Filed Pursuant to Rule 424(b)(5)
Registration No. 333-96863
PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED AUGUST 1, 2002
20,000,000 Shares
CHESAPEAKE LOGO
CHESAPEAKE ENERGY CORPORATION
Common Stock
------------------
Our common stock is listed on The New York Stock Exchange under the symbol
"CHK." On December 12, 2002, the last reported sale price was $7.66 per share.
The underwriters have an option to purchase a maximum of 3,000,000
additional shares from us to cover over-allotments of shares.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "SUPPLEMENTAL RISK
FACTORS" ON PAGE S-11 OF THIS PROSPECTUS SUPPLEMENT AND "RISK FACTORS" ON PAGE 2
OF THE ACCOMPANYING PROSPECTUS.
<Table>
<Caption>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS CHESAPEAKE
-------- ------------- -----------
Per Share............................................ $7.50 $0.3525 $7.1475
Total................................................ $150,000,000 $7,050,000 $142,950,000
</Table>
Delivery of the shares of common stock will be made on or about December
18, 2002.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus supplement or the prospectus to which it relates is truthful or
complete. Any representation to the contrary is a criminal offense.
Joint Book-Running Managers
CREDIT SUISSE FIRST BOSTON MORGAN STANLEY SALOMON SMITH BARNEY
Co-Managers
BEAR, STEARNS & CO. INC. LEHMAN BROTHERS
JOHNSON RICE & COMPANY L.L.C.
The date of this prospectus supplement is December 12, 2002.
------------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<Table>
<Caption>
PAGE
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PROSPECTUS SUPPLEMENT SUMMARY......... S-1
SUPPLEMENTAL RISK FACTORS............. S-11
FORWARD LOOKING STATEMENTS............ S-13
USE OF PROCEEDS....................... S-15
CAPITALIZATION........................ S-16
PRICE RANGE OF COMMON STOCK........... S-17
</Table>
<Table>
<Caption>
PAGE
----
DIVIDEND POLICY....................... S-18
MANAGEMENT............................ S-19
UNDERWRITING.......................... S-23
NOTICE TO CANADIAN RESIDENTS.......... S-25
LEGAL MATTERS......................... S-26
EXPERTS............................... S-26
</Table>
PROSPECTUS
<Table>
<Caption>
PAGE
----
ABOUT THIS PROSPECTUS................. 1
ABOUT CHESAPEAKE ENERGY CORPORATION... 1
ABOUT THE SUBSIDIARY GUARANTORS....... 1
RISK FACTORS.......................... 2
WHERE YOU CAN FIND MORE INFORMATION... 9
FORWARD-LOOKING STATEMENTS............ 9
</Table>
<Table>
<Caption>
PAGE
----
USE OF PROCEEDS....................... 10
RATIOS OF EARNINGS TO FIXED CHARGES... 11
DESCRIPTION OF DEBT SECURITIES........ 11
DESCRIPTION OF CAPITAL STOCK.......... 19
PLAN OF DISTRIBUTION.................. 28
LEGAL MATTERS......................... 29
EXPERTS............................... 30
</Table>
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YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE
ON THE DATE OF THIS DOCUMENT.
PROSPECTUS SUPPLEMENT SUMMARY
This summary highlights selected information from this prospectus
supplement and the accompanying prospectus, but may not contain all information
that may be important to you. This prospectus supplement and the accompanying
prospectus include specific terms of this offering, information about our
business and financial data. We encourage you to read this prospectus supplement
and the accompanying prospectus in their entirety before making an investment
decision. Unless otherwise indicated, this prospectus supplement assumes no
exercise of the underwriters' over-allotment option.
CHESAPEAKE
We are among the ten largest independent natural gas producers in the
United States, owning interests in approximately 12,400 producing oil and gas
wells (pro forma for the approximately 1,900 wells expected to be acquired in
the pending ONEOK acquisition described below). We believe our estimated proved
reserves (pro forma for the pending ONEOK acquisition) were approximately 2.4
tcfe as of September 30, 2002. Approximately 91% of our pro forma proved
reserves are natural gas and 88% of our pro forma proved reserves are located in
the Mid-Continent region of the United States, which includes Oklahoma, western
Arkansas, southwestern Kansas and the Texas Panhandle. We have smaller
operations in the Deep Giddings field in Texas, the Tuscaloosa Trend in
Louisiana, the Permian Basin region of southeastern New Mexico and in the
Williston Basin of North Dakota and Montana. On November 25, 2002, we entered
into an agreement to acquire from ONEOK, Inc. all of the outstanding capital
stock of ONEOK Resources Company for $300 million, which, by our internal
estimates, will add approximately 200 bcfe to our proved reserves and
approximately 47,000 mcfe to our daily production. The proved reserves have a
reserve-to-production index of 11.0 years and are 94% natural gas and 88% proved
developed. We expect to close the ONEOK acquisition in January 2003. However,
there is no assurance this acquisition will be completed or that our estimates
of its reserves will prove correct.
Our executive offices are located at 6100 North Western Avenue, Oklahoma
City, Oklahoma 73118, and our telephone number is (405) 848-8000.
BUSINESS STRATEGY
From inception in 1989, our business goal has been to create value for our
investors by building one of the largest onshore natural gas resource bases in
the United States. Since 1998, our business strategy to achieve this goal has
been to integrate our aggressive and technologically advanced Mid-Continent
drilling program with a Mid-Continent focused producing property consolidation
program. We believe this balanced business strategy enables us to achieve
greater economies of scale, increase our undrilled acreage inventory and attract
and retain talented and motivated land, geoscientific and engineering personnel.
We are executing our strategy by:
- Consistently Making High-Quality Acquisitions. Our acquisition program
is focused on small- to medium-sized acquisitions of Mid-Continent
natural gas properties that provide high-quality production and
significant drilling opportunities. Since January 1, 2000, we have
acquired $1.1 billion of such properties in approximately 13 separate
transactions (greater than $10 million each) at an estimated average cost
of $1.26 per mcfe of proved reserves. Each of these acquisitions either
increased our ownership in existing wells or fields or added additional
drilling locations in our core Mid-Continent operating area. We believe
we are acquiring a high-quality asset base from ONEOK, distinguished by
proved reserves that are 94% gas and 88% proved developed. We believe
these properties provide substantial opportunities for additional
drilling and improvement of operational efficiencies. The ONEOK
properties compliment our existing Mid-Continent assets, with 87% of
ONEOK's proved reserves located in townships where we presently own
properties. Because the Mid-Continent region contains many small
companies seeking market liquidity and larger companies seeking to divest
non-core assets, we expect to find additional attractive acquisition
opportunities in the future.
S-1
- Consistently Growing through the Drillbit. One of our most distinctive
characteristics is our ability to increase reserves through the drillbit.
We are conducting one of the five most active drilling programs in the
United States with our program focused on finding gas in the
Mid-Continent region. We currently have 24 rigs drilling on
Chesapeake-operated prospects and we are participating in approximately
46 wells being drilled by others. Our Mid-Continent drilling program is
the most active in the region, and is supported by our ownership of an
extensive land and 3-D seismic base.
- Consistently Focusing on the Mid-Continent. In this region, we believe
we are the largest natural gas producer, the most active driller and the
most active acquirer of undeveloped leases and producing properties. We
believe the Mid-Continent region, which trails only the Gulf Coast and
Rocky Mountain basins in U.S. gas production, has many attractive
characteristics. These characteristics include long-lived natural gas
properties with relatively predictable decline curves; multi-pay
geological targets that decrease drilling risk, resulting in our
historical Mid-Continent drilling success rate of over 95%; relatively
high natural gas prices, typically only 10 to 20 cents per mmbtu behind
Henry Hub index prices; generally lower service costs than in more
competitive or more remote basins; and a favorable regulatory environment
with virtually no federal land ownership. In addition, we believe the
location of our headquarters in Oklahoma City provides us with many
competitive advantages over other companies that direct their activities
in this region from district offices in Oklahoma City or Tulsa or from
out-of-state headquarters.
- Consistently Focusing on Low Costs. By minimizing operating costs, we
have been able to deliver consistently attractive financial returns
through all phases of the commodity price cycle. We believe our general
and administrative costs and our lease operating expenses are among the
lowest in the industry. We believe these low costs are the result of our
management's effective cost-control programs, our high quality asset base
and the extensive and competitive services, gas processing and
transportation infrastructures in the Mid-Continent. We believe the ONEOK
acquisition should reduce our overall operating cost structure per mcfe
because our production costs per mcfe for the ONEOK properties are
expected to be lower than our current production costs per mcfe. We
believe further operating efficiencies can be achieved through our
acquisition of these properties.
- Consistently Improving our Capitalization. We have made significant
progress in improving our balance sheet since the beginning of 2000,
increasing common stockholders' equity by $1.0 billion from a combination
of earnings, preferred stock exchanges and common equity issued for
acquired properties. Our total long-term debt outstanding was $0.96
billion at December 31, 1999 while our proved reserves were 1.2 tcfe, for
a debt to proved reserves ratio of $0.80 per mcfe. As of September 30,
2002, this calculation had improved to $0.70 per mcfe as a result of a
95% increase in our estimates of proved reserves to 2.4 tcfe (pro forma
for the pending ONEOK acquisition) while debt has increased by only 71%
to $1.65 billion (pro forma for our issuance in November 2002 of $50
million of our 9% senior notes due 2012 and the application of proceeds
therefrom, for this offering and for the proposed notes offering, as
described under "Capitalization"). As of December 31, 1999, our debt to
total capitalization ratio was 129%. As of September 30, 2002, this ratio
was 65% (pro forma for our issuance in November 2002 of $50 million of
our 9% senior notes due 2012 and the application of proceeds therefrom,
for this offering and for the proposed notes offering, as described under
"Capitalization"). Additionally, as of December 12, 2002, we had $86.5
million outstanding under our revolving bank credit facility, for an
adjusted total of $1.74 billion in indebtedness. We plan to continue
making debt reduction per mcfe one of our primary financial goals.
Based on our view that natural gas has become the fuel of choice to meet
growing power demand and increasing environmental concerns, we believe our
Mid-Continent focused natural gas development strategy should provide
substantial growth opportunities in the years ahead. Although U.S. gas
production has declined in each of the past five quarters, we have increased our
production in each of those quarters. Our goal is to increase our overall
production by 10% to 15% per year, with approximately one-third of this growth
projected to be generated through the drillbit and the remainder from
acquisitions.
S-2
COMPANY STRENGTHS
We believe the following six characteristics distinguish our past
performance and future growth potential from other natural gas producers:
- High-Quality Asset Base. Our producing properties are characterized by
long-lived reserves, established production profiles and an emphasis on
natural gas. Based upon current production and reserve levels, our proved
reserves-to-production ratio, or reserve life, is approximately 11.4
years. We estimate the ONEOK properties have a reserve life of 11.0
years. In each of our operating areas, our properties are concentrated in
locations that enable us to establish substantial economies of scale in
drilling and production operations and facilitate the application of more
effective reservoir management practices. We intend to continue building
our Mid-Continent asset base by concentrating both our drilling and
acquisition efforts in this region.
- Low-Cost Producer. Our high-quality asset base has enabled us to achieve
a low operating cost structure. During the first nine months of 2002, our
cash operating costs per unit of production were $0.78, which consisted
of general and administrative expenses of $0.09 per mcfe, production
expenses of $0.54 per mcfe and production taxes of $0.15 per mcfe. We
believe this is one of the lowest operating cost structures among
publicly traded independent oil and natural gas producers. We believe the
ONEOK acquisition should lower our cash operating costs because we
project these properties will have production expenses of $0.45 per mcfe.
In addition, we believe the ONEOK acquisition will lower our overall
general and administrative expenses because we expect overhead recovery
fees from third parties to more than offset any additional general and
administrative expenses associated with managing the acquired assets. We
currently operate approximately 77% of our proved reserves, or 75% of our
proved reserves by value. This large percentage of operational control
provides us with a high degree of operating flexibility and cost control.
The ONEOK acquisition will add 494 additional operated wells and will
increase our ownership in 175 wells we presently operate.
- Successful Acquisition Program. Our experienced asset acquisition team
stays focused on adding to our attractive resource base in the
Mid-Continent region. This area is characterized by long-lived natural
gas reserves, low lifting costs, multiple geological targets that provide
substantial drilling potential, favorable basis differentials to
benchmark commodity prices, a well-developed oil and gas transportation
infrastructure and considerable potential for further consolidation of
assets. Since 1998 and following the completion of the ONEOK acquisition,
we will have completed $2.2 billion in acquisitions at an average cost of
$1.07 per mcfe of proved reserves. We believe we are well-positioned to
continue this consolidation as a result of our large existing asset base,
our corporate presence in Oklahoma, our knowledge and expertise in the
Mid-Continent and current trends in the industry. The ONEOK acquisition
is an example of the application of our acquisition strategy. The ONEOK
properties have a large percentage of proved developed gas reserves with
low operating costs, significant operating and undeveloped drilling
upside and are located in areas where currently we have a substantial
operating presence. We plan to pursue acquisitions of properties with
similar characteristics in the future.
- Large Inventory of Drilling Projects. During the past 13 years, we
believe we have been one of the ten most active drillers in the United
States and the most active driller in the Mid-Continent. We believe we
have developed a particular expertise in drilling deep vertical and
horizontal wells in challenging reservoir conditions. We actively pursue
deep drilling targets because of our view that most undiscovered gas
reserves in the Mid-Continent will be found at depths below 12,500 feet.
In addition, we believe that our large 3-D seismic inventory, much of
which is proprietary to Chesapeake, provides us with an advantage over
our competitors, which largely prefer to drill shallower development
wells. As a result of our aggressive land acquisition strategies and
Oklahoma's favorable forced-pooling regulations, we have been able to
accumulate an onshore leasehold position of approximately 1.8 million net
acres. In addition, our technical teams have identified over 1,500
exploratory and developmental drillsites, representing more than five
years of
S-3
future drilling opportunities at our current rate of drilling. The ONEOK
acquisition will add to our existing land inventory approximately 240,000
net acres, on which we have identified more than 100 additional
drillsites.
- Hedging Program. We have historically used and intend to continue using
hedging programs to reduce the risks inherent in producing oil and
natural gas, commodities that are extremely volatile in price. We believe
this volatility is likely to continue and may even accelerate in the
years ahead. We believe that a producer can use this volatility to its
benefit by taking advantage of prices when they exceed historical norms.
Over the past seven quarters, we increased our oil and gas revenues
through hedging by $190 million. For the fourth quarter 2002, we will
increase our oil and gas revenues by approximately $12 million. We
currently have gas hedging positions covering 50.0 bcf for the first
three quarters of 2003 at an average price of $4.20 per mcf. We have no
open hedges on any gas volumes beyond the third quarter of 2003 and have
not hedged any gas volumes associated with the ONEOK acquisition. In
addition, we have all of our projected oil production hedged for 2003 at
an average NYMEX price of $27.78 per barrel of oil.
- Entrepreneurial Management. Our management team formed Chesapeake in
1989 with an initial capitalization of $50,000. Through the following
years, this management team has guided our company through operational
challenges and extremes of oil and gas prices to create one of the ten
largest independent natural gas producers in the United States with a
current enterprise value of approximately $3.2 billion (pro forma for
this equity offering and our proposed senior notes offering). The
company's co-founders, Aubrey K. McClendon and Tom L. Ward have been
business partners in the oil and gas industry for 19 years and own
approximately 10.8 million and 12.3 million of our common shares,
respectively. Each of Messrs. McClendon and Ward is purchasing $1.0
million of common stock in this offering at the price offered to the
public.
RECENT DEVELOPMENTS
- ONEOK Acquisition. On November 25, 2002, we entered into an agreement to
acquire all of the capital stock of ONEOK Resources Company, a wholly
owned subsidiary of ONEOK, Inc., for $300 million in cash. We estimate
the acquired properties contain approximately 200 bcfe of proved reserves
and 60 bcfe of probable and possible reserves. We believe we are
acquiring a high-quality asset base from ONEOK, distinguished by proved
reserves that are 94% gas and 88% proved developed. We believe these
properties provide substantial opportunities for additional drilling and
improvement of operational efficiencies. The ONEOK properties compliment
our existing Mid-Continent assets, with 87% of ONEOK's proved reserves
located in townships where we presently own properties. We intend to use
the net proceeds from this offering, together with the net proceeds from
the proposed senior notes offering or borrowings under our revolving bank
credit facility, to effect the pending ONEOK acquisition. See "Use of
Proceeds."
ONEOK, Inc. is Oklahoma's largest utility and one of the Mid-Continent's
largest mid-stream gas processors and gas marketers. ONEOK is selling
approximately two-thirds of its exploration and production assets through
the sale of the stock of ONEOK Resources. ONEOK will retain its interests
in three fields in Oklahoma, Mocane-Laverne, Cement and Chitwood, where
both ONEOK and Chesapeake will continue to own interests. The completion
of the transaction is subject to the satisfaction of customary closing
conditions and is scheduled to close on January 31, 2003.
- Proposed Senior Notes Offering. On December 4, 2002, we announced our
intention to privately place $150 million principal amount of a new issue
of senior notes due 2014. Our board has authorized the issuance of up to
$250 million of new senior notes. There is no assurance our proposed
senior notes offering will be completed or completed for the amount
contemplated.
S-4
THE OFFERING
<Table>
Common stock offered by Chesapeake........... 20,000,000 shares
Common stock outstanding after this 187,087,957 shares
offering...................................
Use of proceeds.............................. We intend to use the net proceeds from this
offering, together with the net proceeds from
the proposed senior notes offering or
borrowings under our revolving bank credit
facility, to effect the pending ONEOK
acquisition. Prior to this application of
proceeds, we will use the net proceeds to
reduce amounts outstanding under our
revolving bank credit facility and hold any
remaining net proceeds as cash. If we are
unable to complete the ONEOK acquisition, the
net proceeds from this offering will be used
for general corporate purposes, including the
repayment of amounts outstanding under our
revolving bank credit facility and other
possible future acquisitions. See "Use of
Proceeds."
New York Stock Exchange symbol............... CHK
</Table>
The number of shares of our common stock shown above to be outstanding
after this offering is based on the number of shares outstanding as of December
12, 2002, and excludes:
- 4,792,529 shares of treasury stock;
- 24,626,910 shares of common stock issuable upon the exercise of
outstanding stock options at a weighted average exercise price of $4.39
per share; and
- 7,611,026 shares of common stock reserved for additional grants under our
stock option plans.
Unless we indicate otherwise, the share information in this prospectus
supplement assumes the underwriters' option to cover over-allotments is not
exercised. See "Underwriting."
------------------
RISK FACTORS
You should carefully consider all of the information in this prospectus
supplement. In particular, you should evaluate the specific risk factors set
forth in the section entitled "Supplemental Risk Factors" in this prospectus
supplement and the section entitled "Risk Factors" in the accompanying
prospectus for a discussion of risks relating to an investment in our common
stock.
S-5
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table sets forth summary consolidated financial data as of
and for each of the three years ended December 31, 1999, 2000 and 2001 and the
nine months ended September 30, 2001 and 2002. These data were derived from our
audited consolidated financial statements included in our annual report on Form
10-K for the year ended December 31, 2001, which is incorporated by reference
herein, and from our unaudited consolidated financial statements included in our
quarterly report on Form 10-Q for the quarterly period ended September 30, 2002,
which is incorporated by reference herein. The financial data below should be
read together with, and are qualified in their entirety by reference to, our
historical consolidated financial statements and the accompanying notes and the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" which are set forth in our annual report on Form 10-K and in our
quarterly report on Form 10-Q.
<Table>
<Caption>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- -------------------
1999 2000 2001 2001 2002
-------- --------- -------- -------- --------
(UNAUDITED)
($ IN THOUSANDS, EXCEPT RATIOS AND PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues:
Oil and gas sales.................... $280,445 $ 470,170 $735,529 $574,190 $456,992
Risk management income (loss)........ -- -- 84,789 94,715 (86,995)
Oil and gas marketing sales.......... 74,501 157,782 148,733 123,071 112,334
-------- --------- -------- -------- --------
Total revenues.................... 354,946 627,952 969,051 791,976 482,331
-------- --------- -------- -------- --------
Operating costs:
Production expenses.................. 46,298 50,085 75,374 55,933 71,252
Production taxes..................... 13,264 24,840 33,010 31,349 19,934
General and administrative........... 13,477 13,177 14,449 10,114 11,930
Oil and gas marketing expenses....... 71,533 152,309 144,373 119,337 108,836
Oil and gas depreciation, depletion
and amortization.................. 95,044 101,291 172,902 124,904 157,731
Depreciation and amortization of
other assets...................... 7,810 7,481 8,663 5,954 10,489
-------- --------- -------- -------- --------
Total operating costs............. 247,426 349,183 448,771 347,591 380,172
-------- --------- -------- -------- --------
Income from operations................. 107,520 278,769 520,280 444,385 102,159
-------- --------- -------- -------- --------
Other income (expense):
Interest and other income............ 8,562 3,649 2,877 1,384 7,343
Interest expense..................... (81,052) (86,256) (98,321) (72,977) (79,966)
Impairments of investments in
securities........................ -- -- (10,079) -- (4,770)
Loss on repurchases of debt.......... -- -- -- -- (1,353)
Gain on sale of Canadian
subsidiary........................ -- -- 27,000 -- --
Gothic standby credit facility
costs............................. -- -- (3,392) (3,392) --
-------- --------- -------- -------- --------
Total other income (expense)...... (72,490) (82,607) (81,915) (74,985) (78,746)
-------- --------- -------- -------- --------
Income before income taxes and
extraordinary item................... 35,030 196,162 438,365 369,400 23,413
Provision (benefit) for income taxes... 1,764 (259,408) 174,959 148,619 9,366
-------- --------- -------- -------- --------
Income before extraordinary item....... 33,266 455,570 263,406 220,781 14,047
</Table>
S-6
<Table>
<Caption>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- -------------------
1999 2000 2001 2001 2002
-------- --------- -------- -------- --------
(UNAUDITED)
($ IN THOUSANDS, EXCEPT RATIOS AND PER SHARE DATA)
Extraordinary item:
Loss on early extinguishment of debt,
net of applicable income taxes.... -- -- (46,000) (46,000) --
-------- --------- -------- -------- --------
Net income............................. 33,266 455,570 217,406 174,781 14,047
Preferred stock dividends.............. (16,711) (8,484) (2,050) (728) (7,588)
Gain on redemption of preferred
stock................................ -- 6,574 -- -- --
-------- --------- -------- -------- --------
Net income available to common
shareholders......................... $ 16,555 $ 453,660 $215,356 $174,053 $ 6,459
======== ========= ======== ======== ========
Earnings per common share -- basic:
Income before extraordinary item....... $ 0.17 $ 3.52 $ 1.61 $ 1.36 $ 0.04
Extraordinary item..................... -- -- (0.28) (0.28) --
-------- --------- -------- -------- --------
Net income............................. $ 0.17 $ 3.52 $ 1.33 $ 1.08 $ 0.04
======== ========= ======== ======== ========
Earnings per common share -- assuming
dilution:
Income before extraordinary item....... $ 0.16 $ 3.01 $ 1.51 $ 1.29 $ 0.04
Extraordinary item..................... -- -- (0.26) (0.27) --
-------- --------- -------- -------- --------
Net income............................. $ 0.16 $ 3.01 $ 1.25 $ 1.02 $ 0.04
======== ========= ======== ======== ========
OTHER FINANCIAL DATA:
Cash provided by operating activities
before changes in working capital.... $138,727 $ 305,804 $518,563 $407,184 $284,299
Cash provided by operating
activities........................... 145,022 314,640 553,737 440,956 353,658
Cash used in investing activities...... 153,908 325,229 670,105 454,163 617,183
Cash provided by (used in) financing
activities........................... 13,102 (27,740) 234,507 30,794 171,309
EBITDA(1).............................. 218,936 391,190 619,933 481,912 363,364
EBITDA (excluding unrestricted
subsidiary)(2)....................... 212,800 385,785 616,411 480,093 360,718
Ratio of earnings to fixed
charges(3)........................... 1.4x 3.1x 5.1x 5.6x 1.2x
Ratio of EBITDA to interest expense.... 2.7x 4.5x 6.3x 6.6x 4.5x
Ratio of EBITDA to interest expense
(excluding unrestricted
subsidiary)(4)....................... 2.6x 4.5x 6.3x 6.6x 4.5x
Ratio of EBITDA to interest expense and
preferred stock dividends............ 2.2x 4.1x 6.2x 6.5x 4.2x
Ratio of EBITDA to interest expense and
preferred stock dividends (excluding
unrestricted subsidiary)(4).......... 2.2x 4.1x 6.1x 6.5x 4.1x
</Table>
S-7
<Table>
<Caption>
AS OF SEPTEMBER 30, 2002 (UNAUDITED)
------------------------------------------
PRO FORMA AS
PRO FORMA ADJUSTED FOR
AS OF DECEMBER 31, AS ADJUSTED STOCK AND
----------------------------------- FOR STOCK SENIOR NOTES
1999 2000 2001 HISTORICAL OFFERING(5) OFFERINGS(5)(6)
--------- ---------- ---------- ---------- ----------- ---------------
($ IN THOUSANDS)
BALANCE SHEET DATA:
Total assets................ $ 850,533 $1,440,426 $2,286,768 $2,544,633 $2,692,424 $2,842,424
Long-term debt, net of
current maturities and
discounts................. 964,097 944,845 1,329,453 1,494,180 1,500,609 1,650,609
Stockholders' equity
(deficit)................. (217,544) 313,232 767,407 734,787 876,644 876,644
</Table>
- ---------------
(1) We define EBITDA as net income (loss) before risk management income or loss,
interest expense, income taxes, depreciation, depletion and amortization,
impairments of oil and gas properties and other assets, Gothic standby
credit facility costs, gain on sale of Canadian subsidiary, and
extraordinary items. EBITDA provides additional information as to our
ability to meet our fixed charges, including interest on our debt, and is
presented solely as a supplemental measure. EBITDA should not be considered
as an alternative to net income, income before income taxes, cash flows from
operations or any other measure of financial performance presented in
accordance with generally accepted accounting principles. Our EBITDA may not
be comparable to EBITDA of other entities because other entities may not
calculate EBITDA in the same manner as we do.
(2) Excludes EBITDA of Chesapeake Energy Marketing, Inc. for all periods
presented and of Carmen Acquisition Corp. for the six months ended June 30,
2001, as each was designated as an "unrestricted subsidiary" under the
indentures governing our senior notes for the purpose of the financial
covenants contained therein during such periods.
(3) For purposes of determining the ratio of earnings to fixed charges, earnings
are defined as net income before income taxes, extraordinary items,
amortization of capitalized interest and fixed charges, less capitalized
interest. Fixed charges consist of interest (whether expensed or
capitalized), and amortization of debt expenses and discount or premium
relating to any indebtedness.
(4) Excludes EBITDA, interest expense and preferred dividends of each
"unrestricted subsidiary," as described in note (2) above.
(5) Adjusts historical data for this offering and is pro forma for our issuance
in November 2002 of an additional $50 million of our 9% Senior Notes due
2012, and the application of the net proceeds from each offering, as
described under "Use of Proceeds" and "Capitalization."
(6) Further adjusts for a proposed private offering of $150 million of senior
notes that we expect to complete in December 2002. There is no assurance
that our proposed senior notes offering will be completed or completed for
the amount contemplated.
S-8
SUMMARY RESERVE INFORMATION
PRO FORMA PROVED RESERVES
The following table sets forth our internal estimates at September 30, 2002
of proved reserves and the present value of the proved reserves, discounted at
10% per annum, giving pro forma effect to the pending ONEOK acquisition expected
to close in January 2003 (based on NYMEX prices at September 30, 2002 of $30.54
per barrel of oil and $4.09 per mcf of gas):
<Table>
<Caption>
GAS PERCENT OF
OIL GAS EQUIVALENT PROVED PRESENT VALUE
(MBBL) (MMCF) (MMCFE) RESERVES ($ IN THOUSANDS)
------ --------- ---------- ---------- ----------------
Mid-Continent(1)............. 22,640 1,930,213 2,066,057 88% $3,121,990
Gulf Coast................... 3,572 116,809 138,241 6 247,900
Permian Basin................ 6,219 68,888 106,206 5 169,626
Williston Basin.............. 5,033 5,381 35,581 1 58,592
Other areas.................. 7 10,428 10,462 -- 4,012
------ --------- --------- --- ----------
Total................... 37,471 2,131,719 2,356,547 100% $3,602,120
====== ========= ========= === ==========
</Table>
- ---------------
(1) Includes an estimated 195,714 mmcfe of proved reserves and $278 million of
present value of future net revenue, discounted at 10% per annum,
attributable to the pending ONEOK acquisition.
As of September 30, 2002, our pro forma proved developed reserves as a
percentage of our total pro forma proved reserves were 73% (71% before giving
pro forma effect to the ONEOK acquisition). Pro forma natural gas reserves
accounted for 91% of total pro forma proved reserves at September 30, 2002 (90%
before giving pro forma effect to the ONEOK acquisition).
Actual future prices and costs may be materially higher or lower than the
prices and costs as of the date of any estimate. Our September 30, 2002 and
ONEOK reserve estimates are based solely on internal company estimates which
have not been reviewed by independent reserve engineers.
While we expect to close the ONEOK acquisition in January 2003, there can
be no assurance that this acquisition will be completed or that our estimate of
reserves will prove correct.
PROVED RESERVES AT DECEMBER 31, 2001
At December 31, 2001, we estimated that our proved reserves were
approximately 1.8 tcfe, of which approximately 71% were proved developed and 90%
consisted of natural gas. The present value of future net revenue attributable
to these reserves, discounted at 10% per annum, was approximately $1.65 billion
at December 31, 2001 (based on weighted average prices at December 31, 2001 of
$18.82 per barrel of oil and $2.51 per mcf of gas).
S-9
SUMMARY PRODUCTION AND SALES DATA
VOLUMES, REVENUE, PRICES AND PRODUCTION COSTS
The following table sets forth certain information regarding the production
volumes, revenue, average prices received and average production costs
associated with sales of natural gas and oil for the periods indicated:
<Table>
<Caption>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ -------------------
1999 2000 2001 2001 2002
-------- -------- -------- -------- --------
NET PRODUCTION:
Oil (mbbl)............................ 4,147 3,068 2,880 2,073 2,525
Gas (mmcf)............................ 108,610 115,771 144,171 107,634 116,826
Gas equivalent (mmcfe)................ 133,492 134,179 161,451 120,072 131,976
OIL AND GAS SALES ($ IN THOUSANDS):
Oil................................... $ 66,413 $ 80,953 $ 77,522 $ 58,096 $ 64,193
Gas................................... 214,032 389,217 658,007 516,094 392,799
-------- -------- -------- -------- --------
Total oil and gas sales............ $280,445 $470,170 $735,529 $574,190 $456,992
======== ======== ======== ======== ========
AVERAGE SALES PRICE:
Oil ($ per bbl)....................... $ 16.01 $ 26.39 $ 26.92 $ 28.03 $ 25.42
Gas ($ per mcf)....................... 1.97 3.36 4.56 4.79 3.36
Gas equivalent ($ per mcfe)........... 2.10 3.50 4.56 4.78 3.46
OIL AND GAS COSTS ($ PER MCFE):
Production expenses................... $ 0.35 $ 0.37 $ 0.47 $ 0.47 $ 0.54
Production taxes...................... 0.10 0.19 0.20 0.26 0.15
General and administrative............ 0.10 0.10 0.09 0.08 0.09
Depreciation, depletion and
amortization....................... 0.71 0.75 1.07 1.04 1.20
</Table>
Our current production averages approximately 520,000 mcfe per day, and the
current production attributable to the ONEOK acquisition averages approximately
47,000 mcfe per day.
S-10
SUPPLEMENTAL RISK FACTORS
Investing in our common stock will provide you with an equity ownership in
Chesapeake. As one of our stockholders, your shares will be subject to risks
inherent in our business. The trading price of your shares will be affected by
the performance of our business relative to, among other things, competition,
market conditions and general economic and industry conditions. The value of
your investment may decrease, resulting in a loss. You should carefully consider
the following factors as well as other information contained in this prospectus
supplement, the accompanying prospectus and the documents we have incorporated
herein by reference before deciding to invest in our common stock.
OUR COMMODITY PRICE RISK MANAGEMENT ACTIVITIES MAY REDUCE THE REALIZED PRICES
RECEIVED FOR OUR OIL AND GAS SALES.
In order to manage our exposure to price volatility in marketing our oil
and gas, we enter into oil and gas price risk management arrangements for a
portion of our expected production. These transactions are limited in life.
While intended to reduce the effects of volatile oil and gas prices, commodity
price risk management transactions may limit the prices we actually realize and
we may experience reductions in oil and gas revenues from our commodity price
risk management activities in the future. In addition, our commodity price risk
management transactions may expose us to the risk of financial loss in certain
circumstances, including instances in which:
- our production is less than expected;
- there is a widening of price differentials between delivery points for
our production and the delivery point assumed in the hedge arrangement;
or
- the counterparties to our contracts fail to perform under the contracts.
Some of our commodity price and interest rate risk management arrangements
require us to deliver cash collateral or other assurances of performance to the
counterparties in the event that our payment obligations with respect to our
risk management transactions exceed certain levels. As of December 12, 2002, we
were required to post $8.5 million of collateral with one of our counterparties
through letters of credit issued under our bank credit facility. Future
collateral requirements are uncertain and will depend on arrangements with our
counterparties and highly volatile natural gas and oil prices.
OUR RECENT RESERVE ESTIMATES HAVE NOT BEEN REVIEWED BY INDEPENDENT PETROLEUM
ENGINEERS.
Our estimates of proved reserves as of September 30, 2002, and our
estimates of proved reserves attributed to the pending ONEOK acquisition,
included in this prospectus supplement under the caption "Prospectus Supplement
Summary," and certain estimates of our proved reserves and our estimates of
proved reserves attributed to the pending ONEOK acquisition, included in the
documents incorporated by reference herein, have not been reviewed or reported
on by independent petroleum engineers. These estimates were prepared by our own
engineers and professionals using criteria otherwise in compliance with SEC
rules. Oil and gas pricing can affect estimates of quantities of proved reserves
due to the impact of pricing on ultimate economic recovery. Estimates prepared
by independent engineers might be different than our internal estimates.
FUTURE PRICE DECLINES MAY RESULT IN A WRITE-DOWN OF OUR ASSET CARRYING VALUES.
We utilize the full cost method of accounting for costs related to our oil
and gas properties. Under this method, all such costs (productive and
nonproductive) are capitalized and amortized on an aggregate basis over the
estimated lives of the properties using the units-of-production method. These
capitalized costs are subject to a ceiling test, however, which limits such
pooled costs to the aggregate of the present value of future net revenues
attributable to proved oil and gas reserves discounted at 10% plus the lower of
cost or market value of unproved properties. The full cost ceiling is evaluated
at the end of each quarter utilizing the prices for oil and gas at that date. A
significant decline in oil and gas prices from current
S-11
levels, or other factors, without other mitigating circumstances, could cause a
future write-down of capitalized costs and a non-cash charge against future
earnings.
OUR LEVEL OF INDEBTEDNESS MAY ADVERSELY AFFECT OPERATIONS AND LIMIT OUR
GROWTH, AND WE MAY HAVE DIFFICULTY MAKING INTEREST AND PRINCIPAL PAYMENTS ON
OUR INDEBTEDNESS AS IT BECOMES DUE.
As of December 12, 2002, we had long-term indebtedness of approximately
$1.6 billion, $86.5 million of which was bank indebtedness. Our long-term
indebtedness represented 67% of our total book capitalization at September 30,
2002. We will continue to be highly leveraged after this offering.
Our level of indebtedness affects our operations in several ways, including
the following:
- a significant portion of our cash flows must be used to service our
indebtedness; for example, for the nine months ended September 30, 2002,
interest (including capitalized interest) on our borrowings was $83.6
million and equaled approximately 23% of EBITDA. As a result, our
business may not generate sufficient cash flows from operations to enable
us to continue to meet our obligations under our indebtedness;
- a high level of debt increases our vulnerability to general adverse
economic and industry conditions;
- the covenants contained in the agreements governing our outstanding
indebtedness limit our ability to borrow additional funds, dispose of
assets, pay dividends and make certain investments;
- our debt covenants may also affect our flexibility in planning for, and
reacting to, changes in the economy and in our industry; and
- a high level of debt may impair our ability to obtain additional
financing in the future for working capital, capital expenditures,
acquisitions, general corporate or other purposes.
We may incur additional debt, including significant secured indebtedness,
in order to make future acquisitions or to develop our properties. A higher
level of indebtedness increases the risk that we may default on our debt
obligations. Our ability to meet our debt obligations and to reduce our level of
indebtedness depends on our future performance. General economic conditions, oil
and gas prices and financial, business and other factors affect our operations
and our future performance. Many of these factors are beyond our control. We may
not be able to generate sufficient cash flow to pay the interest on our debt,
and future working capital, borrowings or equity financing may not be available
to pay or refinance such debt. Factors that will affect our ability to raise
cash through an offering of our capital stock or a refinancing of our debt
include financial market conditions, the value of our assets and our performance
at the time we need capital.
In addition, our bank borrowing base is subject to annual redeterminations.
We could be forced to repay a portion of our bank borrowings due to
redeterminations of our borrowing base. If we are forced to do so, we may not
have sufficient funds to make such repayments. If we do not have sufficient
funds and are otherwise unable to negotiate renewals of our borrowings or
arrange new financing, we may have to sell significant assets. Any such sale
could have a material adverse effect on our business and financial results.
LOWER OIL AND GAS PRICES COULD NEGATIVELY IMPACT OUR ABILITY TO BORROW.
Our current bank credit facility limits our borrowings to a borrowing base
of $250 million as of the date of this prospectus supplement. The borrowing base
is determined periodically at the discretion of a majority of the banks and is
based in part on oil and gas prices. Additionally, some of our indentures,
contain covenants limiting our ability to incur indebtedness in addition to that
incurred under our bank credit facility. These indentures limit our ability to
incur additional indebtedness unless we meet one of two alternative tests. The
first alternative is based on a percentage of our adjusted consolidated net
tangible assets, which is determined using discounted future net revenues from
proved oil and gas reserves as of the end of each year. As of the date of this
prospectus supplement, we cannot incur additional indebtedness under this first
alternative of the debt incurrence test. The second alternative is based on the
ratio of our adjusted consolidated EBITDA to our adjusted consolidated interest
expense over a trailing twelve-month
S-12
period. As of the date of this prospectus supplement, we are permitted to incur
significant additional indebtedness under this second alternative of the debt
incurrence test. Lower oil and gas prices in the future could reduce our
adjusted consolidated EBITDA, as well as our adjusted consolidated net tangible
assets, and thus could reduce our ability to incur additional indebtedness.
OUR OIL AND GAS MARKETING ACTIVITIES MAY EXPOSE US TO CLAIMS FROM ROYALTY
OWNERS.
In addition to marketing our own oil and gas production, our marketing
activities include marketing oil and gas production for working interest owners
and royalty owners in the wells that we operate. These activities include the
operation of gathering systems and the sale of oil and natural gas under various
arrangements. In the past two years, royalty owners have commenced litigation
against a number of companies in the oil and gas production business claiming
that amounts paid for production attributable to the royalty owners' interest
violated the terms of the applicable leases and state law, that deductions from
the proceeds of oil and gas production were unauthorized under the applicable
leases and that amounts received by upstream sellers should be used to compute
the amounts paid to the royalty owners. Some of this litigation was commenced
against us and other companies in the oil and gas production business as class
action suits including five class action suits filed against Chesapeake. As new
cases are decided and the law in this area continues to develop, our liability
relating to the marketing of oil and gas may increase.
FORWARD LOOKING STATEMENTS
This prospectus supplement, the accompanying prospectus and the documents
incorporated herein by reference include "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Exchange Act. Forward-looking statements give our current
expectations or forecasts of future events. They include statements regarding
oil and gas reserve estimates, planned capital expenditures, the drilling of oil
and gas wells and future acquisitions, expectations of closing and the impact of
the pending ONEOK acquisition and our proposed senior notes offering as
described in this prospectus supplement, expected oil and gas production, cash
flow and anticipated liquidity, business strategy and other plans and objectives
for future operations, expected future expenses and utilization of net operating
loss carryforwards. Statements concerning the fair values of derivative
contracts and their estimated contribution to our future results of operations
are based upon market information as of a specific date. These market prices are
subject to significant volatility.
Although we believe the expectations and forecasts reflected in these and
other forward-looking statements are reasonable, we can give no assurance they
will prove to have been correct. They can be affected by inaccurate assumptions
or by known or unknown risks and uncertainties. Factors that could cause actual
results to differ materially from expected results are described under
"Supplemental Risk Factors" beginning on page S-11 of this prospectus supplement
and "Risk Factors" beginning on page 2 of the accompanying prospectus. These
factors include:
- the volatility of oil and gas prices;
- our substantial indebtedness;
- the cost and availability of drilling and production services;
- our commodity price risk management activities, including counterparty
contract performance risk;
- uncertainties inherent in estimating quantities of oil and gas reserves,
projecting future rates of production and the timing of development
expenditures;
- uncertainties inherent in satisfying closing conditions for the ONEOK
acquisition;
- our ability to replace reserves;
- the availability of capital, including the reception of our proposed
senior notes offering in the high-yield debt markets;
S-13
- uncertainties in evaluating oil and gas reserves of acquired properties
and associated potential liabilities;
- drilling and operating risks;
- our ability to generate future taxable income sufficient to utilize our
federal and state income tax net operating loss (NOL) carryforwards
before their expiration;
- future ownership changes which could result in additional limitations to
our NOLs;
- adverse effects of governmental and environmental regulation;
- losses possible from pending or future litigation;
- the strength and financial resources of our competitors; and
- the loss of officers or key employees.
We caution you not to place undue reliance on these forward-looking
statements, which speak only as of the date of this prospectus supplement or as
of the date of the report or document in which they are contained, and we
undertake no obligation to update such information. We urge you to carefully
review and consider the disclosures made in this prospectus supplement, the
accompanying prospectus and our reports filed with the SEC and incorporated by
reference herein that attempt to advise interested parties of the risks and
factors that may affect our business.
S-14
USE OF PROCEEDS
We expect the net proceeds from this offering to be approximately $142.6
million, after deducting underwriters' discounts and the estimated expenses of
the offering. We intend to use the net proceeds from this offering, together
with the net proceeds from the proposed senior notes offering or borrowings
under our revolving bank credit facility, to effect the pending ONEOK
acquisition. Prior to this application of proceeds, we will use the net proceeds
to reduce amounts outstanding under our revolving bank credit facility and hold
any remaining net proceeds as cash. As of December 12, 2002, we had
approximately $86.5 million outstanding under our revolving bank credit
facility. The ONEOK acquisition is subject to satisfaction of customary closing
conditions, including receipt of satisfactory title. If we are unable to
complete the ONEOK acquisition, the net proceeds from this offering will be used
for general corporate purposes, including the repayment of amounts outstanding
under our revolving bank credit facility and other possible future acquisitions.
S-15
CAPITALIZATION
The following table shows our capitalization as of September 30, 2002 (i)
on a historical basis, (ii) on a pro forma basis, to reflect our issuance in
November 2002 of $50 million of our 9% senior notes due 2012, and the
application of the proceeds from that offering to repurchase other senior notes,
(iii) on a pro forma basis as adjusted to reflect this common stock offering and
(iv) on a pro forma basis as further adjusted to reflect a proposed $150 million
senior notes offering (assuming an offering price at par) and the application of
the anticipated net proceeds to fund the ONEOK acquisition price. This table
should be read in conjunction with, and is qualified in its entirety by
reference to, our historical financial statements and the accompanying notes
included in our quarterly report on Form 10-Q incorporated by reference herein.
<Table>
<Caption>
AS OF SEPTEMBER 30, 2002
---------------------------------------------------------------------
PRO FORMA PRO FORMA AS
FOR CHANGES IN PRO FORMA AS ADJUSTED FOR
LONG-TERM ADJUSTED FOR STOCK STOCK AND NOTES
HISTORICAL DEBT(1) OFFERING(1) OFFERINGS(1)(2)(3)
---------- -------------- ------------------ ------------------
($ IN THOUSANDS)
CASH AND CASH EQUIVALENTS............... $ 25,378 $ 30,514 $ 173,114(4) $ 19,864
========== ========== ========== ==========
LONG-TERM DEBT:
Revolving bank credit facility(5)..... $ -- $ -- $ -- $ --
7.875% senior notes due 2004.......... 86,459 42,137 42,137 42,137
8.375% senior notes due 2008.......... 250,000 250,000 250,000 250,000
8.125% senior notes due 2011.......... 800,000 800,000 800,000 800,000
8.500% senior notes due 2012.......... 142,665 142,665 142,665 142,665
9.000% senior notes due 2012.......... 250,000 300,000 300,000 300,000
% senior notes due 2014(6)....... -- -- -- 150,000
Discount for interest rate swap and
swaption(7)........................ (18,505) (19,379) (19,379) (19,379)
Discount, net of premium, on senior
notes.............................. (16,439) (14,814) (14,814) (14,814)
---------- ---------- ---------- ----------
Total long-term debt............... 1,494,180 1,500,609 1,500,609 1,650,609
---------- ---------- ---------- ----------
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value,
10,000,000 shares authorized;
2,998,000 shares of 6.75% cumulative
convertible preferred stock issued and
outstanding with a liquidation
preference of $149.9 million.......... 149,900 149,900 149,900 149,900
Common stock, $0.01 par value,
350,000,000 shares authorized;
171,019,880 shares issued and
outstanding (191,019,880 as
adjusted)............................. 1,710 1,710 1,910 1,910
Paid-in capital......................... 1,038,347 1,038,347 1,180,747 1,180,747
Accumulated deficit..................... (444,089) (444,832) (444,832) (444,832)
Accumulated other comprehensive
income................................ 8,901 8,901 8,901 8,901
Less: treasury stock, at cost; 4,792,529
shares of common stock................ (19,982) (19,982) (19,982) (19,982)
---------- ---------- ---------- ----------
Total stockholders' equity......... 734,787 734,044 876,644 876,644
---------- ---------- ---------- ----------
Total capitalization............... $2,228,967 $2,234,653 $2,377,253 $2,527,253
========== ========== ========== ==========
</Table>
- ---------------
(1) Gives effect to purchases subsequent to September 30, 2002 of $44.3 million
in principal amount of our 7.875% senior notes due 2004 for total
consideration of $46.6 million, including $0.4 million of accrued interest
and $1.9 million in redemption premium. We used a portion of the proceeds
from our
S-16
issuance in November 2002 of $50 million of our 9% senior notes due 2012 to
purchase a portion of our outstanding 7.875% senior notes.
(2) Except as described under "Use of Proceeds," we intend to use the net
proceeds from this offering and any proceeds from the proposed offering of
senior notes to fund portions of our pending ONEOK acquisition.
(3) If we are unable to complete our proposed $150 million senior notes
offering, we intend to borrow under our revolving bank credit facility to
finance the remainder of the ONEOK acquisition price. As of December 12,
2002, we had approximately $154 million available under our revolving bank
credit facility.
(4) Assumes that the net proceeds from this offering are held as cash and not
used to pay a portion of the purchase price of the pending ONEOK
acquisition.
(5) As of December 12, 2002, $86.5 million in principal amount was outstanding
on our revolving bank credit facility.
(6) We intend to issue $150 million of senior notes due 2014 in December 2002.
Our board of directors has authorized the issuance of up to $250 million of
new senior notes. There is no assurance that our proposed senior notes
offering will be completed or completed for the amount contemplated.
(7) The discount is subject to change as the fair value of the related
derivative changes.
PRICE RANGE OF COMMON STOCK
Our common stock is traded on the New York Stock Exchange under the symbol
"CHK." The following table sets forth the range of high and low sales prices per
share of our common stock for each calendar quarter.
<Table>
<Caption>
SALES PRICE
--------------
HIGH LOW
------ -----
2000:
First Quarter............................................. $ 3.31 $1.94
Second Quarter............................................ $ 8.00 $2.75
Third Quarter............................................. $ 8.25 $5.31
Fourth Quarter............................................ $10.50 $5.44
2001:
First Quarter............................................. $11.06 $7.65
Second Quarter............................................ $ 9.45 $6.20
Third Quarter............................................. $ 6.96 $4.50
Fourth Quarter............................................ $ 7.59 $5.26
2002:
First Quarter............................................. $ 7.78 $5.05
Second Quarter............................................ $ 8.55 $6.81
Third Quarter............................................. $ 7.25 $4.50
Fourth Quarter (through December 12, 2002)................ $ 7.73 $5.89
</Table>
On December 12, 2002, the closing sale price of our common stock, as
reported by the New York Stock Exchange, was $7.66 per share. On that date,
there were approximately 1,180 holders of record.
S-17
DIVIDEND POLICY
On September 20, 2002, our board of directors declared a $0.03 per share
dividend on our common stock which was paid in October 2002. Prior to that
dividend, we had not paid a dividend on our common stock since 1998. Although we
currently intend to continue paying $0.03 per share quarterly dividends, the
payment of future cash dividends will depend upon, among other things, our
financial condition, funds from operations, the level of our capital and
development expenditures, our future business prospects and any contractual
restrictions.
The indentures governing our 8.125% Senior Notes due 2011, our 8.375%
Senior Notes due 2008 and our 9% Senior Notes due 2012 contain restrictions on
our ability to declare and pay cash dividends. Under those indentures, we may
not pay dividends on our common stock if an event of default has occurred, if we
have not met the debt incurrence tests set forth in the indentures or if
immediately after giving effect to the dividend payment, we have paid total
dividends and made other restricted payments in excess of the permitted amount.
The credit agreement governing our revolving bank credit facility also contains
restrictions on our ability to declare and pay cash dividends.
S-18
MANAGEMENT
Our officers and directors are as follows:
<Table>
<Caption>
NAME AGE POSITION
- ---- --- --------
Aubrey K. McClendon.................. 43 Chairman of the Board, Chief Executive Officer
and Director
Tom L. Ward.......................... 43 President, Chief Operating Officer and
Director
Edgar F. Heizer, Jr.................. 73 Director
Breene M. Kerr....................... 73 Director
Charles T. Maxwell................... 71 Director
Shannon T. Self...................... 46 Director
Frederick B. Whittemore.............. 72 Director
Marcus C. Rowland.................... 50 Executive Vice President and Chief Financial
Officer
Steven C. Dixon...................... 44 Senior Vice President -- Production
J. Mark Lester....................... 49 Senior Vice President -- Exploration
Henry J. Hood........................ 42 Senior Vice President -- Land and Legal
Martha A. Burger..................... 49 Treasurer and Senior Vice President -- Human
Resources
Thomas L. Winton..................... 56 Senior Vice President -- Information
Technology and Chief Information Officer
Douglas J. Jacobson.................. 49 Senior Vice President -- Acquisitions and
Divestitures
Thomas S. Price, Jr.................. 50 Senior Vice President -- Corporate Development
Michael A. Johnson................... 37 Senior Vice President -- Accounting
James C. Johnson..................... 44 President of Chesapeake Energy Marketing, Inc.
Steven W. Miller..................... 45 Senior Vice President -- Drilling
</Table>
Aubrey K. McClendon, age 43, has served as our Chairman of the Board, Chief
Executive Officer and a director since co-founding Chesapeake in 1989. From 1982
to 1989, Mr. McClendon was an independent producer of oil and gas in affiliation
with Tom L. Ward, our President and Chief Operating Officer. Mr. McClendon is a
member of the Board of Visitors of the Fuqua School of Business at Duke
University. Mr. McClendon graduated from Duke University in 1981.
Tom L. Ward, age 43, has served as our President, Chief Operating Officer
and a director since co-founding Chesapeake in 1989. From 1982 to 1989, Mr. Ward
was an independent producer of oil and gas in affiliation with Aubrey K.
McClendon, our Chairman and Chief Executive Officer. Mr. Ward is a member of the
Board of Trustees of Anderson University in Anderson, Indiana. Mr. Ward
graduated from the University of Oklahoma in 1981.
Edgar F. Heizer, Jr., age 73, has been a member of our board of directors
since 1993. From 1985 to the present, Mr. Heizer has been a private venture
capitalist. He founded Heizer Corporation, a publicly traded business
development company, in 1969 and served as Chairman and Chief Executive Officer
from 1969 until 1986, when Heizer Corporation was reorganized into a number of
public and private companies. Mr. Heizer was Assistant Treasurer of the Allstate
Insurance Company from 1962 to 1969 in charge of Allstate's venture capital
operations. He was employed by Booz, Allen and Hamilton from 1958 to 1962,
Kidder, Peabody & Co. from 1956 to 1958, and Arthur Andersen & Co. from 1954 to
1956. He serves on the advisory board of the Kellogg School of Management at
Northwestern University. Mr. Heizer is a director of Material Science
Corporation, a New York Stock Exchange listed company in Elk Grove, Illinois,
Needham & Company, Inc. and several private companies. Mr. Heizer graduated from
Northwestern University in 1951 and from Yale University Law School in 1954.
S-19
Breene M. Kerr, age 73, has been a member of our board of directors since
1993. He is President of Brookside Company, Easton, Maryland. In 1969, Mr. Kerr
founded Kerr Consolidated, Inc., which was sold in 1996. In 1969, Mr. Kerr
co-founded the Resource Analysis and Management Group and remained its senior
partner until 1982. From 1967 to 1969, he was Vice President of Kerr-McGee
Chemical Corporation. From 1951 through 1967, Mr. Kerr worked for Kerr-McGee
Corporation as a geologist and land manager. Mr. Kerr has served as chairman of
the Investment Committee for the Massachusetts Institute of Technology and is a
life member of the Corporation (Board of Trustees) of that university. He served
as a director of Kerr-McGee Corporation from 1957 to 1981. Mr. Kerr currently is
a trustee of the Brookings Institution in Washington, D.C., and has been an
associate director since 1987 of Aven Gas & Oil, Inc., an oil and gas property
management company located in Oklahoma City. Mr. Kerr graduated from the
Massachusetts Institute of Technology in 1951.
Charles T. Maxwell, age 71, has been a member of our board of directors
since September 2002. From 1999 to the present, Mr. Maxwell has been the Senior
Energy Analyst at Weeden & Co., an institutional research and brokerage firm
located in Greenwich, Connecticut. Entering the oil and natural gas industry in
1957, Mr. Maxwell worked for Mobil Oil Corporation for twelve years in the U.S.,
Europe, the Middle East and Africa. In 1968 Mr. Maxwell joined C. J. Lawrence,
an institutional research and brokerage firm, as an oil analyst and was ranked
by Institutional Investor magazine as No. 1 in his field in 1972, 1974, 1977,
and 1981-1986. He rose to the position of Managing Director of C. J. Lawrence/
Morgan Grenfell and retired from the firm in 1997, several years after it was
acquired by Deutsche Bank. In addition, for the last 18 years he has been an
active member of an Oxford-based organization comprised of OPEC officials and
oil industry executives from 30 countries who meet twice each year to discuss
trends in the energy industry. Mr. Maxwell graduated from Princeton University
in 1953 and Oxford University in 1957.
Shannon T. Self, age 46, has been a member of our board of directors since
1993. He is a shareholder in the law firm of Commercial Law Group, P.C.,
formerly Self, Giddens & Lees, Inc., a professional corporation in Oklahoma City
which he co-founded. Mr. Self was an associate and shareholder in the law firm
of Hastie and Kirschner, Oklahoma City, from 1984 to 1991 and was employed by
Arthur Young & Co. from 1979 to 1980. Mr. Self is a member of the Law Board of
Northwestern University School of Law and a director of Piedra Capital, Ltd., a
money management firm in Houston, Texas. Mr. Self is a Certified Public
Accountant. He graduated from the University of Oklahoma in 1979 and from
Northwestern University Law School in 1984.
Frederick B. Whittemore, age 72, has been a member of our board of
directors since 1993. Mr. Whittemore has been an advisory director of Morgan
Stanley Dean Witter & Co. since 1989 and was a managing director or partner of
the predecessor firms of Morgan Stanley Dean Witter & Co. from 1967 to 1989. He
was Vice-Chairman of the American Stock Exchange from 1982 to 1984. Mr.
Whittemore is a director of Partner Reinsurance Company, Bermuda; Maxcor
Financial Group Inc., New York; SunLife of New York, New York; KOS
Pharmaceuticals, Inc., Miami, Florida; and Southern Pacific Petroleum,
Australia, NL. Mr. Whittemore graduated from Dartmouth College in 1953 and from
the Amos Tuck School of Business Administration in 1954.
Marcus C. Rowland, age 50, was appointed as our Executive Vice President in
1998 and has been our Chief Financial Officer since 1993. He served as our
Senior Vice President from 1997 to 1998 and as our Vice President -- Finance
from 1993 until 1997. From 1990 until his association with Chesapeake, Mr.
Rowland was Chief Operating Officer of Anglo-Suisse, L.P. assigned to the White
Nights Russian Enterprise, a joint venture of Anglo-Suisse, L.P. and Phibro
Energy Corporation, a major foreign operation which was granted the right to
engage in oil and gas operations in Russia. Prior to his association with White
Nights Russian Enterprise, Mr. Rowland owned and managed his own oil and gas
company and prior to that was Chief Financial Officer of a private exploration
company in Oklahoma City from 1981 to 1985. Mr. Rowland is a Certified Public
Accountant. He graduated from Wichita State University in 1975.
Steven C. Dixon, age 44, has been our Senior Vice President -- Production
since 1995 and served as our Vice President -- Exploration from 1991 to 1995.
Mr. Dixon was a self-employed geological consultant
S-20
in Wichita, Kansas from 1983 through 1990. He was employed by Beren Corporation
in Wichita, Kansas from 1980 to 1983 as a geologist. Mr. Dixon graduated from
the University of Kansas in 1980.
J. Mark Lester, age 49, has been our Senior Vice President -- Exploration
since 1995 and served as our Vice President -- Exploration from 1989 to 1995.
From 1986 to 1989, Mr. Lester was self-employed and acted as a consultant to
Messrs. McClendon and Ward. He was employed by various independent oil companies
in Oklahoma City from 1980 to 1986, and was employed by Union Oil Company of
California from 1977 to 1980 as a geophysicist. Mr. Lester graduated from Purdue
University in 1975 with a B.S. in Engineering Geology and in 1977 with an M.S.
in Geophysics.
Henry J. Hood, age 42, was appointed as our Senior Vice President -- Land
and Legal in 1997 and served as our Vice President -- Land and Legal from 1995
to 1997. We retained Mr. Hood as a consultant during the two years prior to his
joining Chesapeake, and he was associated with the law firm of White, Coffey,
Galt & Fite from 1992 to 1995. Mr. Hood was associated with or a partner of the
law firm of Watson & McKenzie from 1987 to 1992. Mr. Hood is a member of the
Oklahoma and Texas Bar Associations. Mr. Hood graduated from Duke University in
1982 and from the University of Oklahoma College of Law in 1985.
Martha A. Burger, age 49, has served as our Treasurer since 1995 and as our
Senior Vice President -- Human Resources since March 2000. She was our Vice
President -- Human Resources from 1998 until 2000, our Human Resources Manager
from 1996 to 1998 and our Corporate Secretary from November 1999 until 2000.
From 1994 to 1995, she served in various accounting positions with Chesapeake
including Assistant Controller -- Operations. From 1989 to 1993, Ms. Burger was
employed by Hadson Corporation as Assistant Treasurer and from 1993 to 1994
served as Vice President and Controller of Hadson Corporation. Prior to joining
Hadson Corporation, Ms. Burger was employed by The Phoenix Resource Companies,
Inc. as Assistant Treasurer and by Arthur Andersen & Co. Ms. Burger is a
Certified Public Accountant. She graduated from the University of Central
Oklahoma in 1982 and from Oklahoma City University in 1992.
Thomas L. Winton, age 56, has served as our Senior Vice
President -- Information Technology and Chief Information Officer since 1998.
From 1985 until his association with Chesapeake, Mr. Winton served as the
Director, Information Services Department, at Union Pacific Resources Company.
Prior to that period Mr. Winton held the positions of Regional
Manager -- Information Services from 1984 until 1985 and Manager -- Technical
Applications Planning and Development from 1980 until 1984 with UPRC. Mr. Winton
also served as an analyst and supervisor in the Operations Research Division,
Conoco Inc., from 1973 until 1980. Mr. Winton graduated from Oklahoma Christian
University in 1969, Creighton University in 1973 and the University of Houston
in 1980. Mr. Winton also completed the Tuck Executive Program, Amos Tuck School
of Business, Dartmouth College in 1987.
Douglas J. Jacobson, age 49, has served as our Senior Vice
President -- Acquisitions and Divestitures since 1999. Prior to joining
Chesapeake, Mr. Jacobson was employed by Samson Investment Company from 1980
until 1999, where he served as Senior Vice President -- Project Development and
Marketing from 1996 until 1999. Prior to joining Samson, Mr. Jacobson was
employed by Peat, Marwick, Mitchell & Co. Mr. Jacobson has served on various
Oklahoma legislative commissions which have addressed issues in the oil and gas
industry, including the Commission of Oil and Gas Production Practices and the
Natural Gas Policy Commission. Mr. Jacobson is a Certified Public Accountant. He
graduated from John Brown University in 1976 and from the University of Arkansas
in 1977.
Thomas S. Price, Jr., age 50, has served as our Senior Vice
President -- Corporate Development since March 2000. Mr. Price previously served
as our Vice President -- Corporate Development from 1992 to 2000 and was a
consultant to Chesapeake during the prior two years. He was employed by
Kerr-McGee Corporation, Oklahoma City, from 1988 to 1990 and by Flag-Redfern Oil
Company from 1984 to 1988. Mr. Price is Vice Chairman of the Mid-Continent Oil
and Gas Association and a member of the Petroleum Investor Relations Association
and the National Investor Relations Institute. Mr. Price graduated from the
University of Central Oklahoma in 1983, from the University of Oklahoma in 1989
and from the American Graduate School of International Management in 1992.
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Michael A. Johnson, age 37, has served as our Senior Vice
President -- Accounting, Controller and Chief Accounting Officer since March
2000. He served as our Vice President of Accounting and Financial Reporting from
1998 to 2000 and as our Assistant Controller from 1993 to 1998. From 1991 to
1993, Mr. Johnson served as Project Manager for Phibro Energy Production, Inc.,
a Russian joint venture. From 1987 to 1991 he served as audit manager for Arthur
Andersen & Co. Mr. Johnson is a Certified Public Accountant. He graduated from
the University of Texas at Austin in 1987.
James C. Johnson, age 44, has served as President of Chesapeake Energy
Marketing, Inc., a wholly-owned subsidiary of ours, since 2000. He previously
served as Vice President -- Contract Administration from 1997 to 2000 and as our
Manager -- Contract Administration from 1996 to 1997. From 1980 to 1996, Mr.
Johnson held various gas marketing and land positions with Enogex, Inc., Delhi
Gas Pipeline Corporation, TXO Production Corp. and Gulf Oil Corporation. Mr.
Johnson is a member of the Natural Gas Association of Oklahoma and graduated
from the University of Oklahoma in 1980.
Steven W. Miller, age 45, has served as our Senior Vice
President -- Drilling after serving as our Vice President -- Drilling since 1996
and served as our District Manager -- College Station District from 1994 to
1996. Mr. Miller held various engineering positions in the oil and gas industry
from 1980 to 1993. Mr. Miller is a registered Professional Engineer in Texas, is
a member of the Society of Petroleum Engineers and graduated from Texas A & M
University in 1980.
S-22
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated December 12, 2002, we have agreed to sell to the underwriters
named below, for whom Credit Suisse First Boston Corporation, Morgan Stanley &
Co. Incorporated and Salomon Smith Barney Inc. are acting as representatives,
the following respective numbers of shares of common stock:
<Table>
<Caption>
NUMBER
UNDERWRITER OF SHARES
----------- ----------
Credit Suisse First Boston Corporation...................... 4,800,000
Morgan Stanley & Co. Incorporated........................... 4,800,000
Salomon Smith Barney Inc. .................................. 4,800,000
Bear, Stearns & Co. Inc. ................................... 2,400,000
Lehman Brothers Inc. ....................................... 2,400,000
Johnson Rice & Company L.L.C. .............................. 800,000
----------
Total.................................................. 20,000,000
==========
</Table>
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that if an underwriter defaults, the
purchase commitments of non-defaulting underwriters may be increased or the
offering may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to 3,000,000 additional shares at the initial public offering
price less the underwriting discounts and commissions. The option may be
exercised only to cover any over-allotments of common stock.
The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus supplement and to
selling group members at that price less a selling concession of $0.21 per
share. The underwriters and selling group members may allow a discount of $0.10
per share on sales to other broker/dealers. After the initial public offering,
the representatives may change the public offering price and concession and
discount to broker/dealers.
The following table summarizes the compensation and estimated expenses we
will pay:
<Table>
<Caption>
PER SHARE TOTAL
------------------------------- -------------------------------
WITHOUT WITH WITHOUT WITH
OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT
-------------- -------------- -------------- --------------
Underwriting Discounts and
Commissions paid by us...... $0.3525 $0.3525 $7,050,000 $8,107,500
Expenses payable by us........ $0.0175 $0.0157 $ 350,000 $ 360,000
</Table>
We have agreed that we will not offer, sell, contract to sell, pledge or
otherwise dispose of, directly or indirectly, or file with the Securities and
Exchange Commission a registration statement under the Securities Act of 1933
(the "Securities Act") relating to, any shares of our common stock or securities
convertible into or exchangeable or exercisable for any shares of our common
stock, or publicly disclose the intention to make any offer, sale, pledge,
disposition or filing, without the prior written consent of each of Credit
Suisse First Boston Corporation, Morgan Stanley & Co. Incorporated and Salomon
Smith Barney Inc. for a period of 90 days after the date of this prospectus
supplement.
Our executive officers and directors have agreed that they will not offer,
sell, contract to sell, pledge or otherwise dispose of, directly or indirectly,
any shares of our common stock or securities convertible into or exchangeable or
exercisable for any shares of our common stock, enter into a transaction that
would have the same effect, or enter into any swap, hedge or other arrangement
that transfers, in whole or in part, any of the economic consequences of
ownership of our common stock, whether any of these transactions are to be
settled by delivery of our common stock or other securities, in cash or
otherwise, or
S-23
publicly disclose the intention to make any offer, sale, pledge or disposition,
or to enter into any transaction, swap, hedge or other arrangement, without, in
each case, the prior written consent of each of Credit Suisse First Boston
Corporation, Morgan Stanley & Co. Incorporated and Salomon Smith Barney Inc. for
a period of 90 days after the date of this prospectus supplement.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act, or contribute to payments that the underwriters may be required
to make in that respect.
The shares of common stock are expected to be approved for listing on The
New York Stock Exchange subject to official notice of issuance, under the symbol
"CHK".
In the ordinary course of business, certain of the underwriters and their
affiliates have provided and may in the future provide financial advisory,
investment banking and general financing and banking services for us and our
affiliates for customary fees. Affiliates of Credit Suisse First Boston
Corporation and Bear, Stearns & Co. Inc. are lenders under our revolving bank
credit facility and may receive a portion of the net proceeds from this offering
in the event the ONEOK acquisition is not consummated and to the extent we elect
to repay outstanding amounts under our revolving bank credit facility. Frederick
B. Whittemore, a member of our board of directors, is an advisory director of
Morgan Stanley Dean Witter & Co., an affiliate of Morgan Stanley & Co.
Incorporated.
In connection with the offering the underwriters may engage in stabilizing
transactions, over-allotment transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Securities Exchange Act
of 1934 (the "Exchange Act").
- Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
- Over-allotment involves sales by the underwriters of shares in excess of
the number of shares the underwriters are obligated to purchase, which
creates a syndicate short position. The short position may be either a
covered short position or a naked short position. In a covered short
position, the number of shares over-allotted by the underwriters is not
greater than the number of shares that they may purchase in the
over-allotment option. In a naked short position, the number of shares
involved is greater than the number of shares in the over-allotment
option. The underwriters may close out any covered short position by
either exercising their over-allotment option and/or purchasing shares in
the open market.
- Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed in order to
cover syndicate short positions. In determining the source of shares to
close out the short position, the underwriters will consider, among other
things, the price of shares available for purchase in the open market as
compared to the price at which they may purchase shares through the
over-allotment option. If the underwriters sell more shares than could be
covered by the over-allotment option, a naked short position, the
position can only be closed out by buying shares in the open market. A
naked short position is more likely to be created if the underwriters are
concerned that there could be downward pressure on the price of the
shares in the open market after pricing that could adversely affect
investors who purchase in the offering.
- Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by the
syndicate member is purchased in a stabilizing or syndicate covering
transaction to cover syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty bids
may have the effect of raising or maintaining the market price of our common
stock or preventing or retarding a decline in the market price of the common
stock. As a result the price of our common stock may be higher than the price
that might otherwise exist in the open market. These transactions may be
effected on The New York Stock Exchange or otherwise and if commenced, may be
discontinued at any time.
A prospectus in electronic format may be made available on the web sites
maintained by one or more of the underwriters or selling group members, if any,
participating in this offering. The representatives may
S-24
agree to allocate a number of shares to underwriters and selling group members
for sale to their online brokerage account holders. Internet distributions will
be allocated by the underwriters and selling group members that will make
internet distributions on the same basis as other allocations.
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the common stock in Canada will be made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are made. Any resale of the common stock in Canada must
be made under applicable securities laws which will vary depending on the
relevant jurisdiction, and which may require resales to be made under available
statutory exemptions or under a discretionary exemption granted by the
applicable Canadian securities regulatory authority. Purchasers are advised to
seek legal advice prior to any resale of the common stock.
REPRESENTATIONS OF PURCHASERS
By purchasing common stock in Canada and accepting a purchase confirmation
a purchaser is representing to us and the dealer from whom the purchase
confirmation is received that:
- the purchaser is entitled under applicable provincial securities laws to
purchase the common stock without the benefit of a prospectus qualified
under those securities laws,
- where required by law, that the purchaser is purchasing as principal and
not as agent, and
- the purchaser has reviewed the text above under Resale Restrictions.
RIGHTS OF ACTION -- ONTARIO PURCHASERS ONLY
Under Ontario securities legislation, a purchaser who purchases a security
offered by this prospectus during the period of distribution will have a
statutory right of action for damages, or while still the owner of the shares,
for rescission against us in the event that this prospectus contains a
misrepresentation. A purchaser will be deemed to have relied on the
misrepresentation. The right of action for damages is exercisable not later than
the earlier of 180 days from the date the purchaser first had knowledge of the
facts giving rise to the cause of action and three years from the date on which
payment is made for the shares. The right of action for rescission is
exercisable not later than 180 days from the date on which payment is made for
the shares. If a purchaser elects to exercise the right of action for
rescission, the purchaser will have no right of action for damages against us.
In no case will the amount recoverable in any action exceed the price at which
the shares were offered to the purchaser and if the purchaser is shown to have
purchased the securities with knowledge of the misrepresentation, we will have
no liability. In the case of an action for damages, we will not be liable for
all or any portion of the damages that are proven to not represent the
depreciation in value of the shares as a result of the misrepresentation relied
upon. These rights are in addition to, and without derogation from, any other
rights or remedies available at law to an Ontario purchaser. The foregoing is a
summary of the rights available to an Ontario purchaser. Ontario purchasers
should refer to the complete text of the relevant statutory provisions.
ENFORCEMENT OF LEGAL RIGHTS
All of our directors and officers as well as the experts named herein may
be located outside of Canada and, as a result, it may not be possible for
Canadian purchasers to effect service of process within Canada upon us or those
persons. All or a substantial portion of our assets and the assets of those
persons may be located outside of Canada and, as a result, it may not be
possible to satisfy a judgment against us or those persons in Canada or to
enforce a judgment obtained in Canadian courts against us or those persons
outside of Canada.
S-25
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and about the eligibility of the common
stock for investment by the purchaser under relevant Canadian legislation.
LEGAL MATTERS
The validity of the issuance of the common stock offered by this prospectus
supplement will be passed upon for us by Commercial Law Group, P.C. Certain
other legal matters will be passed upon for us by Vinson & Elkins L.L.P.,
Houston, Texas. The underwriters will be represented by Cravath, Swaine & Moore,
New York, New York. Vinson & Elkins L.L.P. and Cravath, Swaine & Moore will rely
upon Commercial Law Group, P.C. as to all matters of Oklahoma law. Shannon T.
Self, a shareholder in Commercial Law Group, P.C., is a director of Chesapeake,
and he beneficially owns 39,326 shares of our common stock.
EXPERTS
The consolidated financial statements of Chesapeake Energy Corporation,
incorporated in this prospectus supplement by reference to Chesapeake's annual
report on Form 10-K for the year ended December 31, 2001, and the consolidated
financial statements of Gothic Energy Corporation, incorporated in this
prospectus supplement by reference to Chesapeake's annual report on Form 10-K/A
for the year ended December 31, 2000, have been so incorporated in reliance on
the report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
Estimates of the oil and gas reserves of Chesapeake Energy Corporation and
related future net cash flows and the present values thereof, included in
Chesapeake's annual report on Form 10-K for the year ended December 31, 2001,
were based upon reserve reports prepared by Williamson Petroleum Consultants,
Inc., Ryder Scott Company, L.P. and Lee Keeling and Associates, Inc.,
independent petroleum engineers. We have incorporated these estimates in
reliance on the authority of each such firm as experts in such matters.
S-26
PROSPECTUS
$500,000,000
CHESAPEAKE ENERGY CORPORATION
Debt Securities
Common Stock
GUARANTEES OF DEBT SECURITIES OF CHESAPEAKE ENERGY CORPORATION BY:
THE AMES COMPANY, INC.
CARMEN ACQUISITION CORP.
CHESAPEAKE ACQUISITION CORPORATION
CHESAPEAKE ENERGY LOUISIANA CORPORATION
CHESAPEAKE EXPLORATION LIMITED PARTNERSHIP
CHESAPEAKE LOUISIANA, L.P.
CHESAPEAKE OPERATING, INC.
CHESAPEAKE PANHANDLE LIMITED PARTNERSHIP
CHESAPEAKE ROYALTY COMPANY
GOTHIC ENERGY CORPORATION
GOTHIC PRODUCTION CORPORATION
NOMAC DRILLING CORPORATION
CHESAPEAKE MOUNTAIN FRONT CORP.
SAP ACQUISITION CORP.
CHESAPEAKE-STAGHORN ACQUISITION L.P.
CHESAPEAKE KNAN ACQUISITION CORPORATION
CHESAPEAKE ALPHA CORP.
CHESAPEAKE BETA CORP.
CHESAPEAKE DELTA CORP.
CHESAPEAKE FOCUS CORP.
CHESAPEAKE SIGMA, L.P.
We may from time to time offer and sell common stock and debt securities
that will be fully, irrevocably and unconditionally guaranteed by certain of our
subsidiaries, The Ames Company, Inc., Carmen Acquisition Corp., Chesapeake
Acquisition Corporation, Chesapeake Energy Louisiana Corporation, Chesapeake
Exploration Limited Partnership, Chesapeake Louisiana, L.P., Chesapeake
Operating, Inc., Chesapeake Panhandle Limited Partnership, Chesapeake Royalty
Company, Gothic Energy Corporation, Gothic Production Corporation, Nomac
Drilling Corporation, Chesapeake Mountain Front Corp., Sap Acquisition Corp.,
Chesapeake-Staghorn Acquisition L.P., Chesapeake KNAN Acquisition Corporation,
Chesapeake Alpha Corp., Chesapeake Beta Corp., Chesapeake Delta Corp.,
Chesapeake Focus Corp. and Chesapeake Sigma, L.P.
This prospectus provides you with a general description of the securities
that may be offered. Each time securities are sold, we will provide one or more
supplements to this prospectus that will contain additional information about
the specific offering and the terms of the securities being offered. The
supplements may also add, update or change information contained in this
prospectus. You should carefully read this prospectus and any accompanying
prospectus supplement before you invest in any of our securities.
Our common stock is listed for trading on the New York Stock Exchange under
the symbol "CHK." Our executive offices are located at 6100 North Western
Avenue, Oklahoma City, Oklahoma 73118, and our telephone number is (405)
848-8000.
INVESTING IN OUR SECURITIES INVOLVES RISKS. PLEASE READ CAREFULLY THE
SECTION ENTITLED "RISK FACTORS" BEGINNING ON PAGE 2 OF THIS PROSPECTUS.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is August 1, 2002.
------------------
TABLE OF CONTENTS
<Table>
ABOUT THIS PROSPECTUS....................................... 1
ABOUT CHESAPEAKE ENERGY CORPORATION......................... 1
ABOUT THE SUBSIDIARY GUARANTORS............................. 1
RISK FACTORS................................................ 2
WHERE YOU CAN FIND MORE INFORMATION......................... 9
FORWARD LOOKING STATEMENTS.................................. 9
USE OF PROCEEDS............................................. 10
RATIOS OF EARNINGS TO FIXED CHARGES......................... 11
DESCRIPTION OF DEBT SECURITIES.............................. 11
DESCRIPTION OF CAPITAL STOCK................................ 19
PLAN OF DISTRIBUTION........................................ 28
LEGAL MATTERS............................................... 29
EXPERTS..................................................... 30
</Table>
---------------------
YOU SHOULD RELY ONLY ON THE INFORMATION INCLUDED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS AND ANY ACCOMPANYING PROSPECTUS SUPPLEMENT. WE HAVE
NOT AUTHORIZED ANY DEALER, SALESMAN OR OTHER PERSON TO PROVIDE YOU WITH
ADDITIONAL OR DIFFERENT INFORMATION. THIS PROSPECTUS AND ANY ACCOMPANYING
PROSPECTUS SUPPLEMENT ARE NOT AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER
TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH THEY RELATE AND ARE NOT
AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SECURITIES IN ANY
JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE AN OFFER OR
SOLICITATION IN THAT JURISDICTION. YOU SHOULD NOT ASSUME THAT THE INFORMATION IN
THIS PROSPECTUS OR ANY ACCOMPANYING PROSPECTUS SUPPLEMENT OR IN ANY DOCUMENT
INCORPORATED BY REFERENCE IN THIS PROSPECTUS OR ANY ACCOMPANYING PROSPECTUS
SUPPLEMENT IS ACCURATE AS OF ANY DATE OTHER THAN THE DATE OF THE DOCUMENT
CONTAINING THE INFORMATION.
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement on Form S-3 that we
filed with the Securities and Exchange Commission, which we refer to as the
"SEC," using a "shelf" registration process. Under this shelf process, we may,
over time, sell any combination of the securities described in this prospectus
in one or more offerings up to a total dollar amount of $500 million. This
prospectus provides you with a general description of the securities we may
offer pursuant to this prospectus. Each time we sell securities, we will provide
one or more prospectus supplements that will contain specific information about
the terms of that offering. This prospectus does not contain all of the
information included in the registration statement. For a complete understanding
of the offering of securities, you should refer to the registration statement
relating to this prospectus, including its exhibits. A prospectus supplement may
also add, update or change information contained in this prospectus. You should
read both this prospectus and any accompanying prospectus supplement together
with the additional information described under the heading "Where You Can Find
More Information."
ABOUT CHESAPEAKE ENERGY CORPORATION
We are among the ten largest independent natural gas producers in the
United States. We own interests in approximately 8,800 producing oil and gas
wells with what we believe to be approximately 1.9 trillion cubic feet of gas
equivalent of proved reserves in the United States as of March 31, 2002 (using
oil and gas prices of $26.32 per barrel of oil and $3.19 per thousand cubic
feet, or mcf, of gas). Approximately 90% of our reserves are natural gas. Our
primary operating area is the Mid-Continent region of the United States, which
includes Oklahoma, western Arkansas, southwestern Kansas and the Texas Panhandle
and in which 85% of our reserves are located. We have smaller operations in the
Deep Giddings field in Texas, the Permian Basin region of southeastern New
Mexico and the Williston Basin of North Dakota and Montana.
Unless the context requires otherwise or unless otherwise noted, all
references in this prospectus or any accompanying prospectus supplement to
"Chesapeake," "we," "us" or "our" are to Chesapeake Energy Corporation and its
subsidiaries.
ABOUT THE SUBSIDIARY GUARANTORS
The Ames Company, Inc., Carmen Acquisition Corp., Chesapeake Acquisition
Corporation, Chesapeake Energy Louisiana Corporation, Chesapeake Exploration
Limited Partnership, Chesapeake Louisiana, L.P., Chesapeake Operating, Inc.,
Chesapeake Panhandle Limited Partnership, Chesapeake Royalty Company, Gothic
Energy Corporation, Gothic Production Corporation, Nomac Drilling Corporation,
Chesapeake Mountain Front Corp., Sap Acquisition Corp., Chesapeake-Staghorn
Acquisition L.P., Chesapeake KNAN Acquisition Corporation, Chesapeake Alpha
Corp., Chesapeake Beta Corp., Chesapeake Delta Corp., Chesapeake Focus Corp. and
Chesapeake Sigma, L.P. constitute substantially all of our subsidiaries as of
the date of this prospectus other than Chesapeake Energy Marketing, Inc. and,
unless otherwise indicated in an accompanying prospectus supplement, each will
jointly and severally, fully, irrevocably and unconditionally guarantee our
payment obligations under any series of debt securities offered by this
prospectus. We refer to these subsidiaries guarantors in this prospectus as the
"Subsidiary Guarantors." Financial information concerning our Subsidiary
Guarantors and non-guarantor subsidiaries will be included in our consolidated
financial statements filed as a part of our periodic reports filed pursuant to
the Securities Exchange Act of 1934, as amended, to the extent required by the
rules and regulations of the SEC.
1
RISK FACTORS
Your investment in our securities will involve risks. You should carefully
consider, in addition to the other information contained in, or incorporated by
reference into, this prospectus and any accompanying prospectus supplement, the
risks described below before deciding whether an investment in our securities is
appropriate for you.
RISKS RELATED TO OUR BUSINESS
Oil and gas prices are volatile. A decline in prices could adversely affect
our financial results, cash flows, access to capital and ability to grow.
Our revenues, operating results, profitability, future rate of growth and
the carrying value of our oil and gas properties depend primarily upon the
prices we receive for our oil and gas. Prices also affect the amount of cash
flow available for capital expenditures and our ability to borrow money or raise
additional capital. The amount we can borrow from banks is subject to
semi-annual redeterminations based on prices specified by our bank group at the
time of redetermination. In addition, we may have ceiling test writedowns in the
future if prices fall significantly below the prices at December 31, 2001.
Historically, the markets for oil and gas have been volatile and they are
likely to continue to be volatile. Wide fluctuations in oil and gas prices may
result from relatively minor changes in the supply of and demand for oil and
natural gas, market uncertainty and other factors that are beyond our control,
including:
- worldwide and domestic supplies of oil and gas;
- weather conditions;
- the level of consumer demand;
- the price and availability of alternative fuels;
- risks associated with owning and operating drilling rigs;
- the availability of pipeline capacity;
- the price and level of foreign imports;
- domestic and foreign governmental regulations and taxes;
- the ability of the members of the Organization of Petroleum Exporting
Countries to agree to and maintain oil price and production controls;
- political instability or armed conflict in oil-producing regions; and
- the overall economic environment.
These factors and the volatility of the energy markets make it extremely
difficult to predict future oil and gas price movements with any certainty.
Declines in oil and gas prices would not only reduce revenue, but could reduce
the amount of oil and gas that we can produce economically and, as a result,
could have a material adverse effect on our financial condition, results of
operations and reserves. Further, oil and gas prices do not necessarily move in
tandem. Because approximately 90% of our proved reserves are currently natural
gas reserves, we are more affected by movements in natural gas prices.
Our level of indebtedness may adversely affect operations, and we may have
difficulty repaying long-term indebtedness as it matures.
As of March 31, 2002, we had long-term indebtedness of $1.3 billion, which
included no bank indebtedness. Our long-term indebtedness represented 65% of our
total book capitalization at March 31, 2002.
2
Our level of indebtedness affects our operations in several ways, including
the following:
- a significant portion of our cash flows must be used to service our
indebtedness; for example, for the three months ended March 31, 2002,
interest (including capitalized interest) on our borrowings was $27.0
million and equaled approximately 24% of EBITDA. As a result, our
business may not generate sufficient cash flows from operations to enable
us to continue to meet our obligations under our indentures;
- a high level of debt increases our vulnerability to general adverse
economic and industry conditions;
- the covenants contained in the agreements governing our outstanding
indebtedness limit our ability to borrow additional funds, dispose of
assets, pay dividends and make certain investments;
- our debt covenants may also affect our flexibility in planning for, and
reacting to, changes in the economy and in our industry; and
- a high level of debt may impair our ability to obtain additional
financing in the future for working capital, capital expenditures,
acquisitions, general corporate or other purposes.
We may incur additional debt, including significant secured indebtedness,
in order to make future acquisitions or to develop our properties. A higher
level of indebtedness increases the risk that we may default on our debt
obligations. Our ability to meet our debt obligations and to reduce our level of
indebtedness depends on our future performance. General economic conditions, oil
and gas prices and financial, business and other factors affect our operations
and our future performance. Many of these factors are beyond our control. We may
not be able to generate sufficient cash flow to pay the interest on our debt and
future working capital, borrowings or equity financing may not be available to
pay or refinance such debt. Factors that will affect our ability to raise cash
through an offering of our capital stock or a refinancing of our debt include
financial market conditions, the value of our assets and our performance at the
time we need capital.
In addition, our bank borrowing base is subject to annual redeterminations.
We could be forced to repay a portion of our bank borrowings due to
redeterminations of our borrowing base. If we are forced to do so, we may not
have sufficient funds to make such repayments. If we do not have sufficient
funds and are otherwise unable to negotiate renewals of our borrowings or
arrange new financing, we may have to sell significant assets. Any such sale
could have a material adverse effect on our business and financial results.
Our industry is extremely competitive.
The energy industry is extremely competitive. This is especially true with
regard to exploration for, and development and production of, new sources of oil
and natural gas. As an independent producer of oil and natural gas, we
frequently compete against companies that are larger and financially stronger in
acquiring properties suitable for exploration, in contracting for drilling
equipment and other services and in securing trained personnel.
Our commodity price risk management activities may reduce the realized
prices received for our oil and gas sales.
In order to manage our exposure to price volatility in marketing our oil
and gas, we enter into oil and gas price risk management arrangements for a
portion of our expected production. These transactions are limited in life.
While intended to reduce the effects of volatile oil and gas prices, commodity
price risk management transactions may limit the prices we actually realize and
we may experience reductions to oil and gas revenues from our commodity price
risk management activities in the future. In addition, our
3
commodity price risk management transactions may expose us to the risk of
financial loss in certain circumstances, including instances in which:
- our production is less than expected;
- there is a widening of price differentials between delivery points for
our production and the delivery point assumed in the hedge arrangement;
or
- the counterparties to our contracts fail to perform under the contracts.
Some of our commodity price risk management arrangements require us to
deliver cash collateral or other assurances of performance to the counterparties
in the event that our payment obligations with respect to our commodity price
risk management transactions exceed certain levels. As of March 31, 2002, we
were required to post $20.0 million of collateral. Future collateral
requirements are uncertain and will depend on arrangements with our
counterparties and highly volatile natural gas and oil prices.
Estimates of oil and gas reserves are uncertain and inherently imprecise.
This prospectus and the documents incorporated by reference herein contain
estimates of our proved reserves and the estimated future net revenues from our
proved reserves. These estimates are based upon various assumptions, including
assumptions required by the SEC relating to oil and gas prices, drilling and
operating expenses, capital expenditures, taxes and availability of funds. The
process of estimating oil and gas reserves is complex. The process involves
significant decisions and assumptions in the evaluation of available geological,
geophysical, engineering and economic data for each reservoir. Therefore, these
estimates are inherently imprecise.
Actual future production, oil and gas prices, revenues, taxes, development
expenditures, operating expenses and quantities of recoverable oil and gas
reserves most likely will vary from these estimates. Such variations may be
significant and could materially affect the estimated quantities and present
value of our proved reserves. In addition, we may adjust estimates of proved
reserves to reflect production history, results of exploration and development
drilling, prevailing oil and gas prices and other factors, many of which are
beyond our control. Our properties may also be susceptible to hydrocarbon
drainage from production by operators on adjacent properties.
At December 31, 2001 approximately 29% by volume of our estimated proved
reserves were undeveloped. Recovery of undeveloped reserves requires significant
capital expenditures and successful drilling operations. The estimates of these
reserves include the assumption that we will make significant capital
expenditures to develop the reserves, including $224 million in 2002. Although
we have prepared estimates of our oil and gas reserves and the costs associated
with these reserves in accordance with industry standards, the estimated costs
may not be accurate, development may not occur as scheduled and results may not
be as estimated.
You should not assume that the present values referred to in the documents
incorporated by reference into this prospectus represent the current market
value of our estimated oil and gas reserves. In accordance with SEC
requirements, the estimates of our present values are based on prices and costs
as of the date of the estimates. The December 31, 2001 present value is based on
weighted average wellhead oil and gas prices of $18.82 per barrel of oil and
$2.51 per mcf of natural gas. Actual future prices and costs may be materially
higher or lower than the prices and costs as of the date of an estimate. A
change in price of $0.10 per mcf and $1.00 per barrel would result in a change
in our December 31, 2001 present value of proved reserves of approximately $82
million and $16 million, respectively.
Any changes in consumption by oil and gas purchasers or in governmental
regulations or taxation will also affect actual future net cash flows.
The timing of both the production and the expenses from the development and
production of oil and gas properties will affect both the timing of actual
future net cash flows from our proved reserves and their present value. In
addition, the 10% discount factor, which is required by the SEC to be used in
calculating discounted future net cash flows for reporting purposes, is not
necessarily the most accurate discount
4
factor. The effective interest rate at various times and the risks associated
with our business or the oil and gas industry in general will affect the
accuracy of the 10% discount factor.
If we do not make significant capital expenditures, we may not be able to
replace reserves.
Our exploration, development and acquisition activities require substantial
capital expenditures. Historically, we have funded our capital expenditures
through a combination of cash flows from operations, our bank credit facility
and debt and equity issuances. Future cash flows are subject to a number of
variables, such as the level of production from existing wells, prices of oil
and gas, and our success in developing and producing new reserves. If revenue
were to decrease as a result of lower oil and gas prices or decreased
production, and our access to capital were limited, we would have a reduced
ability to replace our reserves. If our cash flow from operations is not
sufficient to fund our capital expenditure budget, there can be no assurance
that additional bank debt, debt or equity issuances or other methods of
financing will be available to meet these requirements.
If we are not able to replace reserves, we may not be able to sustain
production.
Our future success depends largely upon our ability to find, develop or
acquire additional oil and gas reserves that are economically recoverable.
Unless we replace the reserves we produce through successful development,
exploration or acquisition, our proved reserves will decline over time. Recovery
of such reserves will require significant capital expenditures and successful
drilling operations. We cannot assure you that we can successfully find and
produce reserves economically in the future. In addition, we may not be able to
acquire proved reserves at acceptable costs.
Acquisitions are subject to the uncertainties of evaluating recoverable
reserves and potential liabilities.
Our recent growth is due in part to acquisitions of exploration and
production companies and producing properties. We expect acquisitions will also
contribute to our future growth. Successful acquisitions require an assessment
of a number of factors, many of which are beyond our control. These factors
include recoverable reserves, exploration potential, future oil and gas prices,
operating costs and potential environmental and other liabilities. Such
assessments are inexact and their accuracy is inherently uncertain. In
connection with our assessments, we perform a review of the acquired properties,
which we believe is generally consistent with industry practices. However, such
a review will not reveal all existing or potential problems. In addition, our
review may not permit us to become sufficiently familiar with the properties to
fully assess their deficiencies and capabilities. We do not inspect every well.
Even when we inspect a well, we do not always discover structural, subsurface
and environmental problems that may exist or arise.
We are generally not entitled to contractual indemnification for preclosing
liabilities, including environmental liabilities. Normally, we acquire interests
in properties on an "as is" basis with limited remedies for breaches of
representations and warranties. In addition, competition for producing oil and
gas properties is intense and many of our competitors have financial and other
resources that are substantially greater than those available to us. Therefore,
we may not be able to acquire oil and gas properties that contain economically
recoverable reserves or be able to complete such acquisitions on acceptable
terms.
Additionally, significant acquisitions can change the nature of our
operations and business depending upon the character of the acquired properties,
which may have substantially different operating and geological characteristics
or be in different geographic locations than our existing properties. While it
is our current intention to continue to concentrate on acquiring properties with
development and exploration potential located in the Mid-Continent region, there
can be no assurance that in the future we will not decide to pursue acquisitions
or properties located in other geographic regions. To the extent that such
acquired properties are substantially different than our existing properties,
our ability to efficiently realize the economic benefits of such transactions
may be limited.
5
Oil and gas drilling and producing operations are hazardous and expose us
to environmental liabilities.
Oil and gas operations are subject to many risks, including well blowouts,
cratering and explosions, pipe failure, fires, formations with abnormal
pressures, uncontrollable flows of oil, natural gas, brine or well fluids, and
other environmental hazards and risks. Our drilling operations involve risks
from high pressures and from mechanical difficulties such as stuck pipes,
collapsed casings and separated cables. If any of these risks occurs, we could
sustain substantial losses as a result of:
- injury or loss of life;
- severe damage to or destruction of property, natural resources and
equipment;
- pollution or other environmental damage;
- clean-up responsibilities;
- regulatory investigations and penalties; and
- suspension of operations.
Our liability for environmental hazards includes those created either by
the previous owners of properties that we purchase or lease or by acquired
companies prior to the date we acquire them. In accordance with industry
practice, we maintain insurance against some, but not all, of the risks
described above. We cannot assure you that our insurance will be adequate to
cover casualty losses or liabilities. Also, we cannot predict the continued
availability of insurance at premium levels that justify its purchase.
Exploration and development drilling may not result in commercially
productive reserves.
We do not always encounter commercially productive reservoirs through our
drilling operations. The new wells we drill or participate in may not be
productive and we may not recover all or any portion of our investment in wells
we drilled or participate in. The seismic data and other technologies we use do
not allow us to know conclusively prior to drilling a well that oil or gas is
present or may be produced economically. The cost of drilling, completing and
operating a well is often uncertain, and cost factors can adversely affect the
economics of a project. Our efforts will be unprofitable if we drill dry wells
or wells that are productive but do not produce enough reserves to return a
profit after drilling, operating and other costs. Further, our drilling
operations may be curtailed, delayed or canceled as a result of a variety of
factors, including:
- unexpected drilling conditions;
- title problems;
- pressure or irregularities in formations;
- equipment failures or accidents;
- adverse weather conditions;
- compliance with environmental and other governmental requirements; and
- cost of, or shortages or delays in the availability of, drilling rigs and
equipment.
The loss of key personnel could adversely affect our ability to operate.
We depend, and will continue to depend in the foreseeable future, on the
services of our officers and key employees with extensive experience and
expertise in evaluating and analyzing producing oil and gas properties and
drilling prospects, maximizing production from oil and gas properties and
marketing oil and gas production. Our ability to retain our officers and key
employees is important to our continued success and growth. The unexpected loss
of the services of one or more of these individuals could have a detrimental
effect on our business.
6
Lower oil and gas prices could negatively impact our ability to borrow.
Our current bank credit facility limits our borrowings to a borrowing base,
$225 million as of the date of this prospectus. The borrowing base is determined
periodically at the discretion of a majority of the banks and is based in part
on oil and gas prices. Additionally, some of the indentures under which our
outstanding senior notes have been issued contain covenants limiting our ability
to incur indebtedness in addition to that incurred under our bank credit
facility. These indentures limit our ability to incur additional indebtedness
unless we meet one of two alternative tests. The first alternative is based on a
percentage of our adjusted consolidated net tangible assets, which is determined
using discounted future net revenues from proved oil and gas reserves as of the
end of each year. As of the date of this prospectus, we cannot incur additional
indebtedness under this first alternative of the debt incurrence test other than
the indebtedness we are permitted to incur pursuant to our bank credit facility.
The second alternative is based on the ratio of our adjusted consolidated EBITDA
to our adjusted consolidated interest expense over a trailing twelve-month
period. As of the date of this prospectus, we are permitted to incur significant
additional indebtedness under this second alternative of the debt incurrence
test. Lower oil and gas prices in the future could reduce our adjusted
consolidated EBITDA, as well as our adjusted consolidated net tangible assets,
and thus could reduce our ability to incur additional indebtedness.
RISKS RELATED TO OUR COMMON STOCK
We do not intend to pay, and are restricted in our ability to pay,
dividends on our common stock.
We have not paid cash dividends on our common stock since 1998 and do not
intend to pay dividends on our common stock in the foreseeable future. We
currently intend to retain any earnings for the future operation and development
of our business. Our ability to make dividend payments in the future will depend
on our future performance and liquidity. In addition, our credit facility
contains restrictions on our ability to pay cash dividends on our capital stock,
including our common stock.
Our certificate of incorporation, bylaws, the Oklahoma General Corporation
Act and our shareholder rights agreement contain provisions that could
discourage an acquisition or change of control of our company.
Our shareholder rights agreement and the Oklahoma Business Combination
Statute, together with certain provisions of our certificate of incorporation
and bylaws, may make it more difficult to effect a change in control of our
company, to acquire us or to replace incumbent management. These provisions
could potentially deprive our stockholders of opportunities to sell shares of
our stock at above-market prices. Please read "Description of Capital
Stock -- Anti-Takeover Provisions."
RISKS RELATED TO DEBT SECURITIES
If an active trading market does not develop for a series of debt
securities sold pursuant to this prospectus, you may be unable to sell any such
debt securities or to sell any such debt securities at a price that you deem
sufficient.
Unless otherwise specified in an accompanying prospectus supplement, any
debt securities sold pursuant to this prospectus will be new securities for
which there currently is no established trading market. We may not list any debt
securities sold pursuant to this prospectus on a national securities exchange.
While the underwriters of a particular offering of debt securities may advise us
that they intend to make a market in those debt securities, the underwriters
will not be obligated to do so and may stop their market making at any time. No
assurance can be given:
- that a market for any series of debt securities will develop or continue;
- as to the liquidity of any market that does develop; or
- as to your ability to sell any debt securities you may own or the price
at which you may be able to sell your debt securities.
7
A guarantee of debt securities could be voided if the guarantors
fraudulently transferred their guarantees at the time they incurred the
indebtedness, which could result in the holders of debt securities being able to
rely on only Chesapeake Energy Corporation to satisfy claims.
Any series of debt securities issued pursuant to this prospectus will be
fully, irrevocably and unconditionally guaranteed by the Subsidiary Guarantors.
However, under U.S. bankruptcy law and comparable provisions of state fraudulent
transfer laws, such a guarantee can be voided, or claims under a guarantee may
be subordinated to all other debts of that guarantor if, among other things, the
guarantor, at the time it incurred the indebtedness evidenced by its guarantee:
- intended to hinder, delay or defraud any present or future creditor or
received less than reasonably equivalent value or fair consideration for
the incurrence of the guarantee;
- was insolvent or rendered insolvent by reason of such incurrence;
- was engaged in a business or transaction for which the guarantor's
remaining assets constituted unreasonably small capital; or
- intended to incur, or believed that it would incur, debts beyond its
ability to pay those debts as they mature.
In addition, any payment by that guarantor under a guarantee could be
voided and required to be returned to the guarantor or to a fund for the benefit
of the creditors of the guarantor.
The measures of insolvency for purposes of fraudulent transfer laws vary
depending upon the governing law. Generally, a guarantor would be considered
insolvent if:
- the sum of its debts, including contingent liabilities, was greater than
the fair saleable value of all of its assets;
- the present fair saleable value of its assets was less than the amount
that would be required to pay its probable liability on its existing
debts, including contingent liabilities, as they became absolute and
mature; or
- it could not pay its debts as they became due.
Holders of any debt securities sold pursuant to this prospectus will be
effectively subordinated to all of our and the Subsidiary Guarantors' secured
indebtedness and to all liabilities of our non-guarantor subsidiaries.
Holders of our secured indebtedness, including the indebtedness under our
credit facilities, have claims with respect to our assets constituting
collateral for their indebtedness that are prior to the claims of any debt
securities sold pursuant to this prospectus. In the event of a default on such
debt securities or our bankruptcy, liquidation or reorganization, those assets
would be available to satisfy obligations with respect to the indebtedness
secured thereby before any payment could be made on debt securities sold
pursuant to this prospectus. Accordingly, the secured indebtedness would
effectively be senior to such series of debt securities to the extent of the
value of the collateral securing the indebtedness. To the extent the value of
the collateral is not sufficient to satisfy the secured indebtedness, the
holders of that indebtedness would be entitled to share with the holders of the
debt securities issued pursuant to this prospectus and the holders of other
claims against us with respect to our other assets.
In addition, the Subsidiary Guarantors do not constitute all of our
subsidiaries and any series of debt securities issued and sold pursuant to this
prospectus will not be guaranteed by all of our subsidiaries, and our
non-guarantor subsidiaries will be permitted to incur additional indebtedness
under the indenture. As a result, holders of such debt securities will be
effectively subordinated to claims of third party creditors, including holders
of indebtedness, and preferred shareholders of these non-guarantor subsidiaries.
Claims of those other creditors, including trade creditors, secured creditors,
governmental taxing authorities, holders of indebtedness or guarantees issued by
the non-guarantor subsidiaries and preferred shareholders of the non-guarantor
subsidiaries, will generally have priority as to the assets of the non-guarantor
subsidiaries
8
over our claims and equity interests. As a result, holders of our indebtedness,
including the holders of the debt securities sold pursuant to this prospectus,
will be effectively subordinated to all those claims.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports and other information with
the SEC. You may inspect and copy such material at the public reference
facilities maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C.
20549. Please call the SEC at 1-800-SEC-0330 for more information on the public
reference room. You can also find our SEC filings at the SEC's website at
www.sec.gov and on our website at www.chkenergy.com. Information contained on
our website is not part of this prospectus.
In addition, our reports and other information concerning us can be
inspected at the New York Stock Exchange, 20 Broad Street, New York, New York
10005, where our common stock is listed.
The following documents we filed with the SEC pursuant to the Exchange Act
are incorporated herein by reference:
- the description of our common stock contained in our registration
statement on Form 8-B (No. 001-13726), including the amendment to such
description filed on Form 8-K on August 13, 2001;
- our annual report on Form 10-K for the fiscal year ended December 31,
2001;
- our quarterly report on Form 10-Q for the fiscal quarter ended March 31,
2002;
- our current reports on Form 8-K filed on January 22, 2002, February 5,
2002, February 21, 2002, March 12, 2002, March 18, 2002, April 4, 2002,
April 16, 2002, April 23, 2002, April 30, 2002, June 5, 2002, July 1,
2002 and July 11, 2002 (excluding any information filed pursuant to Item
9 on any such current report on Form 8-K); and
- the consolidated financial statements of Gothic Energy Corporation
included in our annual report on Form 10-K/A for the fiscal year ended
December 31, 2000.
All documents filed by us pursuant to Sections 13(a), 13(c), 14 or 15(d) of
the Exchange Act subsequent to the date of this filing and prior to the
termination of this offering (excluding any information filed pursuant to Item 9
on any current report on Form 8-K) shall be deemed to be incorporated in this
prospectus and to be a part hereof from the date of the filing of such document.
Any statement contained in a document incorporated by reference herein shall be
deemed to be modified or superseded for all purposes to the extent that a
statement contained in this prospectus, or in any other subsequently filed
document which is also incorporated or deemed to be incorporated by reference,
modifies or supersedes such statement. Any statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a part
of this prospectus.
We will provide without charge to each person to whom this prospectus is
delivered, upon written or oral request of such person, a copy of any or all
documents incorporated by reference in this prospectus. Requests for such copies
should be directed to Jennifer M. Grigsby, Secretary, Chesapeake Energy
Corporation, 6100 North Western Avenue, Oklahoma City, Oklahoma 73118, by mail,
or if by telephone at (405) 848-8000.
FORWARD LOOKING STATEMENTS
This prospectus and the documents incorporated herein by reference include
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Exchange Act. Forward-looking
statements give our current expectations or forecasts of future events. They
include statements regarding oil and gas reserve estimates, planned capital
expenditures, the drilling of oil and gas wells and future acquisitions,
expected oil and gas production, cash flow and anticipated liquidity, business
strategy and other plans and objectives for future operations,
9
expected future expenses and utilization of net operating loss carryforwards.
Statements concerning the fair values of derivative contracts and their
estimated contribution to our future results of operations are based upon market
information as of a specific date. These market prices are subject to
significant volatility.
Although we believe the expectations and forecasts reflected in these and
other forward-looking statements are reasonable, we can give no assurance they
will prove to have been correct. They can be affected by inaccurate assumptions
or by known or unknown risks and uncertainties. Factors that could cause actual
results to differ materially from expected results are described under "Risk
Factors" beginning on page 2. These factors include:
- the volatility of oil and gas prices;
- our substantial indebtedness;
- the cost and availability of drilling and production services;
- our commodity price risk management activities, including counterparty
contract performance risk;
- uncertainties inherent in estimating quantities of oil and gas reserves,
projecting future rates of production and the timing of development
expenditures;
- our ability to replace reserves;
- the availability of capital;
- uncertainties in evaluating oil and gas reserves of acquired properties
and associated potential liabilities;
- drilling and operating risks;
- our ability to generate future taxable income sufficient to utilize our
federal and state income tax net operating loss (NOL) carryforwards
before their expiration;
- future ownership changes which could result in additional limitations to
our NOLs;
- adverse effects of governmental and environmental regulation;
- losses possible from pending or future litigation;
- the strength and financial resources of our competitors; and
- the loss of officers or key employees.
We caution you not to place undue reliance on these forward-looking
statements, which speak only as of the date of this prospectus or as of the date
of the report or document in which they are contained, and we undertake no
obligation to update such information. We urge you to carefully review and
consider the disclosures made in this prospectus and our reports filed with the
SEC and incorporated by reference herein that attempt to advise interested
parties of the risks and factors that may affect our business.
USE OF PROCEEDS
Except as may otherwise be described in an accompanying prospectus
supplement, the net proceeds from the sale of the securities offered pursuant to
this prospectus and any accompanying prospectus supplement will be used for
general corporate purposes. Any specific allocation of the net proceeds of an
offering of securities to a specific purpose will be determined at the time of
the offering and will be described in an accompanying prospectus supplement.
10
RATIOS OF EARNINGS TO FIXED CHARGES
For purposes of determining the ratio of earnings to fixed charges,
earnings are defined as net income (loss) before income taxes, extraordinary
items, amortization of capitalized interest and fixed charges, less capitalized
interest. Fixed charges consist of interest (whether expensed or capitalized),
and amortization of debt expenses and discount or premium relating to any
indebtedness.
<Table>
<Caption>
SIX MONTHS THREE MONTHS
YEAR ENDED ENDED YEAR ENDED DECEMBER 31, ENDED
JUNE 30, DECEMBER 31, ------------------------- MARCH 31,
1997 1997 1998 1999 2000 2001 2002
---------- ------------ ---- ---- ---- ---- ------------
Ratio of earnings to fixed
charges...................... (a) (b) (c) 1.4x 3.1x 5.1x (d)
</Table>
- ---------------
(a) Earnings for such year were insufficient to cover fixed charges by
approximately $185 million.
(b) Earnings for such six month period were insufficient to cover fixed charges
by approximately $32 million.
(c) Earnings for such year were insufficient to cover fixed charges by
approximately $915 million.
(d) Earnings for such three month period were insufficient to cover fixed
charges by approximately $47 million.
DESCRIPTION OF DEBT SECURITIES
We will issue our debt securities under an indenture, among us, as issuer,
The Bank of New York, as Trustee, and the Subsidiary Guarantors. The debt
securities will be governed by the provisions of the Indenture and those made
part of the Indenture by reference to the Trust Indenture Act of 1939. We, the
Trustee and the Subsidiary Guarantors may enter into supplements to the
Indenture from time to time.
This description is a summary of the material provisions of the debt
securities and the Indenture. We urge you to read the form of the Indenture
filed as an exhibit to the registration statement of which this prospectus is a
part because the Indenture, and not this description, govern your rights as a
holder of debt securities.
GENERAL
The Debt Securities. Any series of debt securities that we issue:
- will be our general obligations; and
- will be general obligations of the Subsidiary Guarantors.
The Indenture does not limit the total amount of debt securities that we
may issue. We may issue debt securities under the Indenture from time to time in
separate series, up to the aggregate amount authorized for each such series.
We will prepare a prospectus supplement and either an indenture supplement
or a resolution of our board of directors and an accompanying officers'
certificate relating to any series of debt securities that we offer, which will
include specific terms relating to some or all of the following:
- the form and title of the debt securities;
- the total principal amount of the debt securities;
- the date or dates on which the debt securities may be issued;
- the portion of the principal amount which will be payable if the maturity
of the debt securities is accelerated;
- any right we may have to defer payments of interest by extending the
dates payments are due and whether interest on those deferred amounts
will be payable;
11
- the dates on which the principal and premium, if any, of the debt
securities will be payable;
- the interest rate which the debt securities will bear and the interest
payment dates for the debt securities;
- any optional redemption provisions;
- any sinking fund or other provisions that would obligate us to repurchase
or otherwise redeem the debt securities;
- whether the debt securities are entitled to the benefits of any
guarantees by the Subsidiary Guarantors;
- any changes to or additional Events of Default;
- any affirmative or negative covenants relating to such series, including,
without limitation, financial and other covenants that restrict our and
our Restricted Subsidiaries' ability to:
- incur additional indebtedness;
- pay dividends on our capital stock or redeem, repurchase or retire our
capital stock or subordinated indebtedness;
- make investments and other restricted payments;
- create restrictions on the payment of dividends or other amounts to us
from our Restricted Subsidiaries;
- incur liens;
- engage in transactions with affiliates;
- sell assets;
- consolidate, merge or transfer assets; and
- designate a Restricted Subsidiary as an Unrestricted Subsidiary; and
- any other terms of the debt securities.
This description of debt securities will be deemed modified, amended or
supplemented by any description of any series of debt securities set forth in a
prospectus supplement related to that series.
The prospectus supplement will also describe any material United States
federal income tax consequences or other special considerations regarding the
applicable series of debt securities, including those relating to:
- debt securities with respect to which payments of principal, premium or
interest are determined with reference to an index or formula, including
changes in prices of particular securities, currencies or commodities;
- debt securities with respect to which principal, premium or interest is
payable in a foreign or composite currency;
- debt securities that are issued at a discount below their stated
principal amount, bearing no interest or interest at a rate that at the
time of issuance is below market rates; and
- variable rate debt securities that are exchangeable for fixed rate debt
securities.
At our option, we may make interest payments by check mailed to the
registered holders of debt securities or, if so stated in the applicable
prospectus supplement, at the option of a holder by wire transfer to an account
designated by the holder.
Unless otherwise provided in the applicable prospectus supplement, fully
registered securities may be transferred or exchanged at the office of the
Trustee at which its corporate trust business is principally
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administered in the United States, subject to the limitations provided in the
Indenture, without the payment of any service charge, other than any applicable
tax or governmental charge.
Any funds we pay to a paying agent for the payment of amounts due on any
debt securities that remain unclaimed for two years will be returned to us, and
the holders of the debt securities must look only to us for payment after that
time.
The Subsidiary Guarantees. The Subsidiary Guarantors, which currently
constitute all of our subsidiaries other than Chesapeake Energy Marketing, Inc.,
will fully and unconditionally guarantee, on a joint and several basis, our
obligations to pay principal of, premium, if any, and interest on any series of
debt securities. Each entity that becomes a Restricted Subsidiary after the date
of original issuance of any series of debt securities will guarantee the payment
of such series.
Unless otherwise indicated in an accompanying prospectus supplement,
"Restricted Subsidiary" means any subsidiary of our company other than an
Unrestricted Subsidiary. Unless otherwise indicated in an accompanying
prospectus supplement relating to a particular series of debt securities, our
board of directors may designate any Unrestricted Subsidiary to be a Restricted
Subsidiary.
Unless otherwise indicated in an accompanying prospectus supplement,
"Unrestricted Subsidiary" means:
(a) Chesapeake Energy Marketing, Inc. until it is designated as a
Restricted Subsidiary;
(b) any subsidiary of an Unrestricted Subsidiary; and
(c) any subsidiary of our company or of a Restricted Subsidiary that
is designated as an Unrestricted Subsidiary by a resolution adopted by our
board of directors.
The obligations of each Subsidiary Guarantor under its guarantee will be
limited as necessary to prevent that guarantee from constituting a fraudulent
conveyance or fraudulent transfer under federal, state or foreign law. Each
Subsidiary Guarantor that makes a payment or distribution under a guarantee
shall be entitled to a contribution from each other Subsidiary Guarantor in a
pro rata amount based on the respective net assets of each Subsidiary Guarantor
at the time of such payment determined in accordance with GAAP.
If a guarantee were rendered voidable, it could be subordinated by a court
to all other indebtedness (including guarantees and other contingent
liabilities) of the applicable Subsidiary Guarantor, and, depending on the
amount of such indebtedness, a Subsidiary Guarantor's liability on its guarantee
could be reduced to zero. See "Risk Factors -- Risks Related to Debt
Securities -- A guarantee of debt securities could be voided if the guarantors
fraudulently transferred their guarantees at the time they incurred the
indebtedness, which could result in the holders of debt securities being able to
rely on only Chesapeake Energy Corporation to satisfy claims."
Unless otherwise indicated in an accompanying prospectus supplement and
subject to the next paragraph, no Subsidiary Guarantor may consolidate or merge
with or into (whether or not such Subsidiary Guarantor is the surviving entity)
another entity unless:
- the entity formed by or surviving any such consolidation or merger (if
other than such Subsidiary Guarantor) assumes all the obligations of such
Subsidiary Guarantor under the Indenture and the Debt Securities pursuant
to a supplemental indenture, in a form reasonably satisfactory to the
Trustee; and
- immediately after such transaction, no Default or Event of Default
exists.
The preceding does not prohibit a merger between Subsidiary Guarantors or a
merger between our company and a Subsidiary Guarantor.
In the event of a sale or other disposition of all or substantially all of
the assets of any Subsidiary Guarantor, or a sale or other disposition of all
the capital stock of such Subsidiary Guarantor, in any case whether by way of
merger, consolidation or otherwise, or a Subsidiary Guarantor otherwise ceases
to be a
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Subsidiary Guarantor, then the person acquiring the assets (in the event of a
sale or other disposition, by way of such a merger, consolidation or otherwise,
of all or substantially all of the assets of such Subsidiary Guarantor) or such
Subsidiary Guarantor (in any other event) will be released and relieved of any
obligations under its guarantee.
COVENANTS
Reports. The Indenture contains the following covenant for the benefit of
the holders of all series of debt securities:
Notwithstanding that we may not be required to remain subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act, we will file
with the SEC and provide the Trustee and holders of Debt Securities with annual
reports and such information, documents and other reports specified in Sections
13 and 15(d) of the Exchange Act.
A series of debt securities may provide for other covenants applicable to
us and our subsidiaries. A description of any such affirmative and negative
covenants will be contained in a prospectus supplement applicable to such
series.
EVENTS OF DEFAULT, REMEDIES AND NOTICE
Events of Default. Unless otherwise indicated in an accompanying
prospectus supplement, each of the following events will be an "Event of
Default" under the Indenture with respect to a series of debt securities:
- default in any payment of interest on any debt securities of that series
when due that continues for 30 days;
- default in the payment of principal of or premium, if any, on any debt
securities of that series when due at its stated maturity, upon
redemption, upon required repurchase or otherwise;
- default in the payment of any sinking fund payment, if any, on any debt
securities of that series when due;
- failure by us or by a Subsidiary Guarantor to comply for 60 days after
notice with the other agreements contained in the Indenture, any
supplement to the Indenture or any board resolution authorizing the
issuance of that series;
- certain events of bankruptcy, insolvency or reorganization of us or of
the Subsidiary Guarantors;
- any of the guarantees by the Subsidiary Guarantors ceases to be in full
force and effect, except as otherwise provided in the Indenture;
- any of the guarantees by the Subsidiary Guarantors is declared null and
void in a judicial proceeding; or
- any Subsidiary Guarantor denies or disaffirms its obligations under the
Indenture or its guarantee.
Exercise of Remedies. If an Event of Default, other than an Event of
Default described in the fifth bullet point above, occurs and is continuing, the
Trustee or the holders of at least 25% in principal amount of the outstanding
debt securities of that series may declare the entire principal of, premium, if
any, and accrued and unpaid interest, if any, on all the debt securities of that
series to be due and payable immediately.
A default under the fourth bullet point above will not constitute an Event
of Default until the Trustee or the holders of 25% in principal amount of the
outstanding debt securities of that series notify us and the Subsidiary
Guarantors of the default and such default is not cured within 60 days after
receipt of notice.
If an Event of Default described in the fifth bullet point above occurs and
is continuing, the principal of, premium, if any, and accrued and unpaid
interest on all outstanding debt securities of all series will
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become immediately due and payable without any declaration of acceleration or
other act on the part of the Trustee or any holders.
The holders of a majority in principal amount of the outstanding debt
securities of a series may:
- waive all past defaults, except with respect to nonpayment of principal,
premium or interest or any other provision of the Indenture that cannot
be amended without the consent of each holder that is affected; and
- rescind any declaration of acceleration by the Trustee or the holders
with respect to the debt securities of that series, but only if:
- rescinding the declaration of acceleration would not conflict with any
judgment or decree of a court of competent jurisdiction; and
- all existing Events of Default have been cured or waived, other than the
nonpayment of principal, premium or interest on the debt securities of
that series that have become due solely by the declaration of
acceleration.
If an Event of Default occurs and is continuing, the Trustee will be under
no obligation, except as otherwise provided in the Indenture, to exercise any of
the rights or powers under the Indenture at the request or direction of any of
the holders unless such holders have offered to the Trustee reasonable indemnity
or security against any costs, liability or expense. No holder may pursue any
remedy with respect to the Indenture or the debt securities of any series,
except to enforce the right to receive payment of principal, premium or interest
when due, unless:
- such holder has previously given the Trustee notice that an Event of
Default with respect to that series is continuing;
- holders of at least 25% in principal amount of the outstanding debt
securities of that series have requested that the Trustee pursue the
remedy;
- such holders have offered the Trustee reasonable indemnity or security
against any cost, liability or expense;
- the Trustee has not complied with such request within 60 days after the
receipt of the request and the offer of indemnity or security; and
- the holders of a majority in principal amount of the outstanding debt
securities of that series have not given the Trustee a direction that, in
the opinion of the Trustee, is inconsistent with such request within such
60-day period.
The holders of a majority in principal amount of the outstanding debt
securities of a series have the right, subject to certain restrictions, to
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee or of exercising any right or power conferred on the
Trustee with respect to that series of debt securities. The Trustee, however,
may refuse to follow any direction that:
- conflicts with law;
- is inconsistent with any provision of the Indenture;
- the Trustee determines is unduly prejudicial to the rights of any other
holder; or
- would involve the Trustee in personal liability.
Notice of Events of Default. Upon the occurrence of an Event of Default,
we are required to give written notice to the Trustee and indicate the status of
the default and what action we are taking or propose to take to cure the
default. In addition, we are required to deliver to the Trustee, within 90 days
after the end of each fiscal year, a compliance certificate indicating that we
have complied with all covenants contained in the Indenture or whether any
default or Event of Default has occurred during the previous year.
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If an Event of Default occurs and is continuing and is known to the
Trustee, the Trustee must mail to each holder a notice of the Event of Default
by the later of 90 days after the Event of Default occurs or 30 days after the
Trustee knows of the Event of Default. Except in the case of a default in the
payment of principal, premium or interest with respect to any debt securities,
the Trustee may withhold such notice, but only if and so long as the board of
directors, the executive committee or a committee of directors or responsible
officers of the Trustee in good faith determines that withholding such notice is
in the interests of the holders.
Amendments and Waivers. We may amend the Indenture without the consent of
any holder of debt securities to:
- cure any ambiguity, omission, defect or inconsistency;
- convey, transfer, assign, mortgage or pledge any property to or with the
Trustee;
- provide for the assumption by a successor of our obligations under the
Indenture;
- add Subsidiary Guarantors with respect to the debt securities;
- evidence the removal of a Subsidiary Guarantor with respect to the debt
securities as permitted by the Indenture and as described under "-- The
Subsidiary Guarantees" or an accompanying prospectus supplement;
- secure the debt securities;
- add covenants for the benefit of the holders or surrender any right or
power conferred upon us or any Subsidiary Guarantor;
- make any change that does not adversely affect the rights of any holder;
- add or appoint a successor or separate Trustee; or
- comply with any requirement of the SEC in connection with the
qualification of the Indenture under the Trust Indenture Act.
In addition, we may amend the Indenture if the holders of a majority in
principal amount of all debt securities of each series that would be affected
then outstanding under the Indenture consent to it. We may not, however, without
the consent of each holder of outstanding debt securities of each series that
would be affected, amend the Indenture to:
- reduce the percentage in principal amount of debt securities of any
series whose holders must consent to an amendment;
- reduce the rate of or extend the time for payment of interest on any debt
securities;
- reduce the principal of or extend the stated maturity of any debt
securities;
- reduce the premium payable upon the redemption of any debt securities or
change the time at which any debt securities may or shall be redeemed;
- make any debt securities payable in other than U.S. dollars;
- impair the right of any holder to receive payment of premium, principal
or interest with respect to such holder's debt securities on or after the
applicable due date;
- impair the right of any holder to institute suit for the enforcement of
any payment with respect to such holder's debt securities;
- release any security that has been granted in respect of the debt
securities;
- make any change to an amendment or waiver provision which requires each
holder's consent;
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- make any change in the waiver provisions; or
- release a Subsidiary Guarantor or modify such Subsidiary Guarantor's
guarantee in any manner adverse to the holders other than as provided
under "-- The Subsidiary Guarantees."
The consent of the holders is not necessary under the Indenture to approve
the particular form of any proposed amendment. It is sufficient if such consent
approves the substance of the proposed amendment. After an amendment under the
Indenture becomes effective, we are required to mail to all holders a notice
briefly describing the amendment. The failure to give, or any defect in, such
notice, however, will not impair or affect the validity of the amendment.
The holders of a majority in aggregate principal amount of the outstanding
debt securities of each affected series, on behalf of all such holders, and
subject to certain rights of the Trustee, may waive:
- compliance by us or a Subsidiary Guarantor with certain restrictive
provisions of the Indenture; and
- any past default under the Indenture, subject to certain rights of the
Trustee under the Indenture;
except that such majority of holders may not waive a default:
- in the payment of principal, premium or interest; or
- in respect of a provision that under the Indenture cannot be amended
without the consent of all holders of the series of debt securities that
are affected.
Defeasance. At any time, we may terminate, with respect to debt securities
of a particular series, all our obligations under such series of debt securities
and the Indenture, which we call a "legal defeasance." If we decide to make a
legal defeasance, however, we may not terminate our obligations:
- relating to the defeasance trust;
- to register the transfer or exchange of the debt securities;
- to replace mutilated, destroyed, lost or stolen debt securities; or
- to maintain a registrar and paying agent in respect of the debt
securities.
If we exercise our legal defeasance option, any subsidiary guarantee will
terminate with respect to that series of debt securities.
At any time we may also effect a "covenant defeasance," which means we have
elected to terminate our obligations under:
- covenants applicable to a series of debt securities and described in the
prospectus supplement applicable to such series, other than as described
in such prospectus supplement;
- the bankruptcy provisions with respect to the Subsidiary Guarantors, if
any; and
- the guarantee provision described under "Events of Default" above with
respect to a series of debt securities.
We may exercise our legal defeasance option notwithstanding our prior
exercise of our covenant defeasance option. If we exercise our legal defeasance
option, payment of the affected series of debt securities may not be accelerated
because of an Event of Default with respect to that series. If we exercise our
covenant defeasance option, payment of the affected series of debt securities
may not be accelerated because of an Event of Default specified in the fourth,
fifth (with respect only to a Subsidiary Guarantor) or sixth bullet points under
"-- Events of Default" above or an Event of Default that is added specifically
for such series and described in a prospectus supplement.
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In order to exercise either defeasance option, we must:
- irrevocably deposit in trust with the Trustee money or certain U.S.
government obligations for the payment of principal, premium, if any, and
interest on the series of debt securities to redemption or maturity, as
the case may be;
- comply with certain other conditions, including that no default has
occurred and is continuing after the deposit in trust; and
- deliver to the Trustee an opinion of counsel to the effect that holders
of the series of debt securities will not recognize income, gain or loss
for Federal income tax purposes as a result of such defeasance and will
be subject to Federal income tax on the same amount and in the same
manner and at the same times as would have been the case if such deposit
and defeasance had not occurred. In the case of legal defeasance only,
such opinion of counsel must be based on a ruling of the Internal Revenue
Service or other change in applicable Federal income tax law.
Book Entry, Delivery and Form. We may issue debt securities of a series in
the form of one or more global certificates deposited with a depositary. We
expect that The Depository Trust Company, New York, New York, or "DTC," will act
as depositary. If we issue debt securities of a series in book-entry form, we
will issue one or more global certificates that will be deposited with or on
behalf of DTC and will not issue physical certificates to each holder. A global
security may not be transferred unless it is exchanged in whole or in part for a
certificated security, except that DTC, its nominees and their successors may
transfer a global security as a whole to one another.
DTC will keep a computerized record of its participants, such as a broker,
whose clients have purchased the debt securities. The participants will then
keep records of their clients who purchased the debt securities. Beneficial
interests in global securities will be shown on, and transfers of beneficial
interests in global securities will be made only through, records maintained by
DTC and its participants.
DTC advises us that it is:
- a limited-purpose trust company organized under the New York Banking Law;
- a "banking organization" within the meaning of the New York Banking Law;
- a member of the United States Federal Reserve System;
- a "clearing corporation" within the meaning of the New York Uniform
Commercial Code; and
- a "clearing agency" registered under the provisions of Section 17A of the
Exchange Act.
DTC is owned by a number of its participants and by the New York Stock
Exchange, Inc., The American Stock Exchange, Inc. and the National Association
of Securities Dealers, Inc. The rules that apply to DTC and its participants are
on file with the SEC.
DTC holds securities that its participants deposit with DTC. DTC also
records the settlement among participants of securities transactions, such as
transfers and pledges, in deposited securities through computerized records for
participants' accounts. This eliminates the need to exchange certificates.
Participants include securities brokers and dealers, banks, trust companies,
clearing corporations and certain other organizations.
We will wire principal, premium, if any, and interest payments due on the
global securities to DTC's nominee. We, the Trustee and any paying agent will
treat DTC's nominee as the owner of the global securities for all purposes.
Accordingly, we, the Trustee and any paying agent will have no direct
responsibility or liability to pay amounts due on the global securities to
owners of beneficial interests in the global securities.
It is DTC's current practice, upon receipt of any payment of principal,
premium, if any, or interest, to credit participants' accounts on the payment
date according to their respective holdings of beneficial interests in the
global securities as shown on DTC's records. In addition, it is DTC's current
practice to
18
assign any consenting or voting rights to participants, whose accounts are
credited with debt securities on a record date, by using an omnibus proxy.
Payments by participants to owners of beneficial interests in the global
securities, as well as voting by participants, will be governed by the customary
practices between the participants and the owners of beneficial interests, as is
the case with debt securities held for the account of customers registered in
"street name." Payments to holders of beneficial interests are the
responsibility of the participants and not of DTC, the Trustee or us.
Beneficial interests in global securities will be exchangeable for
certificated securities with the same terms in authorized denominations only if:
- DTC notifies us that it is unwilling or unable to continue as depositary
or if DTC ceases to be a clearing agency registered under applicable law
and a successor depositary is not appointed by us within 90 days; or
- we determine not to require all of the debt securities of a series to be
represented by a global security and notify the Trustee of our decision.
The Trustee. The Bank of New York will be the Trustee under the Indenture.
The Bank of New York also serves as Trustee for our 7.875% Senior Notes due
2004, our 8.375% Senior Notes due 2008, our 8.125% Senior Notes due 2011 and our
8.5% Senior Notes due 2012. We may also maintain banking and other commercial
relationships with the Trustee and its affiliates in the ordinary course of
business, and the Trustee may own our debt securities.
Governing Law. The Indenture and the debt securities will be governed by,
and construed in accordance with, the laws of the State of New York.
DESCRIPTION OF CAPITAL STOCK
The description of our capital stock set forth below is not complete and is
qualified by reference to our certificate of incorporation (including our
certificates of designation) and bylaws. Copies of our certificate of
incorporation (including our certificates of designation) and bylaws are
available from us upon request and have also been filed with the SEC. See "Where
You Can Find More Information."
AUTHORIZED CAPITAL STOCK
Our authorized capital stock consists of 350,000,000 shares of common
stock, par value $.01 per share, and 10,000,000 shares of preferred stock, par
value $.01 per share, of which 250,000 shares are designated as Series A Junior
Participating Preferred Stock and 3,000,000 shares are designated 6.75%
Cumulative Convertible Preferred Stock.
COMMON STOCK
Holders of our common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of shareholders. Subject to
preferences that may be applicable to any outstanding preferred stock, holders
of our common stock are entitled to receive ratably such dividends as may be
declared by the board of directors out of funds legally available for dividends.
In the event of our liquidation or dissolution, holders of our common stock are
entitled to share ratably in all assets remaining after payment of liabilities
and the liquidation preference of any outstanding preferred stock.
Holders of our common stock have no preemptive rights and have no rights to
convert their common stock into any other securities. All of the outstanding
shares of common stock are duly authorized, validly issued, fully paid and
nonassessable.
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6.75% CUMULATIVE CONVERTIBLE PREFERRED STOCK
General. We have 6,750,000 shares of authorized preferred stock which are
undesignated. 3,000,000 shares of preferred stock are designated as 6.75%
Cumulative Convertible Preferred Stock, of which 2,998,000 are currently
outstanding. Our board of directors has also authorized the issuance of up to
250,000 shares of Series A Junior Participating Preferred Stock in connection
with the adoption of our shareholder rights plan in July 1998. None of these
shares are currently outstanding. The Series A Preferred Stock is described
below under "-- Share Rights Plan."
Our board of directors has the authority, without further shareholder
approval, to issue shares of preferred stock from time to time in one or more
series, with such voting powers or without voting powers, and with such
designations, preferences and relative, participating, optional or other special
rights, and qualifications, limitations or restrictions, as shall be set forth
in the resolutions providing thereof.
While providing desirable flexibility for possible acquisitions and other
corporate purposes, and eliminating delays associated with a shareholder vote on
specific issuances, the issuance of preferred stock could adversely affect the
voting power of holders of common stock, as well as dividend and liquidation
payments on both common and preferred stock. It also could have the effect of
delaying, deferring or preventing a change in control.
Ranking. The Convertible Preferred Stock, with respect to dividend rights
or rights upon the liquidation, winding-up or dissolution, ranks:
- senior to all classes of our common stock and to the Series A Junior
Participating Preferred Stock and each other class of capital stock or
series of preferred stock established after the original issue date of
the Convertible Preferred Stock (which we will refer to as the "Issue
Date") the terms of which do not expressly provide that such class or
series ranks senior to or on a parity with the Convertible Preferred
Stock as to dividend rights or rights upon our liquidation, winding-up or
dissolution (which we will refer to collectively as "Junior Stock");
- on a parity with any class of capital stock or series of preferred stock
established after the Issue Date the terms of which expressly provide
that such class or series will rank on a parity with the Convertible
Preferred Stock as to dividend rights or rights upon our liquidation,
winding-up or dissolution (which we will refer to collectively as "Parity
Stock"); and
- junior to each class of capital stock or series of preferred stock
established after the Issue Date the terms of which expressly provide
that such class or series will rank senior to the Convertible Preferred
Stock as to dividend rights or rights upon our liquidation, winding-up or
dissolution (which we will refer to collectively as "Senior Stock").
While any shares of our Convertible Preferred Stock are outstanding, we may
not authorize, increase the authorized amount of, or issue any shares of, any
class or series of Senior Stock (or any security convertible into Senior Stock)
without the affirmative vote or consent of the holders of at least 66 2/3% of
the outstanding shares of Convertible Preferred Stock. Without the consent of
any holder of Convertible Preferred Stock, however, we may authorize, increase
the authorized amount of, or issue any shares of, any class or series of Parity
Stock or Junior Stock. See "-- Voting Rights" below.
Dividends. Holders of shares of Convertible Preferred Stock are entitled
to receive, when, as and if declared by our board of directors out of funds
legally available for payment, cumulative cash dividends at the rate per annum
of 6.75% per share on the liquidation preference thereof of $50 per share of
Convertible Preferred Stock (equivalent to $3.375 per annum per share).
Dividends on the Convertible Preferred Stock are payable quarterly on February
15, May 15, August 15 and November 15 of each year at such annual rate, and
accumulate from the most recent date as to which dividends have been paid or, if
no dividends have been paid, from the Issue Date of the Convertible Preferred
Stock, whether or not in any dividend period or periods there have been funds
legally available for the payment of such dividends. Dividends will be payable
to holders of record as they appear on our stock register on the immediately
preceding February 1, May 1, August 1 and November 1. Accumulations of dividends
on shares of
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Convertible Preferred Stock do not bear interest. Dividends payable on the
Convertible Preferred Stock for any period less than a full dividend period
(based upon the number of days elapsed during the period) are computed on the
basis of a 360-day year consisting of twelve 30-day months.
No dividend will be declared or paid upon, or any sum set apart for the
payment of dividends upon, any outstanding share of the Convertible Preferred
Stock with respect to any dividend period unless all dividends for all preceding
dividend periods have been declared and paid or declared and a sufficient sum
set apart for the payment of such dividend, upon all outstanding shares of
Convertible Preferred Stock.
No dividends or other distributions (other than a dividend or distribution
payable solely in shares of Parity Stock or Junior Stock (in the case of Parity
Stock) or Junior Stock (in the case of Junior Stock) and cash in lieu of
fractional shares) may be declared, made or paid, or set apart for payment upon,
any Parity Stock or Junior Stock, nor may any Parity Stock or Junior Stock be
redeemed, purchased or otherwise acquired for any consideration (or any money
paid to or made available for a sinking fund for the redemption of any Parity
Stock or Junior Stock) by us or on our behalf (except by conversion into or
exchange for shares of Parity Stock or Junior Stock (in the case of Parity
Stock) or Junior Stock (in the case of Junior Stock)) unless all accumulated and
unpaid dividends have been or contemporaneously are declared and paid, or are
declared and a sum sufficient for the payment thereof is set apart for such
payment, on the Convertible Preferred Stock and any Parity Stock for all
dividend payment periods terminating on or prior to the date of such
declaration, payment, redemption, purchase or acquisition. Notwithstanding the
foregoing, if full dividends have not been paid on the Convertible Preferred
Stock and any Parity Stock, dividends may be declared and paid on the
Convertible Preferred Stock and such Parity Stock so long as the dividends are
declared and paid pro rata so that the amounts of dividends declared per share
on the Convertible Preferred Stock and such Parity Stock will in all cases bear
to each other the same ratio that accumulated and unpaid dividends per share on
the shares of the Convertible Preferred Stock and such Parity Stock bear to each
other. Holders of shares of the Convertible Preferred Stock are not entitled to
any dividend, whether payable in cash, property or stock, in excess of full
cumulative dividends.
Our ability to declare and pay cash dividends and make other distributions
with respect to our capital stock, including the Convertible Preferred Stock, is
limited by the terms of our outstanding indebtedness. In addition, our ability
to declare and pay dividends may be limited by applicable Oklahoma law.
Liquidation Preference. In the event of our voluntary or involuntary
liquidation, winding-up or dissolution, each holder of Convertible Preferred
Stock will be entitled to receive and to be paid out of our assets available for
distribution to our stockholders, before any payment or distribution is made to
holders of Junior Stock (including common stock), a liquidation preference in
the amount of $50 per share of the Convertible Preferred Stock, plus accumulated
and unpaid dividends thereon to the date fixed for liquidation, winding-up or
dissolution. If, upon our voluntary or involuntary liquidation, winding-up or
dissolution, the amounts payable with respect to the liquidation preference of
the Convertible Preferred Stock and all Parity Stock are not paid in full, the
holders of the Convertible Preferred Stock and the Parity Stock will share
equally and ratably in any distribution of our assets in proportion to the full
liquidation preference and accumulated and unpaid dividends to which they are
entitled. After payment of the full amount of the liquidation preference and
accumulated and unpaid dividends to which they are entitled, the holders of the
Convertible Preferred Stock will have no right or claim to any of our remaining
assets. Neither the sale of all or substantially all of our assets or business
(other than in connection with the liquidation, winding-up or dissolution of its
business), nor our merger or consolidation into or with any other person, will
be deemed to be our voluntary or involuntary liquidation, winding-up or
dissolution.
The certificate of designation does not contain any provision requiring
funds to be set aside to protect the liquidation preference of the Convertible
Preferred Stock even though it is substantially in excess of the par value
thereof.
Voting Rights. The holders of the Convertible Preferred Stock have no
voting rights except as set forth below or as otherwise required by Oklahoma
law.
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If dividends on the Convertible Preferred Stock are in arrears and unpaid
for six or more quarterly periods (whether or not consecutive), the holders of
the Convertible Preferred Stock, voting as a single class with any other
preferred stock or preference securities having similar voting rights that are
exercisable, will be entitled at our next regular or special meeting of
stockholders to elect two additional directors to our board of directors unless
our board is comprised of fewer than six directors at such time, in which case
such holders will be entitled to elect one additional director. Upon the
election of any additional directors, the number of directors that compose our
board shall be increased by such number of additional directors. Such voting
rights and the terms of the directors so elected will continue until such time
as the dividend arrearage on the Convertible Preferred Stock has been paid in
full.
In addition, the affirmative vote or consent of the holders of at least
66 2/3% of the outstanding Convertible Preferred Stock is required for the
issuance of any class or series of Senior Stock (or any security convertible
into Senior Stock) and for amendments to our certificate of incorporation that
would affect adversely the rights of holders of the Convertible Preferred Stock.
The certificate of designation provides that the authorization of, the increase
in the authorized amount of, or the issuance of any shares of any class or
series of Parity Stock or Junior Stock does not require the consent of the
holders of the Convertible Preferred Stock, and is not deemed to affect
adversely the rights of the holders of the Convertible Preferred Stock.
In all cases in which the holders of Convertible Preferred Stock are
entitled to vote, each share of Convertible Preferred Stock shall be entitled to
one vote.
Conversion Rights. Each share of Convertible Preferred Stock is
convertible at any time at the option of the holder thereof into 6.4935 shares
of common stock (which was calculated using an initial conversion price of $7.70
per share of common stock) subject to adjustment for certain dilutive events (we
refer to such price or adjusted price as the "Conversion Price").
Mandatory Conversion. At any time on or after November 20, 2004, we may at
our option cause the Convertible Preferred Stock to be automatically converted
into that number of shares of common stock for each share of Convertible
Preferred Stock equal to $50.00 (the liquidation preference per share of
Convertible Preferred Stock) divided by the then prevailing Conversion Price. We
may exercise this right only if the closing price of its common stock equals or
exceeds 130% of the then prevailing Conversion Price for at least 20 trading
days in any consecutive 30-day trading period, including the last trading day of
such 30-day period, ending on the trading day prior to our issuance of a press
release announcing the mandatory conversion as described below.
We may not authorize, issue a press release or give notice of any mandatory
conversion unless, prior to giving the conversion notice, all accumulated and
unpaid dividends on the Convertible Preferred Stock for periods ended prior to
the date of such conversion notice shall have been paid in cash.
In addition to the mandatory conversion provision described above, if there
are less than 250,000 shares of Convertible Preferred Stock outstanding, we may,
at any time on or after November 20, 2006, at our option, cause the Convertible
Preferred Stock to be automatically converted into that number of shares of
common stock equal to $50.00 (the liquidation preference per share of
Convertible Preferred Stock) divided by the lesser of the then prevailing
Conversion Price and the Market Value for the five trading day period ending on
the second trading day immediately prior to the date set for conversion.
The term "Market Value" means the average closing price of the common stock
for a five consecutive trading day period on the New York Stock Exchange (or
such other national securities exchange or automated quotation system on which
the common stock is then listed or authorized for quotation or, if not so listed
or authorized for quotation, an amount determined in good faith by our board of
directors to be the fair value of the common stock).
Change of Control. Except as provided below, upon a Change of Control (as
defined below), holders of Convertible Preferred Stock shall, in the event that
the Market Value at such time is less than the Conversion Price, have a one-time
option to convert all of their outstanding shares of Convertible Preferred Stock
into shares of common stock at an adjusted Conversion Price equal to the greater
of
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(i) the Market Value as of the Change of Control Date and (ii) $4.0733. This
option shall be exercisable during a period of not less than 30 days nor more
than 60 days commencing on the third business day after notice of the Change of
Control is given by us in the manner specified in the certificate of
designation. In lieu of issuing the shares of common stock issuable upon
conversion in the event of a Change of Control, we may, at our option, make a
cash payment equal to the Market Value for each share of such common stock
otherwise issuable determined for the period ending on the Change of Control
Date. Notwithstanding the foregoing, upon a Change of Control in which (x) each
holder of our common stock receives consideration consisting solely of common
stock of the successor, acquiror or other third party (and cash paid in lieu of
fractional shares) that is listed on a national securities exchange or quoted on
the NASDAQ National Market and (y) all our common stock has been exchanged for,
converted into or acquired for common stock of the successor, acquiror or other
third party (and cash in lieu of fractional shares), and the Convertible
Preferred Stock becomes convertible solely into such common stock, the
Conversion Price will not be adjusted as described in this paragraph.
The certificate of designation defines "Change of Control" as any of the
following events:
- the sale, lease or transfer, in one or a series of related transactions,
of all or substantially all of our assets (determined on a consolidated
basis) to any person or group (as such term is used in Section 13(d)(3)
of the Exchange Act), other than to Permitted Holders (as defined below);
- the adoption of a plan the consummation of which would result in the
liquidation or dissolution of our company;
- the acquisition, directly or indirectly, by any person or group (as such
term is used in Section 13(d)(3) of the Exchange Act), other than
Permitted Holders, of beneficial ownership (as defined in Rule 13d-3
under the Exchange Act) of more than 50% of our aggregate voting power of
the voting stock; provided, however, that the Permitted Holders
beneficially own (as defined in Rules 13d-3 and 13d-5 under the Exchange
Act), directly or indirectly, in the aggregate a lesser percentage of the
total voting power of our voting stock than such other person and do not
have the right or ability by voting power, contract or otherwise to elect
or designate for election a majority of the board of directors (for the
purposes of this definition, such other person shall be deemed to
beneficially own any voting stock of a specified corporation held by a
parent corporation, if such other person is the beneficial owner (as
defined above), directly or indirectly, of more than 35% of the voting
power of the voting stock of such parent corporation and the Permitted
Holders beneficially own (as defined in this proviso), directly or
indirectly, in the aggregate a lesser percentage of the voting power of
the voting stock of such parent corporation and do not have the right or
ability by voting power, contract or otherwise to elect or designate for
election a majority of our board of directors of such parent
corporation); or
- during any period of two consecutive years, individuals who at the
beginning of such period composed our board of directors (together with
any new directors whose election by such board of directors or whose
nomination for election by our shareholders was approved by a vote of
66 2/3% of our directors then still in office who were either directors
at the beginning of such period or whose election or nomination for
election was previously so approved) cease for any reason to constitute a
majority of our board of directors then in office.
For purposes of the definition of "Change of Control," the term "Permitted
Holders" means Aubrey K. McClendon and Tom L. Ward and their respective
Affiliates.
The phrase "all or substantially all" of the assets of our company is
likely to be interpreted by reference to applicable state law at the relevant
time, and will be dependent on the facts and circumstances existing at such
time. As a result, there may be a degree of uncertainty in ascertaining whether
a sale or transfer is of "all or substantially all" of our assets.
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ANTI-TAKEOVER PROVISIONS
Our certificate of incorporation and bylaws and the Oklahoma General
Corporation Act include a number of provisions which may have the effect of
encouraging persons considering unsolicited tender offers or other unilateral
takeover proposals to negotiate with our board of directors rather than pursue
non-negotiated takeover attempts. These provisions include a classified board of
directors, authorized blank check preferred stock, restrictions on business
combinations and the availability of authorized but unissued common stock.
Classified Board of Directors. Our certificate of incorporation and bylaws
contain provisions for a staggered board of directors with only one-third of the
board standing for election each year. Directors can only be removed for cause.
A staggered board makes it more difficult for shareholders to change the
majority of the directors.
Oklahoma Business Combination Statute. Section 1090.3 of the Oklahoma
General Corporation Act prevents an "interested shareholder" from engaging in a
"business combination" with an Oklahoma corporation for three years following
the date the person became an interested shareholder, unless:
- prior to the date the person became an interested shareholder, the board
of directors of the corporation approved the transaction in which the
interested shareholder became an interested shareholder or approved the
business combination;
- upon consummation of the transaction that resulted in the interested
shareholder becoming an interested shareholder, the interested
shareholder owns stock having at least 85% of all voting power of the
corporation at the time the transaction commenced, excluding stock held
by directors who are also officers of the corporation and stock held by
certain employee stock plans; or
- on or subsequent to the date of the transaction in which the person
became an interested shareholder, the business combination is approved by
the board of directors of the corporation and authorized at a meeting of
shareholders by the affirmative vote of the holders of two-thirds of all
voting power not attributable to shares owned by the interested
shareholder.
The statute defines a "business combination" to include:
- any merger or consolidation involving the corporation and an interested
shareholder;
- any sale, lease, exchange, mortgage, pledge, transfer or other
disposition to or with an interested shareholder of 10% or more of the
assets of the corporation;
- subject to certain exceptions, any transaction which results in the
issuance or transfer by the corporation of any stock of the corporation
to an interested shareholder;
- any transaction involving the corporation which has the effect of
increasing the proportionate share of the stock of any class or series or
voting power of the corporation owned by the interested shareholder;
- the receipt by an interested shareholder of any loans, guarantees,
pledges or other financial benefits provided by or through the
corporation; or
- any share acquisition by the interested shareholder pursuant to Section
1090.1 of the Oklahoma General Corporation Act.
For purposes of Section 1090.3, the term "corporation" also includes the
corporation's majority-owned subsidiaries.
In addition, Section 1090.3 defines an "interested shareholder," generally,
as any person that owns stock having 15% or more of all voting power of the
corporation, any person that is an affiliate or associate of the corporation and
owned stock having 15% or more of all voting power of the corporation at any
time within the three-year period prior to the time of determination of
interested shareholder status, and any affiliate or associate of such person.
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Stock Purchase Provisions. Our certificate of incorporation includes a
provision which requires the affirmative vote of two-thirds of the votes cast by
the holders, voting together as a single class, of all then outstanding shares
of capital stock, excluding the votes by an interested shareholder, to approve
the purchase of any of our capital stock from the interested shareholder at a
price in excess of fair market value, unless the purchase is either (1) made on
the same terms offered to all holders of the same securities or (2) made on the
open market and not the result of a privately negotiated transaction.
SHARE RIGHTS PLAN
The Rights. On July 7, 1998, our board of directors declared a dividend
distribution of one preferred stock purchase right for each outstanding share of
common stock. The distribution was paid on July 27, 1998 to the shareholders of
record on that date. Each right entitles the registered holder to purchase from
us one one-thousandth of a share of Series A Preferred Stock at a price of
$25.00, subject to adjustment.
The following is a summary of these rights. The full description and terms
of the rights are set forth in a rights agreement with UMB Bank, N.A., as rights
agent. Copies of the rights agreement and the certificate of designation for the
Series A Preferred Stock are available free of charge. This summary description
of the rights and the Series A Preferred Stock does not purport to be complete
and is qualified in its entirety by reference to all the provisions of the
rights agreement and the certificate of designation for the Series A Preferred
Stock.
Initially, the rights attached to all certificates representing shares of
our outstanding common stock, and no separate rights certificates were
distributed. The rights will separate from our common stock and the distribution
date will occur upon the earlier of:
- ten days following the date of public announcement that a person or group
of persons has become an acquiring person; or
- ten business days (or a later date set by the board of directors prior to
the time a person becomes an acquiring person) following the commencement
of, or the announcement of an intention to make, a tender offer or
exchange offer upon consummation of which the offeror would, if
successful, become an acquiring person.
The earlier of these dates is called the distribution date.
The term "acquiring person" means any person who or which, together with
all of its affiliates and associates, is the beneficial owner of 15% or more of
our outstanding common stock, but does not include:
- us or any of our subsidiaries or employee benefit plans;
- Aubrey K. McClendon, his spouse, lineal descendants and ascendants,
heirs, executors or other legal representatives and any trusts
established for the benefit of the foregoing or any other person or
entity in which the foregoing persons or entities are at the time of
determination the direct record and beneficial owners of all outstanding
voting securities (each a "McClendon shareholder");
- Tom L. Ward, his spouse, lineal descendants and ascendants, heirs,
executors or other legal representatives and any trusts established for
the benefit of the foregoing, or any other person or entity in which the
foregoing persons or entities are at the time of determination the direct
record and beneficial owners of all outstanding voting securities (each a
"Ward shareholder");
- Morgan Guaranty Trust Company of New York, in its capacity as pledgee of
shares beneficially owned by a McClendon or Ward shareholder, or both,
under any pledge agreement in effect on September 11, 1998, to the extent
that upon the exercise by the pledgee of any of its rights or duties as
pledgee, other than the exercise of any voting power by the pledgee or
the acquisition of ownership by the pledgee, such pledgee becomes a
beneficial owner of pledged shares; or
- any person (other than the pledgee just described) that is neither a
McClendon nor Ward shareholder, but who or which is the beneficial owner
of common stock beneficially owned by a
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McClendon or Ward shareholder (a "second tier shareholder"), but only if
the shares of common stock otherwise beneficially owned by a second tier
shareholder ("second tier holder shares") do not exceed the sum of (A)
the holder's second tier holder shares held on September 11, 1998 and (B)
1% of the shares of our common stock then outstanding (collectively,
"exempt persons").
The rights agreement provides that, until the distribution date, the rights
will be transferred with and only with the common stock. Until the distribution
date (or earlier redemption or expiration of the rights), new common stock
certificates issued after July 27, 1998, upon transfer or new issuance of common
stock, will contain a notation incorporating the rights agreement by reference.
Until the distribution date or earlier redemption or expiration of the rights,
the surrender for transfer of any certificate for common stock, outstanding as
of July 27, 1998, even without a notation or a copy of a summary of the rights
being attached, will also constitute the transfer of the rights associated with
the common stock represented by the certificate. As soon as practicable
following the distribution date, separate certificates evidencing the rights
will be mailed to holders of record of the common stock as of the close of
business on the distribution date and these separate rights certificates alone
will evidence the rights.
The rights are not exercisable until the distribution date. The rights will
expire on July 27, 2008.
The purchase price payable, and the number of one one-thousandths of a
share of Series A Preferred Stock or other securities or property issuable, upon
exercise of the rights are subject to adjustment from time to time to prevent
dilution:
- in the event of a stock dividend on, or a subdivision, combination or
reclassification of, the Series A Preferred Stock;
- upon the grant to holders of the Series A Preferred Stock of certain
rights or warrants to subscribe for or purchase shares of Series A
Preferred Stock at a price, or securities convertible into Series A
Preferred Stock with a conversion price, less than the then current
market price of the Series A Preferred Stock; or
- upon the distribution to holders of the Series A Preferred Stock of
evidences of indebtedness or assets (excluding regular periodic cash
dividends paid or dividends payable in Series A Preferred Stock) or of
subscription rights or warrants (other than those referred to above).
The number of outstanding rights and the number of one one-thousandths of a
share of Series A Preferred Stock issuable upon exercise of each right are also
subject to adjustment in the event of a stock split of the common stock or a
stock dividend on the common stock payable in the common stock or subdivisions,
consolidations or combinations of the common stock occurring, in any such case,
prior to the distribution date.
In the event that following the date of public announcement that a person
has become an acquiring person, we are acquired in a merger or other business
combination transaction or more than 50% of our consolidated assets or earning
power is sold, proper provision will be made so that each holder of a right will
thereafter have the right to receive, upon the exercise of the right at the then
current exercise price of the right, that number of shares of common stock of
the acquiring company which at the time of such transaction will have a market
value of two times the exercise price of the right (the "flip-over right").
In the event that a person, other than an exempt person, becomes an
acquiring person, proper provision will be made so that each holder of a right,
other than the acquiring person and its affiliates and associates, will
thereafter have the right to receive upon exercise that number of shares of
common stock, or, if applicable, cash, other equity securities or property of
us, having a market value equal to two times the purchase price of the rights
(the "flip-in right"). Any rights that are or were at any time owned by an
acquiring person will then become void.
With certain exceptions, no adjustment in the purchase price will be
required until cumulative adjustments require an adjustment of at least 1% in
the purchase price. Upon exercise of the rights, no fractional shares of Series
A Preferred Stock will be issued other than fractions which are integral
multiples of one one-hundredth of a share of Series A Preferred Stock. Cash will
be paid in lieu of
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fractional shares of Series A Preferred Stock that are not integral multiples of
one one-hundredth of a share of Series A Preferred Stock.
At any time prior to the earlier to occur of (1) 5:00 p.m., Oklahoma City,
Oklahoma time on the tenth day after the stock acquisition date or (2) the
expiration of the rights, we may redeem the rights in whole, but not in part, at
a price of $0.01 per right; provided, that (a) if the board of directors
authorizes redemption on or after the time a person becomes an acquiring person,
then the authorization must be by board approval and (b) the period for
redemption may, upon board approval, be extended by amending the rights
agreement. Board approval means the approval of a majority of our directors.
Immediately upon any redemption of the rights described in this paragraph, the
right to exercise the rights will terminate and the only right of the holders of
rights will be to receive the redemption price.
Our board of directors may amend the terms of the rights without the
consent of the holders of the rights at any time and from time to time provided
that any amendment does not adversely affect the interests of the holders of the
rights. In addition, during any time that the rights are subject to redemption,
the terms of the rights may be amended by the approval of a majority of the
directors, including an amendment that adversely affects the interests of the
holders of the rights, without the consent of the holders of rights.
Until a right is exercised, a holder will have no rights as a shareholder,
including, without limitation, the right to vote or to receive dividends. While
the distribution of the rights will not be taxable to us or our shareholders,
shareholders may, depending upon the circumstances, recognize taxable income in
the event that the rights become exercisable for Series A Preferred Stock, or
other consideration.
The Series A Preferred Stock. Each one-thousandth of a share of the Series
A Preferred Stock (a "preferred share fraction") that may be acquired upon
exercise of the rights will be nonredeemable and junior to any other shares of
preferred stock that we may issue.
Each preferred share fraction will have a minimum preferential quarterly
dividend rate of $0.01 per preferred share fraction but will, in any event, be
entitled to a dividend equal to the per share dividend declared on the common
stock.
In the event of liquidation, the holder of a preferred share fraction will
receive a preferred liquidation payment equal to the greater of $0.01 per
preferred share fraction or the per share amount paid in respect of a share of
common stock.
Each preferred share fraction will have one vote, voting together with the
common stock. The holders of preferred share fractions, voting as a separate
class, will be entitled to elect two directors if dividends on the Series A
Preferred Stock are in arrears for six fiscal quarters.
In the event of any merger, consolidation or other transaction in which
shares of common stock are exchanged, each preferred share fraction will be
entitled to receive the per share amount paid in respect of each share of common
stock.
The rights of holders of the Series A Preferred Stock to dividends,
liquidation and voting, and in the event of mergers and consolidations, are
protected by customary antidilution provisions.
Because of the nature of the Series A Preferred Stock's dividend,
liquidation and voting rights, the economic value of one preferred share
fraction that may be acquired upon the exercise of each right should approximate
the economic value of one share of our common stock.
SHAREHOLDER ACTION
Except as otherwise provided by law or in our certificate of incorporation
or bylaws, the approval by holders of a majority of the shares of common stock
present in person or represented by proxy at a meeting and entitled to vote is
sufficient to authorize, affirm, ratify or consent to a matter voted on by
shareholders. Our bylaws provide that all questions submitted to shareholders
will be decided by a plurality of the votes cast, unless otherwise required by
law, our certificate of incorporation, stock exchange
27
requirements or any certificate of designation. The Oklahoma General Corporation
Act requires the approval of the holders of a majority of the outstanding stock
entitled to vote for certain extraordinary corporate transactions, such as a
merger, sale of substantially all assets, dissolution or amendment of the
certificate of incorporation. Our certificate of incorporation provides for a
vote of the holders of two-thirds of the issued and outstanding stock having
voting power, voting as a single class, to amend, repeal or adopt any provision
inconsistent with the provisions of the certificate of incorporation limiting
director liability and stock purchases by us, and providing for staggered terms
of directors and indemnity for directors. The same vote is also required for
shareholders to amend, repeal or adopt any provision of our bylaws.
Under Oklahoma law, shareholders may take actions without the holding of a
meeting by written consent or consents signed by the holders of a sufficient
number of shares to approve the transaction had all of the outstanding shares of
our capital stock entitled to vote thereon been present at a meeting. If
shareholder action is taken by written consent, the rules and regulations of the
SEC require us to send each shareholder entitled to vote on the matter, but
whose consent was not solicited, an information statement containing information
substantially similar to that which would have been contained in a proxy
statement.
TRANSFER AGENT AND REGISTRAR
UMB Bank, N.A. is the transfer agent and registrar for our common stock and
the Convertible Preferred Stock.
PLAN OF DISTRIBUTION
Any of the securities being offered hereby may be sold in any one or more
of the following ways from time to time:
- through agents;
- to or through underwriters;
- through dealers; or
- directly by us.
The distribution of the securities may be effected from time to time in one
or more transactions at a fixed price or prices, which may be changed, at market
prices prevailing at the time of sale, at prices related to such prevailing
market prices or at negotiated prices.
Offers to purchase securities may be solicited by agents designated by us
from time to time. Any such agent involved in the offer or sale of the
securities in respect of which this prospectus is delivered will be named, and
any commissions payable by us to such agent will be set forth, in the applicable
prospectus supplement. Unless otherwise indicated in such prospectus supplement,
any such agent will be acting on a reasonable best efforts basis for the period
of its appointment. Any such agent may be deemed to be an underwriter, as that
term is defined in the Securities Act, of the securities so offered and sold.
If securities are sold by means of an underwritten offering, we will
execute an underwriting agreement with an underwriter or underwriters at the
time an agreement for such sale is reached, and the names of the specific
managing underwriter or underwriters, as well as any other underwriters, the
respective amounts underwritten and the terms of the transaction, including
commissions, discounts and any other compensation of the underwriters and
dealers, if any, will be set forth in the applicable prospectus supplement which
will be used by the underwriters to make resales of the securities in respect of
which this prospectus is being delivered to the public. If underwriters are
utilized in the sale of any securities in respect of which this prospectus is
being delivered, such securities will be acquired by the underwriters for their
own account and may be resold from time to time in one or more transactions,
including negotiated transactions, at fixed public offering prices or at varying
prices determined by the underwriters at the time of sale. Securities may be
offered to the public either through underwriting syndicates represented by
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managing underwriters or directly by one or more underwriters. If any
underwriter or underwriters are utilized in the sale of securities, unless
otherwise indicated in the applicable prospectus supplement, the underwriting
agreement will provide that the obligations of the underwriters are subject to
certain conditions precedent and that the underwriters with respect to a sale of
such securities will be obligated to purchase all such securities if any are
purchased.
We may grant to the underwriters options to purchase additional securities,
to cover over-allotments, if any, at the price at which securities are first
offered to the public (with additional underwriting commissions or discounts),
as may be set forth in the prospectus supplement relating thereto. If we grant
any over-allotment option, the terms of such over-allotment option will be set
forth in the prospectus supplement for such securities.
If a dealer is utilized in the sale of the securities in respect of which
this prospectus is delivered, we will sell such securities to the dealer as
principal. The dealer may then resell such securities to the public at varying
prices to be determined by such dealer at the time of resale. Any such dealer
may be deemed to be an underwriter, as such term is defined in the Securities
Act, of the securities so offered and sold. The name of the dealer and their
terms of the transaction will be set forth in the prospectus supplement relating
thereto.
Offers to purchase securities may be solicited directly by us and the sale
thereof may be made by us directly to institutional investors or others, who may
be deemed to be underwriters within the meaning of the Securities Act with
respect to any resale thereof. The terms of any such sales will be described in
the prospectus supplement relating thereto.
If so indicated in the applicable prospectus supplement, we may authorize
agents and underwriters to solicit offers by certain institutions to purchase
securities from us at the public offering price set forth in the applicable
prospectus supplement pursuant to delayed delivery contracts providing for
payment and delivery on the date or dates stated in the applicable prospectus
supplement. Such delayed delivery contracts will be subject to only those
conditions set forth in the applicable prospectus supplement. A commission
indicated in the applicable prospectus supplement will be paid to underwriters
and agents soliciting purchases of securities pursuant to delayed delivery
contracts accepted by us.
Agents, underwriters and dealers may be entitled under relevant agreements
with us to indemnification by us against certain liabilities, including
liabilities under the Securities Act, or to contribution with respect to
payments which such agents, underwriters and dealers may be required to make in
respect thereof.
Each series of securities will be a new issue and, other than our common
stock, which is listed on The New York Stock Exchange, will have no established
trading market. We may elect to list any series of securities on an exchange,
and in the case of common stock, on any additional exchange, but, unless
otherwise specified in the applicable prospectus supplement, we shall not be
obligated to do so. No assurance can be given as to the liquidity of the trading
market for any of the securities.
Agents, underwriters and dealers may be customers of, engage in
transactions with, or perform services for, us and our subsidiaries in the
ordinary course of business.
LEGAL MATTERS
The validity of the debt securities offered by this prospectus will be
passed upon for us by Vinson & Elkins L.L.P. The validity of the common stock
offered by this prospectus will be passed upon for us by Commercial Law Group,
P.C. Legal counsel to any underwriters may pass upon legal matters for such
underwriters.
Shannon T. Self, a shareholder in Commercial Law Group, P.C., is a director
of Chesapeake, and he beneficially owns 35,576 shares of our common stock.
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EXPERTS
The consolidated financial statements of Chesapeake Energy Corporation,
incorporated in this prospectus by reference to Chesapeake's annual report on
Form 10-K for the year ended December 31, 2001, and the consolidated financial
statements of Gothic Energy Corporation, incorporated in this prospectus by
reference to Chesapeake's annual report on Form 10-K/A for the year ended
December 31, 2000, have been so incorporated in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
Estimates of the oil and gas reserves of Chesapeake Energy Corporation and
related future net cash flows and the present values thereof, included in
Chesapeake's annual report on Form 10-K for the year ended December 31, 2001,
were based upon reserve reports prepared by Williamson Petroleum Consultants,
Inc., Ryder Scott Company, L.P. and Lee Keeling and Associates, Inc.,
independent petroleum engineers. We have incorporated these estimates in
reliance on the authority of each such firm as experts in such matters.
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