<PAGE> 1
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
CHESAPEAKE ENERGY CORPORATION
-----------------------------
(Name of Registrant as Specified in its Charter)
------------------------------------------------
(Name of Person(s) Filing Proxy Statement
if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
----------------------------------------------------------------------
2) Aggregate number of securities to which transaction applies:
----------------------------------------------------------------------
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:
-----------------------------------
4) Proposed maximum aggregate value of transaction:
----------------------
5) Total fee paid:
-------------------------------------------------------
Set forth the amount on which the filing fee is calculated and state
how it was determined.
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
-----------------------------------------
2) Form, Schedule or Registration Statement No.:
-------------------
3) Filing Party:
---------------------------------------------------
4) Date Filed:
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<PAGE> 2
CHESAPEAKE ENERGY CORPORATION
6100 NORTH WESTERN AVENUE
OKLAHOMA CITY, OKLAHOMA 73118
---------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD JUNE 23, 1999
---------------
TO OUR SHAREHOLDERS:
The 1999 Annual Meeting of Shareholders of Chesapeake Energy Corporation, an
Oklahoma corporation (the "Company"), will be held at The Waterford Marriott
Hotel, Ballroom A, 6300 Waterford Boulevard, Oklahoma City, Oklahoma, on
Wednesday, June 23, 1999 at 9:00 A.M., local time, for the following purposes:
1. To elect two directors for terms expiring in the year 2002; and
2. To transact such other business as may properly come before the meeting
or any adjournment thereof.
Shareholders of record at the close of business on April 26, 1999 are
entitled to notice of and to vote at the meeting. A complete list of the
shareholders entitled to vote at the meeting will be available for examination
by any shareholder at the Company's executive offices during ordinary business
hours for a period of at least ten days prior to the meeting.
The accompanying Proxy Statement contains information regarding the director
nominees to be voted on at the meeting. The Board of Directors recommends a vote
"FOR" each nominee.
YOUR VOTE IS IMPORTANT. YOU MAY VOTE IN ANY ONE OF THE FOLLOWING WAYS:
o USE THE TOLL-FREE TELEPHONE NUMBER SHOWN ON THE PROXY CARD;
o USE THE INTERNET WEB SITE SHOWN ON THE PROXY CARD; OR
o MARK, SIGN, DATE AND PROMPTLY RETURN THE ENCLOSED PROXY CARD IN THE
POSTAGE-PAID ENVELOPE.
SHAREHOLDERS WHO ATTEND THE MEETING MAY REVOKE THEIR PROXIES AND VOTE IN PERSON
IF THEY DESIRE.
BY ORDER OF THE BOARD OF DIRECTORS
Janice A. Dobbs
Corporate Secretary
Oklahoma City, Oklahoma
April 30, 1999
<PAGE> 3
CHESAPEAKE ENERGY CORPORATION
---------------
PROXY STATEMENT
---------------
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON JUNE 23, 1999
GENERAL INFORMATION
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of Chesapeake Energy Corporation, an Oklahoma
corporation (the "Company"), for use at the Annual Meeting of Shareholders of
the Company (the "Meeting") to be held on the date, at the time and place and
for the purposes set forth in the accompanying Notice of Annual Meeting of
Shareholders, and any adjournment of the Meeting.
This Proxy Statement, the accompanying form of proxy and the Company's
Annual Report for the fiscal year ended December 31, 1998 are being mailed to
shareholders of record on or about April 30, 1999. Shareholders are referred to
the Annual Report for financial information concerning the activities of the
Company.
The Board of Directors has established April 26, 1999 as the record date
(the "Record Date") to determine shareholders entitled to notice of and to vote
at the Meeting. At the close of business on the Record Date, 96,910,308 shares
of $.01 par value common stock of the Company ("Common Stock") were outstanding
and entitled to vote at the Meeting. Each share is entitled to one vote. The
holders of a majority of the outstanding Common Stock, present in person or by
proxy, will constitute a quorum for the transaction of business at the Meeting.
Registered shareholders can vote their shares via (i) a toll-free telephone
call from the U.S. and Canada; or (ii) the Internet; or (iii) by mailing their
signed proxy card. The telephone and Internet voting procedures are designed to
authenticate shareholders' identities, to allow shareholders to vote their
shares and to confirm that their instructions have been properly recorded. The
Company has been advised by counsel that the procedures which have been put in
place are consistent with the requirements of applicable law. Specific
instructions to be followed by any registered shareholder interested in voting
via telephone or the Internet are set forth on the enclosed proxy card.
Each proxy properly completed and returned to the Company in time for the
Meeting, and not revoked, will be voted in accordance with the instructions
given. If there are no contrary instructions, proxies will be voted "FOR" the
election of all nominees as directors. Proxies may be revoked at any time prior
to the voting of the proxy by (i) the execution and submission of a revised
proxy, (ii) written notice to the Corporate Secretary of the Company, or (iii)
voting in person at the Meeting. In the absence of such revocation, shares
represented by the proxies will be voted at the Meeting.
The election of each director nominee will be by plurality vote. The
Company's Corporate Secretary will appoint an inspector of election to tabulate
all votes and to certify the results of all matters voted upon at the Meeting.
It is the Company's policy (i) to count abstentions and broker non-votes for
purposes of determining the presence of a quorum at the Meeting, (ii) to treat
abstentions as shares represented at the Meeting and voting against a proposal
and to disregard broker non-votes in determining results on proposals requiring
a majority vote, and (iii) to consider neither abstentions nor broker non-votes
in determining results of plurality votes.
The cost of soliciting proxies in the enclosed form will be borne by the
Company. In addition to solicitation by mail, officers, employees or agents of
the Company may solicit proxies personally, or by telephone, telegraph,
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<PAGE> 4
facsimile transmission or other means of communication. The Company will request
banks and brokers or other similar agents or fiduciaries to transmit the proxy
material to the beneficial owners for their voting instructions and will
reimburse them for their expenses in so doing.
ELECTION OF DIRECTORS
Pursuant to provisions of the Company's Certificate of Incorporation and
Bylaws, the Board of Directors has fixed the number of directors at seven. The
Company's Certificate of Incorporation and Bylaws provide for three classes of
directors serving staggered three-year terms, with each class to be as nearly
equal in number as possible. The Board of Directors has nominated Aubrey K.
McClendon and Shannon T. Self for re-election as directors for terms expiring at
the 2002 Annual Meeting of Shareholders, and in each case, until their
successors are elected and qualified. Proxies cannot be voted for a greater
number of persons than the number of nominees named. The nominees are presently
directors of the Company whose terms expire at the Meeting. Other directors who
are remaining on the Board will continue in office in accordance with their
previous elections until the expiration of their terms at the 2000 or 2001
Annual Meeting of Shareholders, as the case may be.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" BOTH OF THE NOMINEES FOR
ELECTION TO THE BOARD OF DIRECTORS.
It is the intention of the persons named in the enclosed form of proxy to
vote such proxies for the election of the two nominees. The Board of Directors
expects that both nominees will be available for election but, in the event that
the nominees are not so available, proxies received will be voted for substitute
nominees to be designated by the Board of Directors or, in the event no such
designation is made by the Board of Directors, proxies will be voted for a
lesser number of nominees.
INFORMATION REGARDING NOMINEES AND DIRECTORS
The following information is furnished for each person who is nominated for
re-election as a director or who is continuing to serve as a director of the
Company after the Meeting.
NOMINEES FOR RE-ELECTION AS DIRECTORS FOR TERMS EXPIRING IN 2002
Aubrey K. McClendon, age 39, has served as Chairman of the Board, Chief
Executive Officer and a director since co-founding the Company in 1989. From
1982 to 1989, Mr. McClendon was an independent producer of oil and gas in
affiliation with Tom L. Ward, the Company's President and Chief Operating
Officer. Mr. McClendon is a member of the Board of Visitors of the Fuqua School
of Business at Duke University, an Executive Committee member of the Texas
Independent Producers and Royalty Owners Association, a director of the Oklahoma
Independent Petroleum Association, and a director of the Louisiana Independent
Oil and Gas Association. Mr. McClendon is a 1981 graduate of Duke University.
Shannon T. Self, age 42, has been a director of the Company since 1993. He
is a shareholder in the law firm of Self, Giddens & Lees, Inc., a professional
corporation, in Oklahoma City, which he co-founded in 1991. Mr. Self was an
associate and shareholder in the law firm of Hastie and Kirschner, Oklahoma
City, from 1984 to 1991 and was employed by Arthur Young & Co. from 1979 to
1980. Mr. Self is a member of the Visiting Committee of Northwestern University
School of Law and a director of The Rock Island Group, a private computer firm
in Oklahoma City. Mr. Self is also a Certified Public Accountant. He graduated
from the University of Oklahoma in 1979 and from Northwestern University Law
School in 1984.
DIRECTORS WHOSE TERMS EXPIRE IN 2000
Breene M. Kerr, age 70, has been a director of the Company since 1993. He is
Vice Chairman of Seven Seas Petroleum Corporation, Houston, Texas, an
exploration and production company with operations in Colombia, South America.
In 1969, Mr. Kerr founded Kerr Consolidated, Inc., which was sold in 1996. In
1969, Mr. Kerr co-
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<PAGE> 5
founded the Resource Analysis and Management Group and remained its senior
partner until 1982. From 1967 to 1969, he was Vice President of Kerr-McGee
Chemical Corporation. From 1951 through 1967, Mr. Kerr worked for Kerr-McGee
Corporation as a geologist and land manager. Mr. Kerr has served as chairman of
the Investment Committee for the Massachusetts Institute of Technology and is a
life member of the Corporation (Board of Trustees) of that university. He served
as a director of Kerr-McGee Corporation from 1957 to 1981. Mr. Kerr currently is
a trustee and serves on the Investment Committee of the Brookings Institute in
Washington, D.C., and has been an associate director since 1987 of Aven Gas &
Oil, Inc., an oil and gas property management company located in Oklahoma City.
Mr. Kerr graduated from the Massachusetts Institute of Technology in 1951.
Walter C. Wilson, age 63, has been a director of the Company since 1993.
From 1963 to 1974 and from 1978 to 1997, Mr. Wilson was a general agent with
Massachusetts Mutual Life Insurance Company. From 1974 to 1978, he was Senior
Vice President of Massachusetts Mutual Life Insurance Company, and from 1958 to
1963, he was an agent with that company. Mr. Wilson is a member of the Board of
Trustees of Springfield College, Springfield, Massachusetts, and is a director
of Earth Satellite Corporation of Rockville, Maryland and "Q" Companies, Inc. of
Houston, Texas. Mr. Wilson graduated in 1958 from Dartmouth College.
DIRECTORS WHOSE TERMS EXPIRE IN 2001
Tom L. Ward, age 39, has served as President, Chief Operating Officer, and a
director of the Company since co-founding the Company in 1989. From 1982 to
1989, Mr. Ward was an independent producer of oil and gas in affiliation with
Aubrey K. McClendon, the Company's Chairman and Chief Executive Officer. Mr.
Ward is a member of the Board of Trustees of Anderson University in Anderson,
Indiana. Mr. Ward graduated from the University of Oklahoma in 1981.
Edgar F. Heizer, Jr., age 69, has been a director of the Company since 1993.
From 1985 to the present, Mr. Heizer has been a private venture capitalist. He
founded Heizer Corporation, a publicly traded business development company, in
1969 and served as Chairman and Chief Executive Officer from 1969 until 1986,
when Heizer Corporation was reorganized into a number of public and private
companies. Mr. Heizer was Assistant Treasurer of the Allstate Insurance Company
from 1962 to 1969 in charge of Allstate's venture capital operations. He was
employed by Booz, Allen and Hamilton from 1958 to 1962, Kidder, Peabody & Co.
from 1956 to 1958, and Arthur Andersen & Co. from 1954 to 1956. He serves on the
advisory board of the Kellogg School of Management at Northwestern University.
Mr. Heizer is a director of Material Science Corporation; a New York Stock
Exchange listed company in Elk Grove, Illinois, and several private companies.
Mr. Heizer graduated from Northwestern University in 1951 and from Yale
University Law School in 1954.
Frederick B. Whittemore, age 68, has been a director of the Company since
1993. Mr. Whittemore has been an advisory director of Morgan Stanley Dean Witter
& Co. since 1989 and was a managing director of Morgan Stanley Dean Witter & Co.
from 1970 to 1989. He was Vice-Chairman of the American Stock Exchange from 1982
to 1984. Mr. Whittemore is a director of Partner Reinsurance Company, Bermuda;
Maxcor Financial Group Inc., New York; SunLife of New York, New York; KOS
Pharmaceuticals, Inc., Miami, Florida; and Southern Pacific Petroleum,
Australia, NL. Mr. Whittemore graduated from Dartmouth College in 1953 and from
the Amos Tuck School of Business Administration in 1954.
THE BOARD OF DIRECTORS AND ITS COMMITTEES
During 1998 the Board of Directors held four meetings in person, took action
by written consent five times, and held four meetings by telephone conference.
The Board of Directors has standing compensation, stock option and audit
committees. It does not have a standing nominating committee. During 1998 the
Board of Directors appointed a committee of the Board of Directors to oversee an
affiliate loan transaction (the "Loan Committee").
The duties of the Compensation Committee are described under "Executive
Compensation - Compensation Committee Report". Messrs. Heizer, McClendon, Ward
and Whittemore serve on the Compensation Committee. The Compensation Committee
held two meetings during 1998.
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<PAGE> 6
Messrs. McClendon and Ward serve on committees which administer the
Company's 1992, 1994, 1996 and 1999 stock option plans with respect to all
employee participants who are not executive officers. A committee comprised of
Messrs. Heizer and Whittemore administers the 1994, 1996 and 1999 plans with
respect to employee participants who are executive officers. Each committee for
the 1994 and 1996 plans held three meetings during the year ended December 31,
1998. There were no committee meetings for the Company's other stock option
plans during 1998.
The Audit Committee annually recommends the independent accountants to be
appointed by the Board of Directors as auditor of the Company and its
subsidiaries, and reviews the arrangements for and the results of the auditor's
examination of the Company's books and records, internal accounting control
procedures, and the activities and recommendations of the Company's internal
auditors. It reports to the Board of Directors on Audit Committee activities and
makes such investigations as it deems appropriate. Messrs. Kerr, Self and Wilson
serve on the Audit Committee. The Audit Committee held two meetings during 1998.
The Board of Directors formed the Loan Committee in June of 1998 to assist
in the negotiation and documentation of two loans extended by one of the
Company's subsidiaries to Messrs. McClendon and Ward. Messrs. Heizer and Wilson
serve on the Loan Committee and met on numerous occasions during the year. The
loans to Messrs. McClendon and Ward are described in "Certain Transactions -
Loans to Executives".
Each director attended, either in person or by telephone conference, all of
the Board and committee meetings held while serving as a director or committee
member during 1998.
INFORMATION REGARDING OFFICERS
EXECUTIVE OFFICERS
In addition to Messrs. McClendon and Ward, the following are also executive
officers of the Company.
Marcus C. Rowland, age 46, was appointed Executive Vice President in March
1998 and has been the Company's Chief Financial Officer since 1993. He served as
Senior Vice President from September 1997 to March 1998 and as Vice President -
Finance from 1993 until 1997. From 1990 until his association with the Company,
Mr. Rowland was Chief Operating Officer of Anglo-Suisse, L.P. assigned to the
White Nights Russian Enterprise, a joint venture of Anglo-Suisse, L.P. and
Phibro Energy Corporation, a major foreign operation which was granted the right
to engage in oil and gas operations in Russia. Prior to his association with
White Nights Russian Enterprise, Mr. Rowland owned and managed his own oil and
gas company and prior to that was Chief Financial Officer of a private
exploration company in Oklahoma City from 1981 to 1985. Mr. Rowland is a
Certified Public Accountant. Mr. Rowland graduated from Wichita State University
in 1975.
Steven C. Dixon, age 40, has been Senior Vice President - Operations since
1995 and served as Vice President - Exploration from 1991 to 1995. Mr. Dixon was
a self-employed geological consultant in Wichita, Kansas from 1983 through 1990.
He was employed by Beren Corporation in Wichita, Kansas from 1980 to 1983 as a
geologist. Mr. Dixon graduated from the University of Kansas in 1980.
J. Mark Lester, age 46, has been Senior Vice President - Exploration since
1995 and served as Vice President - Exploration from 1989 to 1995. From 1986 to
1989, Mr. Lester was self-employed and acted as a consultant to Messrs.
McClendon and Ward. He was employed by various independent oil companies in
Oklahoma City from 1980 to 1986, and was employed by Union Oil Company of
California from 1977 to 1980 as a geophysicist. Mr. Lester graduated from Purdue
University in 1975 and in 1977.
Henry J. Hood, age 38, was appointed Senior Vice President - Land and Legal
in 1997 and served as Vice President - Land and Legal from 1995. Mr. Hood was
retained as a consultant to the Company during the two years prior to his
joining the Company, and he was associated with the law firm of White, Coffey,
Galt & Fite from 1992
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to 1995. Mr. Hood was associated with the law firm of Watson & McKenzie from
1987 to 1992. Mr. Hood is a member of the Oklahoma and Texas Bar Associations.
Mr. Hood graduated from Duke University in 1982 and from the University of
Oklahoma College of Law in 1985.
Martha A. Burger, age 46, has served as Treasurer since 1995 and as Vice
President - Human Resources since June 1998. She was the Company's Human
Resources Manager from 1996 to 1998. From 1994 to 1995, she served in various
accounting positions with the Company including Assistant Controller -
Operations. From 1989 to 1993, Ms. Burger was employed by Hadson Corporation as
Assistant Treasurer and from 1993 to 1994, served as Vice President and
Controller of Hadson Corporation. Prior to joining Hadson Corporation, Ms.
Burger was employed by The Phoenix Resource Companies, Inc. as Assistant
Treasurer and by Arthur Andersen & Co. Ms. Burger is a Certified Public
Accountant and graduated from the University of Central Oklahoma in 1982 and
from Oklahoma City University in 1992.
OTHER OFFICERS
Thomas L. Winton, age 52, has served as Senior Vice President - Information
Technology and Chief Information Officer since July 1998. From 1985 until his
association with the Company, Mr. Winton served as the Director, Information
Services Department, at Union Pacific Resources Company. Prior to that period
Mr. Winton held the positions of Regional Manager - Information Services from
1984 until 1985 and Manager - Technical Applications Planning and Development
from 1980 until 1984. Mr. Winton also served as an analyst and supervisor in the
Operations Research Division, Conoco Inc., from 1973 until 1980. Mr. Winton
graduated from Oklahoma Christian University in 1969, Creighton University in
1973, and the University of Houston in 1980. Mr. Winton also completed the Tuck
Executive Program, Amos Tuck School of Business, Dartmouth College in 1987.
Michael A. Johnson, age 33, has served as Vice President - Financial
Reporting since March 1998 and as Chief Accounting Officer since April 1999.
From 1993 to March 1998 he served as Assistant Controller to the Company. From
1991 to 1993, he served as Project Manager for Phibro Energy Production, Inc., a
Russian joint venture. From 1987 to 1991, Mr. Johnson served as audit manager
for Arthur Andersen & Co. Mr. Johnson is a Certified Public Accountant and
graduated from the University of Texas at Austin in 1987.
Thomas S. Price, Jr., age 47, has served as Vice President - Corporate
Development since 1992 and was a consultant to the Company during the prior two
years. He was employed by Kerr-McGee Corporation, Oklahoma City, from 1988 to
1990 and by Flag-Redfern Oil Company from 1984 to 1988. Mr. Price is Vice
Chairman of the Mid-Continent Oil and Gas Association and a member of the
Petroleum Investor Relations Association and the National Investor Relations
Institute. Mr. Price graduated from the University of Central Oklahoma in 1983,
from the University of Oklahoma in 1989, and from the American Graduate School
of International Management in 1992.
Frank E. Jordan, age 38, has served as Vice President - Production since
February 1998. From 1994 to 1998, Mr. Jordan served in various engineering
positions with the Company, including District Manager - College Station in 1996
and Vice President - Drilling, Northern Division in 1997. Prior to joining the
Company, Mr. Jordan served as a Drilling Engineer for Sedco Forex Schlumberger
from 1985 to 1989 and as a Production Engineer for Kerr-McGee Corporation from
1991 to 1994. Mr. Jordan is a member of the Society of Petroleum Engineers and
graduated from Texas A & M University in 1984 and in 1990.
Stephen W. Miller, age 42, has served as Vice President - Operations since
1996 and served as District Manager - College Station District from 1994 to
1996. Mr. Miller held various engineering positions in the oil and gas industry
from 1980 to 1993. Mr. Miller is a registered Professional Engineer in Texas, is
a member of the Society of Petroleum Engineers and graduated from Texas A & M
University in 1980.
Tony S. Say, age 42, has served as President of Chesapeake Energy Marketing,
Inc. since 1995. In 1993, Mr. Say co-founded Princeton Natural Gas Company,
which was purchased by Chesapeake Energy Corporation in 1995. From 1986 to 1993,
Mr. Say was President and Chief Executive Officer of Clinton Gas Transmission,
Inc., a
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company he co-founded and later sold to a major utility in 1993. From 1979 to
1986, Mr. Say was employed by Delhi Gas Pipeline Corporation. Mr. Say is a
member of the Natural Gas Society of Oklahoma and the Natural Gas Society of
North Texas and graduated from the University of Oklahoma in 1979.
Janice A. Dobbs, age 50, has served as Corporate Secretary and Compliance
Manager since 1993. From 1975 until her association with the Company, Ms. Dobbs
was the corporate/securities legal assistant with the law firm of Andrews Davis
Legg Bixler Milsten & Price, Inc. in Oklahoma City. From 1973 to 1975, Ms. Dobbs
was with Texas International Company, an oil and gas exploration and production
company in Oklahoma City. Ms. Dobbs is a Certified Legal Assistant, an associate
member of the American Bar Association, a member of the American Society of
Corporate Secretaries and the Society of Human Resources Management.
SECURITY OWNERSHIP OF MANAGEMENT
AND CERTAIN BENEFICIAL OWNERS
SECURITY OWNERSHIP
The table below sets forth as of the Record Date (i) the name and address of
each person known by management to own beneficially more than 5% of the
Company's outstanding 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 Common Stock beneficially
owned by each of the Company's nominees, directors and executive officers listed
in the Summary Compensation Table below and by all directors and executive
officers of the Company as a group. Unless otherwise noted, the persons named
below have sole voting and investment power with respect to such shares.
<TABLE>
<CAPTION>
BENEFICIAL OWNER COMMON STOCK
- -------------------------------------------------------- ---------------------------------------------------------------------
NUMBER OF OPTION TOTAL PERCENT OF
SHARES SHARES(a) OWNERSHIP CLASS
------------- -------------- ------------ --------------
<S> <C> <C> <C> <C>
Tom L. Ward(1)(2) ..................................... 11,635,988(b)(c) 481,500 12,117,488 12.5%
6100 North Western Avenue
Oklahoma City, OK 73118
Aubrey K. McClendon(1)(2) ............................. 10,496,299(c)(d) 346,500 10,842,799 11.2%
6100 North Western Avenue
Oklahoma City, OK 73118
Franklin Advisers, Inc................................. 380,000 6,366,867(e) 6,746,867 7.0%
777 Mariners Island Boulevard
San Mateo, CA 94403
Edgar F. Heizer, Jr.(1) ............................... 709,650 379,750 1,089,400 1.1%
Breene M. Kerr(1) ..................................... 423,250(f) 62,500 485,750 (3)
Shannon T. Self(1) .................................... 42,382(g) 435,666 478,048 (3)
Frederick B. Whittemore(1) ............................ 481,800(h) 784,000 1,265,800 1.3%
Walter C. Wilson(1) ................................... 0 283,000 283,000 (3)
Steven C. Dixon(2) .................................... 13,256(c) 364,900 378,156 (3)
J. Mark Lester(2) ..................................... 31,583(c) 77,400 108,983 (3)
Marcus C. Rowland(2) .................................. 74,830(c) 40,500 115,330 (3)
All directors and executive officers as a group ....... 23,934,588 3,257,966 28,176,869 28.2%
</TABLE>
- ----------
(1) Director
(2) Executive officer of the Company
(3) Less than 1%
(a) Represents shares of Common Stock which can be acquired on the Record Date
or 60 days thereafter through the exercise of options or conversion of the
Company's Convertible Preferred Stock.
(b) Includes 1,846,860 shares held by TLW Investments, Inc., an Oklahoma
corporation of which Mr. Ward is sole shareholder and chief executive
officer; 1,098,600 shares held by the Aubrey K. McClendon Children's Trust
of which Mr. Ward is Trustee; and 21,435 shares held by Mr. Ward's
immediate family sharing the same household. Excluded are the shares of
Common Stock beneficially owned by Mr. McClendon which may be attributed to
Mr. Ward based on a jointly filed Schedule 13D. Mr. Ward disclaims such
ownership.
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<PAGE> 9
(c) Includes shares purchased on behalf of the executive officer in the
Chesapeake Energy Corporation Savings and Incentive Stock Bonus Plan (Tom
L. Ward, 17,903 shares; Aubrey K. McClendon, 24,467 shares; Steven C.
Dixon, 8,256 shares; J. Mark Lester, 7,083 shares; and Marcus C. Rowland,
12,724 shares).
(d) Includes 508,560 shares held by Chesapeake Investments, an Oklahoma limited
partnership of which Mr. McClendon is sole general partner. Excluded are
the shares beneficially owned by Mr. Ward which may be attributed to Mr.
McClendon based on a jointly filed Schedule 13D. Mr. McClendon disclaims
such ownership.
(e) Consists of 885,000 shares of the Company's Convertible Preferred Stock
which is convertible into 6,366,867 shares of the Company's Common Stock
based upon Schedule 13G filed January 28, 1999.
(f) Includes 250,000 shares held by Talbot Fairfield II Limited Partnership, of
which Mr. Kerr is a general partner.
(g) Consists of 42,382 shares held by Pearson Street Limited Partnership, an
Oklahoma limited partnership of which Mr. Self is a general partner and the
remaining partner is Mr. Self's spouse.
(h) Includes 41,750 shares held by Mr. Whittemore as trustee of the Whittemore
Foundation.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires the Company's directors and executive officers and persons who
beneficially own more than 10% of the Company's Common Stock to file reports of
ownership and subsequent changes with the Securities and Exchange Commission.
Based only on a review of copies of such reports and written representations
delivered to the Company by such persons, the Company believes that there were
no violations of Section 16(a) by such persons during 1998.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
In 1997 the Company changed its fiscal year end to December 31 from June 30.
The following table sets forth for the fiscal year ended December 31, 1998, the
transition period for the six months ended December 31, 1997 and the fiscal
years ended June 30, 1997 and June 30, 1996 the compensation earned in each
period by (i) the Company's chief executive officer, and (ii) the four other
most highly compensated executive officers:
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------------------------------- SECURITIES
UNDERLYING
OTHER OPTION ALL
PERIOD ANNUAL AWARDS OTHER
NAME AND PRINCIPAL POSITION ENDING SALARY BONUS COMPENSATION(a) (# OF SHARES) COMPENSATION(c)
- ----------------------------- -------- --------- -------- --------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Aubrey K. McClendon 12/31/98 $ 350,000 $325,000 $ 115,429 1,505,808(b) $ 10,000
Chairman of the Board and 12/31/97 $ 150,000 $200,000 $ 92,625 457,800(b) $ --
Chief Executive Officer 6/30/97 $ 250,000 $310,000 $ 76,950 463,000(b) $ 11,050
6/30/96 $ 185,000 $100,000 $ 65,408 288,000 $ 8,295
Tom L. Ward 12/31/98 $ 350,000 $325,000 $ 115,977 1,505,808(b) $ 10,000
President and 12/31/97 $ 150,000 $200,000 $ 93,026 457,800(b) $ --
Chief Operating Officer 6/30/97 $ 250,000 $310,000 $ 77,908 463,000(b) $ 13,700
6/30/96 $ 185,000 $100,000 $ 66,850 288,000 $ 8,368
Marcus C. Rowland 12/31/98 $ 250,000 $175,000 (d) 397,476(b) $ 10,000
Executive Vice President 12/31/97 $ 112,500 $100,000 (d) 131,600(b) $ --
and Chief Financial Officer 6/30/97 $ 185,000 $155,000 (d) 36,000(b) $ 9,500
6/30/96 $ 165,000 $ 40,000 (d) 171,000 $ 11,333
Steven C. Dixon 12/31/98 $ 190,000 $110,000 (d) 206,120(b) $ 10,000
Senior Vice President - 12/31/97 $ 87,500 $ 50,000 (d) 92,000(b) $ --
Operations 6/30/97 $ 145,000 $105,000 (d) 30,000(b) $ 11,500
6/30/96 $ 125,000 $ 27,500 (d) 97,500 $ 9,870
J. Mark Lester 12/31/98 $ 175,000 $100,000 (d) 153,691(b) $ 10,000
Senior Vice President - 12/31/97 $ 80,000 $ 40,000 (d) 69,700(b) $ 2,660
Exploration 6/30/97 $ 132,500 $ 70,000 (d) 19,500(b) $ 10,400
6/30/96 $ 110,000 $ 21,000 (d) 64,500 $ 7,635
</TABLE>
8
<PAGE> 10
- ----------
(a) Represents the cost of personal benefits provided by the Company, including
for fiscal year 1998 personal accounting support ($68,725 each), personal
vehicle ($18,000 each), travel allowance ($25,000 each) and country club
membership dues ($3,704 for Mr. McClendon and $4,252 for Mr. Ward).
(b) Includes option grants which were canceled and replacement options which
were granted at 60% of the original grant. No awards of restricted stock or
payments under long-term incentive plans were made by the Company to any of
the named executives in any period covered by the table.
(c) Represents Company matching contributions to the Chesapeake Energy
Corporation Savings and Incentive Stock Bonus Plan.
(d) Other annual compensation did not exceed the lesser of $50,000 ($25,000 for
the transition period) or 10% of the executive officer's salary and bonus
during the period.
STOCK OPTIONS GRANTED DURING 1998
The following table sets forth information concerning options to purchase
Common Stock granted during 1998 to the executive officers named in the Summary
Compensation Table. Amounts represent stock options granted under the Company's
1994 and 1996 stock option plans and include both incentive and non-qualified
stock options. One-fourth of each option becomes exercisable on each of the
first four grant date anniversaries. See "Option Repricing" below. The exercise
price of each option represents the market price of the Common Stock on the date
of grant.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------ POTENTIAL REALIZABLE VALUE
PERCENT OF AT ASSUMED ANNUAL RATES
TOTAL OPTIONS OF STOCK PRICE APPRECIATION
NUMBER OF GRANTED TO FOR OPTION TERM(a)
SECURITIES EMPLOYEES IN EXERCISE ------------------------------
UNDERLYING YEAR ENDED PRICE PER EXPIRATION
NAME OPTIONS GRANTED 12/31/98 SHARE DATE 5% 10%
- --------------------- ---------------- ------------- ----------- ----------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Aubrey K. McClendon 400,000(b) 2.6% $6.69 N/A N/A N/A
514,680(b) 3.3% $4.06 N/A N/A N/A
500,000(b) 3.2% $3.00 N/A N/A N/A
1,505,808(c) 9.7% $1.13 10/16/08 $1,070,104 $2,711,853
Tom L. Ward 400,000(b) 2.6% $6.69 N/A N/A N/A
514,680(b) 3.3% $4.06 N/A N/A N/A
500,000(b) 3.2% $3.00 N/A N/A N/A
1,505,808(c) 9.7% $1.13 10/16/08 $1,070,104 $2,711,853
Marcus C. Rowland 100,000(b) 0.6% $6.69 N/A N/A N/A
138,960(b) 0.9% $4.06 N/A N/A N/A
125,000(b) 0.8% $3.00 N/A N/A N/A
397,476(c) 2.6% $1.13 10/16/08 $ 282,469 $ 715,826
Steven C. Dixon 50,000(b) 0.3% $6.69 N/A N/A N/A
85,200(b) 0.5% $4.06 N/A N/A N/A
40,000(b) 0.3% $3.00 N/A N/A N/A
206,120(c) 1.3% $1.13 10/16/08 $ 146,479 $ 371,207
J. Mark Lester 40,000(b) 0.3% $6.69 N/A N/A N/A
65,820(b) 0.4% $4.06 N/A N/A N/A
35,000(b) 0.2% $3.00 N/A N/A N/A
153,691(c) 1.0% $1.13 10/16/08 $ 109,221 $ 276,787
</TABLE>
- ----------
(a) The assumed annual rates of stock price appreciation of 5% and 10% are set
by the Securities and Exchange Commission and are not intended as a
forecast of possible future appreciation in stock prices.
(b) Option was canceled upon grant of replacement option to purchase 60% of
shares covered by the original option.
(c) This includes the repriced options received by the executive officer in
connection with the October 16, 1998 repricing which resulted in a
forfeiture of previously granted options to purchase 603,872 shares for Mr.
McClendon, 603,872 shares for Mr. Ward, 164,984 shares for Mr. Rowland,
104,074 shares for Mr. Dixon and 69,127 shares for Mr. Lester.
9
<PAGE> 11
OPTION REPRICING
The following table sets forth information about the repricing of options to
purchase Common Stock held by executive officers. Amounts represent replacement
stock options granted under the Company's 1994 and 1996 stock option plans and
include both incentive and non-qualified stock options. The replacement options
granted in 1994 are fully vested and the replacement options granted on October
16, 1998 vest in equal annual increments over four years. The exercise price of
each option represents the market price of the Common Stock on the date of
grant.
<TABLE>
<CAPTION>
LENGTH OF
ORIGINAL
MARKET OPTION TERM
NUMBER OF PRICE OF EXERCISE REMAINING
DATE SECURITIES STOCK AT PRICE AT AT DATE OF
NAME AND OPTIONS UNDERLYING TIME OF TIME OF NEW REPRICING
PRINCIPAL POSITION REPRICED OPTIONS REPRICED REPRICING REPRICING EXERCISE PRICE YEARS DAYS
- ------------------------ ------------ ---------------- ---------- --------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Aubrey K. McClendon 6/13/97(a) 200,000 $14.75 $25.88 $14.75 9 183
Chairman of the Board 6/13/97(a) 63,000 $14.75 $17.67 $14.75 8 295
and 8/21/97(a) 157,800 $ 7.31 $14.75 $ 7.31 9 296
Chief Executive 6/15/98(a) 180,000 $ 4.06 $ 8.75 $ 4.06 9 16
Officer 6/15/98(a) 94,680 $ 4.06 $ 7.31 $ 4.06 9 67
6/15/98(a) 240,000 $ 4.06 $ 6.69 $ 4.06 9 205
10/16/98 114,014 $ 1.13 $ 5.67 $ 1.13 6 319
10/16/98 162,000 $ 1.13 $ 4.92 $ 1.13 6 192
10/16/98 329,794 $ 1.13 $ 4.06 $ 1.13 9 243
10/16/98 300,000 $ 1.13 $ 3.00 $ 1.13 9 273
Tom L. Ward 6/13/97(a) 200,000 $14.75 $25.88 $14.75 9 183
President and 6/13/97(a) 63,000 $14.75 $17.67 $14.75 8 295
Chief Operating 8/21/97(a) 157,800 $ 7.31 $14.75 $ 7.31 9 296
Officer 6/15/98(a) 180,000 $ 4.06 $ 8.75 $ 4.06 9 16
6/15/98(a) 94,680 $ 4.06 $ 7.31 $ 4.06 9 67
6/15/98(a) 240,000 $ 4.06 $ 6.69 $ 4.06 9 205
10/16/98 114,014 $ 1.13 $ 5.67 $ 1.13 6 319
10/16/98 162,000 $ 1.13 $ 4.92 $ 1.13 6 192
10/16/98 329,794 $ 1.13 $ 4.06 $ 1.13 9 243
10/16/98 300,000 $ 1.13 $ 3.00 $ 1.13 9 273
Marcus C. Rowland 1/21/94 81,000 $ 0.56 $ 1.07 $ 0.56 9 0
Executive Vice 4/25/97(a) 36,000 $14.25 $17.67 $14.25 8 344
President and Chief 8/21/97(a) 21,600 $ 7.31 $14.25 $ 7.31 9 247
Financial Officer 6/15/98(a) 48,000 $ 4.06 $ 8.75 $ 4.06 9 67
6/15/98(a) 30,960 $ 4.06 $ 7.31 $ 4.06 9 67
6/15/98(a) 60,000 $ 4.06 $ 6.69 $ 4.06 9 205
10/16/98 40,500 $ 1.13 $ 5.67 $ 1.13 6 319
10/16/98 48,600 $ 1.13 $ 4.92 $ 1.13 6 192
10/16/98 83,376 $ 1.13 $ 4.06 $ 1.13 9 243
10/16/98 75,000 $ 1.13 $ 3.00 $ 1.13 9 273
Steven C. Dixon 1/21/94 145,800 $ 0.56 $ 1.07 $ 0.56 9 0
Senior Vice President- 4/25/97(a) 30,000 $14.25 $17.67 $14.25 8 344
Operations 8/21/97(a) 18,000 $ 7.31 $14.25 $ 7.31 9 247
6/15/98(a) 30,000 $ 4.06 $ 8.75 $ 4.06 9 67
6/15/98(a) 29,165 $ 4.06 $ 7.31 $ 4.06 9 67
6/15/98(a) 26,035 $ 4.06 $ 6.69 $ 4.06 9 205
10/16/98 40,500 $ 1.13 $ 5.67 $ 1.13 6 319
10/16/98 40,500 $ 1.13 $ 4.92 $ 1.13 6 192
10/16/98 51,120 $ 1.13 $ 4.06 $ 1.13 9 243
10/16/98 24,000 $ 1.13 $ 3.00 $ 1.13 9 273
</TABLE>
10
<PAGE> 12
<TABLE>
<CAPTION>
LENGTH OF
ORIGINAL
MARKET OPTION TERM
NUMBER OF PRICE OF EXERCISE REMAINING
DATE SECURITIES STOCK AT PRICE AT AT DATE OF
NAME AND OPTIONS UNDERLYING TIME OF TIME OF NEW REPRICING
PRINCIPAL POSITION REPRICED OPTIONS REPRICED REPRICING REPRICING EXERCISE PRICE YEARS DAYS
- ------------------------ ------------ ---------------- ---------- --------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Henry J. Hood 4/25/97(a) 19,500 $14.25 $17.67 $14.25 8 344
Senior Vice President- 8/21/97(a) 16,242 $ 7.31 $14.25 $ 7.31 9 247
Land and Legal 6/15/98(a) 24,000 $ 4.06 $ 8.75 $ 4.06 9 67
6/15/98(a) 17,820 $ 4.06 $ 7.31 $ 4.06 9 67
6/15/98(a) 24,000 $ 4.06 $ 6.69 $ 4.06 9 205
10/16/98 18,900 $ 1.13 $ 5.67 $ 1.13 6 319
10/16/98 5,063 $ 1.13 $ 4.92 $ 1.13 6 192
10/16/98 39,492 $ 1.13 $ 4.06 $ 1.13 9 243
10/16/98 21,000 $ 1.13 $ 3.00 $ 1.13 9 273
J. Mark Lester 1/21/94 145,800 $ 0.56 $ 1.07 $ 0.56 9 0
Senior Vice President- 4/25/97(a) 19,500 $14.25 $17.67 $14.25 8 344
Exploration 8/21/97(a) 14,146 $ 7.31 $14.25 $ 7.31 9 247
6/15/98(a) 24,000 $ 4.06 $ 8.75 $ 4.06 9 67
6/15/98(a) 16,721 $ 4.06 $ 7.31 $ 4.06 9 67
6/15/98(a) 25,099 $ 4.06 $ 6.69 $ 4.06 9 205
10/16/98 27,000 $ 1.13 $ 5.67 $ 1.13 6 319
10/16/98 16,200 $ 1.13 $ 4.92 $ 1.13 6 192
10/16/98 39,491 $ 1.13 $ 4.06 $ 1.13 9 243
10/16/98 21,000 $ 1.13 $ 3.00 $ 1.13 9 273
Martha A. Burger 4/25/97(a) 13,500 $14.25 $17.67 $14.25 8 344
Treasurer and 8/21/97(a) 8,100 $ 7.31 $14.25 $ 7.31 9 247
Vice President- 6/15/98(a) 10,260 $ 4.06 $ 8.75 $ 4.06 9 67
Human Resources 6/15/98(a) 9,000 $ 4.06 $ 7.31 $ 4.06 9 67
6/15/98(a) 9,000 $ 4.06 $ 6.69 $ 4.06 9 205
10/16/98 6,750 $ 1.13 $ 5.67 $ 1.13 6 319
10/16/98 4,050 $ 1.13 $ 4.92 $ 1.13 6 192
10/16/98 16,956 $ 1.13 $ 4.06 $ 1.13 9 243
10/16/98 9,000 $ 1.13 $ 3.00 $ 1.13 9 273
</TABLE>
- ----------
(a) Option was canceled and a replacement option was granted at 60% of the
number of shares covered by the original option.
AGGREGATED OPTION EXERCISES IN 1998 AND DECEMBER 31, 1998 OPTION VALUES
The following table sets forth information about options exercised by the
named executive officers during 1998 and the unexercised options to purchase
Common Stock held by them at December 31, 1998.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT 12/31/98 OPTIONS AT 12/31/98(a)
SHARES -------------------------- ---------------------------
ACQUIRED VALUE
NAME ON EXERCISE REALIZED(b) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Aubrey K. McClendon -- $ -- 346,500 1,505,808 $ -- $ --
Tom L. Ward -- $ -- 661,500 1,505,808 $ 70,596 $ --
Marcus C. Rowland -- $ -- 40,500 397,476 $ -- $ --
Steven C. Dixon 2,000 $ 7,148 364,900 206,120 $ 68,396 $ --
J. Mark Lester -- $ -- 77,400 153,691 $ 21,103 $ --
</TABLE>
- ----------
(a) At December 31, 1998, the closing price of the Common Stock on the New York
Stock Exchange was $0.94. "In-the-money options" are stock options with
respect to which the market value of the underlying shares of Common Stock
exceeded the exercise price at December 31, 1998. The values shown were
determined by
11
<PAGE> 13
subtracting the aggregate exercise price of such options from the aggregate
market value of the underlying shares of Common Stock on December 31, 1998.
(b) Represents amounts determined by subtracting the aggregate exercise price
of such options from the aggregate market value of the underlying shares of
Common Stock on the exercise date.
PERFORMANCE GRAPH
The following graph compares the performance of the Company's Common Stock
to the S&P 500 Stock Index and to a group of peer companies selected by the
Company for the periods indicated. The graph assumes the investment of $100 on
February 5, 1993 (the day public trading in the Company's Common Stock
commenced) and that all dividends, if any, were reinvested. The value of the
investment at the end of each year is shown in the graph and in the table which
follows:
<TABLE>
<CAPTION>
CHESAPEAKE PRIOR CURRENT S&P 500
MEASUREMENT PERIOD ENERGY PEER PEER STOCK
(FISCAL YEAR COVERED) CORPORATION GROUP(a) GROUP(b) INDEX
- ---------------------- ----------- -------- --------- ---------
<S> <C> <C> <C> <C>
2/5/93 $ 100.00 $ 100.00 $ 100.00 $ 100.00
12/31/94 $ 259.26 $ 107.67 $ 91.53 $ 101.32
12/31/95 $ 820.96 $ 132.89 $ 116.56 $ 139.40
12/31/96 $2,060.15 $ 167.55 $ 148.75 $ 171.40
12/31/97 $ 563.75 $ 150.24 $ 131.05 $ 228.59
12/31/98 $ 180.29 $ 81.67 $ 81.11 $ 293.91
Performance Since 2/5/93 +80.29% -18.33% -18.89% +193.9%
</TABLE>
- ----------
(a) The prior peer group is comprised of Anadarko Petroleum Corporation, Apache
Corporation, Barrett Resources Corporation, Burlington Resources, Inc.,
Cross Timbers Oil Company, Devon Energy Corporation, Enron Oil & Gas
Company, Louis Dreyfus Natural Gas Corporation, Noble Affiliates, Inc.,
Nuevo Energy Company, Ocean Energy, Inc., Pioneer Natural Resources
Company, Seagull Energy Corporation, TransTexas Gas Corporation, Union
Pacific Resources Corporation and Vintage Petroleum, Inc.
12
<PAGE> 14
(b) In order to more accurately reflect the overall exploration and production
sector of the energy business, the Company expanded its peer group in 1998.
The current peer group is comprised of Anadarko Petroleum Corporation,
Apache Corporation, Barrett Resources Corporation, Belco Oil & Gas Corp.,
Benton Oil & Gas Company, Burlington Resources, Inc., Cabot Oil & Gas
Corporation, Cross Timbers Oil Company, Devon Energy Corporation, EEX
Corporation, Enron Oil & Gas Company, Forcenergy Inc., Forest Oil
Corporation, HS Resources, Inc., KCS Energy, Inc., Louis Dreyfus Natural
Gas Corporation, Newfield Exploration Company, Noble Affiliates, Inc.,
Nuevo Energy Company, Ocean Energy, Inc., Pioneer Natural Resources
Company, Santa Fe Energy Resources, Inc., Seagull Energy Corporation,
TransTexas Gas Corporation, Union Pacific Resources Group, Inc. and Vintage
Petroleum, Inc.
EMPLOYMENT AGREEMENTS
The Company has employment agreements with Messrs. McClendon and Ward, each
of which provides, among other things, for an annual base salary of not less
than $350,000, bonuses at the discretion of the Board of Directors, eligibility
for stock options and benefits, including an automobile and travel allowance,
club membership and personal accounting support. Each agreement has a term of
five years commencing July 1, 1998, which term is automatically extended for one
additional year on each June 30 unless one of the parties provides 30 days prior
notice of non-extension. In addition, for each calendar year during which the
employment agreements are in effect, Messrs. McClendon and Ward each agree to
hold shares of the Company's Common Stock having an aggregate investment value
equal to 500% of his annual base salary and bonus.
Under the employment agreements, Messrs. McClendon and Ward are permitted to
participate in all of the wells spudded by or on behalf of the Company during
each calendar quarter. In order to participate, at least 30 days prior to the
beginning of a calendar quarter the executive must notify the disinterested
members of the Compensation Committee whether the executive elects to
participate and, if so, the percentage working interest for the executive in
each well spudded by or on behalf of the Company during such quarter. The
participation election by Messrs. McClendon or Ward may not exceed a 2.5%
working interest in a well and is not effective for any well where the Company's
working interest after elections by Messrs. McClendon, Ward and Rowland to
participate would be reduced to below 12.5%. Once an executive elects to
participate, the percentage cannot be adjusted during the calendar quarter
without the prior written consent of the disinterested directors, and no such
adjustment has ever been requested or granted. For each well in which the
executive participates, the Company bills to the executive an amount equal to
the executive's participation percentage multiplied by the costs of drilling and
operating incurred in drilling the well, together with leasehold costs in an
amount determined by the Company to approximate what third parties pay for
similar leasehold in the area of the well. Payment is due within 150 days for
invoices received prior to June 30, 2000 and within 90 days for invoices
received subsequent to such date. The executive also receives a proportionate
share of revenue from the well less certain charges by the Company for marketing
the production. As a result of marketing arrangements with other participants in
the Company's wells to correct the timing of the receipt of revenues, the
Company has advanced to the executives an amount equal to two months production
on each of the wells based on a six-month trailing average of production
revenue. As a result of declines in the price of oil and natural gas, such
advance now exceeds two months production for the executives' working interests.
The Company and the executives have agreed that such amount will bear interest,
and have also agreed to a payment schedule to reduce such advance to equal one
month's production to be adjusted semiannually.
Messrs. McClendon and Ward have agreed that they will not engage in oil and
gas operations individually except pursuant to the aforementioned participation
in Company wells and as a result of subsequent operations on properties owned by
them or their affiliates as of July 1, 1995. Messrs. McClendon and Ward
participated in all wells drilled by the Company from its initial public
offering in February 1993 through December 1998 with either a 1.0%, 1.25% or
1.5% working interest. Messrs. McClendon and Ward have agreed not to participate
in the Company's wells during the first three quarters of 1999.
The Company has a similar employment agreement with Mr. Rowland. It provides
for an annual base salary of not less than $250,000. The agreement has a term of
two years beginning July 1, 1998, which term is automatically extended for one
additional year on each June 30 unless one of the parties provides 30 days prior
notice of non-
13
<PAGE> 15
extension. Mr. Rowland is permitted to participate in wells drilled by the
Company in the same manner as Messrs. McClendon and Ward, except that Mr.
Rowland's working interest participation in a well may not exceed 1%. Mr.
Rowland did not participate in the Company's wells in 1998. Messrs. McClendon,
Ward and Rowland may not participate in any well in which their combined working
interests cause the Company's working interest to be reduced to less than 12.5%.
Mr. Rowland agrees to hold shares of the Company's Common Stock having an
aggregate investment value (as defined) equal to 100% of his annual base salary
and bonus during each calendar year for the term of the agreement.
The Company also has employment agreements with Messrs. Dixon and Lester.
These agreements have a term of three years from July 1, 1997, with annual base
salaries of $175,000 for Mr. Dixon and $160,000 for Mr. Lester. The agreements
require each of them to acquire and continue to hold shares of the Company's
Common Stock having an annual aggregate investment value equal to 15% of their
annual base salary and bonus compensation.
The Company may terminate any of the employment agreements with its
executive officers at any time without cause; however, upon such termination
Messrs. McClendon, Ward and Rowland are entitled to continue to receive salary
and benefits for the balance of the contract term. Messrs. Dixon and Lester are
entitled to 12 months compensation and benefits. Each of the employment
agreements for Messrs. McClendon, Ward and Rowland further states that if,
during the term of the agreement, there is a change of control and (a) within
one year the agreement expires and is not extended, (b) within one year the
executive officer resigns as a result of (i) a reduction in the executive
officer's compensation, or (ii) a required relocation more than 25 miles from
the executive officer's then current place of employment or (c) within two years
from the effective date of the change of control the executive officer is
terminated other than for cause, death or incapacity, then the executive officer
will be entitled to a severance payment in an amount equal to 60 months of base
compensation (as that term is defined in the agreements) for Messrs. McClendon
and Ward and 36 months for Mr. Rowland. Change of control is defined in these
agreements to include (x) an event which results in a person acquiring
beneficial ownership of securities having 35% or more of the voting power of the
Company's outstanding voting securities, or (y) within two years of a tender
offer or exchange offer for the voting stock of the Company or as a result of a
merger, consolidation, sale of assets or contested election, a majority of the
members of the Company's Board of Directors is replaced by directors who were
not nominated and approved by the Board of Directors.
DIRECTORS' COMPENSATION
From July 1997 through March 1998 directors who were not officers of the
Company ("non-management directors") received an annual retainer of $10,000,
payable quarterly, and $1,250 for each meeting of the Board attended. Beginning
in April 1998, each non-management director received $5,000 for each board
meeting attended, not to exceed $20,000 per year, and an annual retainer of
$5,000, payable quarterly. Directors are reimbursed for travel and other
expenses. Officers who also serve as directors do not receive fees for serving
as directors.
During the first quarter of 1998, each non-management director received
ten-year non-qualified options under the Company's 1992 Nonstatutory Stock
Option Plan (the "1992 NSO Plan") to purchase 3,750 shares of Common Stock, at
an exercise price equal to the market price on the date of grant. Beginning in
April 1998, each non-management director was awarded a ten-year option to
purchase 6,250 shares of Common Stock each quarter (25,000 shares per year) on
the first business day of each quarter at an exercise price equal to the market
price on the grant date. The options are fully exercisable upon grant.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1998, the Compensation Committee was composed of Messrs. Heizer,
McClendon, Ward and Whittemore. Mr. McClendon is Chairman of the Board and Chief
Executive Officer of the Company and Mr. Ward is the Company's President and
Chief Operating Officer.
14
<PAGE> 16
Messrs. McClendon and Ward administer the Company's 1992 stock option plans.
The 1992 Incentive Stock Option Plan was terminated in December 1994 except with
respect to the administration of outstanding options. The only options issued
under the 1992 NSO Plan during the year ended December 31, 1998 were those to
the Company's non-employee directors pursuant to a formula award provision. See
"Directors' Compensation". Messrs. McClendon and Ward also serve on committees
which administer the Company's 1994, 1996 and 1999 stock option plans with
respect to employee participants who are not executive officers. Messrs. Heizer
and Whittemore serve on committees which administer the 1994, 1996 and 1999
plans with respect to employee participants who are executive officers.
Messrs. McClendon and Ward participate as working interest owners in the
Company's oil and gas wells pursuant to the terms of their employment agreements
with the Company. See "Employment Agreements". Accounts receivable from Messrs.
McClendon and Ward are generated by joint interest billings relating to such
participation and as a result of miscellaneous expenses paid on their behalf by
the Company. A subsidiary of the Company extended loans of $5.0 million each to
Messrs. McClendon and Ward in 1998. See "Certain Transactions".
COMPENSATION COMMITTEE REPORT
The Compensation Committee of the Board of Directors is responsible for
establishing the Company's compensation policies and monitoring the
implementation of the Company's compensation system. The Committee's specific
duties include establishing and periodically reviewing the Company's
compensation policies, overseeing the compensation of the Company's executive
officers, coordinating with the Company's stock option committees in the award
of stock options and the annual review of the Company's benefit plans. The
compensation of the Company's employees consists of several components, each of
which is determined using different methods and objectives. The components
include: (a) base salary, (b) cash bonuses, (c) stock options, and (d) medical
insurance, life insurance and other non-cash benefits. The Committee has
determined not to grant economic interests in the Company's oil and gas assets
as a form of compensation.
EXECUTIVE OFFICER COMPENSATION. At the time of the Company's initial public
offering, the Company's executive officers consisted of Messrs. McClendon, Ward
and Rowland. Their compensation was developed based on the historical
compensation paid by the Company to Messrs. McClendon and Ward, advice from a
number of the Company's professional advisors and negotiation of employment
agreements with such individuals. Because Messrs. McClendon and Ward had
historically received only nominal compensation from the Company, the executive
officers' compensation was substantially below the compensation paid by the
Company's peer group. The Committee believes the executive officers'
compensation should be competitive with the Company's peer group and has
increased the executive officers' compensation to comparable levels. The
executive officers' compensation is designed to encourage both short and
long-term performance aligned with shareholders' interests. The individual
components of the executive officers' compensation and the factors considered in
connection with each component are as follows:
Base Salary. The executive officers' base salary is reviewed semiannually
and is set for each individual. Although the Committee believes that
performance-based pay elements should be a key element in the executive
officers' compensation package, the Company must also maintain base salary
levels commensurate with the Company's peer group. The Committee believes the
base salary of the executive officers should be near the mean of the Company's
peer group over time. In addition, the Committee increased the base salary of
the executive officers because of the increase in the Company's asset base and
the successful repositioning of the Company as a long-lived natural gas producer
through eight significant acquisitions during the past 18 months. The actual
amount of each executive's base salary reflects and is adjusted on a subjective
basis for such factors as leadership, commitment, attitude, motivational effect,
level of responsibility, prior experience and extraordinary contributions to the
Company.
Cash Bonuses. The Committee believes that cash bonuses should be paid to the
executive officers based on a subjective evaluation of the performance of the
Company and the individual. The cash bonuses awarded for 1998
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<PAGE> 17
were based on the successful repositioning of the Company as a long-lived gas
producer. Performance measurements for the Company as a whole include growth in
oil and gas reserves, production and cash flow. Performance measurements for
each individual or business segment are dependent on the individual
circumstances. It is anticipated that an executive officer's bonus as percentage
of base salary will increase as the management level and responsibility level of
the individual increases and as the size of the Company increases. The Committee
does not believe bonuses can be awarded based on a predetermined formula so the
amount of each executive officer's cash bonus is based on a subjective
evaluation of many factors such as performance, leadership, commitment,
attitude, motivational effect, level of responsibility, prior experience and
extraordinary contributions to the Company.
Stock Options. The other performance-based compensation provided by the
Company is the issuance of stock options under existing and future stock option
plans. Currently, stock options are granted to virtually all employees based on
a subjective determination utilizing the factors for base compensation and cash
bonus awards. Because all stock options are issued at not less than the market
price of the Company's Common Stock on the date of issuance and options granted
in 1998 vest over a period of not less than four years, the options provide
strong incentives for long-term performance and continued retention of the
executives by the Company. The Committee coordinates closely with the Company's
stock option committees in issuing the stock options.
Employee Retention Program. As a result of the Company's announcement in
July 1998 that it was exploring various strategic alternatives, the Committee
determined that the Company was at substantial risk of losing many of its
employees, especially accounting and technical personnel. The risk was increased
by the strong demand for accounting and technical personnel in the markets in
which the Company operates. Accordingly, the Committee instituted an employee
retention program for certain of the Company's employees which provides for
bonus payments and guaranteed severance packages. The retention program does not
cover Messrs. McClendon, Ward or Rowland.
1998 Performance. The Company's performance for the year ended December 31,
1998 was significantly below the expectations of management. However, the
Committee recognized that the loss was due in large part to a severe
industry-wide decline in the price for oil and gas. Moreover, the repositioning
of the Company was successfully completed during 1998. As a result, the
Committee reduced or maintained the annualized executive compensation while
conforming to an overall compensation level approximately that of other public
oil and gas companies that compete with the Company for employees and projects.
Repricing of Stock Options. A substantial component of the Company's
compensation has historically been paid in the form of stock options. As a
result of declining market prices for the Company's Common Stock during 1998,
management advised that a number of employees were vulnerable to hiring by the
Company's competitors and by companies in other, more prosperous industries.
Based on the foregoing, the Committee determined that it was in the best
interests of the Company to reprice out-of-the-money stock options that were of
no value to the employee, but to require the employee to forfeit a substantial
number of the repriced options. Accordingly, the Committee conditioned each
repricing on forfeiture of 40% of the options to be repriced. The stock option
repricing was approved or ratified by all non-management members of the board.
The options issued to non-employee directors were not repriced during 1998.
Suggested Stock Ownership. The Committee believes it is appropriate for each
executive officer to maintain direct ownership in the Company's Common Stock, as
provided in the individual employment agreements. The stock ownership targets
for executive officers range from 10% to 500% of annual base salary and bonus
(based on the individual officer's aggregate investment in the stock as computed
under the employment agreements). The Committee believes that compliance with
such stock ownership targets is necessary to ensure that the interests of the
executive officers and shareholders are the same. Failure to meet such
objectives will adversely and materially affect the performance-based
compensation for an executive officer who fails to meet the stock ownership
targets. It is the Committee's further belief that a large stock ownership
position should not negatively affect an executive officer's compensation or
stock option awards. Except for stock ownership targets discussed above, the
Committee does not consider the number of options or stock held in determining
compensation.
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Discretion. Individual circumstances and performance can substantially
affect the amount of compensation or benefits to be received by each executive
officer. In general, measuring the efforts or impact of an individual employee
and converting such concepts on an objective basis to a quantifiable increase in
compensation is not possible. However, given the importance of individual effort
to the success of the Company, the lack of objective measurement standards
should not prohibit performance rewards. Accordingly, from time to time, the
Committee may provide extraordinary compensation to an individual employee or
group of employees based on outstanding performance.
Policy on Deductibility of Compensation. Section 162(m) of the Internal
Revenue Code limits the tax deduction to $1 million for compensation paid by a
publicly held company to its chief executive officer and the company's four
other most highly compensated executive officers, unless certain requirements
are met. The Committee presently intends that all compensation paid to executive
officers will meet the requirements for deductibility under Section 162(m).
However, the Committee may award compensation which is not deductible under
Section 162(m) if it believes that such awards would be in the best interest of
the Company or its shareholders.
COMPENSATION OF CHIEF EXECUTIVE OFFICER AND CHIEF OPERATING OFFICER. Based
on historical operations of the Company, the Chief Executive Officer and Chief
Operating Officer have identical positions with managerial control over
different areas of the Company. Accordingly, the Chief Executive Officer and
Chief Operating Officer have been historically compensated on an equal basis and
the Committee anticipates that such practice will continue in the future. In
each case, the compensation for each of the officers was determined in the same
manner as the compensation for other executive officers of the Company. The base
salary received by each of the officers is below the trailing mean of the peer
group considered by the Compensation Committee. The cash bonuses and options
granted to Messrs. McClendon and Ward were based on the subjective evaluation of
the Company's growth during a very challenging year for the industry, the
perceived contributions of Messrs. McClendon and Ward to that growth and the
compensation paid to other chief executive officers of the Company's peer group.
The Committee determined that the overall compensation for the Chief Executive
Officer and Chief Operating Officer were appropriate in light of the Company's
repositioning during a period of adverse market conditions.
<TABLE>
<CAPTION>
COMPENSATION COMMITTEE SPECIAL STOCK OPTION COMMITTEE
OF THE BOARD OF DIRECTORS OF THE BOARD OF DIRECTORS
------------------------- -------------------------------
<S> <C>
Edgar F. Heizer, Jr. Edgar F. Heizer, Jr.
Aubrey K. McClendon Frederick B. Whittemore
Tom L. Ward
Frederick B. Whittemore
</TABLE>
CERTAIN TRANSACTIONS
Legal Counsel. Shannon T. Self, a director of the Company, is a shareholder
in the law firm of Self, Giddens & Lees, Inc., which provides legal services to
the Company. During 1998, the firm billed the Company approximately $493,000 for
such legal services.
Oil and Gas Operations. Prior to 1989, Messrs. McClendon and Ward and their
affiliates, as independent oil producers, acquired various leasehold and working
interests. In 1989, Chesapeake Operating, Inc. ("COI"), a wholly-owned
subsidiary of the Company, was formed to drill and operate wells in which
Messrs. McClendon and Ward or their affiliates owned working interests. COI
entered into joint operating agreements with Messrs. McClendon and Ward and
other working interest owners and billed each for their respective shares of
expenses and fees.
COI continues to operate wells in which directors, executive officers and
related parties own working interests. In addition, directors, executive
officers and related parties have in the past acquired working interests
directly and indirectly from the Company and participated in wells drilled by
COI. The Company's non-employee directors have not acquired from the Company
interests in any new wells drilled by the Company since their election as
directors in 1993 and have no present intention to acquire from the Company
interests in any new wells of the Company.
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<PAGE> 19
The table below presents information about drilling, completion, equipping and
operating costs billed to the persons named from January 1, 1998 to December 31,
1998, the largest amount owed by them during the period and the balances owed by
them at December 31, 1997 and 1998. No interest is charged on amounts owing for
such costs. The amounts for all other directors and executive officers who are
joint working interest owners in Company wells were insignificant.
<TABLE>
<CAPTION>
AUBREY K. TOM L. MARCUS C.
MCCLENDON WARD ROWLAND
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at December 31, 1997 ................... $ 68 $ 2,203 $ 36
Amount billed (to December 31, 1998) ........... $ 3,950 $ 3,902 $ 106
Largest outstanding balance (month end) ........ $ 2,581 $ 3,291 $ 62
Balance at December 31, 1998 ................... $ 1,541 $ 1,444 $ 18
</TABLE>
The amounts advanced to the executive officers as of December 31, 1998 to
correct the timing of the receipt of oil and gas revenues on the wells in which
the executive officers participated equaled $984,000 for Mr. McClendon, $958,000
for Mr. Ward and $29,060 for Mr. Rowland. The amount of these advances in excess
of revenue received by the Company and not disbursed bears interest at 9.125%.
Loans to Executives. In June 1998 the Company extended loans of $5.0 million
each to Messrs. McClendon and Ward to pay a portion of the margin debt incurred
by those individuals in connection with their purchase of Company Common Stock
in the open market in February 1997. Each loan initially had a maturity date of
December 31, 1998, and has been extended to December 31, 1999. In each case the
terms of the loan and the documentation evidencing the loan were negotiated by
the Loan Committee in conjunction with separate legal counsel. At December 31,
1998 and April 26, 1999, the principal amounts owing by Mr. McClendon were $4.9
million and $4.3 million, respectively, and the principal amounts owing by Mr.
Ward were $5.0 million and $4.6 million, respectively.
Interest accrues on each of the loans at an annual rate of 9.125% and is
payable quarterly. Each of the loans matures on December 31, 1999, but require
quarterly interim payments as a condition to participation by each executive
officer in the Company's oil and gas wells under his employment agreement. If
such payments are not made, the Company may, but is not required to, accelerate
the liquidation of a portion of the collateral securing the loans. Each of the
loans is secured by collateral with an indicated fair market value greater than
150% of the unpaid principal balance of the loan.
Miscellaneous. From time to time, the Company pays various expenses incurred
on behalf of Messrs. McClendon and Ward and their affiliates, creating accounts
receivable of the Company. During 1998 additions to accounts receivable
(excluding joint interest billings, which are described above) from Messrs.
McClendon and Ward and their affiliates were insignificant.
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP has served as the Company's independent
accountants since July 1, 1996 and has been retained for 1999. Representatives
of PricewaterhouseCoopers LLP are expected to attend the Meeting. They will have
an opportunity to make a statement if they desire to do so, and will be
available to respond to shareholder questions.
SHAREHOLDER PROPOSALS
At the annual meeting each year, the Board of Directors submits to
shareholders its nominees for election as directors and may submit other matters
to the shareholders for action. Shareholders of the Company also may submit
proposals for inclusion in proxy material. These proposals must meet the
shareholder eligibility and other requirements of the Securities and Exchange
Commission. In order to be included in proxy material for the Company's 2000
annual meeting, a shareholder's proposal must be received not later than January
1, 2000 by the
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<PAGE> 20
Company at 6100 North Western Avenue, Oklahoma City, Oklahoma 73118, Attention:
Ms. Janice Dobbs, Corporate Secretary.
In addition, the Bylaws provide that in order for business to be brought
before a shareholders' meeting, a shareholder must deliver written notice to the
Company not less than 60 nor more than 90 days prior to the date of the meeting.
The notice must state the shareholder's name, address and number and class of
shares beneficially owned by the shareholder, and briefly describe the business
to be brought before the meeting, the reasons for conducting such business at
the meeting and any material interest of the shareholder in the proposal.
The Bylaws also provide that if a shareholder intends to nominate a
candidate for election as a director, the shareholder must deliver written
notice of his or her intention to the Company. The notice must be delivered not
less than 60 nor more than 90 days before the date of a meeting of shareholders.
The notice must set forth the name and address and number and class of shares
beneficially owned by the shareholder and the nominee for election as a
director, the age of the nominee, the nominee's business address and experience
during the past five years, any other directorships held by the nominee, the
nominee's involvement in certain legal proceedings during the past five years
and such other information concerning the nominee as would be required to be
included in a proxy statement soliciting proxies for the election of the
nominee. In addition, the notice must include the consent of the nominee to
serve as a director of the Company if elected.
The Bylaws further provide that, notwithstanding the foregoing notice
requirements, in the event that less than 70 days' notice or prior public
disclosure of the date of the meeting is given or made to shareholders, notice
of a shareholder proposal or nominee to be timely must be received no later than
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.
OTHER MATTERS
The Company's management does not know of any matters to be presented at the
Meeting other than those set forth in the Notice of Annual Meeting of
Shareholders. However, if any other matters properly come before the Meeting,
the persons named in the enclosed proxy intend to vote the shares to which the
proxy relates on such matters in accordance with their best judgment unless
otherwise specified in the proxy.
BY ORDER OF THE BOARD OF DIRECTORS
Janice A. Dobbs
Corporate Secretary
April 30, 1999
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<PAGE> 21
[CHESAPEAKE LOGO AND LETTERHEAD]
P.O. BOX 18496
OKLAHOMA CITY, OK 73154-0496
IF YOU WISH TO VOTE BY TELEPHONE OR INTERNET,
PLEASE READ THE INSTRUCTIONS BELOW
VOTE BY PHONE - 1-800-690-6903
Use any touch-tone telephone to vote your proxy 24 hours a day, 7 days a week.
Have your proxy card in hand when you call. You will be prompted to enter your
12-digit Control Number, which is located below, and then follow the simple
instructions the Vote Voice provides you.
VOTE BY INTERNET - WWW.PROXYVOTE.COM
Use the Internet to vote your proxy 24 hours a day, 7 days a week. Have your
proxy card in hand when you access the website. You will be prompted to enter
your 12-digit Control Number, which is located below, to obtain your records and
create an electronic ballot.
VOTE BY MAIL
Mark, sign and date your proxy card and return it in the postage-paid envelope
we've provided or return it to P. O. Box 9079 Farmingdale, NY 11735-9769
If you vote by phone or vote using the Internet,
please do not mail your proxy.
THANK YOU FOR VOTING.
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P R O X Y
CHESAPEAKE ENERGY CORPORATION
ANNUAL MEETING OF SHAREHOLDERS
JUNE 23, 1999
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
The undersigned hereby appoints Aubrey K. McClendon and Tom L. Ward, or either
of them, with full power of substitution, proxies to represent and vote all
shares of Common Stock of Chesapeake Energy Corporation (the "Company") which
the undersigned would be entitled to vote if personally present at the Company's
Annual Meeting of Shareholders to be held on Wednesday, June 23, 1999, at 9:00
A.M., local time, and at any adjournment thereof, as follows:
1. Election of Directors [ ] FOR election of all [ ] WITHHOLD AUTHORITY
nominees listed below to vote for all
Aubrey K. McClendon nominees
and Shannon T. Self
(INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR AN INDIVIDUAL NOMINEE, WRITE THE
NOMINEE'S NAME ON THE SPACE PROVIDED BELOW.)
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2. In their discretion, upon any other matters that may properly come before the
meeting or any adjournment thereof.
Unless otherwise directed, this proxy will be voted for all nominees listed.
PLEASE DATE AND SIGN ON THE REVERSE SIDE AND RETURN PROMPTLY USING THE ENCLOSED
ENVELOPE.
-----------------------------------
-----------------------------------
-----------------------------------
Signature(s) of Shareholder(s)
Date , 1999
------------------
IMPORTANT: Please date this proxy and sign exactly as your name appears below.
If stock is held jointly, signature should include both names. Executors,
administrators, trustees, guardians and others signing in a representative
capacity, please give your full titles. If a corporation, please sign in full
corporate name by president or other authorized officer. If a partnership,
please sign in partnership name by authorized person.
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