the purchase agreement or underwriting
agreement entered into in connection with such registration have not been
satisfied (for reasons other than a wrongful or bad faith act, omission or
misrepresentation by any Participating Holder) such registration statement will
be deemed not to have become effective. If a registration pursuant to Section
2.1 is deemed not to have been effected hereunder, then the Company shall
continue to be obligated to effect a registration pursuant to such Section.
(d) SELECTION OF UNDERWRITER. The offering of Shares pursuant
to Section 2.1 shall be in such form (which may include an underwritten
offering) as the Participating Holders may elect, and if the Company so elects
an offering pursuant to Section 2.2 shall be in the form of an underwritten
offering. In connection with an underwritten offering of Shares pursuant to
this Agreement, the Company shall have the exclusive right to select one or
more nationally recognized firms of investment bankers to act as the book-
running managing underwriter or co-managing underwriters in connection with
such offering.
(e) WITHDRAWAL. Any Participating Holder shall be permitted
to withdraw all or part of the Shares from such registration at any time prior
to the effective date of the registration statement covering such securities;
provided that, in the event of a withdrawal from a registration effected
pursuant to Section 2.1, such registration shall be deemed to have been
effected for purposes of Section 2.3(c), unless such Participating Holder shall
have paid or reimbursed the Company for the reasonable out-of-pocket costs and
expenses paid by the Company in respect of such registration.
(f) REGISTRATION PROCEDURES. In connection with the Company's
obligations to register Shares pursuant to this Agreement, the Company will use
Commercially Reasonable Efforts to effect such registration so as to permit the
sale of any Shares included in such registration in accordance with the
intended method or methods of distribution thereof, and pursuant thereto the
Company will as expeditiously as possible:
(i) prepare and (as soon thereafter as practicable) file with
the SEC the requisite registration statement containing all information
required thereby to effect such registration and thereafter use
Commercially Reasonable Efforts to cause such registration statement to
become and remain effective in accordance with the terms of this
Agreement, provided, that as far in advance as practicable before filing
such registration statement or any amendment, supplement or exhibit
thereto (but, with respect to the filing of such registration statement,
in no event later than three business days prior to such filing), the
Company will furnish to the Participating Holders or its counsel copies
of reasonably complete drafts of all such documents proposed to be filed
(excluding exhibits, which shall be made available upon request by any
Participating Holder), and any such Holder shall have the opportunity to
object to any information contained therein and the Company will make
the corrections reasonably requested by such Holder with respect to
information relating to such Holder or
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the plan of distribution of the Shares prior to filing any such
registration statement, amendment, supplement or exhibit;
(ii) prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in
connection therewith (A) as reasonably requested by any Participating
Holder to which such registration statement relates (but only to the
extent such request relates to information with respect to such Holder)
and (B) as may be necessary to keep such registration statement
effective for the period referred to in Section 2.1(c) in the case of a
Demand Registration Statement or six (6) months in the case of a
registration effected pursuant to Section 2.2 (or such shorter period as
shall be necessary to complete the distribution of the securities
covered thereby, but not before the expiration of the Shelf Period),
and comply with the provisions of the Securities Act with respect to the
sale or other disposition of all securities covered by such registration
statement during such period in accordance with the intended method or
methods of disposition by the seller or sellers thereof set forth in
such registration statements;
(iii) furnish to each Holder covered by, and each underwriter or
agent participating in the disposition of securities under, such
registration statement such number of conformed copies of such
registration statement and of each such amendment and supplement thereto
(in each case excluding all exhibits and documents incorporated by
reference, which exhibits and documents shall be furnished to any such
Person upon request), such number of copies of the prospectus contained
in such registration statement (including each preliminary prospectus
and any summary prospectus) and any other prospectus filed under Rule
424 under the Securities Act relating to the Shares, in conformity with
the requirements of the Securities Act, and such other documents as such
Holder, underwriter or agent may reasonably request to facilitate the
disposition of such Shares;
(iv) use Commercially Reasonable Efforts to register or qualify
all Shares and other securities covered by such registration statement
under all applicable blue sky and other securities laws, and to keep
such registration or qualification in effect for so long as such
registration statement remains in effect, and take any other action
which may be reasonably necessary or advisable to enable such Holder to
consummate the disposition of the securities owned by such Holder,
except that the Company shall not for any such purpose be required to
(a) qualify generally to do business as a foreign corporation in any
jurisdiction wherein it would not but for the requirements of this
clause (iv) be obligated to be so qualified, (b) subject itself to
taxation in any such jurisdiction or (c) consent to general service of
process in any jurisdiction;
(v) use Commercially Reasonable Efforts to cause all Shares
covered by such registration statement to be registered with or approved
by such other governmental agencies or authorities applicable to the
Company as may be reasonably necessary to enable the seller or sellers
thereof (or underwriter or agent, if any) to consummate the disposition
of such Shares in accordance with the plan of distribution set forth in
such registration statement;
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(vi) furnish to each Participating Holder a signed counterpart,
addressed to such Holder (and underwriter or agent, if any) of:
(A) an opinion of counsel to the Company, dated the
effective date of such registration statement (and, if such
registration includes an underwritten public offering, dated the
date of the closing under the underwriting agreement), and
(B) unless otherwise precluded under applicable
accounting rules, a "comfort" letter, dated the effective date of
such registration statement (and, if such registration includes
an underwritten public offering, dated the date of the closing
under the underwriting agreement), signed by the independent
public accountants who have certified the Company's financial
statements included in such registration statement,
in each case, reasonably satisfactory in form and substance to such
Shareholder (and underwriter or agent and their respective counsel) and
covering substantially the same matters with respect to such
registration statement (and the prospectus included therein) and, in the
case of the accountants' letter, with respect to events subsequent to
the date of such financial statements, as are customarily covered in
opinions of issuer's counsel and in accountants' letters delivered to
the underwriter or agent in underwritten public offerings of securities;
(vii) promptly notify each Holder and any underwriter or agent
participating in the disposition of Shares covered by such registration
statement, at any time when a prospectus relating thereto is required to
be delivered under the Securities Act, upon discovery that, or upon the
happening of any event known to the Company as a result of which, the
prospectus included in such registration statement, as then in effect,
includes an untrue statement of a material fact or omits to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading in light of the circumstances under
which they were made, and promptly prepare and furnish to such Holder
(or underwriter or agent, if any) a reasonable number of copies of a
supplement to or an amendment of such prospectus as may be necessary so
that, as thereafter delivered to the purchasers of such securities, such
prospectus shall not include an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary
to make the statements therein not misleading in light of the
circumstances under which they were made;
(viii) otherwise use Commercially Reasonable Efforts to comply
with all applicable rules and regulations of the SEC, and make available
to its security holders, as soon as reasonably practicable (but not more
than fifteen (15) months) after the effective date of the registration
statement, an earnings statement satisfying the provisions of Section
11(a) of the Securities Act and Rule 158 promulgated thereunder, and
furnish to each Holder covered by such registration statement or any
participating underwriter or agent at least three (3)
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business days prior to the filing a copy of any amendment or supplement
to such registration statement or prospectus;
(ix) provide and cause to be maintained a transfer agent and
registrar for all Shares covered by such registration statement from and
after a date not later than the effective date of such registration
statement;
(x) use Commercially Reasonable Efforts to list, on or prior
to the effective date of such registration statement, all Shares covered
by such registration statement on any securities exchange on which any
of the outstanding shares of Common Stock are then listed for trading;
(xi) cooperate with each seller of Shares and each underwriter
or agent participating in the disposition of such Shares and their
respective counsel in connection with any filings required to be made
with the National Association of Securities Dealers;
(xii) use Commercially Reasonable Efforts to prevent the
issuance by the SEC or any other governmental agency or court of a stop
order, injunction or other order suspending the effectiveness of such
registration statement and, if such an order is issued, use Commercially
Reasonable Efforts to cause such order to be lifted as promptly as
practicable;
(xiii) take such other actions as the Participating Holders shall
reasonably request in order to expedite or facilitate the disposition of
such Shares;
(xiv) promptly notify each Participating Holder and the
underwriter or agent, if any:
(A) when such registration statement or any prospectus
used in connection therewith, or any amendment or supplement
thereto, has been filed and, with respect to such registration
statement or any post-effective amendment thereto, when the same
has become effective;
(B) of any written comments from the SEC with respect
to any filing referred to in clause (A) and of any written
request by the SEC for amendments or supplements to such
registration statement or prospectus;
(C) of the notification to the Company by the SEC of
its initiation of any proceeding with respect to, or of the
issuance by the SEC of, any stop order suspending the
effectiveness of such registration statement; and
(D) of the receipt by the Company of any notification
with respect to the suspension of the qualification of any Shares
for sale under the applicable securities or blue sky laws of any
jurisdiction;
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(xv) cooperate with each Participating Holder and each
underwriter or agent participating in the distribution of such Shares to
facilitate the timely preparation and delivery of certificates (which
shall not bear any restrictive legends, other than as required by
applicable law) representing securities sold under a registration
statement hereunder, and enable such securities to be in such
denominations and registered in such names as such seller, underwriter
or agent may request and keep available and make available to the
Company's transfer agent, prior to the effectiveness of such
registration statement, an adequate supply of such certificates;
(xvi) not later than the effective date of such registration
statement, provide a CUSIP number for all Shares covered by a
registration statement hereunder;
(xvii) incorporate in the registration statement or any
amendment, supplement or post-effective amendment thereto such
information as each Participating Holder, the underwriter or agent (if
any) or their respective counsel may reasonably request to be included
therein with respect to any Shares being sold by such Participating
Holder to such underwriter or agent, the purchase price being paid
therefor by such underwriter or agent and any other terms of the
offering of such Shares; and
(xviii) during any period when a prospectus is required to
be delivered under the Securities Act, make periodic filings with the
SEC pursuant to and containing the information required by the Exchange
Act (whether or not the Company is required to make such filings
pursuant to such Act).
(g) AGREEMENTS OF CERTAIN SHAREHOLDERS. (i) In connection
with the registration of any of the Shares, each Participating Holder shall
furnish to the Company such information regarding such Participating Holder,
the Shares held by such Participating Holder and the intended plan of
distribution of such securities as the Company may from time to time reasonably
request in writing in connection with such registration.
(ii) In connection with the registration of any of the Shares,
each Participating Holder agrees that upon receipt of any notice (a "SUSPENSION
NOTICE") from the Company of the happening of any event of the kind described
in clause (vii) of Section 2.3(f), such Participating Holder will forthwith
discontinue such Participating Holder's disposition of Shares pursuant to the
registration statement relating to such Shares until such Participating
Holder's receipt of the copies of the supplemented or amended prospectus
contemplated by clause (vii) of Section 2.3(f) (the period from the date on
which such Participating Holder receives a suspension Notice to the date on
which such Participating Holder receives copies of the supplemented or amended
prospectus being herein called the "SUSPENSION PERIOD"). The Company shall
take such actions as are necessary to end the Suspension Period as promptly as
practicable. In the event the Company shall give any such notice, the periods
referred to in Section 2.1(c), Section 2.3(c) and clause (ii) of Section 2.3(f)
shall be extended by a number of days equal to the number of days of the
Suspension Period.
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2.4 UNDERWRITTEN OFFERINGS. If the Company at any time
proposes to register any of its equity securities under the Securities Act as
contemplated by Section 2.2 and such securities are to be distributed by or
through one or more underwriters, the Company will, if requested by any
Participating Holder and subject to Section 2.2(b), arrange for such
underwriters to include all of the shares to be offered and sold by the such
Participating Holder or Holders among the securities to be distributed by such
underwriters. Such Participating Holder shall be a party to the underwriting
agreement between the Company and such underwriters, provided that such
agreement is reasonablely satisfactory in substance and form to the Company and
the Participating Holders.
2.5 PREPARATION; REASONABLE INVESTIGATION. In connection with
the preparation and filing of each registration statement under the Securities
Act pursuant to this Agreement, the Company will give the Holders of Shares to
be registered under such registration statement, and their respective counsel
and accountants reasonable access to its books and records and such
opportunities to discuss the business of the Company with its officers and the
independent public accountants who have certified its financial statements as
shall be necessary, in the opinion of such Holders or their counsel, to conduct
a reasonable investigation within the meaning of the Securities Act.
2.6 INDEMNIFICATION.
(a) INDEMNIFICATION BY THE COMPANY. The Company agrees to
indemnify and hold harmless, to the full extent permitted by law, each
Participating Holder, its directors, officers, shareholders, employees,
investment advisers and agents, either direct or indirect, and each other
Person, if any, who controls such Persons within the meaning of the Securities
Act (each such Person, an "INDEMNIFIED PARTY"), from and against any losses,
claims, damages, liabilities or expenses, joint or several (each a "LOSS" and
collectively, "LOSSES"), to which such Indemnified Party may become subject
under the Securities Act or otherwise, to the extent that such Losses (or
actions or proceedings, whether commenced or threatened, in respect thereof)
arise out of or are based upon any untrue statement or alleged untrue statement
of any material fact contained in any registration statement under which any of
the Shares were registered under the Securities Act in accordance with this
Agreement (including all documents incorporated therein by reference), and
preliminary prospectus, final prospectus or summary prospectus contained
therein, or any amendment or supplement thereto, or any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and the Company will
reimburse such Indemnified Party for any legal or any other expenses reasonably
incurred by it in connection with investigating or defending against any such
Loss, action or proceeding; provided that in any such case the Company shall
not be liable to any particular Indemnified Party to the extent that such Loss
(or action or proceeding in respect thereof) arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged omission
made in such registration statement, any such preliminary prospectus, final
prospectus, summary prospectus amendment or supplement in reliance upon and in
conformity with written information furnished to the Company by such
Indemnified Party specifically for inclusion therein; and provided, further,
that the Company shall not be liable in any such case to the extent it is
finally determined
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by a court of competent jurisdiction that any such Loss (or action or
proceeding in respect thereof) arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission made
(i) in any such preliminary prospectus, if (A) it was the
responsibility of such Indemnified Party to provide the Person asserting
such Loss with a current copy of the prospectus and such Indemnified
Party failed to deliver or cause to be delivered a copy of the
prospectus to such Person after the Company had furnished such
Indemnified Party with a sufficient number of copies of the same prior
to the sale of Shares to the Person asserting such Loss and (B) the
prospectus corrected such untrue statement or omission; or
(ii) in such prospectus, if such untrue statement or omission
is corrected in an amendment or supplement to such prospectus and such
amendment or supplement has been delivered to the Indemnified Party
prior to the sale of Shares to the Person asserting such Loss and the
Indemnified Party thereafter fails to deliver the prospectus as so
amended or supplemented prior to or concurrently with such sale after
the Company had furnished such Indemnified Party (in accordance with the
notice provisions contained in Section 8 for Persons who are parties to
this Agreement) with a sufficient number of copies of the same for
delivery to purchasers of securities.
Such indemnity shall remain in full force and effect regardless of any
investigation made by or on behalf of such Indemnified Party and shall survive
the transfer of such securities by such Indemnified Party. The Company shall
also indemnify each other Person who participates (including as an underwriter)
in the offering or sale of Shares hereunder, their officers and directors and
each other Person, if any, who controls any such participating Person within
the meaning of the Securities Act to the same extent as provided above with
respect to Indemnified Parties.
(b) INDEMNIFICATION BY THE PARTICIPATING HOLDERS. (i) The
Company may require, as a condition to including any Shares in any registration
statement filed pursuant to Section 2.1 or 2.2 and as a condition to
indemnifying such sellers pursuant to this Section 2.6, that the Company shall
have received an undertaking reasonably satisfactory to it from each
prospective seller of such Shares to indemnify and hold harmless and reimburse
(in the same manner and to the same extent as set forth in paragraph (a) of
this Section 2.6) the Company, each director, officer, employee and agent of
the Company, and each other Person, if any, who controls the Company within the
meaning of the Securities Act, from and against any Losses (or actions or
proceedings, whether commenced or threatened, in respect thereof) arising out
of or based upon any untrue statement or alleged untrue statement of a material
fact contained in any registration statement under which such securities were
registered under the Securities Act (including all documents incorporated
therein by reference), any preliminary prospectus, final prospectus or summary
prospectus contained therein, or any amendment or supplement thereto, or any
omission or alleged omission from such registration statement, preliminary
prospectus, final prospectus or summary prospectus, or any amendment or
supplement thereto required to be stated therein or necessary to make the
statements therein not misleading, if (but only if) such untrue statement or
alleged untrue statement or omission
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or alleged omission was made in reliance upon and in conformity with written
information furnished to the Company by such prospective seller specifically
for inclusion therein; provided, however, that such prospective seller shall
not be obligated to provide such indemnity to the extent that such Losses
result, directly or indirectly, from the failure of the Company to promptly
amend or take action to correct or supplement any such registration statement,
prospectus, amendment or supplement based on corrected or supplemental
information provided in writing by such prospective seller to the Company
expressly for such purpose; and provided, further, that the obligation to
provide indemnification pursuant to this Section 2.6(b) shall be several, and
not joint and several, among such indemnifying parties. Notwithstanding
anything in this Section 2.6(b) to the contrary, in no event shall the
liability of any prospective seller under such indemnity be greater in amount
than the amount of the proceeds received by such seller upon the sale of its
Shares in the offering to which the Losses relate. Such indemnity shall remain
in full force and effect, regardless of any investigation made by or on behalf
of the Company or any such director, officer, employee, agent or participating
or controlling Person and shall survive the transfer of such securities by such
prospective seller.
(c) NOTICES OF CLAIMS, ETC. Promptly after receipt by an
indemnified party of notice of the commencement of any action or proceeding
involving a claim referred to in paragraph (a) or (b) of this Section 2.6, such
indemnified party will, if a claim in respect thereof is to be made against an
indemnifying party, give prompt written notice to the latter of the
commencement of such action, provided that the failure of any indemnified party
to give notice as provided herein shall not relieve the indemnifying party of
its obligations under this Section 2.6, except to the extent that the
indemnifying party is actually and materially prejudiced by such failure to
give notice. In case any such action is brought against an indemnified party,
the indemnifying party shall be entitled to participate in and to assume the
defense thereof (such assumption to constitute its acknowledgment of its
agreement to indemnify the indemnified party with respect to such matters),
jointly with any other indemnifying party similarly notified to the extent that
it may wish, with counsel reasonably satisfactory to such indemnified party,
and after notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying party shall not be
liable to such indemnified party for any legal fees or other expenses
subsequently incurred by the latter in connection with the defense thereof
other than reasonable costs of investigation; provided,_however, that if, in
such indemnified party's reasonable judgment, a conflict of interest between
such indemnified and indemnifying parties may exist in respect of such claim,
such indemnified party shall be entitled to separate counsel for such claim at
the expense of the indemnifying party; and provided, further, that, unless
there exists a conflict of interest among indemnified parties, all indemnified
parties in respect of such claim shall be entitled to only one counsel or firm
of counsel for all such indemnified parties. In the event an indemnifying
party shall not be entitled, or elects not, to assume the defense of a claim,
such indemnifying party shall not be obligated to pay the fees and expenses of
more than one counsel or firm of counsel for all parties indemnified by such
indemnifying party in respect of such claim, unless in the reasonable judgment
of any such indemnified party a conflict of interest exists between such
indemnified party and any other of such indemnified parties in respect of such
claim, in which event the indemnifying party shall be obligated to pay the fees
and expenses of one additional counsel or firm of counsel for such indemnified
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<PAGE> 181
parties. No indemnifying party shall, without the consent of the indemnified
party, consent to entry of any judgment or enter into any settlement that (i)
does not include as an unconditional term thereof the giving by the claimant or
plaintiff to such indemnified party of a release from all Losses in respect of
such claim or litigation or (ii) would impose injunctive relief on such
indemnified party. No indemnifying party shall be subject to any Losses for
any settlement made without its consent, which consent shall not be
unreasonably withheld.
(d) OTHER INDEMNIFICATION. The provisions of this Section 2.6 shall
be in addition to any other rights to indemnification or contribution which an
indemnified party may have pursuant to law, equity, contract or otherwise.
(e) INDEMNIFICATION PAYMENTS. The indemnification required by this
Section 2.6 shall be made by periodic payments of the amount thereof during the
course of the investigation or defense, promptly as and when bills are received
or Losses are incurred.
(f) CONTRIBUTION. If for any reason the foregoing indemnity and
reimbursement is unavailable or is insufficient to hold harmless an indemnified
party under paragraph (a) or (b) of this Section 2.6, then each indemnifying
party shall contribute to the amount paid or payable by such indemnified party
as a result of any Loss (or actions or proceedings, whether commenced or
threatened, in respect thereof), including, without limitation, any legal or
other expenses reasonably incurred by them in connection with investigating or
defending any such Loss, action or proceeding, in such proportion as is
appropriate to reflect the relative fault of the indemnifying party on the one
hand and the indemnified party on the other. The relative fault shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to
state a material fact relates to information supplied by the indemnifying party
or the indemnified party and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such untrue statement or
omission. Notwithstanding anything in this Section 2.6(f) to the contrary, no
indemnifying party (other than the Company) shall be required pursuant to this
Section 2.6(f) to contribute any amount in excess of the amount by which the
net proceeds received by such indemnifying party from the sale of Shares in the
offering to which the Losses of the indemnified parties relate exceeds the
amount of any damages which such indemnifying party has otherwise been required
to pay by reason of such untrue statement or omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any Person who was not
guilty of such fraudulent misrepresentation.
3. TERM. This Agreement shall be effective on the date hereof and,
subject to Section 13 hereof, shall continue in full force and effect until the
first anniversary of the Effective Date.
4. AMENDMENTS AND WAIVERS. This Agreement may be amended,
supplemented or modified at any time; provided that the Company has provided
its written consent to such amendment, supplement or modification. Any term or
condition of this Agreement may be
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<PAGE> 182
waived at any time by the party that is entitled to the benefit thereof, but no
such waiver shall be effective unless set forth in a written instrument duly
executed by or on behalf of the party waiving such term or condition. No
waiver by any party of any term or condition of this Agreement, in any one or
more instances, shall be deemed to be or construed as a waiver of the same term
or condition of this Agreement on any future occasion.
5. ENTIRE AGREEMENT. This Agreement supersedes all prior
discussions and agreements between the parties with respect to the subject
matter hereof and contains the sole and entire agreement between the parties
hereto with respect to the subject matter hereof.
6. NO THIRD-PARTY BENEFICIARY. The terms and provisions of this
Agreement are intended solely for the benefit of each party and their
respective Successors and it is not the intention of the parties to confer
third-party beneficiary rights upon any other Person other than (i) any Holder
entitled to notice of the registration of securities under this Agreement and
(ii) any Participating Holder entitled to indemnity under Section 2.6.
7. INVALID PROVISIONS. If any provision of this Agreement is held
to be illegal, invalid or unenforceable under any present or future law, (i)
such provision will be fully severable, (ii) this Agreement will be construed
and enforced as if such illegal, invalid or unenforceable provision had never
comprised a part hereof, (iii) the remaining provisions of this Agreement will
remain in full force and effect and will not be affected by the illegal,
invalid or unenforceable provision or by its severance herefrom and (iv) in
lieu of such illegal, invalid or unenforceable provision, there will be added
automatically as a part of this Agreement a legal, valid and enforceable
provision as similar in terms to such illegal, invalid or unenforceable
provision as may be possible.
8. NOTICES. All notices, requests and other communications
hereunder must be in writing and will be deemed to have been duly given only
(i) if delivered personally (ii) by facsimile transmission, (iii) by Federal
Express or other nationally recognized courier service or (iv) mailed (first
class postage prepaid) to the parties at the following addresses or facsimile
numbers:
If to the Company, to:
Chesapeake Energy Corporation
6100 North Western Avenue
Oklahoma City, OK 73118
Attention: Aubrey K. McClendon
Fax No.: (405) 848-8588
With respect to the Holders, any notice, request or other communication
hereunder shall be sent to the addresses and facsimile numbers appearing
beneath such Shareholder's signature on the signature page hereof or to the
addresses and facsimile numbers provided to the Company and
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<PAGE> 183
the other parties hereto by notice as herein provided and referencing this
Agreement. All such notices, requests and other communications will (i) if
delivered personally to the address as provided in this Section 8, be deemed
given upon delivery, (ii) if delivered by facsimile transmission to the
facsimile number as provided in this Section 8, be deemed given upon receipt,
and (iii) if delivered by courier service or mail in the manner described above
to the address as provided in this Section 8, be deemed given upon receipt (in
each case regardless of whether such notice, request or other communication is
received by any other Person to whom a copy of such notice is to be delivered
pursuant to this Section 8). Any Person from time to time may change its
address, facsimile number or other information for the purpose of notices to
that Person by giving notice in accordance with this Section 8 specifying such
change to each of the other parties executing this Agreement.
9. ASSIGNMENT. This Agreement shall be binding upon and inure to
the benefit of and be enforceable by the parties hereto and their respective
Successors and permitted assigns.
10. DESCRIPTIVE HEADINGS. The descriptive headings of the several
sections and paragraphs of this Agreement are inserted for convenience of
reference only and do not define or limit the provisions hereof or otherwise
affect the meaning hereof.
11. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF OKLAHOMA WITHOUT REFERENCE TO THE
CONFLICTS OF LAW PRINCIPLES THEREOF.
12. REGISTRATION RIGHTS TO OTHERS. As of the date hereof, the
Company has not granted to any other holder of its securities rights with
respect to the registration of securities of the Company under the Securities
Act other than (i) its agreement to provide registration rights to Charles E.
Davidson in respect of the shares he will receive pursuant to the merger of DLB
Oil and Gas, Inc. with a subsidiary of the Company and (ii) its agreement to
provide registration rights to AnSon Partners Limited Partnership in respect of
the shares it will receive pursuant to the merger of AnSon Partners Limited
Partnership with a subsidiary of the Company.
13. TERMINATION OF CERTAIN RIGHTS AND OBLIGATIONS. The provisions of
Section 2.6., the rights of any party hereto with respect to the breach of any
provision hereof and any obligation accrued as of the date of termination shall
survive the termination of this Agreement.
14. NO INCONSISTENT AGREEMENTS. The Company will not hereafter enter
into, modify, amend or waive any agreement with respect to its securities if
such agreement, modification or waiver would conflict with the rights granted
pursuant to this Agreement to the Shareholders of Shares.
15. SPECIFIC PERFORMANCE. The parties agree that, to the extent
permitted by law, (i) the obligations imposed on them in this Agreement are
special, unique and of
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<PAGE> 184
an extraordinary character, and that in the event of a breach by any such party
damages would not be an adequate remedy and (ii) each of the other parties
shall be entitled to specific performance and injunctive and other equitable
relief in addition to any other remedy to which it may be entitled at law or in
equity.
16. COUNTERPARTS. This Agreement may be executed simultaneously in
any number of counterparts, each of which shall be deemed an original, but all
of which shall together constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and delivered by their respective officers thereunto duly authorized
as of the date first above written.
CHESAPEAKE ENERGY CORPORATION
By:
---------------------------------------------
Aubrey K. McClendon
Chairman of the Board and Chief
Executive Officer
SHAREHOLDERS:
By:
------------------------------------------
Name:
----------------------------------------
Address:
-------------------------------------
Fax:
---------------------------------------------
By:
------------------------------------------
Name:
----------------------------------------
Address:
-------------------------------------
Fax:
---------------------------------------------
By:
------------------------------------------
Name:
----------------------------------------
Address:
-------------------------------------
Fax:
---------------------------------------------
-18-
<PAGE> 185
ANNEX B
[PETRIE PARKMAN OPINION]
2
<PAGE> 186
ANNEX B
February , 1998
The Board of Directors
Hugoton Energy Corporation
301 N. Main
Suite 1900
Wichita, Kansas 67202-4820
Members of the Board:
Chesapeake Energy Corporation, an Oklahoma corporation ("Parent"),
Chesapeake Acquisition Corp., a Kansas corporation ("Sub"), and Hugoton Energy
Corporation, a Kansas corporation ("Hugoton"), have entered into an agreement
and plan of merger, dated as of November 12, 1997, as amended by Amendment No.
1 dated as of February 9, 1998 (the "Merger Agreement"), which provides for,
among other things, the merger (the "Merger") of Sub with and into Hugoton, as
a result of which Hugoton will become a wholly owned subsidiary of Parent.
Upon consummation of the Merger, each share of common stock, no par value (the
"Hugoton Common Stock"), of Hugoton will be converted into the right to receive
1.3 shares of common stock, par value $0.01 per share ("Parent Common Stock"),
of Parent.
You have requested our opinion as to whether the per share consideration
to be received by the holders of Hugoton Common Stock in the Merger is fair
from a financial point of view to such holders.
In arriving at our opinion, we have, among other things:
1. reviewed certain publicly available business and financial
information relating to Hugoton and Parent, including (a) the
Annual Reports on Form 10-K and related audited financial
statements for the fiscal years ended December 31, 1996 and June
30, 1997, respectively, (b) the unaudited financial statements of
Hugoton for the fiscal quarters ended June 30, 1996, September 30,
1996, June 30, 1997, and September 30, 1997, (c) the unaudited
financial statements of Parent for the fiscal quarters ended
September 30, 1996 and September 30, 1997, (d) a draft dated
February 5, 1998 of the balance sheet of Hugoton as of November
30, 1997 and the related income statement for the year ended
December 31, 1997, which includes a projected income statement for
the month of December 1997, prepared by the management of Hugoton
and (e) a preliminary draft dated February 6, 1998 of the
consolidated balance sheet as of November 30, 1997 of Parent and
the related consolidated income statements for the months of
October and November 1997 and for the five-month period ended
November 30, 1997, prepared by the management of Parent;
<PAGE> 187
2. reviewed certain estimates of Hugoton's reserves, including (a)
estimates of proved oil and gas reserves prepared by Ryder Scott Company
Petroleum Engineers ("Ryder Scott") as of July 1, 1997, (b) estimates of
additional oil and gas reserves prepared by the management and staff of
Hugoton as of July 1, 1997, (c) preliminary estimates of proved oil and
gas reserves prepared by Ryder Scott as of January 1, 1998 and (d)
preliminary estimates of additional oil and gas reserves prepared by the
management and staff of Hugoton as of January 1, 1998;
3. reviewed certain estimates of reserves, including (a) estimates of
proved oil and gas reserves of Parent prepared by Williamson Petroleum
Consultants as of June 30, 1997 and September 30, 1997, (b) estimates of
proved oil and gas reserves for the Mid-Continent operations of DLB Oil
& Gas, Inc. to be acquired by Parent prepared by Gruy Engineering as of
January 1, 1997 and DeGolyer & MacNaughton as of December 31, 1996, (c)
estimates of proved oil and gas reserves of AnSon Production Corporation
("AnSon") acquired by Parent prepared by AnSon as of January 1, 1998,
(d) estimates of certain proved oil and gas reserves of Enervest
Management Company ("Enervest") to be acquired by Parent prepared by
Enervest as of January 1, 1998 and (e) estimates of certain proved oil
and gas reserves of Ranger Oil Co. to be acquired by Parent prepared by
Parent as of January 1, 1998;
4. analyzed certain historical and projected financial and operating data
and drilling programs of Hugoton and Parent prepared or provided by the
management of Hugoton and Parent, respectively;
5. discussed the current and projected operations and prospects of Hugoton
and Parent with the management and operating staff of Hugoton and
Parent, respectively;
6. reviewed the historical trading history of the Hugoton Common Stock and
the Parent Common Stock;
7. compared recent stock market capitalization indicators for Hugoton and
Parent with the recent stock market capitalization indicators for
certain other publicly traded independent energy companies;
8. compared the financial terms of the Merger with the financial terms of
certain other transactions that we deemed to be relevant;
9. reviewed the Merger Agreement and the appended form of agreement and
limited irrevocable proxy entered into by Parent and certain
stockholders of Hugoton; and
<PAGE> 188
10. reviewed such other financial studies and analyses and performed
such other investigations and took into account such other
matters as we have deemed necessary or appropriate.
In preparing our opinion, we have assumed and relied upon, without
assuming any responsibility for verification, the accuracy and completeness of
any information supplied or otherwise made available to us by Hugoton and
Parent. We have further relied upon the assurances of the management of
Hugoton and Parent that they are unaware of any facts that would make the
information provided to us incomplete or misleading in any material respect.
With respect to projected financial and operating data and drilling programs,
we have assumed that they have been reasonably prepared on bases reflecting the
best currently available estimates and judgment of the management of Hugoton
and Parent, respectively, relating to the future financial and operational
performance of Hugoton and Parent. With respect to the estimates of oil and
gas reserves, we have assumed that they have been reasonably prepared on bases
reflecting the best available estimates and judgments of Hugoton and Parent or
their respective engineering consultants relating to the oil and gas properties
of Hugoton and Parent, respectively. We have not made an independent
evaluation or appraisal of the assets or liabilities of Hugoton or Parent nor,
except for the estimates of oil and gas reserves referred to above, have we
been furnished with such an evaluation or appraisal. Consistent with the
Merger Agreement, we have assumed that the Merger will be treated for federal
income tax purposes as a reorganization within the meaning of Section 368 of
the Internal Revenue Code of 1986, as amended.
Our opinion relates solely to the fairness, from a financial point of
view, of the per share consideration to be received by the holders of Hugoton
Common Stock. This opinion is for the use and benefit of the Board of
Directors of Hugoton and does not constitute a recommendation to any
stockholder as to how such stockholder should vote on the Merger. We have not
been asked to consider, and this opinion does not address, the after-tax
consequences of the Merger to any particular stockholder of Hugoton or the
price at which the Parent Common Stock will actually trade following the
announcement or consummation of the Merger. As you are aware, we have acted as
financial advisor to Hugoton and we will receive a fee from Hugoton, a
substantial portion of which is contingent upon the consummation of the Merger.
Our opinion is rendered on the basis of conditions in the securities
markets and the oil and gas markets prevailing as of the date hereof and the
condition and prospects, financial and otherwise, of Hugoton and Parent as they
have been represented to us as of the date hereof or as they were reflected in
the materials and discussions described above.
Based upon and subject to the foregoing, it is our opinion that, as of
the date hereof, the per share consideration to be received by the holders of
Hugoton Common Stock in the Merger is fair from a financial point of view to
such holders.
Very truly yours,
Petrie Parkman & Co.
<PAGE> 189
ANNEX C
[BEAR STEARNS OPINION]
2
<PAGE> 190
ANNEX C
[BEAR STEARNS LETTERHEAD]
November 12, 1997
Board of Directors
Chesapeake Energy Corporation
6100 North Western Avenue
Oklahoma City, Oklahoma 73118
Gentlemen:
We understand that Chesapeake Energy Corporation ("Chesapeake"), Chesapeake
Acquisition Corporation, a wholly-owned subsidiary of Chesapeake ("Sub"), and
Hugoton Energy Corporation ("Hugoton") have entered into an Agreement and Plan
of Merger ("the Merger Agreement") dated November 12, 1997, pursuant to which
Hugoton will be merged (the "Merger") with and into Sub, with Sub surviving the
merger. Upon the terms and subject to the conditions set forth in the Merger
Agreement, at the Effective Time (as defined in the Merger Agreement) of the
Merger, each issued and outstanding share of common stock of Hugoton will be
converted into the right to receive 1.3 (the "Exchange Ratio") shares of common
stock of Chesapeake.
You have asked us to render our opinion as to whether the Exchange Ratio in the
Merger is fair, from a financial point of view, to the public shareholders of
Chesapeake.
In the course of performing our reviews and analyses for rendering this opinion,
we have:
1. reviewed the Merger Agreement;
2. reviewed Chesapeake's Annual Report to Shareholders and Annual Report on
Form 10-K for the year ended June 30, 1997 and its Offering Memorandum
dated March 27, 1997 for the issuance of $300 million in Senior Notes;
3. reviewed Hugoton's Annual Report to Shareholders and Annual Report on Form
10-K for the year ended December 31, 1996, its Quarterly Reports on Form
1O-Q for the periods ended March 31, 1997 and June 30, 1997, its
Preliminary Prospectus for the Issuance of 4,500,000 Common Shares dated
April 3, 1997, and the Offering Memorandum regarding Hugoton dated
September 1997 prepared by Petrie Parkman & Co., Hugoton's financial
advisor;
4. reviewed certain operating and financial information, including
projections, provided to us by the senior managements of Chesapeake
and Hugoton relating to Chesapeake's and Hugoton's businesses and
future prospects;
<PAGE> 191
5. reviewed the estimates of oil and natural gas reserves of Hugoton as of
December 31, 1996 and July 1, 1997, as prepared by Ryder Scott Company,
reviewed the estimates of oil and natural gas reserves of Chesapeake as of
June 30, 1997, as prepared by Williamson Petroleum Consultants, Inc.,
reviewed the estimates of oil and natural gas reserves of DLB Oil & Gas,
Inc. as of July 1997, as prepared by DeGolyer & McNaughton, and reviewed
the estimates of oil and natural gas reserves of AnSon Production
Corporation as of December 31, 1997 ("AnSon")prepared by management of
AnSon;
6. met with certain members of Chesapeake's and Hugoton's senior managements
to discuss each company's operations, historical financial statements and
future prospects, including Chesapeake's strategic interest in acquiring
longer-lived reserves;
7. reviewed the historical prices, trading volumes and valuation parameters of
Chesapeake Common Stock and Hugoton Common Stock;
8. reviewed publicly available financial data, stock market performance data
and valuation parameters of companies which we deemed generally comparable
to Chesapeake and Hugoton;
9. reviewed the terms of recent mergers and acquisitions involving companies
which we deemed generally comparable to Chesapeake and Hugoton and the
Merger;
10. conducted such other studies, analyses, inquiries and investigations as we
deemed appropriate.
In the course of our review, we have relied upon and assumed, without
independent verification, the accuracy and completeness of the financial and
other projections provided to us by Chesapeake and Hugoton, including those
prepared by Chesapeake with respect to Hugoton. With respect to Chesapeake's and
Hugoton's projected financial results that could be achieved upon consummation
of the Merger, we have assumed that they have been reasonably prepared on bases
reflecting the best currently available estimates and judgments of the senior
managements of Chesapeake and Hugoton as to the expected future performance of
Chesapeake and Hugoton. With respect to the potential synergies that could be
achieved by Chesapeake and Hugoton upon consummation of the Merger, we have
assumed that they have been reasonably prepared on bases reflecting the best
currently available estimates and judgments of the senior managements of
Chesapeake and Hugoton as to the expected future performance of Chesapeake and
Hugoton, respectively. We have not assumed any responsibility for the
independent verification of any such information or of the projections provided
to us and we have further relied upon the assurances of the senior managements
of Chesapeake and Hugoton that they are unaware of any facts that would make the
information or projections provided to us incomplete or misleading. In arriving
at our opinion, we have not performed or obtained any independent appraisal of
the assets or liabilities of Chesapeake and Hugoton, nor have we been furnished
with any such appraisals. Our opinion is necessarily based on economic, market
and other conditions, and the information made available to us, as of the date
hereof. We have assumed that the Merger will qualify as a tax-free
"reorganization" within the meaning of Section 368(a) of the Code.
We do not express any opinion as to the price or range of prices at which shares
of common stock of Chesapeake may trade subsequent to the consummation of the
Merger.
<PAGE> 192
We have acted as a financial advisor to Chesapeake in connection with the Merger
and will receive a fee for such services.
Bear Stearns has been previously engaged by Chesapeake to provide certain
investment banking and financial advisory services, including serving as an
underwriter with respect to various financings by Chesapeake. In the ordinary
course of business, Bear Stearns may actively trade the equity securities of
Chesapeake for its own account and for the account of its customers and,
accordingly, may at any time hold a long or short position in such securities.
In the ordinary course of business, Bear Stearns may actively trade the equity
securities of Hugoton for its own account and for the account of its customers
and, accordingly, may at any time hold a long or short position in such
securities.
It is understood that this letter is intended for the benefit and use of the
Board of Directors of Chesapeake and does not constitute a recommendation to the
Board of Directors or any holders of Chesapeake Common Stock as to how to vote
in connection with the Merger. This opinion does not address Chesapeake's
underlying business decision to pursue the Merger. This letter is not to be used
for any other purpose, or reproduced, disseminated, quoted to or referred to at
any time, in whole or in part, without our prior written consent; provided,
however, that this letter may be included in its entirety in any joint proxy
statement/prospectus to be distributed to the holders of Chesapeake Common
Stock in connection with the Merger.
Based on and subject to the foregoing, it is our opinion that the Exchange Ratio
in the Merger is fair, from a financial point of view, to the public
shareholders of Chesapeake.
Very truly yours,
BEAR, STEARNS & CO. INC.
By: /s/ STEPHEN STRATY
----------------------------
Senior Managing Director
<PAGE> 193
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The General Corporation Act of Oklahoma provides for indemnification
of each of the Registrant's officers and directors against (a) expenses,
including attorneys' fees, judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with any action, suit or
proceeding brought by reason of his being or having been a director, officer,
employee or agent of the Registrant, or of any other corporation, partnership,
joint venture, trust or other enterprise at the request of the Registrant, other
than an action by or in the right of the Registrant, provided that he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interest of the Registrant, and with respect to any criminal action, he had
no reasonable cause to believe that his conduct was unlawful and (b) expenses,
including attorneys' fees, actually and reasonably incurred by him in connection
with the defense or settlement of any action or suit by or in the right of the
Registrant brought by reason of his being or having been a director, officer,
employee or agent of the Registrant, or any other corporation, partnership,
joint venture, trust or other enterprise at the request of the Registrant,
provided that he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interest of the Registrant, except that no
indemnification shall be made in respect of any claim, issue or matter as to
which he shall have been adjudged liable to the Registrant, unless and only to
the extent that the court in which such action was decided has determined that
the person is fairly and reasonably entitled to indemnity for such expenses
which the court deems proper. Article VIII of the Registrant's Certificate of
Incorporation provides for indemnification of the Registrant's directors and
officers. The Oklahoma General Corporation Act also permits the Registrant to
purchase and maintain insurance on behalf of the Registrant's directors and
officers against any liability arising out of their status as such, whether or
not the Registrant would have the power to indemnify them against such
liability. These provisions may be sufficiently broad to indemnify such persons
for liabilities arising under the Securities Act of 1933 (the "Securities
Act").
The Registrant has entered into indemnity agreements with each of its
directors and executive officers. Under each indemnity agreement, the Registrant
will pay on behalf of the indemnitee, and his executors, administrators and
heirs, any amount which he is or becomes legally obligated to pay because of (i)
any claim or claims from time to time threatened or made against him by any
person because of any act or omission or neglect or breach of duty, including
any actual or alleged error or misstatement or misleading statement, which he
commits or suffers while acting in his capacity as a director and/or officer of
the Registrant or an affiliate or (ii) being a party, or being threatened to be
made a party, to any threatened, pending or contemplated action, suit or
proceeding, whether civil, criminal, administrative or investigative, by reason
of the fact that he is or was an officer, director, employee or agent of the
Registrant or an affiliate or is or was serving at the request of the Registrant
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise. The payments which the Registrant will
be obligated to make hereunder shall include, inter alia, damages, charges,
judgments, fines, penalties, settlements and costs, cost of investigation and
cost of defense of legal, equitable or criminal actions, claims or proceedings
and appeals therefrom, and costs of attachment, supersedeas, bail, surety or
other bonds. The Registrant also provides liability insurance for each of its
directors and executive officers.
II-1
<PAGE> 194
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibits
- ------- -----------------------
<S> <C>
2.1 Agreement and Plan of Merger, dated as of November 12, 1997, among
Chesapeake Energy Corporation, Chesapeake Acquisition Corp., and Hugoton
Energy Corporation (incorporated herein by reference to Annex A hereto).
2.2 Amendment No. 1 to the Agreement and Plan of Merger, dated as of February
9, 1998, among Chesapeake Energy Corporation, Chesapeake Acquisition Corp.,
and Hugoton Energy Corporation (incorporated herein by reference to Annex A
hereto).
3.1 Certificate of Incorporation of Chesapeake (incorporated herein by
reference to Exhibit 3.1 to Registrant's quarterly report on Form 10-Q for
the quarter ended December 31, 1996).
3.2 Bylaws of Chesapeake (incorporated herein by reference to Exhibit 3.2 to
Registrant's registration statement on Form 8-B (No. 001-137260)).
4.1 Indenture dated as of March 15, 1997 among the Registrant, as issuer,
Chesapeake Operating, Inc., Chesapeake Gas Development Corporation and
Chesapeake Exploration Limited Partnership, as Subsidiary Guarantors, and
United States Trust Company of New York, as Trustee, with respect to 7 7/8%
Senior Notes due 2004. Incorporated herein by reference to Exhibit No. 4.1
to Registrant's registration statement on Form S-4 (No. 333-24995).
4.2 Indenture dated as of March 15, 1997 among the Registrant, as issuer,
Chesapeake Operating, Inc., Chesapeake Gas Development Corporation and
Chesapeake Exploration Limited Partnership, as Subsidiary Guarantors, and
United States Trust Company of New York, as Trustee, with respect to 8 1/2%
Senior Notes due 2012. Incorporated herein by reference to Exhibit No. 4.3
to Registrant's registration statement on Form S-4 (No. 333-24995).
4.3 Indenture dated as of May 15, 1995 among Chesapeake Energy Corporation,
its subsidiaries signatory thereto as Subsidiary Guarantors and United
States Trust Company of New York, as Trustee. Incorporated herein by
reference to Exhibit 4.3 to Registrant's registration statement on Form S-4
(No. 33-93718).
4.4 Indenture dated April 1, 1996 among Chesapeake Energy Corporation, its
subsidiaries signatory thereto as Subsidiary Guarantors and United States
Trust Company of New York, as Trustee. Incorporated herein by reference to
Exhibit 4.6 to Registrant's registration statement on Form S-3 (No.
333-1588).
4.5 Stock Registration Agreement dated May 21, 1992 between Chesapeake
Energy Corporation and various lenders, as amended by First Amendment
thereto dated May 26, 1992. Incorporated herein by reference to Exhibits
10.26.1 and 10.26.2 to Registrant's registration statement on Form S-1 (No.
33-55600).
4.6 Form of Agreement and Limited Irrevocable Proxy between Chesapeake Energy
Corporation and certain shareholders of Hugoton Energy Corporation
(incorporated herein by reference to Annex A to Annex A, the Agreement and
Plan of Merger, hereto).
4.7 Form of Agreement and Limited Irrevocable Proxy between Hugoton Energy
Corporation and certain shareholders of Chesapeake Energy Corporation
(incorporated herein by reference to Annex B to Annex A, the Agreement and
Plan of Merger, hereto).
4.8 Form of Registration Rights Agreement between Chesapeake Energy
Corporation and certain shareholders of Hugoton Energy Corporation
(incorporated herein by reference to Exhibit A to Amendment No. 1 to
Agreement and Plan of Merger included in Annex A hereto).
5.1 Opinion of Andrews & Kurth L.L.P. regarding the legality of the securities
being registered.
8.1 Opinion of Andrews & Kurth L.L.P. regarding tax matters.
8.2 Opinion of Vinson & Elkins L.L.P. regarding tax matters.
23.1 Consent of Andrews & Kurth L.L.P. (included in the opinions filed as
Exhibits 5.1 and 8.1 to this Registration Statement).
23.2 Consent of Vinson & Elkins L.L.P. (included in the opinion filed as Exhibit
8.2 to this Registration Statement).
23.3 Consent of Coopers & Lybrand L.L.P. (Chesapeake).
23.4 Consent of Price Waterhouse, LLP (Chesapeake).
23.5 Consent of Ernst & Young LLP (Hugoton).
23.6 Consent of Williamson Petroleum Consultants, Inc. (Chesapeake).
23.7 Consent of Ryder Scott Company (Hugoton).
24.1 Powers of Attorney (included in the signature pages of this Registration
statement).
99.1 Form of Chesapeake Proxy.
99.2 Form of Hugoton Proxy.
99.3 Consent of Petrie Parkman & Co.
99.4 Consent of Bear, Stearns & Co. Inc. (included in, and incorporated herein
by reference to, Annex C to the Joint Proxy Statement/Prospectus).
</TABLE>
(b) Financial Statement Schedules:
None
ITEM 22. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned Registrant hereby undertakes:
II-2
<PAGE> 195
(1) That, for purposes of determining any liability under the
Securities Act of 1933, each filing of the registrant's annual report pursuant
to Section 13(a) or Section 15(d) of the Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report pursuant to
Section 15(d) of the Exchange Act of 1934) that is incorporated by reference in
the registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof;
(2) To deliver or cause to be delivered with the prospectus, to each
person to whom the prospectus is sent or given, the latest annual report to
security holders that is incorporated by reference in the prospectus and
furnished pursuant to and meeting the requirements of Rule 14a-3 or Rule 14c-3
under the Securities Exchange Act of 1934; and, where interim financial
information required to be presented by Article 3 of Regulation S-X are not set
forth in the prospectus, to deliver, or cause to be delivered to each person to
whom the prospectus is sent or given, the latest quarterly report that is
specifically incorporated by reference in the prospectus to provide such interim
financial information;
(3) That, prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this Registration
Statement, by any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus
will contain the information called for by the applicable registration form with
respect to reofferings by persons who may be deemed underwriters, in addition to
the information called for by the other Items of the applicable form;
(4) That every prospectus: (i) that is filed pursuant to paragraph (4)
immediately preceding, or (ii) that purports to meet the requirements of section
10(a)(3) of the Securities Act and is used in connection with an offering of
securities subject to Rule 415, will be filed as a part of an amendment to the
registration statement and will not be used until such amendment is effective,
and that, for purposes of determining any liability under the Securities Act,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof;
(5) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 4, 10(b), 11 or 13 of Form S-4,
within one business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date of the
Registration Statement through the date of responding to the request; and
(6) To supply by means of a post-effective amendment all information
concerning a transaction, and the Company being acquired involved therein, that
was not the subject of and included in the Registration Statement when it became
effective.
II-3
<PAGE> 196
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-4 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Oklahoma City, State of Oklahoma, on February 9,
1998.
CHESAPEAKE ENERGY CORPORATION
By: /s/ Aubrey K. McClendon
------------------------------------
Aubrey K. McClendon
Chairman of the Board
and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned officers
and directors of Chesapeake Energy Corporation hereby constitutes and appoints
Aubrey K. McClendon and Marcus C. Rowland, and each of them, his true and lawful
attorney-in-fact and agent, with full power to act without the other and with
full power of substitution and resubstitution, for him and on his behalf and in
his name, place and stead, in any and all capacities, to sign, execute and file
with the Securities and Exchange commission and any state securities regulatory
board or commission any documents relating to the proposed issuance and
registration of the securities offered pursuant to this Registration Statement
on Form S-4 under the Securities Act, including, any and all amendments
(including post-effective amendments and amendments thereto) to this
Registration Statement on Form S-4 and any registration statement for the same
offering that is to be effective upon the filing pursuant to rule 462(b) under
the Securities Act, with all exhibits and any and all documents required to be
filed with respect thereto, with any regulatory authority, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises in order to effectuate the same as fully to all intents
and purposes as he himself might or could do if personally present, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or any of
them, or their substitute or substitutes, may lawfully do or cause to be done.
Pursuant to the requirements of the Securities Act, as amended, this
Registration Statement on Form S-4 has been signed by the following persons in
the capacities indicated on February 9, 1998.
<TABLE>
<CAPTION>
Name Title
---- -----
<S> <C>
/s/ Aubrey K. McClendon Chairman of the Board of Directors,
- ------------------------------------------- Chief Executive Officer and Director(Principal Executive Officer)
Aubrey K. McClendon
/s/ Tom L. Ward President, Chief Operating Officer
- ------------------------------------------- and Director (Principal Executive Officer)
Tom L. Ward
/s/ Marcus C. Rowland Senior Vice-President Finance and
- ------------------------------------------- Chief Financial Officer (Principal Financial Officer)
Marcus C. Rowland
/s/ Ronald A. Lefaive Controller (Principal Accounting Officer)
- -------------------------------------------
Ronald A. Lefaive
Director
- -------------------------------------------
Edgar F. Heizer, Jr.
/s/ Breene M. Kerr Director
- -------------------------------------------
Breene M. Kerr
/s/ Shannon T. Self Director
- -------------------------------------------
Shannon T. Self
/s/ Frederick B. Whittemore Director
- -------------------------------------------
Frederick B. Whittemore
/s/ Walter C. Wilson Director
- -------------------------------------------
Walter C. Wilson
</TABLE>
II-4
<PAGE> 197
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibits
- ------- -----------------------
<S> <C>
2.1 Agreement and Plan of Merger, dated as of November 12, 1997, among
Chesapeake Energy Corporation, Chesapeake Acquisition Corp., and Hugoton
Energy Corporation (incorporated herein by reference to Annex A hereto).
2.2 Amendment No. 1 to the Agreement and Plan of Merger, dated as of February
9, 1998, among Chesapeake Energy Corporation, Chesapeake Acquisition Corp.,
and Hugoton Energy Corporation (incorporated herein by reference to Annex A
hereto).
3.1 Certificate of Incorporation of Chesapeake (incorporated herein by
reference to Exhibit 3.1 to Registrant's quarterly report on Form 10-Q for
the quarter ended December 31, 1996).
3.2 Bylaws of Chesapeake (incorporated herein by reference to Exhibit 3.2 to
Registrant's registration statement on Form 8-B (No. 001-137260)).
4.1 Indenture dated as of March 15, 1997 among the Registrant, as issuer,
Chesapeake Operating, Inc., Chesapeake Gas Development Corporation and
Chesapeake Exploration Limited Partnership, as Subsidiary Guarantors, and
United States Trust Company of New York, as Trustee. with respect to 7 7/8%
Senior Notes due 2004. Incorporated herein by reference to Exhibit No. 4.1
to Registrant's registration statement on Form S-4 (No. 333-24995).
4.2 Indenture dated as of March 15, 1997 among the Registrant, as issuer,
Chesapeake Operating, Inc., Chesapeake Gas Development Corporation and
Chesapeake Exploration Limited Partnership, as Subsidiary Guarantors, and
United States Trust Company of New York, as Trustee, with respect to 8 1/2%
Senior Notes due 2012. Incorporated herein by reference to Exhibit No. 4.3
to Registrant's registration statement on Form S-4 (No. 333-24995).
4.3 Indenture dated as of May 15, 1995 among Chesapeake Energy Corporation,
its subsidiaries signatory thereto as Subsidiary Guarantors and United
States Trust Company of New York, as Trustee. Incorporated herein by
reference to Exhibit 4.3 to Registrant's registration statement on Form S-4
(No. 33-93718).
4.4 Indenture dated April 1, 1996 among Chesapeake Energy Corporation, its
subsidiaries signatory thereto as Subsidiary Guarantors and United States
Trust Company of New York, as Trustee. Incorporated herein by reference to
Exhibit 4.6 to Registrant's registration statement on Form S-3 (No.
333-1588).
4.5 Stock Registration Agreement dated May 21, 1992 between Chesapeake
Energy Corporation and various lenders, as amended by First Amendment
thereto dated May 26, 1992. Incorporated herein by reference to Exhibits
10.26.1 and 10.26.2 to Registrant's registration statement on Form S-1 (No.
33-55600).
4.6 Form of Agreement and Limited Irrevocable Proxy between Chesapeake Energy
Corporation and certain shareholders of Hugoton Energy Corporation
(incorporated herein by reference to Annex A to Annex A, the Agreement and
Plan of Merger, hereto).
4.7 Form of Agreement and Limited Irrevocable Proxy between Hugoton Energy
Corporation and certain shareholders of Chesapeake Energy Corporation
(incorporated herein by reference to Annex B to Annex A, the Agreement and
Plan of Merger, hereto).
4.8 Form of Registration Rights Agreement between Chesapeake Energy
Corporation and certain shareholders of Hugoton Energy Corporation
(incorporated herein by reference to Exhibit A to Amendment No. 1 to
Agreement and Plan of Merger included in Annex A hereto).
5.1 Opinion of Andrews & Kurth L.L.P. regarding the legality of the securities
being registered.
8.1 Opinion of Andrews & Kurth L.L.P. regarding tax matters.
8.2 Opinion of Vinson & Elkins L.L.P. regarding tax matters.
23.1 Consent of Andrews & Kurth L.L.P. (included in the opinions filed as
Exhibits 5.1 and 8.1 to this Registration Statement).
23.2 Consent of Vinson & Elkins L.L.P. (included in the opinion filed as Exhibit
8.2 to this Registration Statement).
23.3 Consent of Coopers & Lybrand L.L.P. (Chesapeake).
23.4 Consent of Price Waterhouse, LLP (Chesapeake).
23.5 Consent of Ernst & Young LLP (Hugoton).
23.6 Consent of Williamson Petroleum Consultants, Inc. (Chesapeake).
23.7 Consent of Ryder Scott Company (Hugoton).
24.1 Powers of Attorney (included in the signature pages of this Registration
statement).
99.1 Form of Chesapeake Proxy.
99.2 Form of Hugoton Proxy.
99.3 Consent of Petrie Parkman & Co.
99.4 Consent of Bear, Stearns & Co. Inc. (included in, and incorporated
herein by reference to, Annex C to the Joint Proxy Statement/Prospectus)
</TABLE>
<PAGE> 1
EXHIBIT 5.1
[ANDREWS & KURTH L.L.P. LETTERHEAD]
February 10, 1998
Board of Directors
Chesapeake Energy Corporation
6100 North Western Avenue
Oklahoma City, Oklahoma 73118
Gentlemen:
We have acted as special counsel to Chesapeake Energy Corporation, an
Oklahoma corporation ("Chesapeake"), in connection with the proposed issuance
by Chesapeake of up to 27,166,000 shares (the "Shares") of common stock, par
value $0.01 per share, of Chesapeake (the "Common Stock"). The Shares are
proposed to be offered to holders of Common Stock of Hugoton Energy
Corporation, a Kansas corporation ("Hugoton"), in connection with the merger of
Chesapeake Acquisition Corp., a Kansas corporation and an indirect, wholly
owned subsidiary of Chesapeake ("Merger Sub"), with and into Hugoton with
Hugoton as the surviving corporation, pursuant to the Agreement and Plan of
Merger dated as of November 12, 1997, as amended, between Chesapeake, Merger
Sub, and Hugoton (the "Merger Agreement"). This opinion is being delivered in
connection with Chesapeake's Registration Statement on Form S-4 (the
"Registration Statement") relating to the registration of the offering and sale
of the Shares under the Securities Act of 1933, as amended, pursuant to the
Merger Agreement.
As the basis for the opinion hereinafter expressed, we have examined such
statutes, regulations, corporate records and documents, certificates of
corporate and public officials and other instruments as we have deemed necessary
or advisable for the purposes of this opinion. In such examination, we have
assumed the authenticity of all documents submitted to us as originals and the
conformity with the original documents of all documents submitted to us as
copies.
Based on the foregoing and on such legal considerations as we deem
relevant, we are of the opinion that the Shares to be issued by Chesapeake to
shareholders of Hugoton as described in the Merger Agreement, have been validly
authorized and, when issued and delivered in accordance with the Merger
Agreement, will be validly issued, fully paid and non-assessable.
We hereby consent to the use of this opinion as an exhibit to the
Registration Statement and to the use of our name under the heading "Legal
Matters" in the Registration Statement.
Very truly yours,
/s/ ANDREWS & KURTH L.L.P.
<PAGE> 1
EXHIBIT 8.1
[ANDREWS & KURTH L.L.P. LETTERHEAD]
February 9, 1998
Chesapeake Energy Corporation
6100 North Western Avenue
Oklahoma City, Oklahoma 73118
TAX OPINION
Gentlemen:
We have acted as counsel for Chesapeake Energy Corporation, an Oklahoma
corporation (the "Company"), in connection with the Agreement and Plan of
Merger, dated as of November 12, 1997, among the Company, Chesapeake
Acquisition Corp., a Kansas corporation, and Hugoton (as amended by
Amendment No. 1 thereto, dated as of February 9, 1998, the "Merger
Agreement"), pursuant to which Chesapeake Acquisition Corp. will be merged
with and into Hugoton.
All statements of law or legal conclusions attributable to us in the
discussion under the caption "Certain Material U.S. Federal Income Tax
Consequences" in the prospectus included in the Registration Statement on Form
S-4 of Chesapeake Energy Corporation filed in respect of the transactions
contemplated in the Merger Agreement reflect our opinion with respect to the
matters set forth therein.
We hereby consent to the references to our firm and this opinion contained
in the prospectus included in the Registration Statement.
Very truly yours,
/s/ Andrews & Kurth L.L.P.
<PAGE> 1
EXHIBIT 8.2
Vinson & Elkins
ATTORNEYS AT LAW
VINSON & ELKINS L.L.P
2300 FIRST CITY TOWER
1001 FANNIN STREET
HOUSTON, TEXAS 77002-6760
TELEPHONE (713) 758-2222
FAX (713) 758-2346
WRITER'S TELEPHONE WRITER'S FAX
(713) 753-1050 (713) 615-5774
February 10, 1998
Hugoton Energy Corporation
310 North Main Street, Suite 1900
Wichita, Kansas 67202
Ladies and Gentlemen:
You have requested our opinion with respect to certain federal income tax
consequences under the Internal Revenue Code of 1986, as amended (the "Code"),
of the merger of Chesapeake Acquisition Corp. ("Sub") with and into Hugoton
Energy Corporation ("Hugoton"), as hereinafter described (the "Merger"). Our
opinion is based upon (i) the Agreement and Plan of Merger, dated November 12,
1997, by and among Chesapeake Energy Corporation ("Parent"),Sub and Hugoton and
Amendment No. 1 thereto dated February 9,1998 (together, the "Merger
Agreement")(1), (ii) the facts set forth in the Joint Proxy Statement of Hugoton
and Parent relating to the Merger (the "Proxy Statement"), and (iii) the
representations as to the existence of certain facts set forth in Officer's
Certificate dated February 10, 1998 (the "Representations"). Our opinion is
expressly conditioned upon the initial and continuing accuracy of all of such
facts, documents and Representations.
FACTS
HUGOTON
Hugoton is a Kansas corporation with its principal office at 310 North Main
Street, Suite 1900, Wichita, Kansas 67202. Hugoton is an independent oil and gas
company, maintains it books on an accrual method of accounting and uses the
calendar year as its taxable year. As of November 11, 1997, the authorized
capital stock of Hugoton consisted of (i) 100,000,000 shares of common stock, no
par value per share, of which 19,838,574 shares were issued and outstanding and
(ii) 10,000,000 authorized shares of preferred stock, no par value per share,
none of which have been issued.
- ---------------
1 Capitalized terms used but not defined herein have the meanings
ascribed to them in the Merger Agreement.
<PAGE> 2
Hugoton Energy Corporation
Page 2
February 10, 1998
PARENT
Parent is an Oklahoma corporation with its principal office at 6100 North
Western Avenue, Oklahoma City, Oklahoma 73118. Parent is an independent oil and
gas company, maintains its books on an accrual method of accounting and uses a
June 30 fiscal year. As of November 11, 1997, the authorized capital stock of
the Parent consisted of (i) 100,000,000 shares of common stock, par value $.01
per share, of which 70,477,893 shares were issued and outstanding and (ii)
10,000,000 authorized shares of preferred stock, $0.01 par value per share, none
of which have been issued.
PARENT SUB AND SUB
Chesapeake Mid-Continent Corp. ("Parent Sub") is a domestic corporation,
all of the issued and outstanding capital stock of which is owned by Parent. Sub
is a Kansas corporation formed solely for the purpose of engaging in the Merger.
Sub has not conducted any business or held any assets (except for a nominal
amount of cash received in connection with the issuance of its original shares
of stock). All of the issued and outstanding capital stock of Sub is owned by
Parent Sub.
THE MERGER
The Merger Agreement provides for the merger of Sub with and into Hugoton
in accordance with the applicable provisions of the KCL. As a result of the
Merger, at the Effective Time, the separate corporate existence of Sub shall
cease, and Hugoton shall be the surviving corporation in the Merger.
At the Effective Time and by virtue of the Merger, each share of Hugoton
Common Stock will be converted automatically into the right to receive 1.3
shares of Parent Common Stock and each share of Sub stock will be converted
automatically into stock of Hugoton.
No certificates or script representing fractional shares of Parent Common
Stock will be issued in connection with the Merger. Instead, such fractional
shares will be aggregated and sold by the Exchange Agent, and the proceeds of
such sale will be distributed to the holders of shares of Hugoton Common Stock
otherwise entitled to receive a fraction of a share of Parent Common Stock.
Under the KCL, Hugoton shareholders are not entitled to dissenter's rights.
STATEMENT OF AUTHORITIES
Section 368(a)(1)(B) of the Code provides that the term "reorganization"
includes the acquisition by one corporation, in exchange solely for all or part
of its voting stock (or in exchange solely for all or part of the voting stock
of a corporation that is in control of the acquiring corporation), of stock of
another corporation if, immediately after the acquisition, the acquiring
corporation has control of such corporation.
<PAGE> 3
Hugoton Energy Corporation
Page 3
February 10, 1998
In Revenue Ruling 74-565, 1974-2 Cum. Bull. 125, the Internal Revenue
Service addressed the application of section 368(a)(1)(B) to a transaction
similar to the Merger. In the ruling, P, a publicly traded corporation, owned
all of the stock of S-1. S-1 owned all of the stock of S-2. S-2 merged with and
into Y, a publicly traded corporation, with Y being the surviving corporation.
Pursuant to the merger, the Y stock was exchanged for P stock and the S-2 stock
was converted into Y stock with the result that Y became a wholly owned
subsidiary of S-1. The ruling holds that the transitory existence of S-2 will be
ignored and the transaction will be treated as an acquisition by S-1, in
exchange solely for P voting stock (P being in control of S-1), of the stock of
Y, which qualifies as a reorganization within the meaning of section
368(a)(1)(B) of the Code.
Section 368(b) of the Code provides that the term "a party to a
reorganization" includes both corporations, in the case of a reorganization
resulting from the acquisition by one corporation of stock of another, and that
in the case of a reorganization qualifying under section 368(a)(1)(B) if the
stock is acquired for stock of a corporation in control of the acquiring
corporation, the term also includes the controlling corporation. Section 368(c)
provides that the term "control" means the ownership of stock possessing at
least 80 percent of the total combined voting power of all classes of stock
entitled to vote and at least 80 percent of the total number of shares of all
other classes of stock of the corporation.
Section 368(a)(2)(F) of the Code provides generally that if two or more
parties to a transaction described in section 368(a)(1) were investment
companies (as defined in section 368(a)(2)(F)(iii) and (iv)) immediately before
the transaction, then the transaction shall not be considered to be a
reorganization with respect to any such investment company (and its
shareholders) unless such investment company was a regulated investment company,
a real estate investment trust, or a corporation which meets the requirements of
section 368(a)(2)(F)(ii) of the Code. Section 368(a)(3) provides additional
rules with respect to the reorganization of a corporation in a title 11 or
similar case.
Section 1032(a) of the Code provides that no gain or loss shall be
recognized to a corporation on the receipt of money or other property in
exchange for stock of such corporation.
Section 354(a)(1) of the Code provides that no gain or loss shall be
recognized if stock or securities in a corporation a party to a reorganization
are, in pursuance of the plan of reorganization, exchanged solely for stock or
securities in such corporation or in another corporation a party to the
reorganization.
Section 361(a) of the Code provides that no gain or loss shall be
recognized to a corporation if such corporation is a party to a reorganization
and exchanges property, in pursuance of the plan of reorganization, solely for
stock or securities in another corporation a party to the reorganization.
Treas. Reg. Section 1.368-1(b) provides that requisite to a reorganization
under the Code are a continuity of the business enterprise under the modified
corporate form and a continuity of interest
<PAGE> 4
Hugoton Energy Corporation
Page 4
February 10, 1998
therein on the part of those persons who, directly or indirectly, were the
owners of the enterprise prior to the reorganization.(2)
Treas. Reg. Section 1.368-1(d) provides that continuity of business
enterprise requires that the acquiring corporation either (i) continue the
historic business of the acquired corporation or (ii) use a significant portion
of the acquired corporation's historic business assets in a business, and that
the continuity of business enterprise requirement is satisfied if the acquiring
corporation continues the acquired corporation's historic business.
In Revenue Procedure 77-37,1977-2 Cum. Bull. 568, the Internal Revenue
Service published operating rules used in considering requests for rulings
involving reorganizations. Section 3.02 of Revenue Procedure 77-37 provides that
the "continuity of interest" requirement of Treas. Reg. Section 1.368-1(b) is
satisfied if there is continuing interest through stock ownership in the
acquiring corporation (or a corporation in control thereof) on the part of the
former shareholders of the acquired corporation which is equal in value, as of
the effective date of the reorganization, to at least 50 percent of the value
of all of the formerly outstanding stock of the acquired corporation as of the
same date. Sales, redemptions, and other dispositions of stock occurring prior
or subsequent to the plan of reorganization will be considered in determining
whether there is a 50 percent continuing interest through stock ownership as of
the effective date of the reorganization. Revenue Procedure 77-37, by its
terms, does not define, as a matter of law, the lower limits of continuity of
interest. See, e.g., John A. Nelson Co. v. Helvering, 296 U.S.374 (1935);
Helvering v. Minnesota Tea Co., 296 U.S.378 (1935); Miller v. Commissioner, 84
F.2d 415 (6th Cir. 1936); and United States v. Adkins-Phelps, Inc., 400 F.2d
737 (8th Cir. 1968).
In Revenue Procedure 86-42, 1986-2 Cum. Bull. 722, the Internal Revenue
Service set forth standard representations to be submitted as a prerequisite to
the issuance of rulings on the tax consequences of a reorganization described in
section 368(a)(1)(B) of the Code, which to the extent relevant are substantially
the same as the representations set forth in the Representations. In Revenue
Procedure 90-56, 1990-2 Cum. Bull. 639, the Internal Revenue Service stated that
it will no longer issue advance rulings on whether a transaction constitutes a
corporate reorganization within the meaning of section 368(a)(1)(B) of the Code,
but did not revoke Revenue Procedure 86-42.
CONCLUSION
Based upon the facts and Representations referenced above, the authorities
and ruling policies of the Internal Revenue Service discussed above as applied
to those facts and
- -------------------
(2) New Treasury regulations were recently adopted that address the
continuity of interest requirement in reorganizations under section 368 of the
Code. The new regulations, which generally permit post-reorganization
dispositions of the acquiring corporation stock to parties that are unrelated to
the acquiring corporation, are not applicable to transactions that were the
subject of a binding contract executed before January 29, 1998. Accordingly, the
new regulations do not apply to the Merger.
<PAGE> 5
Hugoton Energy Corporation
Page 5
February 10, 1998
Representations, and conditioned upon our understanding that the transactions
contemplated by the Merger Agreement will be carried out strictly in accordance
with the terms of the Merger Agreement and that there are no other relevant
agreements, arrangements, or understandings among any of Parent, Parent Sub,
Sub, Hugoton or the stockholders of Hugoton other than those described or
referenced in the Merger Agreement or the Proxy Statement, it is our opinion
that (i) the Merger will constitute a reorganization within the meaning of
section 368(a) of the Code, (ii) Parent, Parent Sub and Hugoton will each be a
party to that reorganization within the meaning of section 368(b) of the Code,
(iii) no gain or loss will be recognized for federal income tax purposes by
Parent, Parent Sub, Sub or Hugoton as a result of the Merger, and (iv) except
for cash in lieu of fractional shares of Parent Common Stock, no gain or loss
will be recognized for federal income tax purposes by the stockholders of
Hugoton to the extent they receive Parent Common Stock solely in exchange for
Hugoton Common Stock pursuant to the Merger.
In addition, in our opinion the description of the material federal income
tax consequences of the Merger set forth under the heading "Certain Material
U.S. Federal Income Tax Consequences" in the Proxy Statement is accurate and
complete in all material respects and such discussion represents our opinion.
We express no opinion as to the tax treatment of the Merger under the
provisions of any other sections of the Code which also may be applicable
thereto or to the tax treatment of any conditions existing at the time of, or
effects resulting from, any transactions that are not specifically addressed in
the foregoing opinion.
We hereby consent to the filing of this opinion with the Securities and
Exchange Commission as an exhibit to the registration statement that includes
the Proxy Statement and to the reference to our Firm under the heading "Certain
U.S. Federal Income Tax Consequences" in the Proxy Statement. In giving such
consent, we do not admit that we are in the category of persons whose consent is
required under Section 7 of the Securities Act of 1933, as amended.
Very truly yours,
/s/ VINSON & ELKINS L.L.P.
VINSON & ELKINS L.L.P.
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We consent to the incorporation by reference in this registration statement on
Form S-4 (File No. 333-_____) of our report dated September 30, 1997, on our
audits of the consolidated financial statements of Chesapeake Energy Corporation
as of June 30, 1997 and 1996 and for the years then ended. We also consent to
the references to our firm under the caption "Experts."
COOPERS & LYBRAND L.L.P.
Oklahoma City, Oklahoma
February 9, 1998
<PAGE> 1
EXHIBIT 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We consent to the incorporation by reference in this registration statement on
Form S-4 of our report dated September 20, 1995, except for the third paragraph
of Note 9 which is as of October 9, 1997, on our audit of the consolidated
financial statements of Chesapeake Energy Corporation for the year ended June
30, 1995. We also consent to the reference to our firm under the caption
"Experts."
PRICE WATERHOUSE LLP
Houston, Texas
February 9, 1998
<PAGE> 1
EXHIBIT 23.5
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" in the Joint
Proxy Statement of Hugoton Energy Corporation and Chesapeake Energy Corporation
that is made a part of the Registration Statement (Form S-4 dated February 10,
1998) and Prospectus of Chesapeake Energy Corporation for the registration of
26,420,407 shares of its common stock, and to the incorporation by reference
therein of our report dated February 7, 1997, with respect to the consolidated
financial statements and schedules of Hugoton Energy Corporation included in
its Annual Report (Form 10-K) for the year ended December 31, 1996, filed with
the Securities and Exchange Commission.
/s/ ERNST & YOUNG LLP
Wichita, Kansas
February 9, 1998
<PAGE> 1
EXHIBIT 23.6
[WILLIAMSON PETROLEUM CONSULTANTS LETTERHEAD]
CONSENT OF WILLIAMSON PETROLEUM CONSULTANTS, INC.
As independent oil and gas consultants, Williamson Petroleum Consultants, Inc.
hereby consents to the references to our firm and to our reserves report
entitled "Evaluation of Oil and Gas Reserves to the Interests of Chesapeake
Energy Corporation in Certain Properties in Louisiana and Texas, Effective June
30, 1997, for Disclosure to the Securities and Exchange Commission, Williamson
Project 7.8496" dated September 17, 1997 in the Annual Report on Form 10-K of
Chesapeake Energy Corporation incorporated by reference into the Joint Proxy
Statement/Prospectus constituting part of the Registration Statement on Form
S-4 of Chesapeake Energy Corporation to be filed with the Securities and
Exchange Commission on or about February 9, 1998.
/s/ WILLIAMSON PETROLEUM CONSULTANTS, INC.
WILLIAMSON PETROLEUM CONSULTANTS, INC.
Houston, Texas
February 9, 1998
<PAGE> 1
EXHIBIT 23.7
[RYDER SCOTT COMPANY LETTERHEAD]
CONSENT OF RYDER SCOTT COMPANY
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-4 of our reserve report and all schedules, exhibits, and
attachments thereto and to any reference made to us on Form S-4 as a result of
such incorporation.
/s/ RYDER SCOTT COMPANY
PETROLEUM ENGINEERS
RYDER SCOTT COMPANY
PETROLEUM ENGINEERS
Houston, Texas
February 9, 1998
<PAGE> 1
EXHIBIT 99.1
FORM OF PROXY
- --------------------------------------------------------------------------------
CHESAPEAKE ENERGY CORPORATION
PROXY FOR
SPECIAL MEETING OF SHAREHOLDERS
MARCH 10, 1998
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS. The undersigned
shareholder of Chesapeake Energy Corporation ("Chesapeake") hereby appoints
Aubrey K. McClendon and Marcus C. Rowland, or either of them, as proxies, each
with power to act without the other and with full power of substitution, for the
undersigned to vote the number of shares of common stock of Chesapeake that the
undersigned would be entitled to vote if personally present at the Special
Meeting of shareholders of Chesapeake to be held on March 10, 1998, at 10:00
a.m., CST time, at 6100 North Western Avenue, Oklahoma City, Oklahoma, and at
any adjournment or postponement thereof, on the following matters that are more
particularly described in the Joint Proxy Statement/Prospectus dated February
, 1998:
(1) Proposal to approve and adopt the Agreement and Plan of Merger dated
November 12, 1997, as amended by Amendment No. 1 dated as of February 9,
1998, among Chesapeake, Chesapeake Acquisition Corp., a wholly owned
subsidiary of Chesapeake ("Sub") and Hugoton Energy Corporation ("Hugoton")
pursuant to which Sub will merge with and into Hugoton (the "Merger") and
each outstanding share of Hugoton Common Stock will be converted into the
right to receive 1.3 shares of Chesapeake Common Stock, $.01 par value, and
the related issuance of Chesapeake Common Stock pursuant to the Merger.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(2) To consider and take action upon any other matter which may properly come
before the meeting or any adjournment or postponement thereof.
(Continued and to be signed on other side)
- --------------------------------------------------------------------------------
<PAGE> 2
- --------------------------------------------------------------------------------
(Continued from other side.)
This proxy, when properly executed, will be voted in the manner directed
herein by the undersigned shareholder. IF NO DIRECTION IS MADE, THIS PROXY WILL
BE VOTED "FOR" PROPOSAL 1. Receipt of the Joint Proxy Statement/Prospectus dated
February , 1998, is hereby acknowledged.
--------------------------------
--------------------------------
Signature of Shareholder(s)
Please sign your name exactly as
it appears hereon. Joint owners
must each sign. When signing as
attorney, executor,
administrator, trustee or
guardian, please give your full
title as it appears thereon.
Date: , 1998.
PLEASE MARK, SIGN, DATE AND RETURN USING THE ENCLOSED ENVELOPE.
- --------------------------------------------------------------------------------
<PAGE> 1
EXHIBIT 99.2
FORM OF PROXY
- --------------------------------------------------------------------------------
HUGOTON ENERGY CORPORATION
PROXY FOR
SPECIAL MEETING OF STOCKHOLDERS
[DATE]
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS. The undersigned
stockholder of Hugoton Energy Corporation ("Hugoton") hereby appoints Floyd C.
Wilson and W. Mark Womble, or either of them, as proxies, each with power to act
without the other and with full power of substitution, for the undersigned to
vote the number of shares of common stock of Hugoton that the undersigned would
be entitled to vote if personally present at the Special Meeting of Stockholders
of Hugoton to be held on , at a.m., time, at , and
at any adjournment or postponement thereof, on the following matters that are
more particularly described in the Joint Proxy Statement/Prospectus dated
, 1997:
(1) Proposal to approve the merger of Chesapeake Acquisition Corp. ("Sub"), an
indirect wholly-owned subsidiary of Chesapeake Energy Corporation
("Chesapeake"), with and into Hugoton and the conversion of each outstanding
share of Hugoton common stock, no par value, into the right to receive 1.3
shares of Chesapeake common stock, $.01 par value, pursuant to the Agreement
and Plan of Merger dated November 12, 1997, as amended by Amendment No. 1
dated as of February 9, 1998, among Chesapeake, Sub and Hugoton.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(2) To consider and take action upon any other matter which may properly come
before the meeting or any adjournment or postponement thereof.
(Continued and to be signed on other side)
- --------------------------------------------------------------------------------
<PAGE> 2
- --------------------------------------------------------------------------------
(Continued from other side.)
This proxy, when properly executed, will be voted in the manner directed
herein by the undersigned stockholder. IF NO DIRECTION IS MADE, THIS PROXY WILL
BE VOTED "FOR" PROPOSAL 1. Receipt of the Joint Proxy Statement/Prospectus dated
, is hereby acknowledged.
----------------------------------
----------------------------------
Signature of Stockholder(s)
Please sign your name exactly as
it appears hereon. Joint owners
must each sign. When signing as
attorney, executor, administrator,
trustee or guardian, please give
your full title as it appears
thereon.
Date: , 1997.
PLEASE MARK, SIGN, DATE AND RETURN USING THE ENCLOSED ENVELOPE.
- --------------------------------------------------------------------------------
<PAGE> 1
EXHIBIT 99.3
CONSENT OF PETRIE PARKMAN
The undersigned hereby consents to the use of its opinion letter dated
February __, 1998 to the Board of Directors of Hugoton Energy Corporation in
the Joint Proxy Statement/Prospectus forming a part of this Registration
Statement on Form S-4 and to the references to such opinion in this
Registration Statement on Form S-4 under the captions "SUMMARY", "THE MERGER --
Reasons for the Merger; Recommendations of the Boards of Directors", and "THE
MERGER -- Opinions of Financial Advisors". In giving such consent, we do not
admit that we come within the category of persons whose consent is required
under Section 7 of the Securities Act of 1933, as amended, or the rules and
regulations of the Securities and Exchange Commission thereunder, nor do we
hereby admit that we are experts with respect to any part of the Registration
Statement within the meaning of the term "expert" as used in the Securities Act
of 1933, as amended, or the rules and regulations of the Securities and
Exchange Commission promulgated thereunder.
PETRIE PARKMAN & Co.
February 10, 1998
