SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended December 31, 1996 [ ] Transition Report pursuant to Section 13 or 15(d) of the Securities Act of 1934 For the transition period from __________ to __________ Commission File No. 1-13726 CHESAPEAKE ENERGY CORPORATION (Exact name of registrant as specified in its charter) Oklahoma 73-1395733 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 6100 North Western Avenue Oklahoma City, Oklahoma 73118 (Address of principal executive offices) (Zip Code) (405) 848-8000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO At January 31, 1997, there were 69,562,725 shares of the registrant's $.01 par value Common Stock outstanding.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES PART I. FINANCIAL INFORMATION Index to Financial Statements and Management's Discussion and Analysis Page Item 1. Consolidated Financial Statements: Consolidated Balance Sheets at December 31, 1996 and June 30, 1996 Consolidated Statements of Income for the Three and Six Months Ended December 31, 1996 and 1995 Consolidated Statements of Cash Flows for the Six Months Ended December 31, 1996 and 1995 Notes to Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
<TABLE> CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) <CAPTION> ASSETS December 31, June 30, 1996 1996 ------------ -------- ($ in thousands) CURRENT ASSETS: <S> <C> <C> Cash and cash equivalents $140,739 $ 51,638 Short-term investments 29,092 - Accounts receivable: Oil and gas sales 15,313 12,687 Oil and gas marketing sales 20,793 6,982 Joint interest and other, net of allowance for doubtful accounts of $198,000 and $340,000 26,066 27,661 Related parties 4,000 2,884 Inventory 7,071 5,163 Other 7,199 2,158 -------- -------- Total Current Assets 250,273 109,173 ======== ======== PROPERTY AND EQUIPMENT: Oil and gas properties, at cost based on full cost accounting: Evaluated oil and gas properties 527,566 363,213 Unevaluated properties 181,774 165,441 Less: accumulated depreciation, depletion and amortization (128,963) (92,720) --------- -------- 580,377 435,934 Other property and equipment 22,052 18,162 Less: accumulated depreciation and amortization (3,880) (2,922) -------- -------- Total Property and Equipment 598,549 451,174 -------- ------- OTHER ASSETS 11,775 11,988 -------- ------- TOTAL ASSETS $860,597 $572,335 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable and current maturities of long- term debt $ 6,718 $ 6,755 Accounts payable 72,256 54,514 Accrued liabilities and other 10,144 14,062 Revenues and royalties due others 37,974 33,503 -------- -------- Total Current Liabilities 127,092 108,834 -------- -------- LONG-TERM DEBT, NET 220,149 268,431 -------- -------- REVENUES AND ROYALTIES DUE OTHERS 6,126 5,118 -------- -------- DEFERRED INCOME TAXES 23,168 12,185 -------- -------- STOCKHOLDERS' EQUITY: Preferred Stock, $.01 par value, 10,000,000 shares authorized; none issued - - Common Stock, 100,000,000 shares authorized; $.01 par value at December 31, 1996, $.10 par value at June 30, 1996; 69,276,935 and 60,159,826 shares issued and outstanding at December 31, 1996 and June 30, 1996, respectively 693 3,008 Paid-in capital 426,914 136,782 Accumulated earnings 56,455 37,977 -------- -------- Total Stockholders' Equity 484,062 177,767 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $860,597 $572,335 ======== ======== </TABLE> The accompanying notes are an integral part of these consolidated financial statements.
<TABLE> CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (in thousands, except per share data) <CAPTION> Three Months Ended Six Months Ended December 31, December 31, ------------------ ---------------- 1996 1995 1996 1995 ---- ---- ---- ---- <S> <C> <C> <C> <C> REVENUES: Oil and gas sales $53,414 $26,519 $90,167 $46,350 Oil and gas marketing sales 17,835 3,787 30,019 3,787 Oil and gas service opera- tions - 1,460 - 3,618 Interest and other 1,668 277 2,516 1,791 -------- -------- -------- -------- Total revenues 72,917 32,043 122,702 55,546 -------- -------- -------- ------- COSTS AND EXPENSES Production expenses and taxes 3,344 2,007 5,874 3,703 Oil and gas marketing expenses 17,682 3,766 29,548 3,766 Oil and gas service operations - 1,167 - 3,019 Oil and gas depreciation, depletion and amortization 19,214 11,798 36,243 22,234 Depreciation and amortization of other assets 884 689 1,836 1,384 General and administrative 2,068 971 3,739 1,912 Interest 3,399 3,181 6,216 6,544 -------- -------- -------- -------- Total costs and expenses 46,591 23,579 83,456 42,562 -------- -------- -------- -------- INCOME BEFORE INCOME TAX AND EXTRAORDINARY ITEM 26,326 8,464 39,246 12,984 INCOME TAX EXPENSE Current - - - - Deferred 9,609 3,005 14,325 4,609 -------- -------- -------- -------- Total income tax expense 9,609 3,005 14,325 4,609 -------- -------- -------- -------- INCOME BEFORE EXTRAORDINARY ITEM 16,717 5,459 24,921 8,375 EXTRAORDINARY ITEM: Loss on early extinguishment of debt, net of applicable income tax of $3,703 ( 6,443) - ( 6,443) - -------- -------- -------- -------- NET INCOME $10,274 $ 5,459 $18,478 $ 8,375 ======== ======== ======== ======== NET EARNINGS PER COMMON SHARE AND COMMON SHARE EQUIVALENT (PRIMARY) Income before extraordinary item $ .25 $ .10 $ .38 $ .15 Extraordinary item ( .10) - ( .10) - -------- -------- -------- -------- Net Income $ .15 $ .10 $ .28 $ .15 ======== ======== ======== ======== NET EARNINGS PER COMMON SHARE AND COMMON SHARE EQUIVALENT (FULLY DILUTED) Income before extraordinary item $ .25 $ .09 $ .38 $ .14 Extraordinary item ( .10) - ( .10) - -------- -------- -------- -------- Net Income $ .15 $ .09 $ .28 $ .14 ======== ======== ======== ======== WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING Primary 68,108 57,454 66,300 57,148 ======== ======== ======== ======== Fully-diluted 68,108 58,044 66,300 57,968 ======== ======== ======== ======== </TABLE> The accompanying notes are an integral part of these consolidated financial statements.
<TABLE> CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) <CAPTION> Six Months Ended December 31, --------------------------------- 1996 1995 -------- -------- ($ in thousands) <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net income $18,478 $ 8,375 Adjustments to reconcile net income to ne cash provided by operating activities: Depreciation, depletion and amorti- zation 37,317 23,044 Deferred taxes 10,622 4,609 Amortization of loan costs 762 574 Amortization of bond discount 191 280 Gain on sale of fixed assets and other ( 522) ( 412) Investments in securities, net ( 34,777) 406 Extraordinary item before income tax benefit 10,146 - Equity in earnings of subsidiary ( 178) - Other adjustments - ( 130) Changes in current assets and liabilities ( 138) 10,383 --------- --------- Cash provided by operating activities 41,901 47,129 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Exploration, development and acqui- sition of oil and gas properties (186,753) ( 91,160) Proceeds from sale of assets 12,274 6,473 Investment in gas marketing company, net of cash acquired - ( 320) Investment in service operations ( 3,048) - Long-term loan made to a third party ( 2,000) - Additions to property, equipment and other ( 4,622) ( 3,671) --------- --------- Cash used in investing activities (184,149) ( 88,678) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from long-term borrowings 50,000 16,650 Payments on long-term borrowings (106,831) ( 2,181) Cash received from issuance of common stock 288,091 - Cash received from exercise of stock options 273 458 Other financing ( 184) - --------- --------- Cash provided by financing activities 231,349 14,927 -------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 89,101 ( 26,622) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 51,638 55,535 --------- --------- CASH AND CASH EQUIVALENTS, END OF PERIOD $140,739 $ 28,913 ========= ========= </TABLE> The accompanying notes are an integral part of these consolidated financial statements.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 (Unaudited) 1. Accounting Principles The accompanying unaudited consolidated financial statements of Chesapeake Energy Corporation and Subsidiaries (the "Company") have been prepared in accordance with the instructions to Form 10-Q as prescribed by the Securities and Exchange Commission. All material adjustments (consisting solely of normal recurring adjustments) which, in the opinion of management, are necessary for a fair presentation of the results for the interim periods have been reflected. The results for the three months and six months ended December 31, 1996, are not necessarily indicative of the results to be expected for the full fiscal year. 2. Recent Events On November 25, 1996, the Company issued 8,000,000 shares of Common Stock in a public offering at a price of $33.63 per share, which resulted in net proceeds to the Company of approximately $256.9 million. On December 2, 1996, the underwriters of the Company's Common Stock offering exercised an over-allotment option to purchase an additional 972,000 shares of Common Stock at a price of $33.63 per share, resulting in additional net proceeds to the Company of approximately $31.2 million, and total proceeds of $288.1 million. Using a portion of the proceeds from the Common Stock offering, the Company exercised its covenant defeasance rights under Section 8.03 of the Indenture dated as of March 31, 1994 with respect to all of its outstanding $47.5 million of 12% Senior Notes. A combination of cash and non-callable U.S. Government Securities in the amount of $55 million was irrevocably deposited in trust to satisfy the Company's obligations, including accrued but unpaid interest through the date of defeasance of $1.3 million. The Company also repaid in full the outstanding balance of its revolving bank credit facility. Effective December 31, 1996, the Company changed its state of incorporation from Delaware to Oklahoma. As part of this transaction, the authorized capital stock of the Company was increased to 100,000,000 shares of common stock, par value $.01 per share, and 10,000,000 shares of preferred stock, par value $.01 per share. Also effective December 31, 1996, the Company effected a 2-for-1 split of its common stock. All par value, share and per share information, common stock options and exercise prices included in these consolidated financial statements and related footnotes have been restated to reflect the stock split. 3. Legal Proceedings On October 15, 1996, Union Pacific Resources Company ("UPRC") filed suit against the Company alleging patent infringement and tortious interference with contracts regarding confidentiality and proprietary information of UPRC. UPRC is seeking injunctive relief and damages in an unspecified amount, including actual, enhanced, consequential and punitive damages. The Company believes it has meritorious defenses to the allegations, including its belief that the subject patent is invalid. Given the subject of the claims, the Company is unable to predict the outcome of the matter or estimate a range of financial exposure. 4. Senior Notes 10 1/2% Notes The Company has outstanding $90 million in aggregate principal amount of 10 1/2% Notes which mature June 2002. The 10 1/2% Notes bear interest at an annual rate of 10 1/2%, payable semiannually on each June 1 and December 1. The 10 1/2% Notes are senior, unsecured obligations of the Company, and are fully and unconditionally guaranteed, jointly and severally, by certain subsidiaries of the Company (the "Guarantor Subsidiaries"). 9 1/8% Notes The Company has outstanding $120 million in aggregate principal amount of 9 1/8% Senior Notes due 2006 which mature April 15, 2006. The 9 1/8% Notes bear interest at an annual rate of 9 1/8%, payable semiannually on each April 15 and October 15. The 9 1/8% Notes are senior, unsecured obligations of the Company, and are fully and unconditionally guaranteed, jointly and severally, by the Guarantor Subsidiaries. Set forth below are condensed consolidating financial statements of the Guarantor Subsidiaries, the Non-Guarantor Subsidiaries and the Company. Separate financial statements of each Guarantor Subsidiary have not been included because management has determined that they are not material to investors.
<TABLE> CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 (unaudited) CONDENSED CONSOLIDATING BALANCE SHEET AS OF DECEMBER 31, 1996 ($ in thousands) <CAPTION> Guarantor Non-Guarantor Company Subsidiaries Subsidiaries (Parent) Eliminations Consolidated ------------ ------------- -------- ------------ ------------ ASSETS <S> <C> <C> <C> <C> <C> CURRENT ASSETS: Cash and cash equivalent $ 4,782 $ 6,182 $ 129,775 $ - $140,739 Accounts receivable, net 53,866 21,369 - ( 9,063) 66,172 Inventory 6,702 369 - - 7,071 Other 931 33 35,327 - 36,291 ---------- ---------- --------- ----------- -------- Total Current Assets 66,281 27,953 165,102 ( 9,063) 250,273 ---------- ---------- --------- ----------- -------- PROPERTY AND EQUIPMENT: Oil and gas properties 502,928 24,638 - - 527,566 Unevaluated leasehold 181,774 - - - 181,774 Other property and equipment 10,824 103 11,125 - 22,052 Less: accumulated depreciation, depletion and amortization ( 122,962) ( 9,287) ( 594) - (132,843) --------- ---------- --------- ----------- -------- Total Property & Equipment 572,564 15,454 10,531 - 598,549 --------- ---------- --------- ----------- -------- INVESTMENTS IN SUBSIDIARIES AND INTERCOMPANY ADVANCES 628,415 6,850 514,075 (1,149,340) - --------- ---------- --------- ----------- -------- OTHER ASSETS 4,482 1,019 6,274 - 11,775 --------- ---------- --------- ----------- -------- TOTAL ASSETS $1,271,742 $ 51,276 $695,982 $(1,158,403) $860,597 ========== ========== ========= =========== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable and current maturities of long-term debt $ 4,268 $ 2,450 $ - $ - $ 6,718 Accounts payable and other 104,859 21,389 3,189 ( 9,063) 120,374 ---------- -------- -------- ----------- -------- Total Current Liabilities 109,127 23,839 3,189 ( 9,063) 127,092 ---------- -------- -------- ----------- -------- LONG-TERM DEBT 1,486 8,740 209,923 - 220,149 ---------- -------- -------- ----------- -------- REVENUES PAYABLE 6,126 - - - 6,126 ---------- -------- -------- ----------- -------- DEFERRED INCOME TAXES 14,916 1,014 7,238 - 23,168 ---------- -------- -------- ----------- -------- INTERCOMPANY PAYABLES 1,057,860 7,917 79,793 (1,145,570) - ---------- -------- -------- ----------- -------- STOCKHOLDERS' EQUITY: Common Stock 116 2 577 ( 2) 693 Other 82,111 9,764 395,262 ( 3,768) 483,369 ---------- -------- -------- ----------- -------- Total Stockholders' Equity 82,227 9,766 395,839 ( 3,770) 484,062 ---------- -------- -------- ----------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,271,742 $ 51,276 $695,982 $(1,158,403) $860,597 ========== ======== ======== ============ ======== </TABLE>
<TABLE> CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 (unaudited) CONDENSED CONSOLIDATING BALANCE SHEET AS OF JUNE 30, 1996 ($ in thousands) <CAPTION> Guarantor Non-Guarantor Company Subsidiaries Subsidiaries (Parent) Eliminations Consolidated ------------ -------------- ----------- ------------ ------------ ASSETS <S> <C> <C> <C> <C> <C> CURRENT ASSETS: Cash and cash equivalents $ 4,061 $ 2,751 $ 44,826 $ - $ 51,638 Accounts receivable, net 44,080 7,723 - ( 1,589) 50,214 Inventory 4,947 216 - - 5,163 Other 2,155 3 - - 2,158 ---------- ---------- ---------- ---------- --------- Total Current Assets 55,243 10,693 44,826 ( 1,589) 109,173 ---------- ---------- ---------- ---------- --------- PROPERTY AND EQUIPMENT: Oil and gas properties 338,610 24,603 - - 363,213 Unevaluated leasehold 165,441 - - - 165,441 Other property and equipment 9,608 61 8,493 - 18,162 Less: accumulated depreciation, depletion and amortization ( 87,193) ( 8,007) ( 442) - ( 95,642) ---------- ---------- ---------- ---------- --------- Total Property & Equipment 426,466 16,657 8,051 - 451,174 ---------- ---------- ---------- ---------- --------- INVESTMENTS IN SUBSIDIARIES AND INTERCOMPANY ADVANCES 519,386 8,132 382,388 (909,906) - ---------- ---------- ---------- ---------- --------- OTHER ASSETS 2,310 940 8,738 - 11,988 ---------- ---------- ---------- ---------- ---------- TOTAL ASSETS $1,003,405 $ 36,422 $444,003 $(911,495) $572,335 ========== ========== ========== ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable and current maturities of long-term debt $ 3,846 $ 2,880 $ 29 $ - $ 6,755 Accounts payable and other 91,069 7,339 5,260 ( 1,589) 102,079 ---------- ---------- ---------- ---------- ---------- Total Current Liabilities 94,915 10,219 5,289 ( 1,589) 108,834 ---------- ---------- ---------- ---------- ---------- LONG-TERM DEBT 2,113 10,020 256,298 - 268,431 ---------- ---------- ---------- ---------- ---------- REVENUES PAYABLE 5,118 - - - 5,118 ---------- ---------- ---------- ---------- ----------- DEFERRED INCOME TAXES 23,950 1,335 (13,100) - 12,185 ---------- ---------- ---------- ---------- ----------- INTERCOMPANY PAYABLES 824,307 8,182 73,647 (906,136) - ---------- ---------- ---------- ---------- ----------- STOCKHOLDERS' EQUITY: Common Stock 117 2 2,891 ( 2) 3,008 Other 52,885 6,664 118,978 ( 3,768) 174,759 ---------- ---------- ---------- ---------- ----------- Total Stockholders' Equity 53,002 6,666 121,869 ( 3,770) 177,767 ---------- ---------- ---------- ---------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,003,405 $ 36,422 $444,003 $(911,495) $572,335 ========== ========== ========== ========== =========== </TABLE>
<TABLE> CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 (unaudited) CONDENSED CONSOLIDATING STATEMENTS OF INCOME ($ in thousands) <CAPTION> Guarantor Non-Guarantor Company Subsidiaries Subsidiaries (Parent) Eliminations Consolidated ------------ ------------- -------- ------------ ------------ <S> <C> <C> <C> <C> <C> For the Three Months Ended December 31, 1996: REVENUES: Oil and gas sales $ 51,147 $ 1,888 $ - $ 379 $ 53,414 Oil and gas marketing sales - 36,693 - (18,858) 17,835 Interest and other 52 162 1,454 - 1,668 -------- -------- -------- -------- -------- Total Revenues 51,199 38,743 1,454 (18,479) 72,917 -------- -------- -------- -------- -------- COSTS AND EXPENSES: Production expenses and taxes 3,116 228 - - 3,344 Oil and gas marketing expenses - 36,161 - (18,479) 17,682 Oil and gas depreciation, depletion and amortization 18,577 637 - - 19,214 Other depreciation and amortization 509 40 335 - 884 General and administrative 1,370 259 439 - 2,068 Interest 275 122 3,002 - 3,399 -------- -------- -------- -------- -------- Total Costs & Expenses 23,847 37,447 3,776 (18,479) 46,591 -------- -------- -------- -------- -------- INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY ITEM 27,352 1,296 ( 2,322) - 26,326 INCOME TAX EXPENSE (BENEFIT) 9,983 474 ( 848) - 9,609 -------- -------- -------- -------- -------- NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 17,369 822 ( 1,474) - 16,717 -------- -------- -------- -------- -------- EXTRAORDINARY ITEM: Loss on early extinguishment of debt, net of applicable income tax ( 590) - ( 5,853) - ( 6,443) -------- -------- -------- -------- -------- NET INCOME (LOSS) $ 16,779 $ 822 $( 7,327) $ - $ 10,274 ======== ======== ======== ======== ======== For the Three Months Ended December 31, 1995: REVENUES: Oil and gas sales $ 24,925 $ 1,594 $ - $ - $ 26,519 Gas marketing sales - 4,370 - ( 583) 3,787 Oil and gas service operations 1,460 - - - 1,460 Interest and other 215 6 56 - 277 -------- -------- -------- -------- -------- Total revenues 26,600 5,970 56 ( 583) 32,043 -------- -------- -------- -------- -------- COSTS AND EXPENSES: Production expenses and taxes 1,844 163 - - 2,007 Gas marketing expenses - 4,349 - ( 583) 3,766 Oil and gas service operations 1,167 - - - 1,167 Oil and gas depreciation 11,179 619 - - 11,798 Other depreciation and amortization 418 13 258 - 689 General and administrative 686 67 218 - 971 Interest 42 165 2,974 - 3,181 -------- -------- -------- -------- -------- Total Costs & Expenses 15,336 5,376 3,450 ( 583) 23,579 -------- -------- -------- -------- -------- INCOME (LOSS) BEFORE INCOME TAX 11,264 594 ( 3,394) - 8,464 -------- -------- -------- -------- -------- INCOME TAX EXPENSE 4,958 316 ( 2,269) - 3,005 -------- -------- -------- -------- -------- NET INCOME (LOSS) $ 6,306 $ 278 $( 1,125) $ - $ 5,459 ======== ======== ======== ======== ======== </TABLE>
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 (unaudited) <TABLE> <CAPTION> CONDENSED CONSOLIDATING STATEMENTS OF INCOME ($ in thousands) Guarantor Non-Guarantor Company Subsidiaries Subsidiaries (Parent) Eliminations Consolidated ------------ ------------ -------- ------------ ------------ <S> <C> <C> <C> <C> <C> For the Six Months Ended December 31, 1996: REVENUES: Oil and gas sales $ 85,936 $ 3,579 $ - $ 652 $ 90,167 Oil and gas marketing sales - 58,607 - (28,588) 30,019 Interest and other 167 571 1,778 - 2,516 -------- -------- ------- -------- -------- Total Revenues 86,103 62,757 1,778 (27,936) 122,702 -------- -------- ------- -------- -------- COSTS AND EXPENSES: Production expenses and taxes 5,463 411 - - 5,874 Oil and gas marketing expenses - 57,484 - (27,936) 29,548 Oil and gas depreciation, depletion and amortization 34,950 1,293 - - 36,243 Other depreciation and amor- tization 1,043 71 722 - 1,836 General and administrative 2,543 495 701 - 3,739 Interest 308 227 5,681 - 6,216 -------- -------- ------- -------- -------- Total Costs & Expenses 44,307 59,981 7,104 (27,936) 83,456 -------- -------- ------- -------- -------- INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY ITEM 41,796 2,776 ( 5,326) - 39,246 INCOME TAX EXPENSE (BENEFIT) 15,255 1,014 ( 1,944) - 14,325 NET INCOME (LOSS) -------- -------- -------- -------- -------- BEFORE EXTRAORDINARY ITEM 26,541 1,762 ( 3,382) - 24,921 -------- -------- -------- -------- -------- EXTRAORDINARY ITEM: Loss on early extinguishment of debt, net of applicable income tax ( 590) - ( 5,853) - ( 6,443) -------- -------- ------- ------- -------- NET INCOME (LOSS) $ 25,951 $ 1,762 $( 9,235) $ - $ 18,478 ======== ======== ======== ======= ======== For the Six Months Ended December 31, 1995: REVENUES: Oil and gas sales $ 43,533 $ 2,817 $ - $ - $ 46,350 Gas marketing sales - 4,370 - ( 583) 3,787 Oil and gas service operations 3,618 - - - 3,618 Interest and other 1,236 6 549 - 1,791 -------- -------- ------- ------- -------- Total Revenues 48,387 7,193 549 ( 583) 55,546 -------- -------- ------- ------- -------- COSTS AND EXPENSES: Production expenses and taxes 3,392 311 - - 3,703 Gas marketing expenses - 4,349 - ( 583) 3,766 Oil and gas service operations 3,019 - - - 3,019 Oil and gas depreciation, depletion and amortization 21,059 1,175 - - 22,234 Other depreciation and amor- tization 850 17 517 - 1,384 General and administrative 1,499 101 312 - 1,912 Interest 81 350 6,113 - 6,544 -------- -------- ------- ------- -------- Total Costs & Expenses 29,900 6,303 6,942 ( 583) 42,562 -------- -------- ------- ------- -------- INCOME (LOSS) BEFORE INCOME TAX 18,487 890 ( 6,393) - 12,984 INCOME TAX EXPENSE (BENEFIT) 6,562 316 ( 2,269) - 4,609 -------- -------- ------- ------- -------- NET INCOME (LOSS) $ 11,925 $ 574 $( 4,124) $ - $ 8,375 ======== ======== ======= ======= ======== </TABLE>
<TABLE> CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 (unaudited) CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS ($ in thousands) <CAPTION> Guarantor Non-Guarantor Company Subsidiaries Subsidiaries (Parent) Elimination Consolidated ------------ ------------- -------- ----------- ------------ <S> <C> <C> <C> <C> <C> For the Six Months Ended December 31, 1996: CASH FLOWS FROM OPERATING ACTIVITIES: $ 89,669 $( 5,642) $( 42,126) $ - $ 41,901 CASH FLOWS FROM INVESTING ACTIVITIES: Oil and gas properties (186,718) ( 35) - - (186,753) Proceeds from sale of assets 12,274 - - - 12,274 Investment in service opera- tions ( 3,048) - - - ( 3,048) Other additions ( 4,185) ( 204) ( 2,233) - ( 6,622) -------- -------- -------- -------- -------- (181,677) ( 239) ( 2,233) - (184,149) -------- -------- -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from borrowings 50,000 - - - 50,000 Payments on borrowings ( 51,246) ( 1,710) ( 53,875) - (106,831) Cash received from exercise of stock options - - 273 - 273 Cash received from issuance of common stock - - 288,091 - 288,091 Other financing - - ( 184) - ( 184) Intercompany advances, net 93,975 11,022 (104,997) - - -------- -------- -------- -------- -------- 92,729 9,312 129,308 - 231,349 -------- -------- -------- -------- -------- Net increase (decrease) in cash 721 3,431 84,949 - 89,101 Cash, beginning of period 4,061 2,751 44,826 - 51,638 -------- -------- -------- -------- -------- Cash, end of period $ 4,782 $ 6,182 $129,775 $ - $140,739 ======== ======== ======== ======== ======== For the Six Months Ended December 31, 1995: CASH FLOWS FROM OPERATING ACTIVITIES: $ 50,475 $ 599 $( 3,945) $ - $ 47,129 -------- -------- -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Oil and gas properties (84,998) (11,462) - 5,300 (91,160) Proceeds from sales 11,773 - - (5,300) 6,473 Investment in gas marketing company - 256 ( 576) - (320) Other additions ( 2,812) ( 25) ( 834) - ( 3,671) -------- -------- -------- -------- -------- (76,037) (11,231) ( 1,410) - (88,678) -------- -------- -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from long-term borrowings 11,350 5,300 - - 16,650 Payments on borrowings ( 582) ( 1,585) ( 14) - ( 2,181) Cash received from exercise of stock options - - 458 - 458 Intercompany advances, net (57,930) 9,738 48,192 - - -------- -------- -------- -------- -------- (47,162) 13,453 48,636 - 14,927 -------- -------- -------- -------- -------- Net increase (decrease) in cash and cash equivalents (72,724) 2,821 43,281 - (26,622) Cash, beginning of period 53,227 5 2,303 - 55,535 -------- -------- -------- -------- -------- Cash, end of period $(19,497) $ 2,826 $ 45,584 $ - $ 28,913 ======== ======== ======== ======== ======== </TABLE>
PART I. FINANCIAL INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RECENT EVENTS On November 25, 1996, the Company issued 8,000,000 shares of Common Stock in a public offering at a price of $33.63 per share, which resulted in net proceeds to the Company of approximately $256.9 million. On December 2, 1996, the underwriters of the Company's Common Stock offering exercised an over-allotment option to purchase an additional 972,000 shares of Common Stock at a price of $33.63 per share, resulting in additional net proceeds to the Company of approximately $31.2 million, and total proceeds of $288.1 million. Using a portion of the proceeds from the Common Stock offering, the Company exercised its covenant defeasance rights under Section 8.03 of the Indenture dated as of March 31, 1994, with respect to all of its outstanding $47.5 million of 12% Senior Notes. A combination of cash and non-callable U.S. Government Securities in the amount of $55.0 million was irrevocably deposited in trust to satisfy the Company's obligations, including accrued but unpaid interest through the date of defeasance of $1.3 million. The Company also repaid in full the outstanding balance of its revolving bank credit facility. Effective December 31, 1996, the Company changed its state of incorporation from Delaware to Oklahoma. As part of this transaction, the authorized capital stock of the Company was increased to 100,000,000 shares of common stock, par value $.01 per share, and 10,000,000 shares of preferred stock, par value $.01 per share. Also effective December 31, 1996, the Company effected a 2-for-1 split of its common stock. All par value, share and per share information, common stock options and exercise prices included in these consolidated financial statements and related footnotes have been restated to reflect the stock split. RESULTS OF OPERATIONS THREE MONTHS ENDED DECEMBER 31, 1996 VS. DECEMBER 31, 1995 Net income for the three months ended December 31, 1996 (the "Current Quarter") was $10.3 million, a $4.8 million increase from net income of $5.5 million for the quarter ended December 31, 1995 (the "Prior Quarter"), after giving effect to an extraordinary loss of $6.4 million (net of income tax) incurred during the Current Quarter. This increase in net income was caused primarily by the Company's significantly higher oil and gas production and increases in oil and gas sales prices. Revenues from oil and gas sales for the Current Quarter were $53.4 million, an increase of $26.9 million, or 101%, from the Prior Quarter. Gas pro- duction increased to 14.8 billion cubic feet ("Bcf"), an increase of 2.5 Bcf, or 20%, compared to the Prior Quarter. Oil production increased 266 thousand barrels ("MBbls"), or 76%, from 352 MBbls to 618 MBbls. The increase in oil and gas production was accompanied by increases in the average oil and gas prices realized. In the Current Quarter, the Company received an average oil price of $22.43 per barrel ("Bbl"), net of hedging losses of $0.8 million. This was an increase of $5.15 per Bbl, or 30%, from the $17.28 per Bbl realized in the Prior Quarter. Gas price realiza- tions increased to $2.68 per thousand cubic feet ("Mcf") in the Current Quarter, net of hedging losses of $0.8 million, an increase of 61% from the $1.66 per Mcf realized in the Prior Quarter. The following table sets forth oil and gas production for the Company's primary operating areas during the Current Quarter. <TABLE> <CAPTION> Producing Oil Gas Total Percent Operating Areas Wells<F1> (MBbls) (MMcf) (MMcfe) % <S> <C> <C> <C> <C> <C> Giddings 195 158 9,475 10,423 56% Southern Oklahoma 205 149 3,237 4,131 22% Louisiana Trend 26 238 1,068 2,496 14% All Other 115 73 991 1,429 8% --- --- ------ ------ ---- Total 541 618 14,771 18,479 100% === === ====== ====== ==== <FN> <F1> Includes wells being drilled at December 31, 1996 </TABLE> Revenues from the Company's oil and gas marketing operations in the Current Quarter, which commenced in December 1995 with the purchase of Chesapeake Energy Marketing, Inc. ("CEM"), were $17.8 million compared to $3.8 million in the Prior Quarter. The Prior Quarter included only one month of operations. Oil and gas marketing expenses were $17.7 million during the Current Quarter, resulting in a gross profit margin of $0.1 million. In the Prior Quarter the gross profit margin was $21,000. The Company had no revenues or expenses for oil and gas service operations in the Current Quarter, as a result of the sale of this business in June 1996 to Peak USA Energy Services, Ltd. ("Peak"). Peak is a limited partnership formed by Peak Oilfield Services Company (a joint venture between Cook Inlet Region, Inc. and Nabors Industries, Inc.) and the Company. Production expenses and taxes increased to $3.3 million in the Current Quarter from $2.0 million in the Prior Quarter. This increase was the result of a significant increase in oil and gas production volumes during the Current Quarter, higher oil and gas prices which increased severance taxes and slightly higher lifting costs per unit of production. On a gas equivalent production unit ("Mcfe") basis, production expenses and taxes were $0.18 per Mcfe in the Current Quarter compared to $0.14 per Mcfe in the Prior Quarter. Much of the Company's gas production from wells drilled before September 1996 in the downdip Giddings Field qualifies for exemption from Texas state production taxes for production through August 31, 2001. Additionally, certain oil and gas production from the Company's wells in the Knox and Sholem Alechem fields in Oklahoma and the Louisiana Austin Chalk Trend qualifies for production tax exemption until well costs are recovered. These exemptions, combined with the fact that many of the Company's wells are high volume gas wells that tend to have lower operating costs per Mcfe than lower volume wells, help generate the Company's historically low production costs per Mcfe. The Company expects that operating costs in fiscal 1997 will continue to increase because of the Company's expansion of drilling efforts into the Louisiana Trend and the Williston Basin, both of which are oil prone areas with significant associated water production which results in higher operating costs than gas prone areas, and because severance tax exemptions will be more limited in these areas compared to existing exemptions in the Giddings Field. Depreciation, depletion and amortization ("DD&A") of oil and gas properties for the Current Quarter was $19.2 million, an increase of $7.4 million from the Prior Quarter. The increase in DD&A expense for oil and gas properties between quarters is the result of a 4.1 billion cubic feet equivalent ("Bcfe") increase in production volumes and an increase in the DD&A rate per Mcfe. The average DD&A rate per Mcfe, a function of capitalized and estimated future development costs and the related proved reserves, was $1.04 for the Current Quarter and $0.82 for the Prior Quarter. The Company believes the DD&A rate will continue to increase during fiscal 1997 based on projected higher finding costs for wells drilled in the Louisiana Trend. Depreciation and amortization of other assets increased to $0.9 million in the Current Quarter compared to $0.7 million in the Prior Quarter. This increase is primarily the result of higher amortization expense related to debt issuance costs, and higher depreciation related to the Company's acquisition of additional buildings and equipment in its Oklahoma City headquarters complex to support the Company's growth. General and administrative expenses increased to $2.1 million during the Current Quarter, a $1.1 million, or 110%, increase from the Prior Quarter. This increase is the result of the continued growth of the Company. General and administrative expenses were $0.11 per Mcfe in the Current Quarter as compared to $0.07 per Mcfe in the Prior Quarter. The Company capitalized $0.4 million and $0.1 million of payroll and other internal costs directly related to oil and gas exploration and development activities, net of partner reimbursements, in the Current Quarter and Prior Quarter, respectively. Interest expense increased to $3.4 million during the Current Quarter, from $3.2 million in the Prior Quarter, as a result of higher levels of interest costs due to increased levels of total debt during the Current Quarter. During the Current Quarter, the Company capitalized $3.4 million of interest costs representing the estimated costs to carry its unevaluated leasehold inventory, compared to the $1.1 million in the Prior Quarter. This increase in capitalized interest costs is the result of larger investments being carried during the Current Quarter in leasehold that have yet to be evaluated than in the Prior Quarter. Income tax expense increased to $9.6 million in the Current Quarter (before giving effect to the income tax benefit applicable to the extraordinary item) from $3.0 million in the Prior Quarter. The Company's estimated effective income tax rate was 36.5% for the Current Quarter, compared to 35.5% for the Prior Quarter. The Company estimates its effective rate based on anticipated levels of income for the year, estimated production in excess of that allowed in computing statutory depletion for tax purposes, the interplay between state location of production revenue and the related state income tax, and other factors. The provision for income tax expense is deferred because the Company is not currently a cash income taxpayer. The Company has significant tax net operating loss carryforwards generated from the intangible drilling cost deduction for income tax purposes associated with the Company's drilling activities which are available to offset regular taxable income in the future. The Company recorded an extraordinary loss in the Current Quarter of $6.4 million, net of applicable income tax effect of $3.7 million. This loss was the result of the Company retiring by defeasance all of its $47.5 million 12% Senior Notes and paying all amounts outstanding under the Company's revolving bank credit facility from the proceeds of an equity offering concluded during the Current Quarter. SIX MONTHS ENDED DECEMBER 31, 1996 VS. DECEMBER 31, 1995 Net income for the six months ended December 31, 1996 (the "Current Period") was $18.5 million, a $10.1 million increase from net income of $8.4 million for the six months ended December 31, 1995 (the "Prior Period"), after giving effect to an extraordinary loss of $6.4 million (net of income tax) incurred in the Current Period. This increase was caused by the Company's significantly higher oil and gas production and increases in oil and gas sales prices. Revenues from oil and gas sales for the Current Period were $90.2 million, an increase of $43.8 million, or 94%, from the Prior Period. Gas production increased to 30.1 Bcf, an increase of 7.1 Bcf, or 31%, compared to the Prior Period. Oil production increased to 1,116 MBbls, an increase of 422 MBbls, or 61%, compared to the Prior Period. In the Current Period the Company realized an average gas price of $2.18 per Mcf, net of hedging losses of $5.6 million. This was an increase of $0.67 per Mcf, or 44%, as compared to the $1.51 per Mcf realized in the Prior Period. The Company realized an average oil price of $21.88 per Bbl, net of hedging losses of $1.5 million. This was an increase of $4.92 per Bbl, or 29%, compared to the $16.96 per Bbl realized in the Prior Period. Revenues from the Company's oil and gas marketing operations were $30.0 million in the Current Period compared to $3.8 million in the Prior Period, which included only one month of operations. Oil and gas marketing expenses were $29.5 million in the Current Period, resulting in a gross profit margin of $0.5 million. Production expenses and taxes increased to $5.9 million in the Current Period, an increase of $2.2 million, or 59%, from $3.7 million incurred in the Prior Period. This increase was the result of a significant increase in oil and gas production volumes during the Current Period, higher oil and gas prices which increase severance taxes, and slightly higher lifting costs per unit of production. On an Mcfe basis, production expenses and taxes were $0.16 per Mcfe in the Current Period compared to $0.14 in the Prior Period. The Company expects that production expenses will continue to increase in fiscal 1997 because of the Company's expansion of drilling efforts into the Louisiana Trend and the Williston Basin, both of which are oil prone areas with significant associated water production which results in higher operating costs than gas prone areas. The Company expects that production taxes will trend higher during fiscal 1997 due to higher taxes resulting from higher oil and gas prices, and because severance tax exemptions will be more limited in the Louisiana Trend compared to existing exemptions in the Giddings Field. DD&A of oil and gas properties in the Current Period was $36.2 million, an increase of $14.0 million, or 63%, from $22.2 million expensed in the Prior Period. The increase in DD&A expense is the result of a 9.7 Bcfe increase in production volumes and an increase in the DD&A rate per Mcfe. The average DD&A rate per Mcfe was $0.99 in the Current Period as compared to $0.82 in the Prior Period. The Company believes the DD&A rate will continue to trend higher in fiscal 1997 based on higher projected finding costs for wells drilled in the Louisiana Trend which will represent a significant portion of the Company's activities. Depreciation and amortization of other assets increased to $1.8 in the Current Period, a $0.4 million, or 29%, increase from the Prior Period. This increase is the result of higher amortization expense related to debt issuance costs, and higher depreciation related to the Company's acquisition of additional buildings and equipment in its Oklahoma City headquarters complex to support the Company's growth. General and administrative expenses increased to $3.7 million during the Current Period, a $1.8 million, or 95%, increase from the Prior Period. This increase is the result of the continued growth of the Company. General and administrative expenses were $0.10 per Mcfe in the Current Period, compared to $0.07 per Mcfe in the Prior Period. The Company capitalized $1.1 million and $0.4 million of payroll and other internal costs directly related to oil and gas exploration and development activities, net of partner reimbursements, in the Current Period and Prior Period, respectively. Interest expense decreased to $6.2 million in the Current Period from $6.5 million in the Prior Period. This decrease occurred despite an increase in total interest costs as a result of higher average long-term debt levels in the Current Period compared to the Prior Period. However, the increase was more than offset by the amount of interest capitalized by the Company in the Current Period. During the Current Period the Company capitalized $7.6 million of interest costs representing the estimated costs to carry its unevaluated leasehold inventory, compared to $1.9 million in the Prior Period. Income tax expense increased to $14.3 million in the Current Period (before giving effect to the income tax benefit applicable to the extraordinary item) from $4.6 in the Prior Period. The Company's estimated effective income tax rate was 36.5% for the Current Period, compared to 35.5% for the Prior Period. The Company estimates its effective rate based on anticipated levels of income for the year, estimated production in excess of that allowed in computing statutory depletion for tax purposes, the interplay between state location of production revenue and the related state income tax, and other factors. The provision for income tax expense is deferred because the Company is not currently a cash income taxpayer. The Company has significant federal tax net operating loss carryforwards generated from the intangible drilling cost deduction for income tax purposes associated with the Company's drilling activities which are available to offset regular taxable income in the future. RISK MANAGEMENT ACTIVITIES Periodically the Company utilizes hedging strategies to hedge the price of a portion of its future oil and gas production. These strategies include swap arrangements that establish an index-related price above which the Company pays the hedging partner and below which the Company is paid by the hedging partner, the purchase of index-related puts that provide for a "floor" price to the Company to be paid by the counter-party to the extent the price of the commodity is below the contracted floor, and basis protection swaps. Results from hedging transactions are reflected in oil and gas sales to the extent related to the Company's oil and gas production. The Company has not entered into hedging transactions unrelated to the Company's oil and gas production. The Company has the following oil swap arrangements for periods after the Current Quarter: <TABLE> <CAPTION> Monthly NYMEX-Index Month Volume(Bbls) Strike Price (per Bbl) - ------ ------------ ---------------------- <S> <C> <C> January 1997 31,000 $20.01 January 1997 62,000 $23.27 February 1997 28,000 $19.72 February 1997 56,000 $22.74 March 1997 31,000 $19.46 April 1997 30,000 $19.22 May 1997 31,000 $18.97 June 1997 30,000 $18.79 July 1997 31,000 $18.60 August 1997 31,000 $18.43 September 1997 30,000 $18.30 October 1997 31,000 $18.19 November 1997 30,000 $18.13 December 1997 31,000 $18.08 </TABLE> The Company has entered into oil swap arrangements to cancel the effect of the swaps for the months of August through December at an average price of $22.10 per Bbl. The Company has the following gas swap arrangements for periods after the Current Quarter: <TABLE> <CAPTION> Monthly Houston Ship Channel Months Volume (MMBtu) Index Strike Price (per MMBtu) - ------ -------------- ------------------------------ <S> <C> <C> March 1997 620,000 $2.222 April 1997 600,000 $2.022 May 1997 620,000 $1.937 </TABLE> The Company has the following gas floor arrangements for periods after the Current Quarter: <TABLE> <CAPTION> Monthly Houston Ship Channel Months Volume(MMBtu) Index Strike Price (per MMBtu) - ------ ------------- ------------------------------ <S> <C> <C> January 1997 620,000 $2.260 February 1997 560,000 $2.155 </TABLE> Gains or losses on the crude oil and natural gas hedging transactions are recognized as price adjustments in the month of related production. The Company estimates that had all of the crude oil and natural gas swap agreements in effect for production periods beginning January 1, 1997 terminated on January 28, 1997, based on the closing prices for NYMEX futures contracts as of that date, the Company would have paid the counterparty approximately $1.8 million, which would have represented the "fair value" at that date. These agreements were not terminated. CAPITAL RESOURCES AND LIQUIDITY During the Current Quarter the Company completed an offering of 8,972,000 shares of Common Stock at a price of $33.63 per share resulting in net proceeds to the Company of approximately $288.1 million. The Company used approximately $55.0 million to retire through convenant defeasance the Company's $47.5 million 12% Senior Notes, including accrued but unpaid interest through the date of defeasance of $1.3 million. The Company used $50 million to repay all amounts outstanding under its revolving bank credit facility. The balance of the net proceeds has been and will be used to fund exploration and development capital expenditures and for general corporate purposes. As of December 31, 1996, the Company had working capital of $123.2 million. Additionally, the Company had credit availability of $68 million under its $125 million revolving credit facility, with no amounts outstanding. The Company has estimated that its capital expenditures for fiscal 1997 will be approximately $360 million, including approximately $265 million for drilling, completion and production expenditures, $30 million for pipeline and gathering facilities, and the balance for acreage acquisition, seismic programs and general corporate purposes. The capital expenditure budget is largely discretionary, and can be adjusted by the Company based on operating results or other factors. The Company believes it has sufficient capital resources, including expected cash flow from operations, to fund its capital program for the foreseeable future. During the Current Quarter, and as a result of its Common Stock offering and subsequent reduction of debt levels, the Company received a senior debt credit rating increase from Standard & Poor's Rating Services to BB. Additionally, the Company has been placed on Credit Watch with positive implications by Moody's Investors Service, which has currently rated the Company's senior debt as Ba3. The Company's long-term debt to total book capitalization had been reduced to approximately 32% as of December 31, 1996. The Company is negotiating with its commercial bank group to obtain a $100 million unsecured credit facility with the Company as the sole direct borrower. This would replace its existing $125 million secured credit facility under which a subsidiary of the Company is the borrower and the Company is the guarantor. While the successful negotiation of this facility is not assured, the Company believes the facility will be put in place during the third fiscal quarter with financial terms substantially similar to the existing revolving credit facility. The Company's cash provided by operating activities decreased to $42 million during the Current Period, compared to $47 million during the Prior Period. The decrease of $5 million is the result of additional investments in short- term marketable securities during the Current Period partially offset by increases in net income, adjusted for non-cash charges (such as DD&A and deferred income taxes), and cash provided by changes in current assets and current liabilities between the two periods. Cash used in investing activities increased to $184 million in the Current Period, up from $89 million in the Prior Period. The $95 million increase is a result of the Company's increased drilling activity and increased investment in leasehold during the Current Period. Cash provided by financing activities was $231 million during the Current Period, as compared to consolidated cash provided by financing activities of $15 million during the Prior Period. The increase resulted primarily from the Company's issuance of Common Stock reduced by $54 million for the defeasance of the Company's $47.5 million 12% Senior Notes and $50 million for the repayment of the Company's revolving credit facility. LEGAL PROCEEDINGS On October 15, 1996, Union Pacific Resources Company ("UPRC") filed suit against the Company alleging patent infringement and tortious interference with contracts regarding confidentiality and proprietary information of UPRC. UPRC is seeking injunctive relief and damages in an unspecified amount, including actual, enhanced, consequential and punitive damages. The Company believes it has meritorious defenses to the allegations, including its belief that the subject patent is invalid. Given the subject of the claims, the Company is unable to predict the outcome of the matter or estimate a range of financial exposure. FORWARD LOOKING STATEMENTS All statements other than statements of historical fact contained in this Form 10-Q, including statements in "Management's Discussion and Analysis of Financial Condition and Results of Operations" are forward-looking statements. When used herein, the words "budget", "budgeted", "anticipate", "expects", "believes", "seeks", "goals", "intends", or "projects" and similar expressions are intended to identify forward-looking statements. It is important to note that the Company's actual results could differ materially from those projected by such forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, no assurance can be given that such expectations will prove correct. Factors that could cause the Company's results to differ materially from the results discussed in such forward-looking statements include but are not limited to the following: production variances from expectations, volatility of oil and gas prices, the need to develop and replace its reserves, the substantial capital expenditures required to fund its operations, environmental risks, drilling and operating risks, risks related to exploration and development drilling, uncertainties about estimates of reserves, competition, government regulation, and the ability of the Company to implement its business strategy. All forward-looking statements in this document are expressly qualified in their entirety by the cautionary statements in this paragraph. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Reference is made to this item in the Company's quarterly report on Form 10-Q for the three months ended September 30, 1996 for a description of a pending legal proceeding. ITEM 2. CHANGES IN SECURITIES On December 31, 1996, the Company changed its state of incorporation from Delaware to Oklahoma by the merger of Chesapeake Energy Corporation, a Delaware corporation, with and into its newly formed wholly-owned subsidiary, Chesapeake Oklahoma Corporation. The surviving corporation changed its name to Chesapeake Energy Corporation. Each outstanding share of Common Stock, par value $.10, of the merged Delaware corporation was converted into one share of Common Stock, par value $.01, of the surviving corporation. As a result of the merger, the surviving corporation succeeded to all of the assets and is responsible for all of the liabilities of the merged Delaware corporation. On matters of corporate governance, the rights of the Company's security holders are now governed by Oklahoma law, which is similar to the corporate law of Delaware. ITEM 3. DEFAULTS UPON SENIOR SECURITIES - - Not applicable ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company's annual meeting of shareholders was held on December 13, 1996. In addition to electing two directors, shareholders voted to change the Company's state of incorporation from Delaware to Oklahoma, which included merging with and into Chesapeake Oklahoma Corporation, the Company's wholly-owned subsidiary, and increasing the Company's authorized capital stock to 100,000,000 shares of common stock, par value $.01 per share, and 10,000,000 shares of preferred stock, par value $.01 per share. The shareholders also approved amendments to the Company's 1992 Nonstatutory Stock Option Plan and its 1994 Stock Option Plan and adopted the Company's 1996 Stock Option Plan. In the election of directors, Aubrey K. McClendon received 55,530,182 votes for election, and 770 shares withheld from voting. Shannon T. Self received 55,011,352 votes for election, and 541,016 shares withheld from voting. The proposal to change the Company's state of incorporation from Delaware to Oklahoma was approved by a vote of 49,618,962 shares for, representing 82% of the outstanding shares of common stock; 3,326,750 shares voted against the proposal, 22,238 shares abstained from voting and 2,584,418 shares were broker non-votes. The proposal to approve amendments to the Company's 1992 Nonstatutory Stock Option Plan and its 1994 Stock Option Plan and to adopt the Company's 1996 Stock Option Plan was approved by a vote of 38,931,478 shares for, which represented 65% of the outstanding common stock; 13,782,600 shares voted against the proposal, 35,100 shares abstained from voting and 2,803,190 shares were broker non-votes. ITEM 5. OTHER INFORMATION - - Not applicable ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits The following exhibits are filed as a part of this report: Exhibit No. - ----------- 3.1 Registrant's Certificate of Incorporation. 3.2 Registrant's Bylaws. Incorporated herein by reference to Exhibit 3.2 to Registrant's registration statement on Form 8-B. 10.1.2* Registrant's 1992 Nonstatutory Stock Option Plan, as amended. 10.1.3* Registrant's 1994 Stock Option Plan, as amended. 10.1.4* Registrant's 1996 Stock Option Plan. Incorporated herein by reference to Registrant's Proxy Statement for its 1996 Annual Meeting of Shareholders. 11 Statement regarding computation of earnings per common share 27 Financial Data Schedule _______________________ * Management contract or compensatory plan or arrangement. (b) Reports on Form 8-K None
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CHESAPEAKE ENERGY CORPORATION (Registrant) February 14, 1997 AUBREY K. MCCLENDON Date Aubrey K. McClendon Chairman and Chief Executive Officer February 14, 1997 MARCUS C. ROWLAND Date Marcus C. Rowland Vice President and Chief Financial Officer
INDEX TO EXHIBITS <TABLE> <CAPTION> Exhibit No. Description Method of Filing - ----------- ----------- ---------------- <S> <C> <C> 3.1 Registrant's Certificate of Filed herewith electronically Incorporation. 3.2 Registrant's Bylaws. Incorporated herein by reference to Exhibit 3.2 to Registrant's registration statement on Form 8-B. 10.1.2 Registrant's 1992 Nonstatutory Filed herewith electronically Stock Option Plan, as amended. 10.1.3 Registrant's 1994 Stock Option Filed herewith electronically Plan, as amended. 10.1.4 Registrant's 1996 Stock Option Incorporated herein by Plan reference to Registrant's Proxy Statement for its 1996 Annual Meeting of Shareholders. 11 Statement regarding computation Filed herewith electronically of earnings per common share 27 Financial Data Schedule Filed herewith electronically </TABLE>