1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 1997 [ ] Transition Report pursuant to Section 13 or 15(d) of the Securities Act of 1934 For the transition period from __________ to __________ COMMISSION FILE NO. 1-13726 CHESAPEAKE ENERGY CORPORATION - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) OKLAHOMA 73-1395733 - -------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 6100 NORTH WESTERN AVENUE OKLAHOMA CITY, OKLAHOMA 73118 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (405) 848-8000 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- At October 31, 1997 there were 70,429,017 shares of the registrant's $.01 par value Common Stock outstanding.
2 <TABLE> <CAPTION> PART I. FINANCIAL INFORMATION Page ---- <S> <C> Item 1. Consolidated Financial Statements: Consolidated Balance Sheets at September 30, 1997 and June 30, 1997...............................................................................3 Consolidated Statements of Operations for the Three Months Ended September 30, 1997 and 1996 .......................................................4 Consolidated Statements of Cash Flows for the Three Months Ended September 30, 1997 and 1996 .................................................5 Notes to Consolidated Financial Statements .....................................................6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................14 Item 3. Quantitative and Qualitative Disclosures About Market Risk....................................................................................18 </TABLE> Page 2
3 CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) <TABLE> <CAPTION> ASSETS September 30, June 30, 1997 1997 --------- --------- ($ in thousands) <S> <C> <C> CURRENT ASSETS: Cash and cash equivalents $ 51,182 $ 124,017 Restricted cash 4,600 -- Short-term investments 85,478 104,485 Accounts receivable: Oil and gas 24,285 30,845 Joint interest and other, net of allowances of $346,000 and $387,000, respectively 27,363 25,311 Related parties 7,299 7,401 Note receivable 18,000 -- Inventory 4,625 4,854 Other 941 692 --------- --------- Total Current Assets 223,773 297,605 --------- --------- PROPERTY AND EQUIPMENT: Oil and gas properties, at cost based on full cost accounting: Evaluated oil and gas properties 960,741 865,516 Unevaluated properties 131,194 128,505 Less: accumulated depreciation, depletion and amortization (460,534) (431,983) --------- --------- 631,401 562,038 Other property and equipment 63,652 50,379 Less: accumulated depreciation and amortization (5,754) (5,051) --------- --------- Total Property and Equipment 689,299 607,366 --------- --------- OTHER ASSETS 18,597 44,097 --------- --------- TOTAL ASSETS $ 931,669 $ 949,068 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable and current maturities of long-term debt $ -- $ 1,380 Accounts payable 81,731 86,817 Accrued liabilities and other 18,532 28,701 Revenues and royalties due others 23,686 29,428 --------- --------- Total Current Liabilities 123,949 146,326 --------- --------- LONG-TERM DEBT, NET 508,971 508,950 --------- --------- REVENUES AND ROYALTIES DUE OTHERS 7,541 6,903 --------- --------- DEFERRED INCOME TAXES -- -- --------- --------- CONTINGENCIES AND COMMITMENTS -- -- --------- --------- STOCKHOLDERS' EQUITY: Preferred Stock, $.01 par value, 10,000,000 shares authorized; none issued -- -- Common Stock, $.01 par value, 100,000,000 shares authorized; 70,376,462 and 70,276,975 shares issued and outstanding at September 30, 1997 and June 30, 1997, respectively 704 703 Paid-in capital 433,201 432,991 Accumulated earnings (deficit) (142,697) (146,805) --------- --------- Total Stockholders' Equity 291,208 286,889 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 931,669 $ 949,068 ========= ========= </TABLE> The accompanying notes are an integral part of these consolidated financial statements. Page 3
4 CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) <TABLE> <CAPTION> THREE MONTHS ENDED SEPTEMBER 30, ------------------- 1997 1996 ------- ------- ($ in thousands, except per share data) <S> <C> <C> REVENUES: Oil and gas sales $45,667 $36,753 Oil and gas marketing sales 26,865 12,184 Interest and other 5,878 848 ------- ------- Total Revenues 78,410 49,785 ------- ------- COSTS AND EXPENSES: Production expenses and taxes 5,180 2,530 Oil and gas marketing expenses 26,690 11,866 Oil and gas depreciation, depletion and amortization 28,550 17,029 Depreciation and amortization of other assets 1,142 952 General and administrative 2,760 1,671 Interest 8,575 2,817 ------- ------- Total Costs and Expenses 72,897 36,865 ------- ------- INCOME BEFORE INCOME TAXES 5,513 12,920 INCOME TAX EXPENSE: Current -- -- Deferred -- 4,716 ------- ------- Total Income Tax Expense -- 4,716 ------- ------- NET INCOME $ 5,513 $ 8,204 ======= ======= NET INCOME PER COMMON SHARE: PRIMARY $ .08 $ .13 ======= ======= FULLY-DILUTED $ .08 $ .13 ======= ======= WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING: PRIMARY 72,699 64,258 ======= ======= FULLY-DILUTED 73,243 64,338 ======= ======= </TABLE> The accompanying notes are an integral part of these consolidated financial statements. Page 4
5 CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) <TABLE> <CAPTION> THREE MONTHS ENDED SEPTEMBER 30, 1997 1996 --------- --------- ($ in thousands) <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: NET INCOME $ 5,513 $ 8,204 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Depreciation, depletion and amortization 29,297 17,545 Deferred taxes -- 4,716 Amortization of loan costs 395 436 Amortization of bond discount 20 142 (Gain) loss on sale of assets (2,695) 6 Bad debt expense 25 -- Equity in earnings of investees 140 -- Other adjustments -- (206) CHANGES IN CURRENT ASSETS AND LIABILITIES 9,929 (4,890) --------- --------- Cash provided by operating activities 42,624 25,953 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Exploration, development and acquisition of oil and gas properties (99,095) (87,350) Proceeds from sale of assets and other 1,190 8,642 Investment in service operations -- (2,545) Other investments (3,000) -- Additions to property, equipment and other (13,360) (1,870) --------- --------- Cash used in investing activities (114,265) (83,123) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Dividends paid on common stock (1,405) -- Proceeds from long-term borrowings -- 10,000 Payments on long-term borrowings -- (2,135) Cash received from exercise of stock options 226 191 Other (15) (80) --------- --------- Cash provided by (used in) financing activities (1,194) 7,976 --------- --------- NET DECREASE IN CASH AND CASH EQUIVALENTS (72,835) (49,194) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 124,017 51,638 --------- --------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 51,182 $ 2,444 ========= ========= </TABLE> The accompanying notes are an integral part of these consolidated financial statements. Page 5
6 CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1997 (unaudited) 1. Interim Financial Statements 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 ended September 30, 1997, are not necessarily indicative of the results for the full fiscal year. 2. Recent Events On October 22, 1997 the Company announced that it had agreed to acquire two Oklahoma City-based independent oil and gas producers that own total proved reserves of approximately 160 billion cubic feet of natural gas equivalent ("Bcfe"). In the larger of the two acquisitions, the Company has reached an agreement to acquire by merger the Mid-Continent operations of DLB Oil & Gas, Inc. ("DLB"). In its Mid-Continent division, DLB owns approximately 130 Bcfe of proved reserves, additional probable and possible reserves, nine gas gathering systems, and a gas marketing subsidiary based in Houston, Texas. The DLB acquisition is valued at approximately $150 million. The Company also reached an agreement to acquire AnSon Production Company ("AnSon"), a privately owned oil and gas producer that owns approximately 30 Bcfe of proved reserves, additional probable and possible reserves, undeveloped mineral interests, and a gas marketing subsidiary based in Oklahoma City. The AnSon acquisition is valued at approximately $43 million. On November 13, 1997, the Company announced that it had signed a definitive agreement to merge with Hugoton Energy Corporation ("Hugoton") in a stock-for-stock transaction. The merger agreement provides for a fixed exchange ratio of 1.3 shares of the Company's common stock for each share of Hugoton stock, resulting in Hugoton's shareholders owning approximately 26% of the Company following the transaction. Based upon the closing price of the Company's common stock on November 12, 1997, Hugoton's 20.9 million fully-diluted shares outstanding, and the assumption by the Company of $105 million of Hugoton's debt, the transaction is valued at approximately $380 million. Hugoton has approximately 300 Bcfe of proved reserves. On November 13, 1997, the Company also announced that it had entered into an agreement to purchase from Pan East Petroleum Corporation, a Canadian exploration and production company ("Pan East"), 11.9 million treasury shares of Pan East's common stock at a price per share of $2.50 (Cdn) in a private placement. Based on Pan East's existing 48 million outstanding shares and the Company's previous open market purchase of 100,000 Pan East shares, the Company will own approximately 12 million shares, or 19.9% of Pan East's outstanding common stock, for an investment of $30 million (Cdn), or $22 million (U.S.). The purpose of the private placement is to assist Pan East in financing its share of the exploration, development and acquisition activities under a proposed joint venture with the Company during the next two years. Both the private placement and the joint venture are scheduled to close on or before November 30, 1997. Page 6
7 In November 1997, the Company received proceeds of approximately $108 million in connection with the initial public offering of Bayard Drilling Technologies, Inc. ("Bayard") common stock. After underwriting fees, the Company received approximately $21.40 per share for the 4,194,000 shares of Bayard it sold in the offering. In addition, the Company received $18 million as repayment of a loan made to Bayard during fiscal 1997. The sale of stock is expected to yield a pre-tax gain of approximately $74 million. The Company recently announced its decision to change its year-end to December 31. The Company believes this change will make its financial results more easily comparable to those of its peer group. Accordingly, the Company will file a transition report on Form 10-K for the six month period between the closing date of the Company's most recent fiscal year ended June 30, 1997 and the opening date of the new fiscal year beginning January 1, 1998. 3. Legal Proceedings On October 15, 1996, Union Pacific Resources Company ("UPRC") filed suit against the Company in the U.S. District Court for the Northern District of Texas, Fort Worth Division alleging (a) infringement and inducing infringement of UPRC's claim to a patent (the "UPRC Patent") for an invention involving a method of maintaining a borehole in a stratigraphic zone during drilling, and (b) tortious interference with certain business relations between UPRC and certain of its former employees. UPRC's claims against the Company are based on services provided by a third party vendor to the Company. UPRC is seeking injunctive relief, damages of an unspecified amount, including actual, enhanced, consequential and punitive damages, interest, costs and attorney's fees. The Company believes that it has meritorious defenses to UPRC's allegations and has requested the court to declare the UPRC Patent invalid. The Company has also filed a motion to limit the scope of UPRC's claims and for summary judgment. No prediction can be made as to the outcome of the matter. As previously disclosed, the Company and certain of its officers and directors are currently involved in various purported class actions alleging violations of the Securities Exchange Act of 1934. The plaintiffs assert that the defendants made materially false and misleading statements and failed to disclose material facts about the success of the Company's exploration efforts, principally in the Louisiana Trend. As a result, the complaints allege, the price of the Company's common stock was artificially inflated during periods beginning as early as January 25, 1996 and ending on June 27, 1997, when the Company issued a press release announcing disappointing drilling results in the Louisiana Trend and a full-cost ceiling writedown to be reflected in its June 30, 1997 financial statements. The plaintiffs further allege that certain of the named individual defendants sold common stock during the class period when they knew or should have known adverse nonpublic information. Each case seeks a determination that the suit is a proper class action, certification of the plaintiff as a class representative and damages in an unspecified amount, together with costs of litigation, including attorneys' fees. The Company and the individual defendants believe that these actions are without merit, and intend to defend against them vigorously. Page 7
8 4. Restricted Cash The Company is required to deposit margin cash with the counterparty to certain hedging arrangements when commodity futures prices exceed the index-related fixed price stated in the agreement less the amount of open credit established by the counterparty. The amount of restricted margin cash on deposit at September 30, 1997 was $4.6 million. 5. Senior Notes 10 1/2% Notes The Company has outstanding $90 million in aggregate principal amount of 10 1/2% Notes which mature June 1, 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 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. 7 7/8% Notes The Company has outstanding $150 million in aggregate principal amount of 7 7/8% Senior Notes which mature March 15, 2004. The 7 7/8% Notes bear interest at the rate of 7 7/8%, payable semiannually on each March 15 and September 15. The 7 7/8% Notes are senior, unsecured obligations of the Company and are fully and unconditionally guaranteed, jointly and severally, by the Guarantor Subsidiaries. 8 1/2% Notes The Company has outstanding $150 million in aggregate principal amount of 8 1/2% Senior Notes which mature March 15, 2012. The 8 1/2% Notes bear interest at the rate of 8 1/2%, payable semiannually on each March 15 and September 15. The 8 1/2% Notes are senior, unsecured obligations of the Company and are fully and unconditionally guaranteed, jointly and severally, by the Guarantor Subsidiaries. Set forth below are condensed consolidating financial statements of the Guarantor Subsidiaries, the Company's subsidiaries which are not guarantors Page 8
9 of the Senior Notes (the "Non-Guarantor Subsidiaries") and the Company. Separate audited financial statements of each Guarantor Subsidiary have not been provided because management has determined that they are not material to investors. The Guarantor Subsidiaries are Chesapeake Operating, Inc., Chesapeake Exploration Limited Partnership, Chesapeake Louisiana Limited Partnership, Chesapeake Energy Louisiana Corporation and Chesapeake Gas Development Corporation, and the Non-Guarantor Subsidiaries are Chesapeake Energy Marketing, Inc. and Chesapeake Canada Corporation. Prior to June 30, 1997 Chesapeake Gas Development Corporation was a Non-Guarantor Subsidiary. Page 9
10 CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1997 (unaudited) CONDENSED CONSOLIDATING BALANCE SHEET AS OF SEPTEMBER 30, 1997 ($ IN THOUSANDS) <TABLE> <CAPTION> GUARANTOR NON-GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES (PARENT) ELIMINATIONS CONSOLIDATED ------------ ------------- --------- ------------ ------------ <S> <C> <C> <C> <C> <C> ASSETS CURRENT ASSETS: Cash and cash equivalents $ (6,345) $ 6,651 $ 50,876 $ -- $ 51,182 Restricted cash 4,600 -- -- -- 4,600 Short-term investments -- 2,026 83,452 -- 85,478 Accounts receivable, net 44,732 17,786 2,058 (5,629) 58,947 Notes receivable -- -- 18,000 -- 18,000 Inventory 4,521 104 -- -- 4,625 Other 904 22 15 -- 941 --------- --------- --------- --------- --------- Total Current Assets 48,412 26,589 154,401 (5,629) 223,773 --------- --------- --------- --------- --------- PROPERTY AND EQUIPMENT: Oil and gas properties 960,690 51 -- -- 960,741 Unevaluated leasehold 131,200 (6) -- -- 131,194 Other property and equipment 48,009 349 15,294 -- 63,652 Less: accumulated depreciation, depletion and amortization (465,432) -- (856) -- (466,288) --------- --------- --------- --------- --------- Total Property & Equipment 674,467 394 14,438 -- 689,299 --------- --------- --------- --------- --------- INVESTMENTS IN SUBSIDIARIES AND INTERCOMPANY ADVANCES 81,755 -- 791,374 (873,129) -- --------- --------- --------- --------- --------- OTHER ASSETS 4,950 653 12,994 -- 18,597 --------- --------- --------- --------- --------- TOTAL ASSETS $ 809,584 $ 27,636 $ 973,207 $(878,758) $ 931,669 ========= ========= ========= ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable and current maturities of long-term debt $ -- $ -- $ -- $ -- $ -- Accounts payable and other 101,776 16,783 11,023 (5,633) 123,949 --------- --------- --------- --------- --------- Total Current Liabilities 101,776 16,783 11,023 (5,633) 123,949 --------- --------- --------- --------- --------- LONG-TERM DEBT -- -- 508,971 -- 508,971 --------- --------- --------- --------- --------- REVENUES PAYABLE 7,541 -- -- -- 7,541 --------- --------- --------- --------- --------- DEFERRED INCOME TAXES -- -- -- -- -- --------- --------- --------- --------- --------- INTERCOMPANY PAYABLES 784,903 (301) -- (784,602) -- --------- --------- --------- --------- --------- STOCKHOLDERS' EQUITY: Common Stock 10 1 694 (1) 704 Other (84,646) 11,153 452,519 (88,522) 290,504 --------- --------- --------- --------- --------- Total Stockholders' Equity (84,636) 11,154 453,213 (88,523) 291,208 --------- --------- --------- --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 809,584 $ 27,636 $ 973,207 $(878,758) $ 931,669 ========= ========= ========= ========= ========= </TABLE> Page 10
11 CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1997 (unaudited) CONDENSED CONSOLIDATING BALANCE SHEET AS OF JUNE 30, 1997 ($ IN THOUSANDS) <TABLE> <CAPTION> GUARANTOR NON-GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES (PARENT) ELIMINATIONS CONSOLIDATED ------------ ------------- --------- ------------ ------------ <S> <C> <C> <C> <C> <C> ASSETS CURRENT ASSETS: Cash and cash equivalents $ (6,534) $ 4,363 $ 126,188 $ -- $ 124,017 Short-term investments -- 4,324 100,161 -- 104,485 Accounts receivable, net 47,379 19,943 3,022 (6,787) 63,557 Inventory 4,795 59 -- -- 4,854 Other 666 26 -- -- 692 --------- --------- --------- --------- --------- Total Current Assets 46,306 28,715 229,371 (6,787) 297,605 --------- --------- --------- --------- --------- PROPERTY AND EQUIPMENT: Oil and gas properties 865,485 31 -- -- 865,516 Unevaluated leasehold 128,519 (14) -- -- 128,505 Other property and equipment 33,486 1,904 14,989 -- 50,379 Less: accumulated depreciation, depletion and amortization (436,276) -- (758) -- (437,034) --------- --------- --------- --------- --------- Total Property & Equipment 591,214 1,921 14,231 -- 607,366 --------- --------- --------- --------- --------- INVESTMENTS IN SUBSIDIARIES AND INTERCOMPANY ADVANCES 817 -- 680,439 (681,256) -- --------- --------- --------- --------- --------- OTHER ASSETS 4,961 673 38,463 -- 44,097 --------- --------- --------- --------- --------- TOTAL ASSETS $ 643,298 $ 31,309 $ 962,504 $(688,043) $ 949,068 ========= ========= ========= ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable and current maturities of long-term debt $ 1,380 $ -- $ -- $ -- $ 1,380 Accounts payable and other 122,241 17,527 11,965 (6,787) 144,946 --------- --------- --------- --------- --------- Total Current Liabilities 123,621 17,527 11,965 (6,787) 146,326 --------- --------- --------- --------- --------- LONG-TERM DEBT -- -- 508,950 -- 508,950 --------- --------- --------- --------- --------- REVENUES PAYABLE 6,903 -- -- -- 6,903 --------- --------- --------- --------- --------- DEFERRED INCOME TAXES -- -- -- -- -- --------- --------- --------- --------- --------- INTERCOMPANY PAYABLES 589,111 1,492 -- (590,603) -- --------- --------- --------- --------- --------- STOCKHOLDERS' EQUITY: Common Stock 11 1 693 (2) 703 Other (76,348) 12,289 440,896 (90,651) 286,186 --------- --------- --------- --------- --------- Total Stockholders' Equity (76,337) 12,290 441,589 (90,653) 286,889 --------- --------- --------- --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 643,298 $ 31,309 $ 962,504 $(688,043) $ 949,068 ========= ========= ========= ========= ========= </TABLE> Page 11
12 CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1997 (unaudited) CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS ($ IN THOUSANDS) <TABLE> <CAPTION> GUARANTOR NON-GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES (PARENT) ELIMINATIONS CONSOLIDATED ------------ ------------- -------- ------------ ------------ <S> <C> <C> <C> <C> <C> FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997: REVENUES: Oil and gas sales $ 45,049 $ -- $ -- $ 618 $ 45,667 Oil and gas marketing sales -- 44,326 -- (17,461) 26,865 Interest and other 135 487 20,118 (14,862) 5,878 -------- -------- -------- -------- -------- Total Revenues 45,184 44,813 20,118 (31,705) 78,410 -------- -------- -------- -------- -------- COSTS AND EXPENSES: Production expenses and taxes 5,180 -- -- -- 5,180 Oil and gas marketing expenses -- 43,533 -- (16,843) 26,690 Oil and gas depreciation, depletion and amortization 28,550 -- -- -- 28,550 Other depreciation and amortization 628 21 493 -- 1,142 General and administrative 2,578 265 (83) -- 2,760 Interest 12,246 33 11,158 (14,862) 8,575 -------- -------- -------- -------- -------- Total Costs & Expenses 49,182 43,852 11,568 (31,705) 72,897 -------- -------- -------- -------- -------- INCOME (LOSS) BEFORE INCOME TAXES (3,998) 961 8,550 -- 5,513 INCOME TAX EXPENSE (BENEFIT) -- -- -- -- -- -------- -------- -------- -------- -------- NET INCOME (LOSS) $ (3,998) $ 961 $ 8,550 $ -- $ 5,513 ======== ======== ======== ======== ======== FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996: REVENUES: Oil and gas sales $ 34,789 $ 1,691 $ -- $ 273 $ 36,753 Oil and gas marketing sales -- 21,914 -- (9,730) 12,184 Interest and other 115 409 324 -- 848 -------- -------- -------- -------- -------- Total Revenues 34,904 24,014 324 (9,457) 49,785 -------- -------- -------- -------- -------- COSTS AND EXPENSES: Production expenses and taxes 2,347 183 -- -- 2,530 Oil and gas marketing expenses -- 21,323 -- (9,457) 11,866 Oil and gas depreciation, depletion and amortization 16,373 656 -- -- 17,029 Other depreciation and amortization 534 31 387 -- 952 General and administrative 1,173 236 262 -- 1,671 Interest 33 105 2,679 -- 2,817 -------- -------- -------- -------- -------- Total Costs & Expenses 20,460 22,534 3,328 (9,457) 36,865 -------- -------- -------- -------- -------- INCOME (LOSS) BEFORE INCOME TAX 14,444 1,480 (3,004) -- 12,920 INCOME TAX EXPENSE (BENEFIT) 5,272 540 (1,096) -- 4,716 -------- -------- -------- -------- -------- NET INCOME (LOSS) $ 9,172 $ 940 $ (1,908) $ -- $ 8,204 ======== ======== ======== ======== ======== </TABLE> Page 12
13 CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1997 (unaudited) CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS ($ IN THOUSANDS) <TABLE> <CAPTION> GUARANTOR NON-GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES (PARENT) CONSOLIDATED ------------ ------------- -------- ------------ <S> <C> <C> <C> <C> FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997: CASH FLOWS FROM OPERATING ACTIVITIES: $ 647 $ 6,108 $ 35,869 $ 42,624 --------- --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Oil and gas properties (99,067) (28) -- (99,095) Proceeds from sale of assets 1,190 -- -- 1,190 Other investments -- -- (3,000) (3,000) Other additions (14,590) 1,555 (325) (13,360) --------- --------- --------- --------- (112,467) 1,527 (3,325) (114,265) --------- --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Cash received from exercise of stock options -- -- 226 226 Dividends paid on common stock -- -- (1,405) (1,405) Other -- (15) -- (15) Intercompany advances, net 112,009 (5,332) (106,677) -- --------- --------- --------- --------- 112,009 (5,347) (107,856) (1,194) --------- --------- --------- --------- Net increase (decrease) in cash 189 2,288 (75,312) (72,835) Cash, beginning of period (6,534) 4,363 126,188 124,017 --------- --------- --------- --------- Cash, end of period $ (6,345) $ 6,651 $ 50,876 $ 51,182 ========= ========= ========= ========= FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996: CASH FLOWS FROM OPERATING ACTIVITIES: $ 27,667 $ 222 $ (1,936) $ 25,953 --------- --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Oil and gas properties (87,341) (9) -- (87,350) Proceeds from sales 8,642 -- -- 8,642 Investment in service operations (2,545) -- -- (2,545) Other additions (1,196) (49) (625) (1,870) --------- --------- --------- --------- (82,440) (58) (625) (83,123) --------- --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from long-term borrowings 10,000 -- -- 10,000 Payments on borrowings (1,230) (900) (5) (2,135) Cash received from exercise of stock options -- -- 191 191 Other -- -- (80) (80) Intercompany advances, net 29,970 3,984 (33,954) -- --------- --------- --------- --------- 38,740 3,084 (33,848) 7,976 --------- --------- --------- --------- Net increase (decrease) in cash and cash equivalents (16,033) 3,248 (36,409) (49,194) Cash, beginning of period 4,061 2,751 44,826 51,638 --------- --------- --------- --------- Cash, end of period $ (11,972) $ 5,999 $ 8,417 $ 2,444 ========= ========= ========= ========= </TABLE> Page 13
14 PART I. FINANCIAL INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RECENT EVENTS On October 22, 1997, the Company announced that it had agreed to acquire two Oklahoma City-based independent oil and gas producers that own total proved reserves of approximately 160 billion cubic feet of natural gas equivalent ("Bcfe"). In the larger of the two acquisitions, the Company has reached an agreement to acquire by merger the Mid-Continent operations of DLB Oil & Gas, Inc. ("DLB"). In its Mid-Continent division, DLB owns approximately 130 Bcfe of proved reserves, additional probable and possible reserves, nine gas gathering systems, and a gas marketing subsidiary based in Houston, Texas. The DLB acquisition is valued at approximately $150 million. The Company also reached an agreement to acquire AnSon Production Company ("AnSon"), a privately owned oil and gas producer that owns approximately 30 Bcfe of proved reserves, additional probable and possible reserves, undeveloped mineral interests, and a gas marketing subsidiary based in Oklahoma City. The AnSon acquisition is valued at approximately $43 million. On November 13, 1997, the Company announced that it had signed a definitive agreement to merge with Hugoton Energy Corporation ("Hugoton") in a stock-for-stock transaction. The merger agreement provides for a fixed exchange ratio of 1.3 shares of the Company's common stock for each share of Hugoton stock, resulting in Hugoton's shareholders owning approximately 26% of the Company following the transaction. Based upon the closing price of the Company's common stock on November 12, 1997, Hugoton's 20.9 million fully-diluted shares outstanding, and the assumption by the Company of $105 million of Hugoton's debt, the transaction is valued at approximately $380 million. Hugoton has approximately 300 Bcfe of proved reserves. On November 13, 1997, the Company also announced that it had entered into an agreement to purchase from Pan East Petroleum Corporation, a Canadian exploration and production company ("Pan East"), 11.9 million treasury shares of Pan East's common stock at a price per share of $2.50 (Cdn) in a private placement. Based on Pan East's existing 48 million outstanding shares and the Company's previous open market purchase of 100,000 Pan East shares, the Company will own approximately 12 million shares, or 19.9% of Pan East's outstanding common stock, for an investment of $30 million (Cdn), or $22 million (U.S.). The purpose of the private placement is to assist Pan East in financing its share of the exploration, development and acquisition activities under a proposed joint venture with the Company during the next two years. Both the private placement and the joint venture are scheduled to close on or before November 30, 1997. In November 1997, the Company received proceeds of approximately $108 million in connection with the initial public offering of Bayard Drilling Technologies, Inc. ("Bayard") common stock. After underwriting fees, the Company received approximately $21.40 per share for the 4,194,000 shares of Bayard it sold in the offering. In addition, the Company received $18 million as repayment of a loan made to Bayard during fiscal 1997. The sale of stock is expected to yield a pre-tax gain of approximately $74 million. The Company recently announced its decision to change its year-end to December 31. The Company believes this change will make its financial results more easily comparable to those of its peer group. Accordingly, the Company will file a transition report on Form 10-K for the six month period between the closing date of the Company's most recent fiscal year ended June 30, 1997 and the opening date of the new fiscal year beginning January 1, 1998 (the "Transition Period"). THREE MONTHS ENDED SEPTEMBER 30, 1997 VS. SEPTEMBER 30, 1996 Net income for the three months ended September 30, 1997 (the "Current Quarter") was $5.5 million, a $2.7 million decrease from net income of $8.2 million for the quarter ended September 30, 1996 (the "Prior Quarter"). This decrease was caused primarily by the Company's higher oil and gas production expenses, depreciation, depletion and amortization of oil and gas properties, and interest expenses in the Current Quarter, offset by higher oil and gas revenues resulting from higher production and higher gas prices and increases in interest and other income. Revenues from oil and gas sales for the Current Quarter were $45.7 million, an increase of $8.9 million, or 24%, from the Prior Quarter. Gas production decreased to 13.9 billion cubic feet ("Bcf"), a decrease of 1.4 Bcf, or 9%, compared to the Prior Quarter. Oil production increased 372 thousand barrels ("MBbls"), or 75%, from 498 MBbls to 870 MBbls. In the Current Quarter, the Company received an average oil price of $18.48 per barrel ("Bbl") (net of hedging losses of $0.2 million), a decrease of $2.71 per Bbl, or 13%, from the $21.19 per Bbl realized in the Prior Quarter. Gas price realizations increased to $2.12 per thousand cubic feet (AMcf@) in the Current Quarter inclusive of hedging gains of $0.6 million, an increase of 24% from the $1.71 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. Page 14
15 <TABLE> <CAPTION> Producing Oil Gas Total Percent Operating Areas Wells(a) (MBls) (MMcf) (MMcfe) % --------------- ------ ------ ------ ------ ------ <S> <C> <C> <C> <C> <C> Giddings 220 114 8,532 9,216 48% Louisiana Trend 67 460 1,817 4,577 24% Oklahoma 277 185 3,168 4,278 22% All Other 100 111 424 1,090 6% ------ ------ ------ ------ ------ Total 664 870 13,941 19,161 100% ====== ====== ====== ====== ====== </TABLE> (a) Includes wells being drilled at September 30, 1997 Revenues from the Company's oil and gas marketing operations in the Current Quarter were $26.9 million as compared to $12.2 million in the Prior Quarter. Oil and gas marketing expenses were $26.7 million and $11.9 million in the Current Quarter and Prior Quarter, respectively, resulting in a gross profit margin of $0.2 million and $0.3 million, respectively. Production expenses and taxes increased to $5.2 million in the Current Quarter from $2.5 million in the Prior Quarter. This increase was the result of a significant increase in oil sales volumes during the Current Quarter as well as significantly higher lifting costs in the Louisiana Trend. On a gas equivalent production unit ("Mcfe") basis, production expenses and taxes were $0.27 per Mcfe in the Current Quarter compared to $0.14 per Mcfe in the Prior Quarter. The Company expects that operating costs during the remainder of the Transition Period and during 1998 will increase because of the Company's increased drilling efforts in 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, higher lifting costs associated with production to be acquired from Hugoton, DLB and AnSon, and reduced severance tax exemptions as compared to existing exemptions in the Giddings Field. Depreciation, depletion and amortization ("DD&A") of oil and gas properties for the Current Quarter was $28.6 million, an increase of $11.6 million from the Prior Quarter. The increase in DD&A expense for oil and gas properties between quarters is the result of a 0.8 Bcfe increase in sales 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 $1.49 for the Current Quarter and $0.93 for the Prior Quarter. The Company believes the DD&A rate will continue to increase during the Transition Period based on projected higher finding costs for wells drilled in the Louisiana Trend. Depreciation and amortization of other assets increased to $1.1 million in the Current Quarter as compared to $1.0 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 office complex. General and administrative expenses increased to $2.8 million during the Current Quarter, a $1.1 million, or 65%, increase from the Prior Quarter. This increase is the result of the continued growth of the Company. On an Mcfe basis, general and administrative expenses were $0.14 per Mcfe in the Current Quarter as compared to $0.09 per Mcfe in the Prior Quarter. The Company capitalized $1.4 million and $0.7 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. The Company believes general and administrative expenses will increase substantially as the result of, and upon completion of, the announced acquisitions. Interest expense increased to $8.6 million during the Current Quarter, a $5.8 million increase from the Prior Quarter, as a result of higher levels of interest associated with the issuance of $300 million of Senior Notes in March 1997. In addition, during the Current Quarter the Company capitalized $2.6 million of interest costs representing the estimated costs to carry its unevaluated leasehold inventory, compared to $4.2 million in the Prior Quarter. This decrease in capitalized interest costs is the result of lower investments being carried during the Current Quarter in leasehold that has yet to be evaluated than in the Prior Quarter, as well as a lower capitalization rate during the Current Quarter. The Company expects interest expense to increase based upon the Company's assumption of certain liabilities associated with the announced acquisitions. Page 15
16 The Company recorded no net income tax expense during the Current Quarter as compared to $4.7 million recorded in the Prior Quarter. At June 30, 1997 the Company recorded a $64.1 million valuation allowance against its net deferred tax asset. All income taxes recorded during the Current Quarter were offset by a corresponding reduction to the valuation allowance. The Company does not anticipate recording any income tax until such time as the Company can demonstrate that it is more likely than not that it will generate future taxable income sufficient to utilize its existing net operating loss carryforwards. HEDGING ACTIVITIES The Company periodically utilizes various strategies to hedge the price of a portion of its future oil and gas production. These strategies include (1) swap arrangements that establish an index-related price above which the Company pays the counterparty and below which the Company is paid by the counterparty, (2) collar transactions that establish a defined set price above which the Company pays the counterparty and a separate defined set price below which the counterparty pays the Company, with a NYMEX price between the two resulting in no payment by either party, (3) the purchase of index-related puts that provide for a floor price below which the counterparty pays the Company the amount by which the price of the commodity is below the contracted floor, (4) the sale of index-related calls that provide for a ceiling price above which the Company pays the counterparty the amount by which the price of the commodity is above the contracted ceiling, and (5) 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 or physical purchase or sale commitments. As of September 30, 1997, the Company had the following oil swap arrangements for periods after September 1997: <TABLE> <CAPTION> NYMEX-Index Month Volume(Bbls) Strike Price (per Bbl) ----- ------------ ---------------------- <S> <C> <C> October 1997 31,000 $18.19 November 1997 30,000 $18.13 December 1997 31,000 $18.08 January through June 1998 724,000 $19.82 </TABLE> The Company entered into oil swap arrangements to cancel the effect of the swaps for the months of October through December at an average price of $20.79 per Bbl. As of September 30, 1997, the Company had the following gas hedging arrangements for periods after September 1997: <TABLE> <CAPTION> NYMEX Months Volume (MMBtu) Index Strike Price (per MMBtu) ------ -------------- ------------------------------ <S> <C> <C> October 1997 4,340,000 $2.421 November 1997 3,000,000 2.560 December 1997 2,480,000 3.036 January 1998 2,480,000 3.039 February 1998 2,240,000 2.835 </TABLE> The Company entered into a gas swap arrangement to cancel the effect of 1,240,000 MMBtu of the October hedged volumes at a price of $2.157 per MMBtu. The December 1997 through February 1998 transactions represent calls sold by the Company, for which $1.9 million in advance premium was received. The Company has also entered into the following collar transactions: <TABLE> <CAPTION> NYMEX- NYMEX- Defined Low Defined High Months Volume (MMBtu) Strike Price Strike Price - ----- -------------- ------------ ------------ <S> <C> <C> <C> March 1998 1,240,000 $ 2.693 $ 2.33 April 1998 1,200,000 2.483 2.11 </TABLE> Page 16
17 These transactions require that the Company pay the counterparty if NYMEX exceeds the defined high strike price and that the counterparty pay the Company if NYMEX is less than the defined low strike price. The Company has entered into a curve lock for 4.9 Bcf of gas which gives the Company the option to hedge April 1999 through November 1999 gas based upon a negative $0.285 differential to the December 1998 NYMEX gas price any time between the strike date and December 1998. Gains or losses on crude oil and natural gas hedging transactions are recognized as price adjustments in the month of related production. The Company estimates that had all of the crude oil and natural gas hedging agreements in effect for production periods beginning October 1, 1997 terminated on September 30, 1997, based on the closing prices for NYMEX futures contracts as of that date, the Company would have paid the counterparty approximately $2.9 million, which would have represented the "fair value" at that date. These agreements were not terminated. The Company's oil and gas marketing subsidiary periodically enters into various hedging transactions designed to hedge against physical purchase commitments made by it. Gains or losses on these transactions are recorded as adjustments to Oil and Gas Marketing Sales in the consolidated statements of operations and are not considered by management to be material. CAPITAL RESOURCES AND LIQUIDITY As of September 30, 1997, the Company had working capital of $99.8 million. This working capital position does not include the $74 million in net proceeds received from the Bayard transaction in November 1997. The Company has estimated that its capital expenditures for the Transition Period will be approximately $175 million, including approximately $150 million for drilling, completion and production expenditures, and the balance for acreage acquisition, seismic programs and general corporate purposes, but excluding acquisitions. The Company has not yet developed capital expenditure budgets in connection with the announced acquisitions of DLB, AnSon and Hugoton. 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 and asset sales, to fund its exploration and development program for the foreseeable future. During November 1997, the Company announced it had entered into agreements to acquire DLB, AnSon and Hugoton through stock-for-stock mergers. While the number of shares to be issued in the DLB and AnSon mergers will be determined by the market price of the Company's common stock for a stated period prior to closing, based on the closing price of the Company's common stock on November 13, 1997 the Company would issue 6.8 million and 4.5 million shares to acquire DLB and AnSon, respectively. The Company will issue approximately 27.2 million shares to acquire Hugoton. As a result of the mergers, the Company's aggregate liabilities will increase by approximately $190 million. The AnSon transaction is expected to close in November 1997. The DLB and Hugoton transactions are expected to close in the first quarter of 1998. The Company currently maintains no commercial bank credit facility, but anticipates refinancing the DLB and Hugoton debt at closing with a new commercial bank credit facility. The Company is currently negotiating with a lender to arrange this facility. Also during November 1997, the Company announced its plans to purchase 11.9 million treasury shares from Pan East at a price of $2.50 (Cdn) per share, or an aggregate purchase price of approximately $21.1 million (U.S.). The Company will finance this investment using its existing working capital and expects this transaction to close on or before November 30, 1997. The Company's cash provided by operating activities increased to $42.6 million during the Current Quarter, compared to $26.0 million during the Prior Quarter. The increase of $16.6 million is the result of cash provided by changes in current assets and current liabilities between the two periods. Net cash used in investing activities increased to $114.3 million in the Current Quarter, up from $83.1 million in the Prior Quarter. The $31.2 million increase is primarily a result of the Company's increased drilling activity and increased investment in gas gathering and processing facilities during the Current Quarter. Consolidated cash used in financing activities was $1.2 million during the Current Quarter, as compared to consolidated cash provided by financing activities of $8.0 million during the Prior Quarter. The change resulted primarily from having no borrowings during the Current Quarter as Page 17
18 well as the payment of $1.4 million of dividends on the Company's common stock during the Current Quarter. The Company is subject to certain routine legal proceedings, none of which are expected to have a material adverse effect upon the Company's financial condition or operations. The Company is also involved in certain litigation for which the Company is unable to predict the ultimate financial impact (see Part II, Item 1). 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", "estimates", "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. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - Not applicable Page 18
19 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On October 15, 1996, Union Pacific Resources Company ("UPRC") filed suit against the Company in the U.S. District Court for the Northern District of Texas, Fort Worth Division alleging (a) infringement and inducing infringement of UPRC's claim to a patent (the "UPRC Patent") for an invention involving a method of maintaining a borehole in a stratigraphic zone during drilling, and (b) tortious interference with certain business relations between UPRC and certain of its former employees. UPRC's claims against the Company are based on services provided by a third party vendor to the Company. UPRC is seeking injunctive relief, damages of an unspecified amount, including actual, enhanced, consequential and punitive damages, interest, costs and attorney's fees. The Company believes that it has meritorious defenses to UPRC's allegations and has requested the court to declare the UPRC Patent invalid. The Company has also filed a motion to limit the scope of UPRC's claims and for summary judgment. No prediction can be made as to the outcome of the matter. As previously disclosed in the Company's Form 10-K for the year ended June 30, 1997, the Company and certain of its officers and directors are defendants in various purported class actions alleging violations of Sections 10b-5 and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. In addition to those previously disclosed, the following additional purported class actions have been filed: Nathaniel J. Hirsch v. Aubrey K. McClendon, Thomas L. Ward, Marcus C. Rowland, Henry J. Hood, Steven C. Dixon, J. Mark Lester, and Chesapeake Energy Corporation, filed in the U.S. District Court for the Western District of Oklahoma on October 14, 1997. Kay Chestnut v. Chesapeake Energy Corporation, Aubrey K. McClendon, Thomas L. Ward, Marcus C. Rowland, Shannon T. Self, Walter C. Wilson, Henry J. Hood, Steven C. Dixon and J. Mark Lester, filed in the U.S. District Court for the Western District of Oklahoma on October 16, 1997. Of the previously disclosed cases, Leslie Joseph Klein IRA v. Chesapeake Energy Corporation et al. has been dismissed, and two others, Albion Financial LLC v. Chesapeake Energy Corporation et al. and Elmo G. Hubble v. Chesapeake Energy Corporation et al., have been transferred to the U.S. District Court for the Western District of Oklahoma. The plaintiffs have filed an unopposed motion to consolidate all the purported class action suits. The plaintiffs assert that the defendants made materially false and misleading statements and failed to disclose material facts about the success of the Company's exploration efforts, principally in the Louisiana Trend. As a result, the complaints allege, the price of the Company's common stock was artificially inflated during periods beginning as early as January 25, 1996 and ending on June 27, 1997, when the Company issued a press release announcing disappointing drilling results in the Louisiana Trend and a full- Page 19
20 cost ceiling writedown to be reflected in its June 30, 1997 financial statements. The plaintiffs further allege that certain of the named individual defendants sold common stock during the class period when they knew or should have known adverse nonpublic information. Each case seeks a determination that the suit is a proper class action, certification of the plaintiff as a class representative and damages in an unspecified amount, together with costs of litigation, including attorneys' fees. The Company and the individual defendants believe that these actions are without merit, and intend to defend against them vigorously. Page 20
21 ITEM 2. CHANGES IN SECURITIES - - Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES - - Not applicable ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - - Not applicable ITEM 5. OTHER INFORMATION - - 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. ----------- 10.2.4 Employment Agreement dated as of July 1, 1997 between Steven C. Dixon and Chesapeake Energy Corporation. 11 Statement regarding computation of earnings per common share 27 Financial Data Schedule (b) Form 8-K During the quarter ended September 30, 1997, the Company filed the following Current Reports on Form 8-K dated: July 8, 1997 announcing operations updates, August 28, 1997 announcing fiscal 1997 results, and September 19, 1997 announcing the declaration of a quarterly cash dividend. Page 21
22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CHESAPEAKE ENERGY CORPORATION ----------------------------- (Registrant) November 14, 1997 /s/ AUBREY K. MCCLENDON - ----------------- ------------------------------ Date Aubrey K. McClendon Chairman and Chief Executive Officer November 14, 1997 /s/ MARCUS C. ROWLAND - ----------------- ------------------------------ Date Marcus C. Rowland Senior Vice President and Chief Financial Officer Page 22
23 Index to Exhibits <TABLE> <CAPTION> Exhibit No. Description Page - ----------- ----------- ---- <S> <C> <C> 10.2.4 Employment Agreement dated as of July 1, 1997 between Steven C. Dixon and Chesapeake Energy Corporation. 11 Statement regarding computation of earnings per common share 27 Financial Data Schedule </TABLE> Page 23