-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, M9mvFTpQaMu4RHFUDgCN9WSdUNw4EeAJEwwHxPBiG1iXZuPbQMcvuTqGsBL8Ut0c wMRwekPO3TDAs61wDpLuog== 0000909334-96-000206.txt : 19961118 0000909334-96-000206.hdr.sgml : 19961118 ACCESSION NUMBER: 0000909334-96-000206 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961114 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHESAPEAKE ENERGY CORP CENTRAL INDEX KEY: 0000895126 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 731395733 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-13726 FILM NUMBER: 96665135 BUSINESS ADDRESS: STREET 1: 6104 N WESTERN CITY: OKLAHOMA CITY STATE: OK ZIP: 73118 BUSINESS PHONE: 4058488000 MAIL ADDRESS: STREET 1: 6104 NORTH WESTERN AVE CITY: OKLAHOMA CITY STATE: OK ZIP: 73118 10-Q 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 1996 [ ] Transition Report pursuant to Section 13 or 15(d) of the Securities Act of 1934 For the transition period from __________ to __________ Commission File No. 1-13726 CHESAPEAKE ENERGY CORPORATION (Exact name of registrant as specified in its charter) Delaware 73-1395733 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 6100 North Western Avenue Oklahoma City, Oklahoma 73118 (Address of principal executive offices) (Zip Code) (405) 848-8000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO At October 31, 1996 there were 30,128,321 shares of the registrant's $.10 par value Common Stock outstanding. PART I. FINANCIAL INFORMATION Index to Financial Statements and Management's Discussion and Analysis Page Chesapeake Energy Corporation: Item 1. Consolidated Financial Statements: Consolidated Balance Sheets at September 30, 1996 and June 30, 1996 Consolidated Statements of Income for the Three Months Ended September 30, 1996 and 1995 Consolidated Statements of Cash Flows for the Three Months Ended September 30, 1996 and 1995 Notes to Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Chesapeake Exploration Limited Partnership: Item 1. Financial Statements Balance Sheets at September 30, 1996 and June 30, 1996 Statements of Income for the Three Months Ended September 30, 1996 and 1995 Statements of Cash Flows for the Three Months Ended September 30, 1996 and 1995 Notes to Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) ASSETS
September 30, June 30, 1996 1996 --------- --------- ($ in thousands) CURRENT ASSETS: Cash and cash equivalents $ 2,444 $ 51,638 Accounts receivable: Oil and gas sales 14,409 12,687 Oil and gas marketing sales 8,413 6,982 Joint interest and other, net of allowance for doubtful accounts of $340,000 19,822 27,661 Related parties 3,007 2,884 Inventory 10,461 5,163 Other 4,694 2,158 --------- -------- Total Current Assets 63,250 109,173 --------- -------- PROPERTY AND EQUIPMENT: Oil and gas properties, at cost based on full cost accounting: Evaluated oil and gas properties 428,309 363,213 Unevaluated properties 185,433 165,441 Less: accumulated depreciation, depletion and amortization (109,749) (92,720) --------- --------- 503,993 435,934 Other property and equipment 19,701 18,162 Less: accumulated depreciation and amortization (3,358) ( 2,922) --------- --------- Total Property and Equipment 520,336 451,174 --------- --------- OTHER ASSETS 11,965 11,988 --------- --------- TOTAL ASSETS $595,551 $572,335 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable and current maturities of long-term debt $ 10,642 $ 6,755 Accounts payable 56,946 54,514 Accrued liabilities and other 13,869 14,062 Revenues and royalties due others 28,200 33,503 --------- --------- Total Current Liabilities 109,657 108,834 --------- --------- LONG-TERM DEBT, NET 277,323 268,431 --------- --------- REVENUES AND ROYALTIES DUE OTHERS 5,588 5,118 --------- --------- DEFERRED INCOME TAXES 16,326 12,185 --------- --------- CONTINGENCIES AND COMMITMENTS - - STOCKHOLDERS' EQUITY: Preferred Stock, $.01 par value, 2,000,000 shares authorized; 0 shares issued and outstanding - - Common Stock, $.10 par value, 45,000,000 shares authorized at September 30, 1996; 30,126,372 and 30,079,913 shares issued and outstanding at September 30, 1996 and June 30, 1996, respectively 3,013 3,008 Paid-in capital 137,463 136,782 Accumulated earnings 46,181 37,977 --------- --------- Total Stockholders' Equity 186,657 177,767 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $595,551 $572,335 ========= ========= The accompanying notes are an integral part of these consolidated financial statements.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended September 30, ------------------- 1996 1995 ------ ------ ($ in thousands, except per share data) REVENUES: Oil and gas sales $36,753 $19,831 Oil and gas marketing sales 12,184 - Oil and gas service operations - 2,157 Interest and other 848 1,514 ------- ------- Total Revenues 49,785 23,502 ------- ------- COSTS AND EXPENSES: Production expenses and taxes 2,530 1,696 Oil and gas marketing expenses 11,866 - Oil and gas service operations - 1,852 Oil and gas depreciation, depletion and amortization 17,029 10,435 Depreciation and amortization of other assets 952 696 General and administrative 1,671 941 Interest 2,817 3,363 ------- ------- Total Costs and Expenses 36,865 18,983 ------- ------- INCOME BEFORE INCOME TAXES 12,920 4,519 INCOME TAX EXPENSE Current - - Deferred 4,716 1,604 ------- ------- Total Income Tax Expense 4,716 1,604 ------- ------- NET INCOME $ 8,204 $ 2,915 ======= ======= NET INCOME PER COMMON SHARE: Primary $ .26 $ .10 ======= ======= Fully-diluted $ .26 $ .10 ======= ======= WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING: Primary 32,129 28,526 ======= ======= Fully-diluted 32,169 28,772 ======= ======= The accompanying notes are an integral part of these consolidated financial statements.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended September 30, ------------------- 1996 1995 ----- ----- ($ in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 8,204 $ 2,915 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and amortization 17,545 10,833 Deferred taxes 4,716 1,604 Amortization of loan costs 436 298 Amortization of bond discount 142 140 Gain (loss) on sale of fixed assets and other 6 (433) Investments in securities (2,912) (713) Other adjustments (206) - Changes in current assets and liabilities (1,978) 2,741 -------- -------- Cash provided by operating activities 25,953 17,385 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Exploration, development and acquisition of oil and gas properties (87,350) (46,004) Proceeds from sale of assets 8,642 4,247 Investment in service operations (2,545) - Additions to property, equipment and other (1,870) (979) -------- -------- Cash used in investing activities (83,123) (42,736) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from long-term borrowings 10,000 - Payments on long-term borrowings (2,135) (1,016) Cash received from exercise of stock options 191 113 Other (80) - -------- -------- Cash provided by financing activities 7,976 (903) -------- -------- NET DECREASE IN CASH AND CASH EQUIVALENTS (49,194) (26,254) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 51,638 55,535 -------- -------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,444 $29,281 ======== ======== The accompanying notes are an integral part of these consolidated financial statements.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1996 (unaudited) 1. Accounting Principles The accompanying unaudited consolidated financial statements of Chesapeake Energy Corporation and Subsidiaries (the "Company") have been prepared in accordance with the instructions to Form 10-Q as prescribed by the Securities and Exchange Commission. All material adjustments (consisting solely of normal recurring adjustments) which, in the opinion of management, are necessary for a fair presentation of the results for the interim periods have been reflected. The results for the three months ended September 30, 1996, are not necessarily indicative of the results for the full fiscal year. As used in this Form 10-Q, the terms "Restricted Subsidiaries" and "Subsidiary Guarantors" include Chesapeake Operating, Inc. ("COI"), Lindsay Oil Field Supply, Inc., Sander Trucking Company, Inc., Whitmire Dozer Service, Inc., and Chesapeake Exploration Limited Partnership ("CEX"), and the terms "Unrestricted Subsidiaries" and "Non-Guarantor Subsidiaries" include Chesapeake Gas Development Corporation ("CGDC") and Chesapeake Energy Marketing, Inc. ("CEM"), each of which is a direct or indirect wholly owned subsidiary of the Company. 2. Recent Events On October 28, 1996 the Company filed a registration statement with the Securities and Exchange Commission with respect to a proposed public offering of 3,250,000 shares of Common Stock of the Company (3,737,500 shares if the underwriters' over-allotment option is fully exercised). The Company intends to use the net proceeds from the offering to reduce debt, to fund expanded exploration and development capital expenditures and for general corporate purposes. On October 15, 1996, Union Pacific Resources Company ("UPRC") filed suit against the Company in the United States District Court for the Northern District of Texas alleging (a) infringement of UPRC's claimed patent (the "UPRC patent") for an invention involving a method of maintaining a bore hole in a stratigraphic zone during drilling, and (b) tortious interference with contracts between UPRC and a third party vendor (the "Vendor") regarding the confidentiality of proprietary information of UPRC. UPRC is seeking injunctive relief, damages of an unspecified amount, including actual, enhanced, consequential and punitive damages, interest, costs and attorney's fees. The Company believes that it has meritorious defenses to UPRC's allegations, including, without limitation, the Company's belief that the UPRC Patent is invalid. The Company will vigorously defend the lawsuit. No assurance can be given as to the outcome of the matter or the ultimate impact on the Company of any damages (which could be substantial) that may be awarded to UPRC because litigation is inherently uncertain. 3. Senior Notes 12% Notes The Company has outstanding $47.5 million in aggregate principal amount of 12% Notes which mature in March 2001. The 12% Notes bear interest at an annual rate of 12%, payable semiannually on each March 1 and September 1. The 12% Notes are senior obligations of the Company and are secured by a pledge of all of the issued and outstanding capital stock of, and partnership interests in, the Company=s Restricted Subsidiaries. In addition, the 12% Notes are fully and unconditionally guaranteed, jointly and severally, by the Restricted Subsidiaries. The only subsidiary's securities which constitute a substantial portion of the collateral for the 12% Notes are the partnership interests in CEX, a limited partnership which is 10% owned by COI, as the sole general partner, and 90% owned directly by the Company, as the sole limited partner. Separate financial statements of CEX are presented elsewhere in this Form 10-Q. 10 1/2% Notes The Company has outstanding $90 million in aggregate principal amount of 10 1/2% Notes which mature June 2002. The 10 1/2% Notes bear interest at an annual rate of 10 1/2%, payable semiannually on each June 1 and December 1. The 10 1/2% Notes are senior, unsecured obligations of the Company, and are fully and unconditionally guaranteed, jointly and severally, by the Company's Restricted Subsidiaries. 9 1/8% Notes On April 9, 1996 the Company issued $120 million in aggregate principal amount of 9 1/8% Senior Notes due 2006 which mature April 15, 2006. The 9 1/8% Notes bear interest at an annual rate of 9 1/8%, payable semiannually on each April 15 and October 15, commencing October 15, 1996. The 9 1/8% Notes are senior, unsecured obligations of the Company, and are fully and unconditionally guaranteed, jointly and severally, by the Company's Restricted Subsidiaries. Set forth below are condensed consolidating financial statements of CEX, the other Subsidiary Guarantors, all Subsidiary Guarantors combined, the Non-Guarantor Subsidiaries and the Company. The CEX limited partnership condensed financial statements were prepared on a separate entity basis as reflected in the Company's books and records and include all material costs of doing business as if the partnership were on a stand-alone basis except that interest is not charged or allocated on intercompany advances. No provision has been made for income taxes because the partnership is not a tax paying entity. Separate financial statements of each Subsidiary Guarantor, other than CEX, have not been provided because management has determined they are not material to investors. CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1996 (unaudited) CONDENSED CONSOLIDATING BALANCE SHEET AS OF SEPTEMBER 30, 1996 ($ in thousands)
SUBSIDIARY GUARANTORS --------------------------------- All Non-Guarantor Company CEX Others Combined Subsidiaries (Parent) Eliminations Consolidated --- ------ -------- ------------ -------- ------------ ------------ ASSETS ------ CURRENT ASSETS: Cash and cash equivalents $ - $(11,972) $(11,972) $ 5,999 $ 8,417 $ - $ 2,444 Accounts receivable, net 18,685 20,969 39,654 9,478 - (3,481) 45,651 Inventory - 10,381 10,381 80 - - 10,461 Other 1,066 655 1,721 46 2,927 - 4,694 ---------- --------- --------- -------- -------- ----------- -------- Total Current Assets 19,751 20,033 39,784 15,603 11,344 (3,481) 63,250 ---------- --------- --------- -------- -------- ----------- -------- PROPERTY AND EQUIPMENT: Oil and gas properties 409,286 (5,589) 403,697 24,612 - - 428,309 Unevaluated leasehold 185,433 - 185,433 - - - 185,433 Other property and equipment - 10,106 10,106 68 9,527 - 19,701 Less: accumulated depreciation, depletion and amortization (101,099) (2,846) (103,945) (8,650) (512) - (113,107) ---------- -------- --------- -------- -------- ----------- --------- Total Property & Equipment 493,620 1,671 495,291 16,030 9,015 - 520,336 ---------- -------- --------- -------- -------- ----------- --------- INVESTMENTS IN SUBSIDIARIES AND INTERCOMPANY ADVANCES 64,934 524,033 588,967 6,266 429,908 (1,025,141) - ---------- -------- ---------- -------- -------- ------------ -------- OTHER ASSETS 762 1,818 2,580 939 8,446 - 11,965 ---------- --------- ----------- -------- -------- ----------- -------- TOTAL ASSETS $579,067 $547,555 $1,126,622 $ 38,838 $458,713 $(1,028,622) $595,551 ========== ========= ========== ========= ========= ============ ======== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES: Notes payable and current maturities of long-term debt $ - $ 8,002 $ 8,002 $ 2,610 $ 30 $ - $ 10,642 Accounts payable and other 2,105 82,350 84,455 9,315 8,726 (3,481) 99,015 ---------- -------- ---------- -------- -------- ------------ ------- Total Current Liabilities 2,105 90,352 92,457 11,925 8,756 (3,481) 109,657 ---------- -------- ---------- -------- -------- ------------ ------- LONG-TERM DEBT 10,000 1,502 11,502 9,390 256,431 - 277,323 ---------- -------- ---------- -------- -------- ------------ ------- REVENUES PAYABLE - 5,588 5,588 - - - 5,588 ---------- -------- ---------- -------- -------- ------------ -------- DEFERRED INCOME TAXES - 26,086 26,086 540 (10,300) - 16,326 ---------- -------- ---------- -------- -------- ------------ ------- INTERCOMPANY PAYABLES 465,046 460,636 925,682 8,039 87,650 (1,021,371) - ---------- -------- ---------- -------- -------- ------------- -------- STOCKHOLDERS' EQUITY: Common Stock - 117 117 2 2,896 (2) 3,013 Other 101,916 (36,726) 65,190 8,942 113,280 (3,768) 183,644 ---------- --------- ---------- -------- -------- ------------ -------- Total Stockholders' Equity 101,916 (36,609) 65,307 8,944 116,176 (3,770) 186,657 ---------- --------- ---------- -------- -------- ------------ -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $579,067 $547,555 $1,126,622 $ 38,838 $458,713 $(1,028,622) $595,551 ========== ======== ========== ========= ======== ============ =========
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1996 (unaudited) CONDENSED CONSOLIDATING BALANCE SHEET AS OF JUNE 30, 1996 ($ in thousands)
SUBSIDIARY GUARANTORS ---------------------------------- All Non-Guarantor Company CEX Others Combined Subsidiaries (Parent) Eliminations Consolidated --------- -------- --------- ------------ -------- ------------ ------------ ASSETS ------ CURRENT ASSETS: Cash and cash equivalents $ - $ 4,061 $ 4,061 $ 2,751 $ 44,826 $ - $ 51,638 Accounts receivable, net 14,778 29,302 44,080 7,723 - (1,589) 50,214 Inventory - 4,947 4,947 216 - - 5,163 Other 1,891 264 2,155 3 - - 2,158 -------- -------- ---------- -------- -------- -------- -------- Total Current Assets 16,669 38,574 55,243 10,693 44,826 (1,589) 109,173 -------- -------- ---------- -------- -------- -------- -------- PROPERTY AND EQUIPMENT: Oil and gas properties 346,821 (8,211) 338,610 24,603 - - 363,213 Unevaluated leasehold 165,441 - 165,441 - - - 165,441 Other property and equipment - 9,608 9,608 61 8,493 - 18,162 Less: accumulated depreciation, depletion and amortization (84,726) (2,467) (87,193) (8,007) (442) - (95,642) ------- -------- -------- -------- ------- -------- -------- Total Property & Equipment 427,536 (1,070) 426,466 16,657 8,051 - 451,174 ------- -------- -------- -------- ------- -------- ------- INVESTMENTS IN SUBSIDIARIES AND INTERCOMPANY ADVANCES 56,055 463,331 519,386 8,132 382,388 (909,906) - ------ ------- ---------- -------- -------- --------- -------- OTHER ASSETS 694 1,616 2,310 940 8,738 - 11,988 ------- -------- -------- -------- -------- --------- -------- TOTAL ASSETS $500,954 $502,451 $1,003,405 $ 36,422 $444,003 $(911,495) $572,335 ======== ======== ========== ======== ======== ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES: Notes payable and current maturities of long-term debt $ - $ 3,846 $ 3,846 $ 2,880 $ 29 $ - $ 6,755 Accounts payable and other 789 90,280 91,069 7,339 5,260 (1,589) 102,079 -------- -------- ---------- -------- -------- ---------- ------- Total Current Liabilities 789 94,126 94,915 10,219 5,289 (1,589) 108,834 -------- -------- ---------- -------- -------- ---------- ------- LONG-TERM DEBT - 2,113 2,113 10,020 256,298 - 268,431 -------- -------- ---------- -------- -------- ---------- ------- REVENUES PAYABLE - 5,118 5,118 - - - 5,118 -------- -------- ---------- -------- -------- ---------- ------- DEFERRED INCOME TAXES - 23,950 23,950 1,335 (13,100) - 12,185 -------- -------- ---------- -------- -------- ---------- ------- INTERCOMPANY PAYABLES 413,726 410,581 824,307 8,182 73,647 (906,136) - -------- -------- ---------- -------- -------- ---------- ------- STOCKHOLDERS' EQUITY: Common Stock - 117 117 2 2,891 (2) 3,008 Other 86,439 (33,554) 52,885 6,664 118,978 (3,768) 174,759 -------- -------- ---------- -------- -------- --------- -------- Total Stockholders' Equity 86,439 (33,437) 53,002 6,666 121,869 (3,770) 177,767 -------- -------- ---------- -------- -------- --------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $500,954 $502,451 $1,003,405 $ 36,422 $444,003 $(911,495) $572,335 ======== ======== ========== ======== ======== ========= ========
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1996 (unaudited) CONDENSED CONSOLIDATING STATEMENTS OF INCOME ($ in thousands)
SUBSIDIARY GUARANTORS ------------------------------ All Non-Guarantor Company CEX Others Combined Subsidiaries (Parent) Eliminations Consolidated -------- ------- ------- ------- ------- ----------- ------------ September 30, 1996: REVENUES: Oil and gas sales $ 34,789 $ - $34,789 $ 1,691 $ - $ 273 $36,753 Oil and gas marketing sale - - - 21,914 - (9,730) 12,184 Interest and other - 115 115 409 324 - 848 -------- ------- ------- ------- -------- --------- ------- Total Revenues 34,789 115 34,904 24,014 324 (9,457) 49,785 -------- ------- ------- ------- -------- --------- ------- COSTS AND EXPENSES: Production expenses and taxe 2,432 (85) 2,347 183 - - 2,530 Oil and gas marketing expenses - - - 21,323 - (9,457) 11,866 Oil and gas depreciation, depletion and amortization 16,373 - 16,373 656 - - 17,029 Other depreciation and amortization 107 427 534 31 387 - 952 General and administrative 198 975 1,173 236 262 - 1,671 Interest and other 11 22 33 105 2,679 - 2,817 ------ ------- ------- ------- -------- --------- ------- Total Costs & Expenses 19,121 1,339 20,460 22,534 3,328 (9,457) 36,865 -------- ------- ------- ------- -------- --------- ------- INCOME (LOSS) BEFORE INCOME TAXE 15,668 (1,224) 14,444 1,480 (3,004) - 12,920 INCOME TAX EXPENSE (BENEFIT) - 5,272 5,272 540 (1,096) - 4,716 -------- ------- ------- ------- -------- --------- ------- NET INCOME (LOSS) $15,668 $(6,496) $ 9,172 $ 940 $(1,908) $ - $ 8,204 ======== ======= ======= ======= ======== ========= ======= For the Three Months Ended September 30, 1995: REVENUES: Oil and gas sales $18,609 $ (1) $18,608 $ 1,223 $ - $ - $19,831 Oil and gas service operation - 2,157 2,157 - - - 2,157 Interest and other - 1,021 1,021 - 493 - 1,514 -------- ------- ------- ------- -------- --------- ------- Total Revenues 18,609 3,177 21,786 1,223 493 - 23,502 -------- ------- ------- ------- -------- --------- ------- COSTS AND EXPENSES: Production expenses and taxes 1,405 143 1,548 148 - - 1,696 Oil and gas service operation - 1,852 1,852 - - - 1,852 Oil and gas depreciation, depletion and amortization 9,880 - 9,880 555 - - 10,435 Other depreciation and amortization 54 378 432 5 259 - 696 General and administrative 258 560 818 29 94 - 941 Interest and other 12 27 39 185 3,139 - 3,363 -------- ------- ------- ------- -------- --------- ------- Total Costs & Expenses 11,609 2,960 14,569 922 3,492 - 18,983 -------- ------- ------- ------- -------- --------- ------- INCOME (LOSS) BEFORE INCOME TAX 7,000 217 7,217 301 (2,999) - 4,519 INCOME TAX EXPENSE - 1,604 1,604 - - - 1,604 -------- -------- ------- ------- -------- --------- ------- NET INCOME (LOSS) $ 7,000 $ (1,387) $ 5,613 $ 301 $(2,999) $ - $ 2,915 ======== ======== ======= ======= ======== ========= =======
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1996 (unaudited) CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS ($ in thousands)
SUBSIDIARY GUARANTORS --------------------------------- All Non-Guarantor Company CEX Others Combined Subsidiaries (Parent) Eliminations Consolidated -------- ------- -------- ------------ --------- ------------ ------------ For the Three Months Ended September 30, 1996: CASH FLOWS FROM OPERATING ACTIVITIES $ 32,274 $(4,607) $27,667 $ 222 $ (1,936) $ - $ 25,953 -------- ------- ------- -------- -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Oil and gas properties (82,457) (4,884) (87,341) (9) - - (87,350) Proceeds from sale of assets - 8,642 8,642 - - - 8,642 Investment in service operations - (2,545) (2,545) - - - (2,545) Other additions (611) (585) (1,196) (49) (625) - (1,870) -------- ------- ------- -------- -------- -------- -------- (83,068) 628 (82,440) (58) (625) - (83,123) -------- ------- ------- -------- -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from long-term borrowings 10,000 - 10,000 - - - 10,000 Payments on borrowings - (1,230) (1,230) (900) (5) - (2,135) Cash received from exercise of stock options - - - - 191 - 191 Other - - - - (80) - (80) Intercompany advances, net 40,794 (10,824) 29,970 3,984 (33,954) - - -------- ------- ------- -------- -------- -------- -------- 50,794 (12,054) 38,740 3,084 (33,848) - 7,976 -------- ------- ------- -------- -------- -------- -------- Net increase (decrease) in cash and cash equivalents - (16,033) (16,033) 3,248 (36,409) - (49,194) Cash, beginning of period - 4,061 4,061 2,751 44,826 - 51,638 -------- -------- -------- ------- ------- -------- -------- Cash, end of period $ - $(11,972) $(11,972) $ 5,999 $ 8,417 $ - $ 2,444 ======== ======== ======== ======= ======= ======== ======== For the Three Months Ended September 30, 1995: CASH FLOWS FROM OPERATING ACTIVITIES $ 18,995 $ 470 $19,465 $ 852 $(2,932) $ - $ 17,385 -------- -------- ------- ------- ------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Oil and gas properties (46,004) - (46,004) - - - (46,004) Proceeds from sale of assets 107 4,140 4,247 - - - 4,247 Other additions (39) (481) (520) (10) (449) - (979) ------- -------- ------- ------- ------- -------- -------- (45,936) 3,659 (42,277) (10) (449) - (42,736) ------- -------- ------- ------- ------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Payments on borrowings - (309) (309) (700) (7) - (1,016) Cash received from exercise of stock options - - - - 113 - 113 Intercompany advances, net 26,941 (29,677) (2,736) 73 2,663 - - ------- -------- ------- ------- ------- -------- -------- 26,941 (29,986) (3,045) (627) 2,769 - (903) ------- -------- ------- ------- ------- -------- -------- Net increase (decrease)in cash and cash equivalents - (25,857) (25,857) 215 (612) - (26,254) Cash, beginning of period - 53,227 53,227 5 2,303 - 55,535 -------- -------- ------- ------- ------- -------- ------- Cash, end of period $ - $27,370 $27,370 $ 220 $ 1,691 $ - $29,281 ======== ======== ======= ======= ======= ======== =======
PART I. FINANCIAL INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RECENT EVENTS On October 28, 1996 the Company filed a registration statement with the Securities and Exchange Commission with respect to a proposed public offering of 3,250,000 shares of Common Stock of the Company (3,737,500 shares if an over-allotment option granted by the Company to the underwriters is exercised in full). The Company intends to use approximately $53 million of the net proceeds to purchase or otherwise satisfy the Company's obligations in respect of $47.5 million principal amount of the Company's outstanding 12% Senior Notes and such additional amounts as may be necessary to fully repay the outstanding balance of its bank revolving credit facility. The balance of the net proceeds will be used to fund expanded exploration and development capital expenditures and for general corporate purposes. The prepayment of the Company's 12% Senior Notes, together with repayment of the amount outstanding under the bank revolving credit facility, will result in an extraordinary charge to the Company of approximately $7 million, net of tax. The Company anticipates, subject to the completion of the pending Common Stock offering, to record this extraordinary charge to earnings in the Company's quarter ending December 31, 1996. In October 1996, a patent infringement suit was filed against the Company by Union Pacific Resources Company. Management believes that the Company has meritorious defenses to this action, although the Company is unable to predict the ultimate outcome of this lawsuit because litigation is inherently uncertain. See Part II, Item 1 - Legal Proceedings. THREE MONTHS ENDED SEPTEMBER 30, 1996 VS. SEPTEMBER 30, 1995 Net income for the three months ended September 30, 1996 (the "Current Quarter") was $8.2 million, a $5.3 million increase from net income of $2.9 million for the quarter ended September 30, 1995 (the "Prior Quarter"). This increase was caused primarily by the Company's significantly higher oil and gas production and increases in oil and gas sales prices. Revenues from oil and gas sales for the Current Quarter were $36.8 million, an increase of $17.0 million, or 86%, from the Prior Quarter. Gas production increased to 15.3 billion cubic feet ("Bcf"), an increase of 4.6 Bcf, or 43%, compared to the Prior Quarter. Oil production increased 156 thousand barrels ("MBbls"), or 46%, from 342 MBbls to 498 MBbls. The increase in oil and gas production was accompanied by increases in the average oil and gas prices realized. In the Current Quarter, the Company received an average oil price of $21.19 per barrel ("Bbl") net of hedging losses of $0.7 million, an increase of $4.55 per Bbl, or 27%, from the $16.64 per Bbl realized in the Prior Quarter. Gas price realizations increased to $1.71 per thousand cubic feet ("Mcf") in the Current Quarter net of hedging losses of $4.9 million, an increase of 30% from the $1.32 per Mcf realized in the Prior Quarter. The following table sets forth oil and gas production for the Company's primary operating areas during the Current Quarter.
Oil Gas Total Percent Operating Areas Wells (MBls) (MMcf) (MMcfe) % --------------- --------- ------ ------ -------- ------- Giddings 185 137 10,785 11,606 63% Southern Oklahoma 192 144 2,965 3,830 21% Louisiana Trend 15 154 777 1,701 9% All Other 121 63 797 1,175 7% -------- ------ ------ ------- ------- Total 513 498 15,324 18,312 100% ======== ====== ====== ======= ======= Includes wells being drilled at September 30, 1996.
Revenues from the Company's oil and gas marketing operations in the Current Quarter, which commenced in December 1995 with the purchase of Chesapeake Energy Marketing, Inc. ("CEM"), were $12.2 million. Oil and gas marketing expenses were $11.9 million, resulting in a gross profit margin during the Current Quarter of $0.3 million, as compared to no activity in the Prior Quarter. The Company had no revenues or expenses for oil and gas service operations in the Current Quarter, as a result of the sale of this business in June 1996 to Peak USA Energy Services, Ltd. ("Peak"). Peak is a limited partnership formed by Peak Oilfield Services Company (a joint venture between Cook Inlet Region, Inc. and Nabors Industries, Inc.) and the Company. As a result of this investment, the Company recorded $84,000 in net profit in interest and other revenue in the Current Quarter, utilizing the equity accounting method. Production expenses and taxes increased to $2.5 million in the Current Quarter from $1.7 million in the Prior Quarter. This increase was the result of a significant increase in oil and gas production volumes during the Current Quarter. On a gas equivalent production unit ("Mcfe") basis, production expenses and taxes were $0.14 per Mcfe in the Current Quarter compared to $0.13 per Mcfe in the Prior Quarter. Much of the Company's gas production from wells drilled before September 1996 in the downdip Giddings Field qualifies for exemption from Texas state production taxes for production through August 31, 2001. Additionally, certain oil and gas production from the Company's wells in the Knox and Sholem Alechem fields in Oklahoma and the Louisiana Austin Chalk Trend qualifies for production tax exemption until well costs are recovered. These exemptions, combined with the fact that many of the Company's wells are high volume gas wells that tend to have lower operating costs per Mcfe than lower volume wells, result in the Company's historically low production costs per Mcfe. The Company expects that operating costs in fiscal 1997 will increase because of the Company's expansion of drilling efforts into the Louisiana Trend and the Williston Basin, both of which are oil prone areas with significant associated water production which results in higher operating costs than gas prone areas, and because limited severance tax exemptions will be available in these areas as compared to existing exemptions in the Giddings Field. Depreciation, depletion and amortization ("DD&A") of oil and gas properties for the Current Quarter was $17.0 million, an increase of $6.6 million from the Prior Quarter. The increase in DD&A expense for oil and gas properties between quarters is the result of a 5.6 billion cubic feet equivalent ("Bcfe") increase in production volumes and an increase in the DD&A rate per Mcfe. The average DD&A rate per Mcfe, a function of capitalized and estimated future development costs and the related proved reserves, was $0.93 for the Current Quarter and $0.82 for the Prior Quarter. The Company believes the DD&A rate will increase during fiscal 1997 based on projected higher finding costs for wells drilled in the Louisiana Trend. Depreciation and amortization of other assets increased to $1.0 million in the Current Quarter as compared to $0.7 million in the Prior Quarter. This increase is primarily the result of higher amortization expense related to debt issuance costs, and higher depreciation related to the Company's acquisition of additional buildings in its Oklahoma City office complex. General and administrative expenses increased to $1.7 million during the Current Quarter, a $0.8 million, or 89%, increase from the Prior Quarter. This increase is the result of the continued growth of the Company. On an Mcfe basis, general and administrative expenses were $0.09 per Mcfe in the Current quarter as compared to $0.07 per Mcfe in the Prior Quarter. The Company capitalized $0.7 million and $0.3 million of payroll and other internal costs directly related to oil and gas exploration and development activities, net of partner reimbursements, in the Current Quarter and Prior Quarter, respectively. Interest expense decreased to $2.8 million during the Current Quarter, a $0.6 million decrease from the Prior Quarter, as a result of higher levels of interest capitalized during the Current Quarter. During the Current Quarter, the Company capitalized $4.2 million of interest costs representing the estimated costs to carry its unevaluated leasehold inventory, compared to $0.9 million in the Prior Quarter. This increase in capitalized interest costs is the result of larger investments being carried during the Current Quarter in leasehold that has yet to be evaluated than in the Prior Quarter. Income tax expense increased to $4.7 million in the Current Quarter from $1.6 million in the Prior Quarter. The Company's estimated effective income tax rate was 36.5% for the Current Quarter, compared to 35.5% for the Prior Quarter. The Company estimates its effective rate based on anticipated levels of income for the year and estimated production in excess of that allowed in computing statutory depletion for tax purposes. The provision for income tax expense is deferred because the Company is not currently a cash income taxpayer. The Company has significant tax net operating loss carryforwards generated from the intangible drilling cost deduction for income tax purposes associated with the Company's drilling activities which are available to offset regular taxable income in the future. HEDGING ACTIVITIES Periodically the Company utilizes hedging strategies to hedge the price of a portion of its future oil and gas production. These strategies include swap arrangements that establish an index-related price above which the Company pays the hedging partner and below which the Company is paid by the hedging partner, the purchase of index-related puts that provide for a "floor" price to the Company to be paid by the counter-party to the extent the price of the commodity is below the contracted floor, and basis protection swaps. Results from hedging transactions are reflected in oil and gas sales to the extent related to the Company's oil and gas production. The Company has the following oil swap arrangements for periods after the Current Quarter:
Monthly NYMEX-Index Month Volume(Bbls) Strike Price (per Bbl) ----- ------------ ---------------------- October 1996 31,000 $17.69 November 1996 30,000 $17.65 December 1996 31,000 $17.62 December 1996 62,000 $23.89 January 1997 31,000 $20.01 January 1997 62,000 $23.27 February 1997 28,000 $19.72 February 1997 56,000 $22.74 March 1997 31,000 $19.46 April 1997 30,000 $19.22 May 1997 31,000 $18.97 June 1997 30,000 $18.79 July 1997 31,000 $18.60 August 1997 31,000 $18.43 September 1997 30,000 $18.30 October 1997 31,000 $18.19 November 1997 30,000 $18.13 December 1997 31,000 $18.08
The Company has the following gas swap arrangements for periods after the Current Quarter:
Monthly Houston Ship Channel Months Volume (MMBtu) Index Strike Price (per MMBtu) ------ -------------- ------------------------------ March 1997 620,000 $2.222 April 1997 600,000 $2.022 May 1997 620,000 $1.937
The Company has the following gas floor arrangements for periods after the Current Quarter:
Monthly Houston Ship Channel Months Volume(MMBtu) Index Strike Price (per MMBtu) ------ ------------- ------------------------------ November 1996 600,000 $2.175 December 1996 620,000 $2.255 January 1997 620,000 $2.260 February 1997 560,000 $2.155
Gains or losses on the crude oil and natural gas hedging transactions are recognized as price adjustments in the month of related production. The Company estimates that had all of the crude oil and natural gas swap agreements in effect for production periods beginning October 1, 1996 terminated on October 25, 1996, based on the closing prices for NYMEX futures contracts as of that date, the Company would have paid the counterparty approximately $1.8 million, which would have represented the "fair value" at that date. These agreements were not terminated. CAPITAL RESOURCES AND LIQUIDITY On October 28, 1996 the Company filed a registration statement with the Securities and Exchange Commission with respect to a proposed public offering of 3,250,000 shares of Common Stock of the Company (3,737,500 shares if an over-allotment option granted by the Company to the underwriters is exercised in full). The Company intends to use approximately $53 million of the net proceeds to purchase or otherwise satisfy the Company's obligations in respect of $47.5 million principal amount of the Company's outstanding 12% Senior Notes and such additional amounts as may be necessary to fully repay the outstanding balance of its bank revolving credit facility. The outstanding balance was $10 million at September 30, 1996 and $35 million as of October 31, 1996. The balance of the net proceeds will be used to fund expanded exploration and development capital expenditures and for general corporate purposes. As of September 30, 1996 the Company had a working capital deficit of $46.4 million. This deficit was created as a result of the Company's capital expenditure program for acreage acquisition and exploratory and development drilling expenditures exceeding the Company's cash flow from operations. The Company had credit availability under its revolving credit facility at September 30, 1996 to satisfy this working capital deficit. The Company's cash provided by operating activities increased to $26.0 million during the Current Quarter, compared to $17.4 million during the Prior Quarter. The increase of $8.6 million is the result of increases in net income, adjusted for non-cash charges (such as DD&A and deferred income taxes), and cash provided by changes in current assets and current liabilities between the two periods. Net cash used in investing activities increased to $83.1 million in the Current Quarter, up from $42.7 million in the Prior Quarter. The $40.4 million increase is a result of the Company's increased drilling activity and increased investment in leasehold during the Current Quarter. The Company's expected cash flow from operations is subject to a number of factors, many of which are beyond the Company's control, including the level of production and oil and gas prices. In the event the Company experiences unforeseen changes in its working capital position or capital resources, management will revise its capital expenditure program accordingly. The Company has budgeted approximately $300 million for exploratory and developmental drilling, acreage acquisition and general corporate purposes for fiscal 1997. The Company may increase this budget if favorable drilling results continue, oil and gas prices remain firm, and the pending equity offering is consummated. The capital expenditure budget is largely discretionary, and can be adjusted by the Company based on operating results, capital availability or other factors. Consolidated cash provided by financing activities was $8.0 million during the Current Quarter, as compared to consolidated cash used by financing activities of $1.0 million during the Prior Quarter. The increase resulted primarily from additional borrowings under the Company's revolving and term credit facilities during the Current Period. FORWARD LOOKING STATEMENTS All statements other than statements of historical fact contained in this Form 10-Q, including statements in "Management's Discussion and Analysis of Financial Condition and Results of Operations" are forward-looking statements. When used herein, the words "budget", "budgeted", "anticipate", "expects", "believes", "seeks", "goals", "intends", or "projects" and similar expressions are intended to identify forward-looking statements. It is important to note that Chesapeake's actual results could differ materially from those projected by such forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, no assurance can be given that such expectations will prove correct. Factors that could cause the Company's results to differ materially from the results discussed in such forward-looking statements include but are not limited to the following: production variances from expectations, volatility of oil and gas prices, the need to develop and replace its reserves, the substantial capital expenditures required to fund its operations, environmental risks, drilling and operating risks, risks related to exploration and development drilling, uncertainties about estimates of reserves, competition government regulation, and the ability of the Company to implement its business strategy. All forward-looking statements in this document are expressly qualified in their entirety by the cautionary statements in this paragraph. CHESAPEAKE EXPLORATION LIMITED PARTNERSHIP (a wholly-owned partnership of Chesapeake Energy Corporation) BALANCE SHEETS (Unaudited) ASSETS
September 30, June 30, 1996 1996 ------------- ---------- ($ in thousands) CURRENT ASSETS: Accounts receivable $ 18,685 $ 14,778 Prepaid expenses 1,066 1,891 -------- -------- Total Current Assets 19,751 16,669 -------- -------- PROPERTY AND EQUIPMENT: Oil and gas properties, at cost based on full cost accounting: Evaluated oil and gas properties 409,286 346,821 Unevaluated properties 185,433 165,441 Less: accumulated depreciation, depletion and amortization (101,099) ( 84,726) -------- -------- Total Property and Equipment 493,620 427,536 -------- -------- INTERCOMPANY RECEIVABLES: Chesapeake Energy Corporation 56,538 47,502 Chesapeake Gas Development Corporation 8,015 8,171 Other 381 382 -------- -------- 64,934 56,055 OTHER ASSETS 762 694 -------- -------- TOTAL ASSETS $579,067 $500,954 ======== ======== LIABILITIES AND PARTNERS' CAPITAL CURRENT LIABILITIES: Accrued Expenses $ 2,105 $ 789 -------- -------- Total Current Liabilities 2,105 789 -------- -------- LONG-TERM DEBT 10,000 - -------- -------- INTERCOMPANY PAYABLES: Chesapeake Operating, Inc. 462,856 411,536 Lindsay Oil Field Supply, Inc. 2,190 2,190 -------- -------- 465,046 413,726 -------- -------- CONTINGENCIES AND COMMITMENTS PARTNERS' CAPITAL: Contributions 424 424 Accumulated Earnings 101,492 86,015 -------- -------- Total Partners' Capital 101,916 86,439 -------- -------- TOTAL LIABILITIES & PARTNERS' CAPITAL $579,067 $500,954 ======== ========
The accompanying notes are an integral part of these financial statements. CHESAPEAKE EXPLORATION LIMITED PARTNERSHIP (a wholly-owned partnership of Chesapeake Energy Corporation) STATEMENTS OF INCOME (Unaudited)
Three Months Ended September 30, ------------------ 1996 1995 ------ ------ ($ in thousands) REVENUES: Oil and gas sales $34,789 $18,609 ------- ------- Total revenues 34,789 18,609 ------- ------- COSTS AND EXPENSES: Production expenses and taxes 2,432 1,405 Oil and gas depreciation, depletion and amortization 16,373 9,880 Amortization 107 54 General and administrative 198 258 Interest expense and other 11 12 ------- ------- Total costs and expenses 19,121 11,609 ------- ------- NET INCOME $15,668 $ 7,000 ======= =======
The accompanying notes are an integral part of these financial statements. CHESAPEAKE EXPLORATION LIMITED PARTNERSHIP (a wholly-owned partnership of Chesapeake Energy Corporation) STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended September 30, ------------------ 1996 1995 ------ -------- ($ in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 15,668 $ 7,000 Adjustments to reconcile net income to net cash provided by operating activities: Oil and gas depreciation 16,373 9,636 Amortization 107 54 Changes in current assets and liabilities 126 2,305 ------- ------- Cash provided by operating activities 32,274 18,995 ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Development and acquisition of oil and gas properties (82,457) (46,004) Proceeds from sale of assets - 107 Other additions (611) (39) ------- ------- Cash used in investing activities (83,068) (45,936) ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from long-term borrowings 10,000 - Intercompany advances 94,198 45,124 Intercompany payments (53,404) (18,183) Cash provided by financing activities 50,794 26,941 ------- ------- Net increase (decrease) in cash - - Cash & cash equivalents, beginning of period - - ------- ------- Cash & cash equivalents, end of period $ - $ - ======= =======
The accompanying notes are an integral part of these consolidated financial statements. CHESAPEAKE EXPLORATION LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS September 30, 1996 (Unaudited) 1. Accounting Principles The accompanying unaudited financial statements of Chesapeake Exploration Limited Partnership ("CEX") have been prepared in accordance with the instructions to Form 10-Q as prescribed by the Securities and Exchange Commission. All material adjustments (consisting solely of normal recurring adjustments) which, in the opinion of management, are necessary for a fair presentation of the results for the interim periods have been reflected. The results for the three months ended September 30, 1996, are not necessarily indicative of the results to be expected for the full fiscal year. The CEX financial statements were prepared on a separate entity basis as reflected in the Company's books and records and include all material costs of doing business as if the partnership were on a stand-alone basis, except that interest is not charged on intercompany accounts, or allocated. These financial statements should be read in conjunction with the September 30, 1996 consolidated financial statements and related notes of Chesapeake Energy Corporation and Subsidiaries included in this Form 10-Q and the Company's annual report on Form 10-K for the year ended June 30, 1996. PART I. FINANCIAL INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 1996 VS. SEPTEMBER 30, 1995 CEX represents substantially all of the Company's oil and gas operations. Therefore, the discussion in Management's Discussion and Analysis of Financial Condition and Results of Operations, included elsewhere in this report, for the Company relate primarily to CEX. CEX is a member of the consolidated group of companies of which Chesapeake Energy Corporation is the parent company. Although CEX has separate financing capabilities, CEX is largely dependent on the Company and the Company is dependent on the operations of CEX. Accordingly, capital resources and liquidity issues for CEX are not typical of an entity that operates on a stand alone basis and therefore should be considered only in conjunction with the discussion of the Company's capital resources and liquidity included elsewhere in this report. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On October 15, 1996, Union Pacific Resources Company ("UPRC") filed suit against the Company in the United States District Court for the Northern District of Texas alleging (a) infringement of UPRC's claimed patent (the "UPRC patent") for an invention involving a method of maintaining a bore hole in a stratigraphic zone during drilling, and (b) tortious interference with contracts between UPRC and a third party vendor (the "Vendor") regarding the confidentiality of proprietary information of UPRC. UPRC is seeking injunctive relief, damages of an unspecified amount, including actual, enhanced, consequential and punitive damages, interest, costs and attorney's fees. The Company believes that it has meritorious defenses to UPRC's allegations, including, without limitation, the Company's belief that the UPRC Patent is invalid. The Company will vigorously defend the lawsuit. No assurance can be given as to the outcome of the matter or the ultimate impact on the Company of any damages (which could be substantial) that may be awarded to UPRC because litigation is inherently uncertain. Since February 1994, the Vendor has assisted the Company in the analysis of horizontal drilling data. In May 1994, the UPRC Patent was issued to UPRC by the U.S. Patent Office and, in August 1995, UPRC advised the Company that the Vendor's services infringed the UPRC Patent. Promptly following receipt of such notification, the Company retained patent counsel who, in December 1995, provided the Company with a legal opinion that the UPRC Patent was invalid. In September 1995, litigation to which the Company was not a party commenced between UPRC and the Vendor. On October 11, 1996, the litigation was settled with an agreed judgment reciting the validity of the UPRC Patent and finding that the services provided by the Vendor violated the UPRC Patent. The agreed judgment enjoined the Vendor from further infringement of the UPRC Patent and use of UPRC's trade secrets. By letter dated October 16, 1996, the Vendor advised the Company that the Vendor expected to offer alternative services in the near future which, according to the Vendor, will not violate the Vendor's settlement agreement with UPRC and will not infringe the UPRC Patent. The Vendor also advised the Company that UPRC had agreed to permit the Vendor to complete work in progress which, under the agreed judgment, had been found to infringe the UPRC Patent. The Company believes that alternative services offered by the Vendor and other third party vendors will allow the Company to continue its horizontal drilling program without material interruption. ITEM 2. CHANGES IN SECURITIES - - Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES - - Not applicable ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - - Not applicable ITEM 5. OTHER INFORMATION - - Not applicable ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits The following exhibits are filed as a part of this report: Exhibit No. 11 Statement regarding computation of earnings per common share 27 Financial Data Schedule (b) Form 8-K On July 5, 1996, the Company filed a current report on Form 8-K reporting under Item 4 the resignation on July 1, 1996 of Price Waterhouse LLP as the independent accountants of the Company as a result of the purchase of Price Waterhouse LLP's Oklahoma City practice by Coopers & Lybrand L.L.P. On August 2, 1996, the Company filed a current report on Form 8-K reporting under Item 5 the announcement on July 26, 1996 of the Company's operating updates. On September 11, 1996, the Company filed a current report on Form 8-K reporting under Item 5 the issuance on August 29, 1996 of the Company's announcement of the fourth quarter earnings and cash flow results for the fiscal year ended June 30, 1996. On September 17, 1996, the Company filed a current report on From 8-K reporting under Item 5 the announcement on September 4, 1996 of an agreement with Mitchell Energy & Development to construct an associated gathering system in south-central Louisiana, and further, that the Company and Enron Louisiana Energy Company reached an agreement whereby Enron will expand its Eunice facility to process the Company's gas. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CHESAPEAKE ENERGY CORPORATION (Registrant) November 14, 1996 AUBREY K. MCCLENDON Date Aubrey K. McClendon Chairman and Chief Executive Officer November 14, 1996 MARCUS C. ROWLAND Date Marcus C. Rowland Vice President and Chief Financial Officer Index to Exhibits
Exhibit No. Description Method of Filing - ----------- ----------- ---------------- 11 Statement regarding computation Filed herewith electronically of earnings per common share 27 Financial Data Schedule Filed herewith electronically
EX-11 2 EXHIBIT 11 CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES STATEMENT OF NET INCOME PER SHARE --------------------------------- ($ in thousands, except per share) (Unaudited)
Three Months Ended September 30, ---------------------- 1996 1995 ------ ------ PRIMARY INCOME PER SHARE Computation for statement of income Net income per statement of income $ 8,204 $ 2,915 ======== ======== Common shares outstanding 30,126 26,404 Adjustment to weighted average common shares outstanding: Add dilutive effect of: Employee Options 2,003 2,122 -------- -------- Weighted average common shares and common equivalent shares outstanding, as adjusted 32,129 28,526 ======== ======== Net income per common share, as adjusted $ .26 $ .10 ======== ======== FULLY DILUTED INCOME PER SHARE Net income applicable to common stock as shown in primary computation above $ 8,204 $ 2,915 ======== ======== Common shares outstanding 30,126 26,404 Adjustment to weighted average common shares outstanding: Add fully dilutive effect of: Employee Options 2,043 2,368 -------- -------- Weighted average common shares and common equivalent shares outstanding, as adjusted 32,169 28,772 ======== ======== Fully diluted net income per common share $ .26 $ .10 ======== ========
EX-27 3
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE SHEET AS OF SEPTEMBER 30, 1996, AND STATEMENT OF INCOME FOR 3 MONTHS ENDED SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q SEPTEMBER 30, 1996. 0000895126 CHESAPEAKE ENERGY CORPORATION 1,000 3-MOS JUN-30-1997 SEP-30-1996 2,444 2,912 45,991 340 10,461 63,250 633,443 113,107 595,551 109,657 277,323 0 0 3,013 183,644 595,551 48,937 49,785 34,048 36,865 0 0 2,817 12,920 4,716 0 0 0 0 8,204 .26 .26
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