As filed with the Securities and Exchange Commission on September 18, 2003
Registration No. 333-104394
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
AMENDMENT NO. 2
TO
FORM S-3
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
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Chesapeake Energy Corporation
(Name of Registrant as specified in its charter)
Oklahoma 73-1395733
(State or other (I.R.S. Employer
jurisdiction Identification No.)
of incorporation or
organization)
6100 North Western Avenue Aubrey K. McClendon
Oklahoma City, Oklahoma Chairman of the Board and
73118 Chief Executive Officer
(405) 848-8000 6100 North Western Avenue
(Address, including zip Oklahoma City, Oklahoma
code, and telephone 73118
number, (405) 848-8000
including area code, of (Name, address, including
Registrant's principal zip code, and telephone
executive offices) number,
including area code, of
agent for service)
Copy to:
James M. Prince, Esq.
Vinson & Elkins L.L.P.
2300 First City Tower
1001 Fannin Street
Houston, Texas 77002-6760
(713) 758-3710
(713) 615-5962 (Fax)
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Approximate date of commencement of proposed sale to the public: From time
to time after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [_]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
================================================================================
4,600,000 Shares
of
Chesapeake Energy Corporation
6.00% Cumulative Convertible Preferred Stock
(Liquidation Preference $50 per share)
and
Common Stock
(Par Value $.01 per share)
Issuable Upon Conversion of the Cumulative Convertible Preferred Stock
-----------------
This prospectus relates to the offering for resale of Chesapeake Energy
Corporation's 6.00% Cumulative Convertible Preferred Stock (liquidation
preference $50 per share) and the shares of our common stock (including
attached preferred share purchase rights) issuable upon conversion of the
preferred stock. In this prospectus, the terms "Chesapeake", "we", or "us" will
each refer to Chesapeake Energy Corporation and its subsidiaries. The preferred
stock was offered to qualified institutional buyers in reliance on Rule 144A
and to certain persons in offshore transactions in reliance on Regulation S, in
transactions exempt from, or not subject to, the registration requirements of
the Securities Act. This prospectus will be used by selling securityholders to
resell their shares of our preferred stock and shares of our common stock
issuable upon conversion of their preferred stock. We will not receive any
proceeds from sales by the selling securityholders.
Convertibility of the Preferred Stock:
Holders may convert their preferred stock at any time into 4.8605 shares of
common stock of Chesapeake per share of preferred stock. The conversion rate
may be adjusted upon the occurrence of certain events. The common stock
currently trades on the New York Stock Exchange under the symbol "CHK." The
closing price of the common stock on the New York Stock Exchange was $7.66 per
share on April 7, 2003.
Mandatory Conversion of the Preferred Stock at Our Option:
On or after March 20, 2006, we may, at our option, cause the preferred stock
to be automatically converted into that number of shares of common stock that
are issuable at the then prevailing conversion price. We may exercise our
conversion right only if, for 20 trading days within any period of 30
consecutive trading days (including the last trading day of such period), the
closing price of our common stock equals or exceeds 130% of the then prevailing
conversion price of the preferred stock.
In addition, if there are less than 250,000 shares of preferred stock
outstanding, we may, on or after March 20, 2008, at our option, cause the
preferred stock to be automatically converted into that number of shares of
common stock equal to the liquidation preference divided by the lesser of the
then prevailing conversion price or the average closing price of the common
stock for the five trading day period ending on the second day immediately
preceding the date fixed for conversion.
-----------------
Investing in our preferred or common stock involves risks. Please read
carefully the section entitled "Risk Factors" beginning on page 5.
-----------------
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.
, 2003
You should rely only on the information contained or incorporated by
reference in this prospectus. We have not authorized anyone to provide you with
different information. You should not assume that the information contained in
this prospectus is accurate as of any date other than the date on the front of
this prospectus.
TABLE OF CONTENTS
Page
----
About This Prospectus............................................... i
Prospectus Summary.................................................. 1
Risk Factors........................................................ 5
Ratios of Earnings to Combined Fixed Charges and Preferred Dividends 12
Use of Proceeds..................................................... 13
Business............................................................ 13
Description of the Preferred Stock.................................. 14
Description of Chesapeake Capital Stock............................. 22
Federal Income Tax Considerations................................... 28
Selling Securityholders............................................. 31
Plan of Distribution................................................ 36
Legal Matters....................................................... 38
Experts............................................................. 38
Where You Can Find More Information................................. 38
Forward-Looking Statements.......................................... 39
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we filed with the
Securities and Exchange Commission utilizing a "shelf" registration process or
continuous offering process. Under this shelf registration process, the selling
securityholders may, from time to time, sell the securities described in this
prospectus in one or more offerings. This prospectus provides you with a
general description of the securities which may be offered by the selling
securityholders. Each time a selling securityholder sells securities, the
selling securityholder is required to provide you with this prospectus and, in
certain cases, a prospectus supplement containing specific information about
the selling securityholder and the terms of the securities being offered. That
prospectus supplement may include additional risk factors or other special
considerations applicable to those securities. Any prospectus supplement may
also add, update, or change information in this prospectus. If there is any
inconsistency between the information in this prospectus and any prospectus
supplement, you should rely on the information in that prospectus supplement.
You should read both this prospectus and any prospectus supplement together
with additional information described under "Where You Can Find More
Information."
i
PROSPECTUS SUMMARY
This summary may not contain all the information that may be important to
you. You should read this entire prospectus and the documents to which we have
referred you before making an investment decision. You should carefully
consider the information set forth under "Risk Factors." In addition, certain
statements include forward-looking information which involves risks and
uncertainties. See "Forward-Looking Statements."
The Company
We are among the ten largest independent natural gas producers in the United
States in terms of natural gas produced, owning interests in approximately
13,400 producing oil and gas wells (which includes the approximately 1,900
wells we recently acquired from ONEOK and the approximately 800 wells we
recently acquired from the El Paso Corporation and Vintage Petroleum, Inc.). We
estimate that our proved reserves were approximately 2.75 tcfe as of December
31, 2002, pro forma for the recently completed ONEOK, El Paso and Vintage
acquisitions. Approximately 91% of our pro forma proved reserves are natural
gas and approximately 89% 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 the
Williston Basin of North Dakota and Montana.
Our executive offices are located at 6100 North Western Avenue, Oklahoma
City, Oklahoma 73118, and our telephone number is (405) 848-8000.
The Offering
On March 5, 2003, we completed a private offering of the preferred stock. We
entered into a registration rights agreement with the initial purchasers in the
private offering in which we agreed, for the benefit of the holders of the
preferred stock, to file a shelf registration statement with the SEC by May 5,
2003 with respect to resales of the preferred stock and common stock issued
upon the conversion thereof. We also agreed to use our reasonable best efforts
to cause the shelf registration statement to be declared effective under the
Securities Act by September 1, 2003 and to keep the shelf registration
statement effective until March 5, 2005 or such earlier date as of which the
preferred stock and common stock issued upon the conversion thereof have been
sold pursuant to the shelf registration statement.
Securities Offered.......... 4,600,000 shares of 6.00% cumulative convertible
preferred stock.
Dividends................... Cumulative annual dividends of $3.00 per share
payable quarterly in cash on each March 15, June
15, September 15 and December 15, commencing June
15, 2003, when, as and if declared by the board
of directors. Dividends will be paid in arrears
on the basis of a 360-day year consisting of
twelve 30-day months. Dividends on the preferred
stock will accumulate and be cumulative from the
date of issuance thereof. Accumulated dividends
on the preferred stock will not bear interest.
Liquidation Preference...... $50 per share, plus accumulated and unpaid
dividends.
1
Ranking..................... The preferred stock will rank with respect to
dividend rights and rights upon our liquidation,
winding-up or dissolution:
. senior to all of our common stock and to all
of our other capital stock issued in the
future unless the terms of that stock
expressly provide that it ranks senior to, or
on a parity with, the preferred stock;
. on a parity with our existing 6.75% Cumulative
Convertible Preferred Stock and with any of
our capital stock issued in the future the
terms of which expressly provide that it will
rank on a parity with the preferred stock; and
. junior to all of our capital stock the terms
of which expressly provide that such stock
will rank senior to the preferred stock.
We currently have 2,998,000 shares of 6.75%
Cumulative Convertible Preferred Stock issued and
outstanding, with an aggregate liquidation
preference of $149.9 million.
Redemption.................. Shares of preferred stock are not redeemable by
us.
Conversion Rights........... Each share of preferred stock may be converted at
any time, at the option of the holder, into
4.8605 shares of common stock (which is
calculated using an initial conversion price of
$10.287 per share of common stock) plus cash in
lieu of fractional shares. The conversion price
is subject to adjustment upon the occurrence of
certain events. Please read "Description of the
Preferred Stock--Conversion Rights."
Mandatory Conversion........ On or after March 20, 2006, we may, at our
option, cause the preferred stock to be
automatically converted into that number of
shares of common stock that are issuable at the
then prevailing conversion price. We may exercise
our conversion right only if, for 20 trading days
within any period of 30 consecutive trading days
(including the last trading day of such period),
the closing price of our common stock exceeds
130% of the then prevailing conversion price of
the preferred stock.
In addition, if there are less than 250,000
shares of preferred stock outstanding, we may, on
or after March 20, 2008, at our option, cause the
preferred stock to be automatically converted
into that number of shares of common stock equal
to the liquidation preference divided by the
lesser of the then prevailing conversion price
and the average closing price of the common stock
for the five trading day period ending on the
second day immediately preceding the date fixed
for conversion. Please read "Description of the
Preferred Stock--Mandatory Conversion."
Change of Control........... Except as provided below, upon a change of
control, each holder of preferred stock shall, in
the event that the market value of our common
stock at such time is less than the conversion
price, have a one-time option to convert all of
its shares of preferred stock into shares of
common stock at an adjusted conversion price
equal to the greater of (x) the market value of
the common stock (determined as described herein)
and (y) $5.47.
2
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 of such common
stock otherwise issuable as of the change of
control date.
Notwithstanding the foregoing, upon a change of
control in which (1) each holder of our common
stock receives consideration consisting solely of
common stock of the successor, acquiror or other
third party that is listed on a national
securities exchange or quoted on the NASDAQ
National Market and (2) all our common stock has
been exchanged for, converted into or acquired
for common stock of the successor, acquiror or
other third party and the preferred stock becomes
convertible solely into such common stock, the
conversion price will not be adjusted as
described above.
Voting Rights............... Except as required by Oklahoma law and our
certificate of incorporation, which includes the
certificate of designation for the preferred
stock, the holders of preferred stock will have
no voting rights unless dividends payable on the
preferred stock are in arrears for six or more
quarterly periods. In that event, the holders of
the preferred stock, voting as a single class
with the shares of any other preferred stock or
preference securities having similar voting
rights (including the existing preferred stock),
will be entitled at the next regular or special
meeting of our stockholders to elect two
directors (or one director if fewer than six
directors comprise our board prior to
appointment) and the number of directors that
comprise our board will be increased by the
number of directors so elected. These voting
rights and the terms of the directors so elected
will continue until such time as the dividend
arrearage on the preferred stock has been paid in
full. The affirmative consent of holders of at
least 66 2/3% of the outstanding preferred stock
will be required for the issuance of any class or
series of stock (or security convertible into
stock) ranking senior to the preferred stock as
to dividend rights or rights upon our
liquidation, winding-up or dissolution and for
amendments to our certificate of incorporation
that would affect adversely the rights of holders
of the preferred stock.
Tax Consequences............ The U.S. Federal income tax consequences of
purchasing, owning and disposing of the preferred
stock and any common stock received upon its
conversion are described in "Federal Income Tax
Considerations." Prospective investors are urged
to consult their own tax advisors regarding the
tax consequences of purchasing, owning and
disposing of the preferred stock and any common
stock received upon its conversion in light of
their personal investment circumstances,
including consequences resulting from the
possibility that actual or constructive
distributions on the preferred stock may exceed
our current and accumulated earnings and profits,
as calculated for U.S. Federal income tax
purposes, in which case they would not be treated
as dividends for U.S. Federal income tax purposes.
3
Common Stock................ Our common stock is listed for trading on the
NYSE under the symbol "CHK."
Risk Factors
An investment in the preferred stock or common stock involves certain risks
that a potential investor should carefully evaluate prior to making an
investment in the preferred stock or common stock. See "Risk Factors."
4
RISK FACTORS
In addition to the other information set forth elsewhere or incorporated by
reference in this prospectus, the following factors relating to our company,
our preferred stock and our common stock should be considered carefully before
making an investment decision.
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 the oil and gas we sell. 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
periodic redeterminations based on prices specified by our bank group at the
time of redetermination. In addition, we may have ceiling test writedowns if
prices fall significantly.
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;
. risk 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 91% of our proved reserves are currently natural
gas reserves, we are more affected by movements in natural gas prices.
Our level of indebtedness and preferred stock may adversely affect
operations and limit growth, and we may have difficulty making debt service and
preferred stock dividend payments on our indebtedness and preferred stock as
they become due.
As of March 31, 2003, we had $2.01 billion in aggregate principal amount of
long-term indebtedness outstanding, $26 million of which was bank indebtedness,
plus 6.00% Cumulative Convertible Preferred Stock
5
and 6.75% Cumulative Convertible Preferred Stock outstanding, having an
aggregate liquidation preference of $379.9 million. Our long-term indebtedness
represented 65% of our total book capitalization at December 31, 2002. We will
continue to be highly leveraged after this offering.
Our level of indebtedness and preferred stock affects our operations in
several ways, including the following:
. a substantial portion of our cash flows must be used to service our
indebtedness, and our business may not generate sufficient cash flow from
operations to enable us to continue to meet our obligations under our
indebtedness and our stated dividends on our preferred stock;
. a high level of indebtedness 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 the rights
and preferences applicable to our preferred stock may limit our ability
to pay dividends on our common stock; and
. a high level of debt and preferred stock may impair our ability to obtain
additional financing in the future for working capital, capital
expenditures, acquisitions or general corporate and other purposes.
We may incur additional debt, including significant secured indebtedness, or
issue additional series of preferred stock 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 and
preferred stock 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 or dividends
on our preferred stock, 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 periodic
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.
Competition in the oil and natural gas industry is intense, and many of our
competitors have greater financial and other resources than we do.
We operate in the highly competitive areas of oil and natural gas
acquisition, development, exploitation, exploration and production. We face
intense competition from both major and other independent oil and natural gas
companies in each of the following areas:
. seeking to acquire desirable producing properties or new leases for
future exploration; and
. seeking to acquire the equipment and expertise necessary to develop and
operate our properties.
6
Many of our competitors have financial and other resources substantially
greater than ours, and some of them are fully integrated oil companies. These
companies may be able to pay more for development prospects and productive oil
and natural gas properties and may be able to define, evaluate, bid for and
purchase a greater number of properties and prospects than our financial or
human resources permit. Our ability to develop and exploit our oil and natural
gas properties and to acquire additional properties in the future will depend
upon our ability to successfully conduct operations, evaluate and select
suitable properties and consummate transactions in this highly competitive
environment.
Our commodity price risk management transactions may expose us to the risk
of financial loss.
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. 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 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 June
30, 2003, we were required to post $23.0 million of collateral 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.
The actual quantities and present value of our proved reserves may prove to
be lower than we have estimated.
This prospectus contains estimates of our proved reserves and the estimated
future net revenues from our proved reserves as well as estimates relating to
our recent acquisitions. 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, 2002, approximately 26% 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 $248
million in 2003. You should be aware that the estimated costs may not be
accurate, development may not occur as scheduled and the results may not be as
estimated.
7
You should not assume that the present values referred to in this prospectus
represent the current market value of our estimated oil and gas reserves. In
accordance with SEC requirements, the estimates of present values are based on
prices and costs as of the date of the estimates, except as otherwise noted in
this prospectus.
The December 31, 2002 present value is based on weighted average oil and gas
prices of $30.18 per barrel of oil and $4.28 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.
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 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 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.
We may not have funds sufficient to make the significant capital
expenditures required to replace our 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,
debt and equity issuances and the sale of non-core assets. 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, we may not
be able to access additional bank debt, debt or equity or other methods of
financing to meet these requirements.
Reserve estimates of properties acquired in 2003 have not been prepared by
independent petroleum engineers. Our internal estimates may not be as reliable
as estimates of those reserves by independent engineers.
Our estimates of proved reserves attributed to our ONEOK, El Paso and
Vintage acquisitions included or incorporated by reference in this prospectus
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. Furthermore, our internal reserve
estimates for the El Paso and Vintage acquisitions are based upon data
available to us which may not be as complete as data available on our other
properties. 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.
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. In
addition, approximately 26% by volume of our total estimated proved reserves at
December 31, 2002 were undeveloped. By their nature, estimates of undeveloped
reserves are less certain. Recovery of such reserves will require significant
capital expenditures and successful drilling operations. We may not be able to
successfully find and produce reserves economically in the future. In addition,
we may not be able to acquire proved reserves at acceptable costs.
8
Acquisitions may prove to be worth less than we paid because of
uncertainties in 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. 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. Our review prior to signing a definitive purchase agreement may
be even more limited. For example, based on our knowledge of the properties and
in exchange for concessions in the negotiations for the El Paso acquisition, we
elected to forego most due diligence review including environmental site
inspections prior to signing a definitive agreement which contains limited
remedies against the seller.
We are generally not entitled to contractual indemnification for preclosing
liabilities, including environmental liabilities, on acquisitions, including
our recent El Paso and Vintage acquisitions. Normally, we acquire interests in
properties on an "as is" basis with limited remedies for breaches of
representations and warranties. We could incur significant unknown liabilities,
including environmental liabilities, or experience losses due to title defects,
in our recent acquisition for which we have limited or no contractual remedies
or insurance coverage.
In addition, competition for producing oil and gas properties is intense and
many of our competitors have financial and other resources which 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 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. For example, we might decide to pursue acquisitions or properties
located in geographic regions other than the Mid-Continent region. 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.
Future price declines may result in a write-down of 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 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.
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
9
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. We maintain insurance against
some, but not all, of the risks described above. Our insurance may not be
adequate to cover casualty losses or liabilities. Also, in the future we may
not be able to continue to obtain 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 drill 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,
marketing oil and gas production, and developing and executing financing and
hedging strategies. 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. We do not maintain key person life insurance on any of our
personnel.
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. The borrowing base is
determined periodically at the discretion of a majority of the banks and is
10
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 or 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 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. The second alternative is based
on the ratio of our adjusted consolidated EBITDA (as defined in the agreement)
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.
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 as class action suits including four 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.
Risks Related to the Securities
We may not be able to pay cash dividends on our capital stock.
We are required to pay all declared dividends on our preferred stock in
cash. Our existing indentures limit, and any indentures and other financing
agreements that we enter into in the future will likely limit, our ability to
pay cash dividends on our capital stock. Specifically, under our existing
indentures, we may pay cash dividends and make other distributions on or in
respect of our capital stock, including our preferred and common stock, only if
certain financial tests are met.
Under Oklahoma law, cash dividends on capital stock may only be paid from
"surplus" or, if there is no "surplus," from the corporation's net profits for
the then current or the preceding fiscal year. Unless we continue to operate
profitably, our ability to pay cash dividends on our capital stock would
require the availability of adequate "surplus," which is defined as the excess,
if any, of our net assets (total assets less total liabilities) over our
capital. Further, even if adequate surplus is available to pay cash dividends
on the preferred stock and common stock (if declared), we may not have
sufficient cash to pay dividends on our preferred stock or common stock, as the
case maybe.
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RATIOS OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED DIVIDENDS
For purposes of determining the ratio of earnings to fixed charges and
preferred dividends, 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. Preference dividends consist of preferred
stock dividends "grossed up" to reflect the pre-tax amount.
Six
Months
Year Ended December 31, Ended
------------------------ June 30,
1998 1999 2000 2001 2002 2003
---- ---- ---- ---- ---- --------
Ratio of earnings to combined fixed charges and preferred
dividends.............................................. (a) 1.1x 2.8x 4.9x 1.3x 3.3x
--------
(a) Earnings for such year were insufficient to cover combined fixed charges
and preference dividends by approximately $927 million.
12
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of the preferred stock
or the common stock contemplated by this prospectus. Please read "Selling
Securityholders" for a list of the persons receiving proceeds from the sale of
the preferred stock or the underlying common stock.
BUSINESS
We are among the ten largest independent natural gas producers in terms of
gas produced in the United States, owning interests in approximately 13,400
producing oil and gas wells (which includes the approximately 1,900 wells we
recently acquired from ONEOK and the approximately 800 wells we recently
acquired from the El Paso Corporation and Vintage Petroleum, Inc.). We estimate
that our proved reserves were approximately 2.75 tcfe as of December 31, 2002,
pro forma for the recently completed ONEOK, El Paso and Vintage acquisitions.
Approximately 91% of our pro forma proved reserves are natural gas and
approximately 89% 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 the
Williston Basin of North Dakota and Montana.
Additional information concerning our company is included in our reports and
other documents incorporated by reference in this prospectus. Please read
"Where You Can Find More Information."
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DESCRIPTION OF THE PREFERRED STOCK
The following is a summary of certain provisions of the certificate of
designation for our 6.00% Cumulative Convertible Preferred Stock which we refer
to in this description as the "Convertible Preferred Stock." A copy of the
certificate of designation and the form of Convertible Preferred Stock share
certificate are available upon request from Chesapeake at the address set forth
under "Where You Can Find More Information." The following summary of the terms
of Convertible Preferred Stock does not purport to be complete and is subject
to, and qualified in its entirety by reference to, the provisions of the
certificate of designation. As used in this section, the terms the "Company",
"us", "we" or "our" refer to Chesapeake Energy Corporation and not any of its
subsidiaries.
General
Under our certificate of incorporation, our board of directors is
authorized, without further stockholder action, to issue up to 10,000,000
shares of preferred stock, par value $.01 per share, 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 therefore. We have 2,152,000 shares of authorized
preferred stock which are undesignated. We have 2,998,000 shares of preferred
stock which are designated as 6.75% Cumulative Convertible Preferred Stock, of
which all are currently outstanding, and 4,600,000 shares of preferred stock
which are designated as 6.00% Cumulative Convertible Preferred Stock, of which
all are currently outstanding. The board of directors has also authorized the
issuance of up to 250,000 shares of Series A Junior Participating Convertible
Preferred Stock in connection with the adoption of our share rights plan in
July 1998. None of these shares are currently outstanding. Please read
"Description of Chesapeake Capital Stock."
The Convertible Preferred Stock and any common stock issued upon the
conversion of the Convertible Preferred Stock will be fully paid and
nonassessable. The holders of the Convertible Preferred Stock have no
preemptive or preferential right to purchase or subscribe to stock,
obligations, warrants or other securities of the Company of any class. The
transfer agent, registrar, redemption, conversion and dividend disbursing agent
for shares of both the Convertible Preferred Stock and common stock is UMB
Bank, N.A.
The Convertible Preferred Stock is subject to mandatory conversion, as
described below in "--Mandatory Conversion," but is not redeemable by the
Company.
Ranking
The Convertible Preferred Stock, with respect to dividend rights or rights
upon the liquidation, winding-up or dissolution of the Company, ranks:
. senior to all classes of common stock and to the Series A Junior
Participating Convertible 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 (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 the liquidation, winding-up or dissolution of the Company
(collectively referred to as "Junior Stock");
. on a parity, in all respects, with our existing 6.75% Cumulative
Convertible Preferred Stock and 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 by the Board of Directors, the terms of
which expressly provide that such class or series will rank senior to the
14
Convertible Preferred Stock as to dividend rights or rights upon the
liquidation, winding-up or dissolution of the Company ("Senior Stock").
While any shares of Convertible Preferred Stock are outstanding, we may not
authorize 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 will be entitled to
receive, when, as and if declared by the Board of Directors out of funds
legally available for payment, cumulative cash dividends at the rate per annum
of 6.00% per share on the liquidation preference thereof of $50 per share of
Convertible Preferred Stock (equivalent to $3.00 per annum per share).
Dividends on the Convertible Preferred Stock will be payable quarterly on
March 15, June 15, September 15 and December 15 of each year, commencing June
15, 2003 (each, a "Dividend Payment Date") at such annual rate, and shall
accumulate from the most recent date as to which dividends shall 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 shall
be 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 March 1, June 1, September 1 and December 1 (each, a
"Record Date"). Accumulations of dividends on shares of Convertible Preferred
Stock will 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 (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 preceding, 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 will not be 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,
15
our ability to declare and pay dividends may be limited by applicable Oklahoma
law. See "Risk Factors--Risks Related to the Preferred Stock--We may not be
able to pay cash dividends on the preferred stock."
Liquidation Preference
In the event of any 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 on the shares to the date fixed for liquidation, winding-up or
dissolution. If, upon any 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 the merger or consolidation of us into or with any other
person, will be deemed to be a voluntary or involuntary liquidation, winding-up
or dissolution by us.
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 from time to time.
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 (including our existing 6.75% Cumulative Convertible Preferred
Stock), will be entitled at the next regular or special meeting of stockholders
to elect two additional directors to our board of directors unless it 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 comprise the 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.
16
Conversion Rights
Each share of Convertible Preferred Stock is convertible at any time at the
option of the holder thereof into 4.8605 shares of common stock (which is
calculated using an initial conversion price of $10.287 per share of common
stock) subject to adjustment as described below (such price or adjusted price
being referred to as the "Conversion Price").
With respect to any shares of Convertible Preferred Stock that are
"restricted securities" on the date of conversion, the shares of common stock
distributed upon conversion will be treated as "restricted securities," will
bear a legend to such effect and will not be transferable by the recipient
thereof except pursuant to an effective registration statement or pursuant to
an exemption from the registration requirements of the Securities Act. All such
shares will be issued in physical certificated form and will not be eligible
for receipt in global form through the facilities of the Depositary. With
respect to shares of Convertible Preferred Stock that are no longer "restricted
securities" on a conversion date, either as a result of a resale of the
Convertible Preferred Stock pursuant to the shelf registration statement of
which this prospectus forms a part or otherwise, all shares of common stock
distributed upon conversion will be freely transferable without restriction
under the Securities Act (other than by our affiliates), and such shares will
be eligible for receipt in global form through the facilities of the Depositary.
The holders of shares of Convertible Preferred Stock at the close of
business on a Record Date will be entitled to receive the dividend payment on
those shares on the corresponding Dividend Payment Date notwithstanding the
conversion of such shares following that Record Date or our default in payment
of the dividend due on that Dividend Payment Date. However, shares of
Convertible Preferred Stock surrendered for conversion during the period
between the close of business on any Record Date and the close of business on
the business day immediately preceding the applicable Dividend Payment Date
must be accompanied by payment of an amount equal to the dividend payable on
such shares on that Dividend Payment Date. A holder of shares of Convertible
Preferred Stock on a Record Date who (or whose transferee) tenders any shares
for conversion on the corresponding Dividend Payment Date will receive the
dividend payable by us on the Convertible Preferred Stock on that date, and the
converting holder need not include payment in the amount of such dividend upon
surrender of shares of Convertible Preferred Stock for conversion. Except as
provided above with respect to a voluntary conversion, we will make no payment
or allowance for unpaid dividends, whether or not in arrears, on converted
shares or for dividends on the shares of common stock issued upon conversion.
Mandatory Conversion
At any time on or after March 20, 2006, 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 our 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.
To exercise the mandatory conversion right described above, we must issue a
press release for publication on the Dow Jones News Service prior to the
opening of business on the first trading day following any date on which the
conditions described in the preceding paragraph are met, announcing such a
mandatory conversion. We will also give notice by mail or by publication (with
subsequent prompt notice by mail) to the holders of the Convertible Preferred
Stock (not more than four business days after the date of the press release) of
the mandatory conversion announcing our intention to convert the Convertible
Preferred Stock. The conversion date will be a date selected by us (the
"Mandatory Conversion Date") and will be no more than five days after the date
on which we issue such press release.
17
In addition to any information required by applicable law or regulation, the
press release and notice of a mandatory conversion shall state, as appropriate:
. the Mandatory Conversion Date;
. the number of shares of common stock to be issued upon conversion of each
share of Convertible Preferred Stock;
. the number of shares of Convertible Preferred Stock to be converted; and
. that dividends on the Convertible Preferred Stock to be converted will
cease to accrue on the Mandatory Conversion Date.
On and after the Mandatory Conversion Date, dividends will cease to accrue
on the Convertible Preferred Stock called for a mandatory conversion and all
rights of holders of such Convertible Preferred Stock will terminate except for
the right to receive the shares of common stock issuable upon conversion
thereof. The dividend payment with respect to the Convertible Preferred Stock
called for a mandatory conversion on a date during the period between the close
of business on any Record Date for the payment of dividends to the close of
business on the corresponding Dividend Payment Date will be payable on such
Dividend Payment Date to the record holder of such share on such Record Date if
such share has been converted after such Record Date and prior to such Dividend
Payment Date. Except as provided in the immediately preceding sentence with
respect to a mandatory conversion, no payment or adjustment will be made upon
conversion of Convertible Preferred Stock for accumulated and unpaid dividends
or for dividends with respect to the common stock issued upon such conversion.
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 March 20, 2008, 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 (as defined below under "--Conversion
Price Adjustment") for the five trading day period ending on the second trading
day immediately prior to the Mandatory Conversion Date. The provisions of the
immediately preceding four paragraphs shall apply to any such mandatory
conversion; provided that (i) the Mandatory Conversion Date will not be less
than 15 days nor more than 30 days after the date on which we issue a press
release announcing such mandatory conversion and (ii) the press release and
notice of mandatory conversion will not state the number of shares of common
stock to be issued upon conversion of each share of Convertible Preferred Stock.
Fractional Shares
No fractional shares of common stock or securities representing fractional
shares of common stock will be issued upon conversion, whether voluntary or
mandatory. Any fractional interest in a share of common stock resulting from
conversion will be paid in cash based on the last reported sale price of the
common stock 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 the Board of Directors to be the fair
value of the common stock) at the close of business on the trading day next
preceding the date of conversion.
18
Conversion Price Adjustment
The Conversion Price is subject to adjustment (in accordance with formulas
set forth in the certificate of designation) in certain events, including:
. any payment of a dividend (or other distribution) payable in shares of
common stock on any class of our capital stock;
. any issuance to all holders of shares of common stock of rights, options
or warrants entitling them to subscribe for or purchase shares of common
stock or securities convertible into or exchangeable for shares of common
stock at less than the Market Value (as defined below) for the period
ending on the date of issuance; provided, however, that no adjustment
shall be made with respect to such a distribution if the holder of shares
of Convertible Preferred Stock would be entitled to receive such rights,
options or warrants upon conversion at any time of shares of Convertible
Preferred Stock into common stock; provided further, however, that if
such rights, options or warrants are only exercisable upon the occurrence
of certain triggering events, then the Conversion Price will not be
adjusted until such triggering events occur;
. any subdivision, combination or reclassification of the common stock;
. any dividend or distribution to all holders of shares of common stock
(other than a dividend or distribution referred to in the second bullet
point above) made pursuant to any shareholder rights plan,
. "poison pill" or similar arrangement and excluding dividends payable upon
the Convertible Preferred Stock;
. any distribution consisting exclusively of cash (excluding any cash
portion of distributions referred to in the preceding bullet point or
cash distributed upon a merger or consolidation to which the fifth
succeeding paragraph applies) to all holders of shares of common stock in
an aggregate amount that, combined together with (a) all other such
all-cash distributions made within the then-preceding 12-months in
respect of which no adjustment has been made and (b) any cash and the
fair market value of other consideration paid or payable in respect of
any tender offer by us or any of our subsidiaries for shares of common
stock concluded within the then-preceding 12-months in respect of which
no adjustment has been made, exceeds 15% of our market capitalization
(defined as the product of the then-current market price of the common
stock times the number of shares of common stock then outstanding) on the
record date of such distribution;
. the completion of a tender or exchange offer made by us or any of our
subsidiaries for shares of common stock that involves an aggregate
consideration that, together with (a) any cash and other consideration
payable in a tender or exchange offer by us or any of our subsidiaries
for shares of common stock expiring within the then-preceding 12-months
in respect of which no adjustment has been made and (b) the aggregate
amount of any such all-cash distributions referred to in the preceding
bullet point to all holders of shares of common stock within the
then-preceding 12-months in respect of which no adjustments have been
made, exceeds 15% of our market capitalization on the expiration of such
tender offer; or
. a distribution to all holders of common stock consisting of evidences of
indebtedness, shares of capital stock other than common stock or assets
(including securities, but excluding those dividends, rights, options,
warrants and distributions referred to above).
No adjustment of the Conversion Price will be required to be made until the
cumulative adjustments (whether or not made) amount to 1.0% or more of the
Conversion Price as last adjusted. We reserve the right to make such reductions
in the Conversion Price in addition to those required in the foregoing
provisions as it considers to be advisable in order that any event treated for
Federal income tax purposes as a dividend of stock or stock rights will not be
taxable to the recipients. In the event we elect to make such a reduction in
the Conversion Price, we will comply with the requirements of securities laws
and regulations thereunder if and to the extent that such laws and regulations
are applicable in connection with the reduction of the Conversion Price.
19
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 the
Board of Directors to be the fair value of the common stock).
If we distribute rights or warrants (other than those referred to in the
second bullet point of the third preceding paragraph) pro rata to holders of
shares of common stock, so long as any such rights or warrants have not expired
or been redeemed by us, the holder of any Convertible Preferred Stock
surrendered for conversion will be entitled to receive upon such conversion, in
addition to the shares of common stock then issuable upon such conversion (the
"Conversion Shares"), a number of rights or warrants to be determined as
follows:
. if such conversion occurs on or prior to the date for the distribution to
the holders of rights or warrants of separate certificates evidencing
such rights or warrants (the "Distribution Date"), the same number of
rights or warrants to which a holder of a number of shares of common
stock equal to the number of Conversion Shares is entitled at the time of
such conversion in accordance with the terms and provisions applicable to
the rights or warrants; and
. if such conversion occurs after such Distribution Date, the same number
of rights or warrants to which a holder of the number of shares of common
stock into which such Convertible Preferred Stock was convertible
immediately prior to such Distribution Date would have been entitled on
such Distribution Date had such Convertible Preferred Stock been
converted immediately prior to such Distribution Date in accordance with
the terms and provisions applicable to the rights or warrants.
The Conversion Price will not be subject to adjustment on account of any
declaration, distribution or exercise of such rights or warrants.
Following any reclassification, consolidation or merger of us with or into
another person or any merger of another person with or into us (with certain
exceptions), or any sale or other disposition of all or substantially all of
our assets (computed on a consolidated basis), each share of Convertible
Preferred Stock then outstanding will, without the consent of any holder of
Convertible Preferred Stock, be convertible at any time at the option of the
holder thereof only into the kind and amount of securities, cash and other
property receivable upon such reclassification, consolidation, merger, sale or
other disposition by a holder of the number of shares of common stock into
which such Convertible Preferred Stock was convertible immediately prior
thereto, after giving effect to any adjustment event.
Change of Control
Except as provided below, upon a Change of Control (as defined below),
holders of Convertible Preferred Stock shall, if 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 (1) the Market
Value as of the Change of Control Date and (2) $5.47. 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 of our common stock will be 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.
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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 Securities Exchange Act of 1934, as amended (the "Exchange Act")),
other than to Permitted Holders;
. the adoption of a plan the consummation of which would result in our
liquidation or dissolution;
. 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 the aggregate voting power of
our 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 or group
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 the Board of Directors of such parent
corporation); or
. during any period of two consecutive years, individuals who at the
beginning of such period composed the 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 the 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 our assets 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.
Consolidation, Merger and Sale of Assets
The certificate of designation provides that we, without the consent of the
holders of any of the outstanding Convertible Preferred Stock, may consolidate
with or merge into any other person or convey, transfer or lease all or
substantially all our assets to any person or may permit any person to
consolidate with or merge into, or transfer or lease all or substantially all
its properties to, us; provided, however that (a) the successor, transferee or
lessee is organized under the laws of the United States or any political
subdivision thereof; (b) the shares of Convertible Preferred Stock will become
shares of such successor, transferee or lessee, having in respect of such
successor, transferee or lessee the same powers, preferences and relative
participating, optional or other special rights and the qualification,
limitations or restrictions thereon, the Convertible Preferred Stock had
immediately prior to such transaction; and (c) certain other conditions are met.
Under any consolidation by us with, or merger by us into, any other person
or any conveyance, transfer or lease of all or substantially all our assets as
described in the preceding paragraph, the successor resulting from such
consolidation or into which we are merged or the transferee or lessee to which
such conveyance, transfer or
21
lease is made, will succeed to, and be substituted for, and may exercise every
right and power of, us under the shares of Convertible Preferred Stock, and
thereafter, except in the case of a lease, the predecessor (if still in
existence) will be released from its obligations and covenants with respect to
the Convertible Preferred Stock.
SEC Reports
Whether or not we are required to file reports with the SEC, if any shares
of Convertible Preferred Stock are outstanding, we must file with the SEC all
such reports and other information as we would be required to file with the SEC
by Sections 13(a) or 15(d) under the Exchange Act. See "Where You Can Find More
Information." We must supply each holder of Convertible Preferred Stock, upon
request, without cost to such holder, copies of such reports or other
information.
DESCRIPTION OF CHESAPEAKE CAPITAL STOCK
Set forth below is a description of the material terms of our capital stock.
However, this description 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 these documents
have also been filed with the SEC. Please read "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, 2,998,000 shares are designated 6.75% Cumulative
Convertible Preferred Stock and 4,600,000 shares are designated as 6.00%
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.
Preferred Stock
We have 2,152,000 shares of authorized preferred stock which are
undesignated. Currently 2,998,000 shares of preferred stock are designated as
6.75% Cumulative Convertible Preferred Stock, all of which are currently
outstanding, and 4,600,000 shares of preferred stock, which are designated as
6.00% Cumulative Convertible Preferred Stock, of which all are currently
outstanding. The terms of the existing 6.75% Cumulative Convertible Preferred
Stock are substantially similar to the terms of our 6.00% Cumulative
Convertible Preferred Stock described above. 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."
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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.
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;
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. 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.
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. Additionally, each share of our common stock issued
after July 27, 1998 and prior to the "distribution date" described below will
be issued with an attached preferred share purchase right. 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 the material terms 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.
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
24
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"),
. any person that is neither a McClendon nor Ward shareholder, but who or
which is the beneficial owner of common stock beneficially owned by a
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 an
acquiring 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").
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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 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.
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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 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, our
6.75% Cumulative Convertible Preferred Stock and our 6.00% Cumulative
Convertible Preferred Stock.
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FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes the material U.S. Federal income tax
consequences to U.S. holders (as defined below) of the purchase, ownership, and
disposition of the preferred stock and any common stock received upon its
conversion. This discussion is based upon the provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), the final, temporary and
proposed Treasury Regulations promulgated thereunder, and administrative
rulings and judicial decisions now in effect, all of which are subject to
change (possibly with retroactive effect) or different interpretations. This
summary does not purport to deal with all aspects of U.S. Federal income
taxation that may be relevant to an investor's decision to purchase shares of
preferred stock, nor any tax consequences arising under the laws of any state,
locality or foreign jurisdiction. This summary is not intended to be applicable
to all categories of investors, such as dealers in securities, banks, insurance
companies, tax-exempt organizations, foreign persons, persons that hold the
preferred stock or common stock as part of a straddle or conversion
transaction, or holders subject to the alternative minimum tax, which may be
subject to special rules. In addition, this discussion is limited to persons
who hold the preferred stock or common stock as "capital assets" (generally,
property held for investment) within the meaning of Section 1221 of the Code.
As used in this section, a "U.S. holder" is a beneficial owner of preferred
stock or common stock that is for U.S. Federal income tax purposes:
. an individual U.S. citizen or resident alien;
. a corporation, or entity taxable as a corporation that was created or
organized in or under the laws of the United States, any state thereof or
the District of Columbia;
. an estate or trust whose world-wide income is subject to U.S. Federal
income tax; or
. a trust if a court within the United States is able to exercise primary
supervision over the administration of the trust and one or more United
States persons have the authority to control all substantial decisions of
the trust, or that has a valid election in effect under applicable U.S.
Treasury Regulations to be treated as a United States person.
If a partnership holds preferred stock or common stock, the tax treatment of
a partner will generally depend upon the status of the partner and upon the
activities of the partnership.
WE RECOMMEND THAT YOU CONSULT YOUR OWN TAX ADVISOR REGARDING THE FEDERAL,
STATE, LOCAL, AND FOREIGN TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP,
CONVERSION, AND DISPOSITION OF PREFERRED STOCK AND COMMON STOCK RECEIVED AS A
RESULT OF A CONVERSION OF PREFERRED STOCK.
Consequences to Holders of Preferred Stock or Common Stock
Distributions. The amount of any distribution to you with respect to
preferred stock or common stock will be treated as a dividend, taxable as
ordinary income to you, to the extent of our current or accumulated earnings
and profits ("earnings and profits") as determined under U.S. Federal income
tax principles. To the extent the amount of such distribution exceeds our
earnings and profits, the excess will be applied against and will reduce your
tax basis (on a dollar-for-dollar basis) in the preferred stock or common
stock, as the case may be. Any amount in excess of your tax basis will be
treated as capital gain. If we are not able to pay dividends on the preferred
stock, the accreted liquidation preference of the preferred stock will increase
and such increase may give rise to deemed dividend income to holders of the
preferred stock in the amount of all, or a portion of, such increase.
Dividends to Corporate Shareholders. In general, a distribution which is
treated as a dividend for U.S. Federal income tax purposes and is made to a
corporate shareholder with respect to the preferred stock or common stock will
qualify for the 70% dividends-received deduction under Section 243 of the Code.
Corporate shareholders should note, however, there can be no assurance that the
amount of distributions made with respect
28
to the preferred stock or the common stock will not exceed the amount of our
earnings and profits in the future. Accordingly, there, can be no assurance
that the dividends-received deduction will be available in respect of
distributions on the preferred stock or common stock.
In addition, there are many exceptions and restrictions relating to the
availability of such dividends-received deduction such as restrictions relating
to:
. the holding period of stock the dividends on which are sought to be
deducted;
. debt-financed portfolio stock;
. dividends treated as "extraordinary dividends" for purposes of Section
1059 of the Code; and
. taxpayers that pay corporate alternative minimum tax.
We recommend that corporate shareholders consult their own tax advisors
regarding the extent, if any, to which such exceptions and restrictions may
apply to their particular factual situation.
Sale or Other Disposition. Upon a sale or other disposition of preferred
stock or common stock (other than an exchange of preferred stock for common
stock pursuant to the conversion privilege), you generally will recognize
capital gain or loss equal to the difference between the amount of cash and the
fair market value of property you receive on the sale or other disposition and
your adjusted tax basis in the preferred stock or common stock. Such capital
gain or loss will be long-term capital gain or loss if your holding period for
the preferred stock or common stock, as applicable, is more than one year.
If, following a change of control, a holder of the preferred stock exercises
the option described in "Description of Preferred Stock--Change of Control" and
we elect to satisfy payment in cash, the transaction will generally be treated
as a redemption for U.S. Federal income tax purposes. The U.S. Federal income
tax treatment of such a redemption to a holder will depend on the particular
facts relating to such holder at the time of the redemption. The receipt of
cash in connection with such redemption will be treated as gain or loss from
the sale or other disposition of the preferred stock (as discussed in the
preceding paragraph), if, taking into account stock that is actually or
constructively owned as determined under Section 318 of the Code:
. your interest in our common and preferred stock is completely terminated
as a result of such redemption;
. your percentage ownership in our voting stock immediately after such
redemption is less than 80% of your percentage ownership immediately
before such redemption; or
. such redemption is "not essentially equivalent to a dividend" (within the
meaning of Section 302(b)(1) of the Code).
If none of the above tests giving rise to sale treatment is satisfied, then
a payment made in redemption of the preferred stock will be treated as a
distribution that is taxable in the same manner as described above under
"Distributions," and your adjusted tax basis in the redeemed preferred stock
will be transferred to any remaining shares you hold in us. If you do not
retain any stock ownership in us following such redemption, then you may lose
your basis completely.
Conversion of Preferred Stock in Exchange for Common Stock. You generally
will not recognize gain or loss by reason of receiving common stock in exchange
for preferred stock upon conversion of the preferred stock, except gain or loss
will be recognized with respect to any cash received in lieu of fractional
shares and the fair market value of any shares of common stock attributable to
dividend arrearages will be treated as a constructive distribution as described
above under "Distributions." The adjusted tax basis of the common stock
(including fractional share interests) so acquired will be equal to the tax
basis of the shares of preferred stock exchanged and the holding period of the
common stock received will include the holding period of the preferred
29
stock exchanged. The tax basis of any common stock treated as a constructive
distribution will be equal to its fair market value on the date of the exchange.
Adjustment of Conversion Price. Holders of preferred stock may, in certain
circumstances, be deemed to have received constructive distributions of stock
if the conversion rate for the preferred stock is adjusted. Adjustments to the
conversion price made pursuant to a bona fide reasonable adjustment formula
which has the effect of preventing the dilution of the interest of the holders
of the preferred stock, however, generally will not be considered to result in
a constructive distribution of stock. Certain of the possible adjustments
provided in the anti-dilution provisions of the preferred stock, including,
without limitation, adjustments in respect of stock dividends or the
distribution of rights to subscribe for common stock should qualify as being
pursuant to a bona fide reasonable adjustment formula and should not result in
a constructive distribution. In contrast, adjustments in respect of
distributions of our indebtedness or assets to our stockholders, for example,
will not qualify as being pursuant to a bona fide reasonable adjustment
formula. In addition, an adjustment triggered by a change of control as
described under "Description of Preferred Stock" may not so qualify. If such
adjustments are made, the holders generally will be deemed to have received
constructive distributions in amounts based upon the value of such holders'
increased interests in our equity resulting from such adjustments. The amount
of the distribution will be treated as a distribution to a holder with the tax
consequences specified above under "Distributions." Accordingly, you could be
considered to have received distributions taxable as dividends to the extent of
our earnings and profits even though you did not receive any cash or property
as a result of such adjustments.
Conversion of Preferred Stock After Dividend Record Date. If a holder
exercises its right to convert the preferred stock into shares of common stock
after a dividend record date but before payment of the dividend, then upon
conversion, the holder generally will be required to pay to us in cash an
amount equal to the portion of such dividend attributable to the current
quarterly dividend period, which amount would increase the tax basis of the
common stock received. When the dividend is received, the holder would
recognize the dividend payment in accordance with the rules described under
"--Distributions" above.
Backup Withholding. Under the backup withholding provisions of the Code and
applicable Treasury Regulations, you may be subject to backup withholding with
respect to dividends paid on, or the proceeds of a sale, exchange or redemption
of, preferred stock or common stock unless:
. you are a corporation or come within certain other exempt categories and
when required demonstrate this fact, or
. within a reasonable period of time, you provide a taxpayer identification
number, certified under penalties of perjury as well as certain other
information or otherwise establish an exemption from the backup
withholding rules.
The amount of any backup withholding from a payment to you will be allowed
as a credit against your U.S. Federal income tax liability and may entitle you
to a refund, provided that the required information is furnished to the
Internal Revenue Service.
THE FOREGOING SUMMARY DOES NOT DISCUSS ALL ASPECTS OF U.S. FEDERAL INCOME
TAXATION THAT MAY BE RELEVANT TO YOU IN LIGHT OF YOUR PARTICULAR CIRCUMSTANCES
AND INCOME TAX SITUATION. WE RECOMMEND THAT YOU CONSULT YOUR OWN TAX ADVISOR AS
TO THE SPECIFIC TAX CONSEQUENCES THAT WOULD RESULT FROM YOUR PURCHASE,
OWNERSHIP AND DISPOSITION OF THE PREFERRED STOCK, INCLUDING THE APPLICATION AND
EFFECT OF STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF
CHANGES IN FEDERAL OR OTHER TAX LAWS.
30
SELLING SECURITYHOLDERS
The preferred stock, and any shares of our common stock issued upon
conversion of the preferred stock, are being offered by the selling
securityholders listed in the table below. We issued and sold the preferred
stock in a private placement to the initial purchasers, Credit Suisse First
Boston LLC, Morgan Stanley & Co. Incorporated, Salomon Smith Barney Inc., Bear
Stearns, & Co. Inc., Lehman Brothers Inc., CIBC World Markets Corp., Johnson
Rice & Company L.L.C., RBC Dain Rauscher Inc., and Simmons & Company
International. The selling securityholders purchased their preferred stock from
the initial purchasers or from subsequent holders in transactions exempt from
registration under the Securities Act. Selling securityholders selling common
stock, issued upon conversion of the preferred stock, acquired such stock from
the initial purchasers or from subsequent holders in transactions exempt from
registration under the Securities Act, or from the Company, through conversion
of their previously acquired preferred stock.
This prospectus covers sales, by the named selling securityholders, of
preferred stock and shares of common stock issued upon conversion of the
preferred stock. This prospectus will not cover subsequent sales of common
stock received upon conversion of preferred stock purchased from a selling
securityholder named in this prospectus.
No offer or sale under this prospectus may be made by a securityholder
unless that holder is listed in the table below, in a supplement to this
prospectus or in an amendment to the related registration statement that has
become effective. We will supplement or amend this prospectus to include
additional selling security holders upon request and upon provision of all
required information to us, subject to the terms of the Registration Rights
Agreement dated as of March 5, 2003 between Chesapeake Energy Corporation and
the initial purchasers.
The following table sets forth, the name of each selling securityholder, the
nature of any position, office, or other material relationship which the
selling securityholder has had, within the past three years, with us or with
any of our predecessors or affiliates, the amount of preferred stock and shares
of our common stock beneficially owned by such securityholder prior to the
offering, the amount being offered for the securityholder's account and the
amount to be owned by such security holder after completion of the offering.
We prepared the table based on information supplied to us by the selling
securityholders. We have not sought to verify such information. Additionally,
some or all of the selling securityholders may have sold or transferred some or
all of their preferred stock, in transactions exempt from the registration
requirements of the Securities Act, or some or all of their shares of our
common stock, in exempt or non-exempt transactions, since the date on which the
information in the table was provided to us. Other information about the
selling securityholders may also change over time.
Number of Number of Number of Number of
Shares of Number of Shares of Shares of Number of Shares of
Preferred Shares of Preferred Common Shares of Common
Stock Preferred Stock to be Stock Common Stock to be
Beneficially Stock Owned After Beneficially Stock Owned After
Owned Being Completion Owned Being Completion
Prior to the Offered of the Prior to the Offered of the
Name Offering Hereby Offering Offering* Hereby Offering*
---- ------------ --------- ----------- ------------ --------- -----------
Aftra Health Fund................... 2,000 2,000 0 9,721 9,721 0
AIG/National Union Fire
Insurance......................... 5,700 5,700 0 27,705 27,705 0
Alexiann Brothers Medical Center.... 2,500 2,500 0 12,151 12,151 0
Aloha Airlines Non-Pilots Pension
Trust............................. 1,700 1,700 0 8,263 8,263 0
Aloha Pilots Retirement Trust....... 875 875 0 4,253 4,253 0
Alpine Associates................... 121,950 121,950 0 592,738 592,738 0
Alpine Partners, L.P................ 16,200 16,200 0 78,740 78,740 0
Amaranth LLC........................ 55,250 55,250 0 268,543 268,543 0
American Skandia Trust.............. 10,800 10,800 0 52,493 52,493 0
Argent Classic Convertible Arbitrage
(Bermuda) Fund, LTD............... 195,100 195,100 0 1,869,062 948,284 920,778
31
Number of Number of Number of Number of
Shares of Number of Shares of Shares of Number of Shares of
Preferred Shares of Preferred Common Shares of Common
Stock Preferred Stock to be Stock Common Stock to be
Beneficially Stock Owned After Beneficially Stock Owned After
Owned Being Completion Owned Being Completion
Prior to the Offered of the Prior to the Offered of the
Name Offering Hereby Offering Offering* Hereby Offering*
---- ------------ --------- ----------- ------------ --------- -----------
Argent Classic Convertible Arbitrage
Fund, L.P.......................... 54,800 54,800 0 911,160 266,355 644,805
Argent LowLev Convertible
Arbitrage Fund LLC................. 26,300 26,300 0 397,311 127,831 269,480
Argent LowLev Convertible
Arbitrage Fund LTD................. 73,400 73,400 0 1,987,279 356,761 1,630,518
Arkansas Teachers Retirement......... 45,235 45,235 0 219,865 219,865 0
Attorney's Title Insurance Fund...... 1,375 1,375 0 6,683 6,683 0
B.C. McCabe Foundation............... 3,800 3,800 0 18,470 18,470 0
B.G. I Global Investors, c/o Forest
Investment Mgmt, L.L.C............. 6,800 6,800 0 33,051 33,051 0
Baptist Health of South Florida...... 8,610 8,610 0 41,849 41,849 0
Bear, Stearns & Co., Inc............. 5,000 5,000 0 24,303 24,303 0
Boilermakers Blacksmith Pension
Trust.............................. 4,925 4,925 0 23,938 23,938 0
C & H Sugar Company, Inc............. 2,200 2,200 0 10,693 10,693 0
Calamos Market Neutral Fund-
Calamos Investment Trust........... 70,000 70,000 0 340,235 340,235 0
CGNU Life Fund....................... 15,000 15,000 0 72,908 72,908
Class C Trading Company, Ltd......... 6,700 6,700 0 157,241 32,565 124,675
Commercial Union Life Fund........... 20,000 20,000 0 97,210 97,210 0
Convertible Securities Fund.......... 1,350 1,350 0 6,562 6,562 0
Credit Suisse First Boston, LLC...... 17,000 17,000 0 82,629 82,629 0
Daimler Chrysler Corp. Emp. #1
Pension Plan dtd 4/1/89............ 41,600 41,600 0 202,197 202,197 0
Delaware PERS........................ 5,475 5,475 0 26,611 26,611 0
Drury University..................... 350 350 0 1,701 1,701 0
Engineers Joint Pension Fund......... 4,370 4,370 0 21,240 21,240 0
F.R. Convt. Sec. Fn.................. 575 575 0 2,795 2,795 0
Family Service Life Insurance Co..... 4,000 4,000 0 19,442 19,442 0
Fidelity Destiny Portfolio:
Destiny II......................... 194,800 194,800 0 946,825 946,825 0
Fidelity Financial Trust: Fidelity
Convertible Securities Fund........ 31,400 31,400 0 152,620 152,620 0
Fidelity Hastings Street Trust:
Fidelity Contra Fund II............. 29,000 29,000 0 789,255 140,955 648,300
Forest Fulcrum Fund, LLP............. 17,100 17,100 0 83,115 83,115 0
Forest Global Convertible Fund Series
A-5................................ 76,500 76,500 0 371,828 371,828 0
Forest Multi-Strategy Master Fund
SPC, on behalf of Series F, Multi
Strategy Segregated Portfolio...... 9,400 9,400 0 45,689 45,689 0
Franklin and Marshall College........ 3,500 3,500 0 17,012 17,012 0
Gasner Investor Holdings Ltd......... 17,000 17,000 0 82,629 82,629 0
Guardian Life Insurance Co........... 126,000 126,000 612,423 612,423 0
Guardian Pension Trust............... 10,000 10,000 0 48,605 48,605 0
Guggenheim Portfolio Co. XV,
L.L.C.............................. 20,000 20,000 0 97,210 97,210 0
Hawaiian Airlines Employees
Pension Plan-IAM................... 625 625 0 3,038 3,038 0
32
Number of Number of Number of Number of
Shares of Number of Shares of Shares of Number of Shares of
Preferred Shares of Preferred Common Shares of Common
Stock Preferred Stock to be Stock Common Stock to be
Beneficially Stock Owned After Beneficially Stock Owned After
Owned Being Completion Owned Being Completion
Prior to the Offered of the Prior to the Offered of the
Name Offering Hereby Offering Offering* Hereby Offering*
---- ------------ --------- ----------- ------------ --------- -----------
Hawaiian Airlines Pension Plan for
Salaried Employees............... 100 100 0 486 486 0
Hawaiian Airlines Pilots Retirement
Plan............................. 1,500 1,500 0 7,291 7,291 0
HFR TQA Master Trust c/o TQA
Investors, L.L.C................. 10,350 10,350 0 115,241 50,306 64,935
Hillbloom Foundation............... 700 700 0 3,402 3,402 0
ICI American Holdings Trust........ 1,250 1,250 0 6,076 6,076 0
JMG Capital Partners, L.P.......... 18,750 18,750 0 91,134 91,134 0
JMG Triton Offshore Fund, Ltd...... 51,250 51,250 0 249,101 249,101 0
KD Convertible Arbitrage Fund
L.P.............................. 73,000 73,000 0 354,817 354,817 0
Key Span Foundation................ 1,150 1,150 0 5,590 5,590 0
LDG Limited........................ 10,350 10,350 0 115,241 50,306 64,935
Lincoln National Convertible
Securities Fund.................. 10,000 10,000 0 48,605 48,605 0
LLT Limited........................ 7,700 7,700 0 37,426 37,426 0
Lord Abbett Investment Trust--
LA Convertible Fund.............. 4,000 4,000 0 19,442 19,442 0
Lord Abbett Series Fund, Inc. Bond
Debenture........................ 4,100 4,100 0 19,928 19,928 0
Lyxor Master Fund, c/o Argent/
LowLev CB........................ 33,000 33,000 0 496,110 160,397 335,714
Lyxor Master Fund, c/o Forest
Investment Mgmt. L.L.C........... 34,100 34,100 0 165,743 165,743 0
Mainstay Convertible Fund.......... 22,600 22,600 0 109,847 109,847 0
Mainstay VP Convertible Portfolio.. 9,100 9,100 0 44,231 44,231 0
McMahan Securities Co, L.P......... 46,400 46,400 0 225,527 225,527 0
Merrill Lynch Insurance Group
Bond Debenture................... 500 500 0 2,430 2,430 0
Met Investors Bond Debenture
Fund............................. 50,000 50,000 0 243,025 243,025 0
Met Investors Series Trust Bond
Debenture........................ 27,000 27,000 0 131,234 131,234 0
National Fuel & Gas Company
Retirement Plan.................. 2,850 2,850 0 13,852 13,852 0
Nations Convertible Securities
Fund............................. 173,650 173,650 0 844,026 844,026 0
New York Life Insurance
Company.......................... 35,800 35,800 0 174,006 174,006 0
New York Life Separate Account
No. 7............................ 500 500 0 2,430 2,430 0
Nicholas Applegate Capital
Management Conv. Income
Fund............................. 259,801 259,801 0 1,262,763 1,262,763 0
Nicholas Applegate Capital
Management Conv. Mutual
Fund............................. 9,170 9,170 0 44,571 44,571 0
33
Number of Number of Number of Number of
Shares of Number of Shares of Shares of Number of Shares of
Preferred Shares of Preferred Common Shares of Common
Stock Preferred Stock to be Stock Common Stock to be
Beneficially Stock Owned After Beneficially Stock Owned After
Owned Being Completion Owned Being Completion
Prior to the Offered of the Prior to the Offered of the
Name Offering Hereby Offering Offering* Hereby Offering*
---- ------------ --------- ----------- ------------ --------- -----------
Nicholas Applegate Capital
Management Convert &
Income 2.......................... 134,100 134,100 0 651,793 651,793 0
Norwich Union Life & Pensions....... 30,000 30,000 0 145,815 145,815 0
Nuveen Preferred and Convertible
Fund JQC.......................... 105,000 105,000 0 510,353 510,353 0
Oxford, Lord Abbett & Co............ 34,000 34,000 0 165,257 165,257 0
Phoenix Lord Abbett Bond
Debenture Fund.................... 200 200 0 972 972 0
Physicians Life..................... 2,375 2,375 0 11,544 11,544 0
Privelege Portfolio 81CAV........... 50,000 50,000 0 243,025 243,025 243,025
Prudential Insurance Co of
America........................... 325 325 0 1,580 1,580 0
R.B.C. Alternative Assets, L.P., c/o
Forest Investment Mgmt.,
L.L.C............................. 6,800 6,800 0 33,051 33,051 0
Ramius, L.P......................... 3,000 3,000 0 14,582 14,582 0
RCG Baldwin, L.P.................... 10,000 10,000 0 48,605 48,605 0
RCG HalifaxMaster Fund, LTD......... 10,000 10,000 0 48,605 48,605 0
RCG Latitude Master Fund, LTD....... 75,000 75,000 0 364,538 364,538 0
RCG Multi Strategy A/C L.P.......... 75,000 75,000 0 364,538 364,538 0
RCG Multi Strategy Master Fund,
LTD............................... 8,000 8,000 0 38,884 38,884 0
Relay 11 Holdings, c/o Forest
Investment Mgmt., L.L.C........... 4,300 4,300 0 20,900 20,900 0
San Diego City Retirement........... 9,450 9,450 0 45,932 45,932 0
San Diego County Convertible........ 20,620 20,620 0 100,224 100,224 0
SG Cowen Securities Corporation..... 30,000 30,000 0 145,815 145,815 0
Southern Farm Bureau Life
Insurance......................... 9,375 9,375 0 45,567 45,567 0
Splinx Convertible Arbitrage, c/o
Forest Investment Mgmt.,
L.L.C............................. 2,100 2,100 0 10,207 10,207 0
State of Oregon/Equity.............. 17,250 17,250 0 83,844 83,844 0
State of Oregon/SAIF Corporation.... 54,000 54,000 0 262,467 262,467 0
State Street Bank Custodian for GE
Pension Trust..................... 26,800 26,800 0 130,261 130,261 0
Susquehanna Capital Group........... 250,000 250,000 0 1,215,125 1,215,125 0
Syngenta AG......................... 900 900 0 4,374 4,374 0
Topanga XI.......................... 43,000 43,000 0 209,002 209,002 0
Total Fina Elf Finance USA, Inc..... 4,600 4,600 0 22,358 22,358 0
TQA Master Fund, LTD................ 34,460 34,460 0 167,493 167,493 0
TQA Master Plus Fund, LTD........... 34,490 34,490 0 167,639 167,639 0
UBS O'Connor LLC f/b/o O'Connor
Global Convertible Arbitrage
Master Limited.................... 50,000 50,000 0 243,025 243,025 0
UBS O'Connor LLC f/b/o O'Connor
Global Convertible Portfolio...... 7,500 7,500 0 36,454 36,454 0
34
Number of Number of Number of Number of
Shares of Number of Shares of Shares of Number of Shares of
Preferred Shares of Preferred Common Shares of Common
Stock Preferred Stock to be Stock Common Stock to be
Beneficially Stock Owned After Beneficially Stock Owned After
Owned Being Completion Owned Being Completion
Prior to the Offered of the Prior to the Offered of the
Name Offering Hereby Offering Offering* Hereby Offering*
---- ------------ --------- ----------- ------------ --------- -----------
Univest Convertible Arbitrage Fund,
Ltd., c/o Forest Investment mngt.
L.L.C............................ 1,407 1,407 0 6,839 6,839 0
US Bank, FBO Benedictine Health
Systems.......................... 2,825 2,825 0 13,731 13,731 0
Wake Forest University............. 6,355 6,355 0 30,888 30,888 0
White River Securities, L.L.C...... 5,000 5,000 0 24,303 24,303 0
WPG Convertible Arbitrage Overseas
Master Fund...................... 18,000 18,000 0 87,489 87,489 0
WPG MSA Convertible Arbitrage
Fund............................. 4,500 4,500 0 21,872 21,872 0
Writers Guild Convertible Fund..... 77,200 77,200 0 375,231 375,231 0
Wyoming State Treasurer............ 11,105 11,105 0 53,976 53,976 0
Xavex Convertible Arbitrage No. 5.. 9,000 9,000 0 43,745 43,745 0
Xavex Convertible Arbitrage 2
Fund............................. 11,200 11,200 0 70,438 54,438 16,000
Xavex Convertible Arbitrage 4
Fund............................. 800 800 0 3,888 3,888 0
Xavex Convertible Arbitrage 7
Fund............................. 5,000 5,000 0 24,303 24,303 0
Xavex Convertible Arbitrage 10
Fund............................. 16,400 16,400 0 94,012 79,712 14,300
Zeneca Holdings Trust.............. 1,325 1,325 0 6,440 6,440 0
Zurich Institutional Benchmarks
Master Fund, LTD................. 6,400 6,400 0 44,707 31,107 13,600
Zurich Institutional Benchmarks
Master Fund, LTD c/o Argent...... 2,500 2,500 0 156,956 12,151 144,805
Zurich Institutional Benchmarks
Master Fund, LTD c/o TQA
Investors, L.L.C................. 10,350 10,350 0 50,306 50,306 0
Zurich Master Hedge Fund c/o Forest
Investment Mgmt., L.L.C.......... 10,200 10,200 0 49,577 49,577 0
Total.............................. 3,607,148
--------
* Includes common stock issuable upon conversion of Chesapeake's 6.75%
Cumulative Convertible Preferred Stock at a conversion rate of 6.4935 shares
of common stock per share of preferred stock.
35
PLAN OF DISTRIBUTION
The preferred stock and the common stock are being registered to permit
public secondary trading of these securities by the holders thereof from time
to time after the date of this prospectus. We have agreed, among other things,
to bear all expenses (other than underwriting discounts and selling
commissions) in connection with the registration and sale of the preferred
stock and the common stock covered by this prospectus.
We will not receive any of the proceeds from the offering of preferred stock
or the common stock by the selling securityholders. We have been advised by the
selling securityholders that the selling securityholders may sell all or a
portion of the preferred stock and common stock beneficially owned by them and
offered hereby from time to time on any exchange on which the securities are
listed on terms to be determined at the times of such sales. The selling
securityholders may also make private sales directly or through a broker or
brokers. Alternatively, any of the selling securityholders may from time to
time offer the preferred stock or the common stock beneficially owned by them
through underwriters, dealers or agents, who may receive compensation in the
form of underwriting discounts, commissions or concessions from the selling
securityholders and the purchasers of the preferred stock and the common stock
for whom they may act as agent. The aggregate proceeds to the selling
securityholders from the sale of the preferred stock or common stock offering
by them hereby will be the purchase price of such preferred stock or common
stock less discounts and commissions, if any.
The preferred stock and common stock may be sold from time to time in one or
more transactions at fixed offering prices, which may be changed, or at varying
prices determined at the time of sale or at negotiated prices. These prices
will be determined by the holders of such securities or by agreement between
these holders and underwriters or dealers who may receive fees or commissions
in connection therewith.
These transactions may include block transactions or crosses. Crosses are
transactions in which the same broker acts as an agent on both sides of the
trade.
In connection with sales of the preferred stock or our common stock or
otherwise, the selling securityholder may enter into hedging transactions with
broker-dealers or others, which may in turn engage in short sales of the
preferred stock or our common stock in the course of hedging the positions they
assume. The selling securityholder may also sell preferred stock or our common
stock short and deliver preferred stock or our common stock to close out short
positions, or loan or pledge preferred stock or our common stock to
broker-dealers or others that in turn may sell such securities. The selling
securityholder may pledge or grant a security interest in some or all of the
preferred stock or our common stock issued upon conversion of the preferred
stock owned by it and if it defaults in the performance of its secured
obligations, the pledgees or secured parties may offer and sell the preferred
stock or our common stock from time to time pursuant to this prospectus. The
selling securityholder also may transfer and donate preferred stock or shares
of our common stock issuable upon conversion of the preferred stock in other
circumstances in which case the transferees, donees, pledgees or other
successors in interest will be the selling securityholder for purposes of the
prospectus. The selling securityholder may sell short our common stock and may
deliver this prospectus in connection with such short sales and use the shares
of our common stock covered by the prospectus to cover such short sales. In
addition, any preferred stock or shares of our common stock covered by this
prospectus that qualify for sale pursuant to Rule 144, Rule 144A or any other
available exemption from registration under the Securities Act may be sold
under Rule 144, Rule 144A or such other available exemption.
At the time a particular offering of preferred stock or shares of our common
stock issuable upon conversion of the preferred stock is made, a prospectus
supplement, if required, will be distributed which will set forth the aggregate
amount of preferred stock or number of shares of our common stock being offered
and the terms of the offering, including the name or names of any underwriters,
dealers, brokers or agents, if any, and any discounts, commissions or
concessions allowed or reallowed to be paid to brokers or dealers.
Our outstanding common stock is listed for trading on the New York Stock
Exchange.
36
The preferred stock was issued and sold on March 5, 2003 in transactions
exempt from the registration requirements of the Securities Act to persons
reasonably believed by the Initial Purchasers to be "qualified institutional
buyers" (as defined in Rule 144A under the Securities Act). We have agreed to
indemnify the Initial Purchasers and each selling securityholder, and each
selling securityholder had agreed to indemnify us, the Initial Purchasers and
each other selling shareholder against certain liabilities arising under the
Securities Act.
Selling securityholders and any underwriters, dealers, brokers or agents who
participate in the distribution of the preferred stock or our common stock may
be deemed to be "underwriters" within the meaning of the Securities Act and any
profits on the sale of the preferred stock and our common stock by them and any
discounts, commissioners or concessions received by any such underwriters,
dealers, brokers or agents may be deemed to be underwriting discounts and
commissions under the Securities Act.
The selling securityholders and any other person participating in such
distribution will be subject to applicable provisions of the Exchange Act and
the rules and regulations thereunder, including, without limitation, Regulation
M which may limit the timing of purchases and sales of the preferred stock and
our common stock by the selling securityholders and any other such person.
Furthermore, Regulation M under the Exchange Act may restrict the ability of
any person engaged in a distribution of the preferred stock and our common
stock being distributed for a period of up to five business days prior to the
commencement of such distribution. All of the foregoing may affect the
marketability of the preferred stock and our common stock and the ability of
any person or entity to engage in market-making activities with respect to the
preferred stock and our common stock.
We will use our reasonable efforts to keep the registration statement of
which this prospectus is a part effective until the earliest of (a) the sale
pursuant to the shelf registration statement of all the preferred stock and the
shares of common stock issuable upon conversion of the preferred stock
thereunder, (b) the expiration of the holding period applicable to such
securities held by persons that are not our affiliates under Rule 144(k) under
the Securities Act or any successor provision, subject to certain permitted
exceptions, and (c) the date all preferred stock and common stock issuable upon
conversion of the preferred stock cease to be outstanding.
37
LEGAL MATTERS
The validity of the issuance of the preferred stock and the validity of the
common stock issuable upon conversion of the preferred stock have been passed
upon for us by Commercial Law Group, P.C. Shannon T. Self, a shareholder in
Commercial Law Group, P.C., is a director of Chesapeake, and he owns 104,992
shares of our common stock.
EXPERTS
The consolidated financial statements of Chesapeake Energy Corporation,
incorporated in this prospectus by reference to the amended annual report on
Form 10-K/A of Chesapeake Energy Corporation for the year ended December 31,
2002, 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.
Certain estimates of proved oil and gas reserves for Chesapeake Energy
Corporation referred to and incorporated by reference herein were based in part
upon engineering reports prepared by Williamson Petroleum Consultants, Inc.,
Ryder Scott Company L.P., Netherland, Sewell & Associates, Inc. and Lee Keeling
and Associates, Inc., independent petroleum engineers. These estimates are
included and incorporated herein in reliance on the authority of each such firm
as experts in such matters.
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:
. our amended annual report on Form 10-K/A for the fiscal year ended
December 31, 2002;
. our quarterly report on Form 10-Q for the quarter ended March 31, 2003;
. our amended quarterly report on Form 10-Q/A for the quarter ended June
30, 2003; and
. our current reports on Form 8-K filed on January 10, 2003, February 4,
2003, February 28, 2003, March 4, 2003, March 14, 2003, March 19, 2003,
April 29, 2003, June 6, 2003 and June 25, 2003 (excluding any information
furnished pursuant to Item 9 on any such current report on Form 8-K).
All documents filed by us pursuant to Sections 13(a), 13(c), 14 or 15(d) of
the Exchange Act (excluding any information furnished pursuant to Item 9 or
Item 12 on any current report on Form 8-K) subsequent to the date of this
filing and prior to the termination of this offering 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.
38
FORWARD-LOOKING STATEMENTS
This prospectus includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act 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, the impact of the ONEOK, El Paso and Vintage acquisitions,
expected oil and gas production, cash flow and anticipated liquidity, business
strategy and other plans and objectives for future operations and expected
future expenses and use of net operating loss carryforwards.
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" and 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 inherent in estimating quantities of oil and gas reserves;
. projecting future rates of production and the timing of development
expenditures;
. 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 loses (NOL) carryforwards
before 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, and we
undertake no obligation to update this 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.
39
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution
The expenses of this offering (all of which are to be paid by the
registrant) are estimated to be as follows:
Securities and Exchange Commission registration fee $18,607
Legal fees and expenses............................ 40,000
Accounting fees and expenses....................... 10,000
Printing expenses.................................. 5,000
Miscellaneous...................................... 4,000
-------
TOTAL........................................... $77,607
=======
Item 15. Indemnification Of Officers And Directors
Section 1031 of the Oklahoma General Corporation Act, under which Chesapeake
is incorporated, authorizes the indemnification of directors and officers under
certain circumstances. Article VIII of the Certificate of Incorporation of
Chesapeake and Article VI of the Bylaws of Chesapeake also provide for
indemnification of directors and officers under certain circumstances. These
provisions, together with Chesapeake's indemnification obligations under
individual indemnity agreements with its directors and officers, may be
sufficiently broad to indemnify such persons for liabilities under the
Securities Act of 1933 (the "Securities Act"), as amended. In addition,
Chesapeake maintains insurance, which insures its directors and officers
against certain liabilities.
The Oklahoma General Corporation Act provides for indemnification of each of
Chesapeake's officers and directors against (a) expenses, including attorneys'
fees, judgments, fines and amounts paid in settlement actually and reasonably
incurred by them in connection with any action, suit or proceeding brought by
reason of such person being or having been a director, officer, employee or
agent of Chesapeake, or of any other corporation, partnership, joint venture,
trust or other enterprise at the request of Chesapeake, other than an action by
or in the right of Chesapeake. To be entitled to indemnification, the
individual must have acted in good faith and in a manner he reasonably believed
to be in or not opposed to the best interest of Chesapeake, and with respect to
any criminal action, the person seeking indemnification had no reasonable cause
to believe that the conduct was unlawful and (b) expenses, including attorneys'
fees, actually and reasonably incurred in connection with the defense or
settlement of any action or suit by or in the right of Chesapeake brought by
reason of the person seeking indemnification being or having been a director,
officer, employee or agent of Chesapeake, or any other corporation,
partnership, joint venture, trust or other enterprise at the request of
Chesapeake, provided the actions were in good faith and were reasonably
believed to be in or not opposed to the best interest of Chesapeake, except
that no indemnification shall be made in respect of any claim, issue or matter
as to which the individual shall have been adjudged liable to Chesapeake,
unless and only to the extent that the court in which such action was decided
has determined that the person is fairly and reasonably entitled to indemnity
for such expenses which the court deems proper. Article VIII of Chesapeake's
Certificate of Incorporation provides for indemnification of Chesapeake's
director and officers. The Oklahoma General Corporation Act also permits
Chesapeake to purchase and maintain insurance on behalf of Chesapeake's
directors and officers against any liability arising out of their status as
such, whether or not Chesapeake would have the power to indemnify them against
such liability. These provisions may be sufficiently broad to indemnify such
persons for liabilities arising under the Securities Act.
Chesapeake has entered into indemnity agreements with each of its directors
and executive officers. Under each indemnity agreement, Chesapeake will pay on
behalf of the indemnitee any amount which he is or becomes legally obligated to
pay because of (a) any claim or claims from time to time threatened or made
against him by
II-1
any person because of any act or omission or neglect or breach of duty,
including any actual or alleged error or misstatement or misleading statement,
which he commits or suffers while acting in his capacity as a director and/or
officer of Chesapeake or an affiliate or (b) being a party, or being threatened
to be made a party, to any threatened, pending or contemplated action, suit or
proceeding, whether civil, criminal, administrative or investigative, by reason
of the fact that he is or was an officer, director, employee or agent of
Chesapeake or an affiliate or is or was serving at the request of Chesapeake as
a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise. The payments which Chesapeake would
be obligated to make under an indemnification agreement could include damages,
charges, judgments, fines, penalties, settlements and costs, cost of
investigation and cost of defense of legal, equitable or criminal actions,
claims or proceedings and appeals therefrom, and costs of attachment,
supersedeas, bail, surety or other bonds. Chesapeake also provides liability
insurance for each of its directors and executive officers.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits.
The following exhibits are filed herewith pursuant to the requirements of
Item 601 of Regulation S-K:
Exhibit
No. Description
------- -----------
2.1 Purchase and Sale Agreement By and Between El Paso Production Company and Noric, L.P. as Seller
and Chesapeake EP Corporation as Buyer dated February 21, 2003. Incorporated herein by reference
to Exhibit 2.1 to Chesapeake's annual report on Form 10-K for the year ended December 31, 2002.
3.1** Chesapeake's Restated Certificate of Incorporation together with Chesapeake's Certificate of
Designation for the 6.75% Cumulative Convertible Preferred Stock, Certificate of Elimination for
2,000 shares of the 6.75% Cumulative Convertible Preferred Stock, Certificate of Designation for the
Series A Junior Participating Preferred Stock and Certificate of Designation for the 6.00% Cumulative
Convertible Preferred Stock.
3.3 Chesapeake's Bylaws. Incorporated herein by reference to Exhibit 3.2 to Chesapeake's quarterly
report on Form 10-Q for the quarter ended June 30, 2001.
4.1 Indenture dated as of March 15, 1997 among Chesapeake, as issuer, Chesapeake Operating, Inc.,
Chesapeake Gas Development Corporation and Chesapeake Exploration Limited Partnership, as
Subsidiary Guarantors, and The Bank of New York (formerly United States Trust Company of New
York), as Trustee, with respect to 7.875% Senior Notes due 2004. Incorporated herein by reference to
Exhibit 4.1 to Chesapeake's registration statement on Form S-4 (No. 333-24995). First Supplemental
Indenture dated December 17, 1997 and Second Supplemental Indenture dated February 16, 1998.
Incorporated herein by reference to Exhibit 4.1.1 to Chesapeake's transition report on Form 10-K for
the six months ended December 31, 1997. Second [Third] Supplemental Indenture dated April 22,
1998. Incorporated herein by reference to Exhibit 4.1.1 to Chesapeake's registration statement on
Form S-3 registration statement (No. 333-57235). Fourth Supplemental Indenture dated July 1, 1998.
Incorporated herein by reference to Exhibit 4.1.1 to Chesapeake's quarterly report on Form 10-Q for
the quarter ended September 30, 1998. Fifth Supplemental Indenture dated November 19, 1999.
Incorporated herein by reference to Exhibit 4.1.1 to Chesapeake's quarterly report on Form 10-Q for
the quarter ended March 31, 2001. Sixth Supplemental Indenture dated December 31, 1999.
Incorporated herein by reference to Exhibit 4.1.1 to Chesapeake's quarterly report on Form 10-Q for
the quarter ended September 30, 2001. Seventh Supplemental Indenture dated September 12, 2001.
Incorporated herein by reference to Exhibit 4.1.2 to Chesapeake's quarterly report on Form 10-Q for
the quarter ended September 30, 2001. Eighth Supplemental Indenture dated October 1, 2001.
Incorporated herein by reference to Exhibit 4.1.3 to Chesapeake's quarterly report on Form 10-Q for
the quarter ended September 30, 2001. Ninth Supplemental Indenture dated December 17, 2001.
Incorporated herein by reference to Exhibit 4.1.1 to Chesapeake's registration statement on Form S-3
II-2
Exhibit
No. Description
------- -----------
(No. 333-76546). Tenth Supplemental Indenture dated as of June 28, 2002. Incorporated herein by
reference to Exhibit 4.1.2 to Chesapeake's registration statement on Form S-4 (No. 333-99289).
Eleventh Supplemental Indenture dated as of July 8, 2002. Incorporated herein by reference to Exhibit
4.1.3 to Chesapeake's registration statement on Form S-4 (No. 333-99289). Twelfth Supplemental
Indenture dated as of February 14, 2003. Incorporated herein by reference to Exhibit 4.1.1 to
Chesapeake's annual report on Form 10-K for the year ended December 31, 2002. Thirteenth
Supplemental Indenture dated as of May 1, 2003. Incorporated by reference to Exhibit 4.1.1 to
Chesapeake's quarterly report on Form 10-Q for the quarter ended March 31, 2003.
4.2 Indenture dated as of March 15, 1997 among Chesapeake, as issuer, Chesapeake Operating, Inc.,
Chesapeake Gas Development Corporation and Chesapeake Exploration Limited Partnership, as
Subsidiary Guarantors, and The Bank of New York (formerly United States Trust Company of New
York), as Trustee, with respect to 8.5% Senior Notes due 2012. Incorporated herein by reference to
Exhibit 4.3 to Chesapeake's registration statement on Form S-4 (No. 333-24995). First Supplemental
Indenture dated December 17, 1997 and Second Supplemental Indenture dated February 16, 1998.
Incorporated herein by reference to Exhibit 4.2.1 to Chesapeake's transition report on Form 10-K for
the six months ended December 31, 1997. Second [Third] Supplemental Indenture dated April 22,
1998. Incorporated herein by reference to Exhibit 4.2.1 to Chesapeake's Amendment No. 1 to Form
S-3 registration statement (No. 333-57235). Fourth Supplemental Indenture dated July 1, 1998.
Incorporated herein by reference to Exhibit 4.2.1 to Chesapeake's quarterly report on Form 10-Q for
the quarter ended September 30, 1998. Fifth Supplemental Indenture dated November 19, 1999.
Incorporated herein by reference to Exhibit 4.2.1 to Chesapeake's quarterly report on Form 10-Q for
the quarter ended March 31, 2001. Sixth Supplemental Indenture dated December 31, 1999.
Incorporated herein by reference to Exhibit 4.2.1 to Chesapeake's quarterly report on Form 10-Q for
the quarter ended September 30, 2001. Seventh Supplemental Indenture dated September 12, 2001.
Incorporated herein by reference to Exhibit 4.2.2 to Chesapeake's quarterly report on Form 10-Q for
the quarter ended September 30, 2001. Eighth Supplemental Indenture dated October 1, 2001.
Incorporated herein by reference to Exhibit 4.2.3 to Chesapeake's quarterly report on Form 10-Q for
the quarter ended September 30, 2001. Ninth Supplemental Indenture dated December 17, 2001.
Incorporated herein by reference to Exhibit 4.2.1 to Chesapeake's registration statement on Form S-3
(No. 333-76546). Tenth Supplemental Indenture dated as of June 28, 2002. Incorporated herein by
reference to Exhibit 4.2.2 to Chesapeake's registration statement on Form S-4 (No. 333-99289).
Eleventh Supplemental Indenture dated as of July 8, 2002. Incorporated herein by reference to Exhibit
4.2.3 to Chesapeake's registration statement on Form S-4 (No. 333-99289). Twelfth Supplemental
Indenture dated as of February 14, 2003. Incorporated herein by reference to Exhibit 4.2.1 to
Chesapeake's annual report on Form 10-K for the year ended December 31, 2002. Thirteenth
Supplemental Indenture dated as of May 1, 2003. Incorporated by reference to Exhibit 4.2.1 to
Chesapeake's quarterly report on Form 10-Q for the quarter ended March 31, 2003.
4.3 Indenture dated as of April 6, 2001 among Chesapeake, as issuer, its subsidiaries signatory thereto, as
Subsidiary Guarantors, and The Bank of New York (formerly United States Trust Company of New
York), as Trustee, with respect to 8.125% Senior Notes due 2011. Incorporated herein by reference to
Exhibit 4.6 to Chesapeake's quarterly report on Form 10-Q for the quarter ended March 31, 2001.
Supplemental Indenture dated May 14, 2001. Incorporated herein by reference to Exhibit 4.6 to
Chesapeake's quarterly report on Form 10-Q for the quarter ended March 31, 2001. Second
Supplemental Indenture dated September 12, 2001. Incorporated herein by reference to Exhibit 4.3.1
to Chesapeake's quarterly report on Form 10-Q for the quarter ended September 30, 2001. Third
Supplemental Indenture dated October 1, 2001. Incorporated herein by reference to Exhibit 4.3.2 to
Chesapeake's quarterly report on Form 10-Q for the quarter ended September 30, 2001. Fourth
II-3
Exhibit
No. Description
------- -----------
Supplemental Indenture dated December 17, 2001. Incorporated herein by reference to Exhibit 4.3.1
to Chesapeake's registration statement on Form S-3 (No. 333-76546). Fifth Supplemental Indenture
dated as of June 28, 2002. Incorporated herein by reference to Exhibit 4.3.2 to Chesapeake's
registration statement on Form S-4 (No. 333-99289). Sixth Supplemental Indenture dated July 8,
2002. Incorporated herein by reference to Exhibit 4.3.3 to Chesapeake's registration statement on
Form S-4 (No. 333-99289). Seventh Supplemental Indenture dated as of February 14, 2003 to
Indenture dated as of April 6, 2001. Incorporated herein by reference to Exhibit 4.3.1 to Chesapeake's
annual report on Form 10-K for the year ended December 31, 2002. Eighth Supplemental Indenture
dated as of May 1, 2003. Incorporated by reference to Exhibit 4.3.1 to Chesapeake's quarterly report
on Form 10-Q for the quarter ended March 31, 2003.
4.4 Indenture dated as of November 5, 2001 among Chesapeake, as issuer, its subsidiaries signatory
thereto, as Subsidiary Guarantors and The Bank of New York, as Trustee, with respect to 8.375%
Senior Notes due 2008. Incorporated herein by reference to Exhibit 4.16 to Chesapeake's registration
statement on Form S-4 (No. 333-74584). First Supplemental Indenture dated December 17, 2001.
Incorporated herein by reference to Exhibit 4.16.1 to Chesapeake's registration statement on Form
S-3 (No. 333-76546). Second Supplemental Indenture dated as of June 28, 2002. Incorporated herein
by reference to Exhibit 4.4.2 to Chesapeake's registration statement on Form S-4 (No. 333-99289).
Third Supplemental Indenture dated as of July 8, 2002. Incorporated herein by reference to Exhibit
4.4.3 to Chesapeake's registration statement on Form S-4 (No. 333-99289). Fourth Supplemental
Indenture dated as of February 14, 2003. Incorporated herein by reference to Exhibit 4.4.1 to
Chesapeake's annual report on Form 10-K for the year ended December 31, 2002. Fifth Supplemental
Indenture dated as of May 1, 2003. Incorporated by reference to Exhibit 4.4.1 to Chesapeake's
quarterly report on Form 10-Q for the quarter ended March 31, 2003.
4.5 Indenture dated as of August 12, 2002 among Chesapeake, as issuer, its subsidiaries signatory thereto,
as Subsidiary Guarantors and The Bank of New York, with respect to its 9% Senior Notes due 2012.
Incorporated herein by reference to Exhibit 4.14 to Chesapeake's registration statement on Form S-4
(No. 333-99289). First Supplemental Indenture dated as of February 14, 2003. Incorporated herein by
reference to Exhibit 4.5.1 to Chesapeake's annual report on Form 10-K for the year ended
December 31, 2002. Second Supplemental Indenture dated as of May 1, 2003. Incorporated by
reference to Exhibit 4.5.1 to Chesapeake's quarterly report on Form 10-Q for the quarter ended
March 31, 2003.
4.6 Indenture dated as of December 20, 2002 among Chesapeake, as issuer, the subsidiaries signatory
thereto, as Subsidiary Guarantors and The Bank of New York, as Trustee with respect to our 7.75%
Senior Notes due 2015. Incorporated herein by reference to Exhibit 4.5 to Chesapeake's registration
statement on Form S-4 (No. 333-102445). First Supplemental Indenture dated as of February 14,
2003. Incorporated herein by reference to Exhibit 4.6.1 to Chesapeake's annual report on Form 10-K
for the year ended December 31, 2002. Second Supplemental Indenture dated as of May 1, 2003.
Incorporated by reference to Exhibit 4.6.1 to Chesapeake's quarterly report on Form 10-Q for the
quarter ended March 31, 2003.
4.7 Indenture dated as of March 5, 2003 among Chesapeake, as issuer, the subsidiaries signatory thereto,
as Subsidiary Guarantors and The Bank of New York, as Trustee with respect to our 7.50% Senior
Notes due 2013. Incorporated herein by reference to Exhibit 4.7 to Chesapeake's registration
statement on Form S-4 filed April 9, 2003. First Supplemental Indenture dated as of May 1, 2003.
Incorporated by reference to Exhibit 4.7.1 to Chesapeake's quarterly report on Form 10-Q for the
quarter ended March 31, 2003.
4.8 Agreement to furnish copies of unfiled long-term debt instruments. Incorporated herein by reference
to Chesapeake's transition report on Form 10-K for the six months ended December 31, 1997.
II-4
Exhibit
No. Description
------- -----------
4.9 $225,000,000 Second Amended and Restated Credit Agreement, dated as of June 11, 2001, among
Chesapeake Energy Corporation, Chesapeake Exploration Limited Partnership, as Borrower, Bear
Stearns Corporate Lending Inc., as Syndication Agent, Union Bank of California, N.A., as
Administrative Agent and Collateral Agent, BNP Paribas and Toronto Dominion (Texas), Inc., as
Co-Documentation Agents and other lenders party thereto. Incorporated herein by reference to
Exhibit 4.6 to Chesapeake's quarterly report on Form 10-Q for the quarter ended June 30, 2001.
Consent and waiver letter dated September 10, 2001 and consent and waiver letter dated October 5,
2001. Incorporated herein by reference to Exhibits 4.6.1 and 4.6.2 to Chesapeake's quarterly report on
Form 10-Q for the quarter ended September 30, 2001, respectively. Consent and waiver letter dated
November 2, 2001. Incorporated herein by reference to Exhibit 4.6.1 to Chesapeake's registration
statement on Form S-4 (No. 333-74584). First Amendment dated March 8, 2002 with respect to
Second Amended and Restated Credit Agreement. Incorporated herein by reference to Exhibit 4.6.1 to
Chesapeake's annual report on Form 10-K for the year ended December 31, 2001. Consent and
waiver letter dated April 15, 2002. Incorporated herein by reference to Exhibit 4.6.1 to Chesapeake's
quarterly report on Form 10-Q for the quarter ended March 31, 2002. Second Amendment dated
June 4, 2002 with respect to Second Amended and Restated Credit Agreement. Incorporated by
reference to Exhibit 4.6.1 to Chesapeake's quarterly report on Form 10-Q for the quarter ended
June 30, 2002. Consent and waiver letter dated August 2, 2002. Incorporated herein by reference to
Exhibit 4.6.2 to Chesapeake's registration statement on Form S-4 (No. 333-99289). Third
Amendment dated September 20, 2002, with respect to the Second Amendment and Restated Credit
Agreement. Incorporated herein by reference to Exhibit 4.6.3 to Chesapeake's quarterly report on
Form 10-Q for the quarter ended September 30, 2002. Fourth Amendment dated November 4, 2002,
with respect to the Second Amended and Restated Credit Agreement. Incorporated herein by
reference to Exhibit 4.6.4 to Chesapeake's quarterly report on Form 10-Q for the quarter ended
September 30, 2002. Consent and waiver letter dated December 11, 2002 with respect to the Second
Amended and Restated Credit Agreement. Incorporated herein by reference to Exhibit 4.6.1 to
Chesapeake's registration statement on Form S-4 (No. 333-102446). Fifth Amendment dated March
3, 2003, with respect to the Second Amended and Restated Credit Agreement. Incorporated herein by
reference to Exhibit 4.9.1 to Chesapeake's registration statement on Form S-4 filed April 9, 2003.
4.10 Third Amended and Restated Credit Agreement, dated as of May 30, 2003, among Chesapeake
Energy Corporation, Chesapeake Exploration Limited Partnership, as Borrower, Union Bank of
California, N.A., as Administrative Agent and Collateral Agent, BNP Paribas and SunTrust Bank, as
Co-Syndication Agents, Credit Lyonnais New York Branch and Toronto Dominion (Texas), Inc., as
Co-Documentation Agents and the several lenders from time to time parties thereto. Incorporated
herein by reference to Exhibit 4.8 to Chesapeake's quarterly report on Form 10-Q for the quarter
ended June 30, 2003.
4.11 Warrant Agreement dated as of September 9, 1997 between Gothic Energy Corporation and UMB
Bank, N.A. (formerly American Stock Transfer & Trust Company), as warrant agent, and Supplement
to Warrant Agreement dated as of January 16, 2001. Incorporated herein by reference to Exhibit 4.9
to Registrant's annual report on Form 10-K for the year ended December 31, 2000.
4.12 Registration Rights Agreement dated as of September 9, 1997 among Gothic Energy Corporation, two
of its subsidiaries, Oppenheimer & Co., Inc., Banc One Capital Corporation and Paribas Corporation.
Incorporated herein by reference to Exhibit 4.10 to Registrant's annual report on Form 10-K for the
year ended December 31, 2000.
4.15 Warrant Agreement dated as of April 21, 1998 between Gothic Energy Corporation and American
Stock Transfer & Trust Company, as warrant agent, and Supplement to Warrant Agreement dated as
of January 16, 2001. Incorporated herein by reference to Exhibit 4.14 to Chesapeake's annual report
on Form 10-K for the year ended December 31, 2000.
II-5
Exhibit
No. Description
------- -----------
4.16 Warrant Registration Rights Agreement dated as of April 21, 1998 among Gothic Energy
Corporation and purchasers of units consisting of its 14 1/8% senior secured discount notes due 2006
and warrants to purchase its common stock. Incorporated herein by reference to Exhibit 4.15 to
Chesapeake's annual report on Form 10-K for the year ended December 31, 2000.
4.17 Rights Agreement dated as of July 15, 1998 between Chesapeake and UMB Bank, N.A., as rights
agent. Incorporated herein by reference to Exhibit 1 to Chesapeake's registration statement on Form
8-A filed July 16, 1998. Amendment No. 1 dated September 11, 1998. Incorporated herein by
reference to Exhibit 10.3 to Chesapeake's quarterly report on Form 10-Q for the quarter ended
September 30, 1998.
4.18 Registration Rights Agreement dated March 5, 2003 between Chesapeake and Salomon Smith
Barney Inc., Bear, Stearns & Co. Inc., Credit Suisse First Boston LLC, Lehman Brothers Inc.,
Morgan Stanley & Co. Incorporated, BNP Paribas Securities Corp., Credit Lyonnais Securities
(USA) Inc., and TD Securities (USA) Inc. Incorporated herein by reference to Exhibit 4.18 to
Chesapeake's registration statement on Form S-4 filed April 9, 2003.
4.19** Registration Rights Agreement dated March 5, 2003 between Chesapeake and Credit Suisse First
Boston LLC, Morgan Stanley & Co. Incorporated, Salomon Smith Barney Inc., Bear Stearns & Co.
Inc., Lehman Brothers Inc., CIBC World Markets Corp., Johnson Rice & Company L.L.C., RBC
Dain Rauscher Inc. and Simmons & Company International.
5.1** Opinion of Commercial Law Group, P.C. regarding the validity of the securities being registered.
12 Computation of Ratios of Earnings to Combined Fixed Charges and Preferred Dividends.
Incorporated herein by reference to Exhibit 12 to Chesapeake's amended quarterly report on Form
10-Q/A for the quarter ended June 30, 2003.
23.1* Consent of PricewaterhouseCoopers LLP.
23.2* Consent of Williamson Petroleum Consultants, Inc.
23.3* Consent of Ryder Scott Company L.P.
23.4* Consent of Lee Keeling and Associates, Inc.
23.5* Consent of Netherland, Sewell & Associates, Inc.
23.6** Consent of Commercial Law Group, P.C. (included in Exhibit 5.1).
24** Power of Attorney (included in the signature page of this Registration Statement).
--------
* Filed herewith.
** Filed with the original filing of this registration statement on April 4,
2003.
(b) Financial Statement Schedules. Incorporated herein by reference to
Item 8 of Chesapeake's annual report on Form 10-K for the year ended December
31, 2002.
Item 17. Undertakings
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant, we have been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
II-6
The registrant hereby undertakes
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(a) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(b) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the
effective registration statement;
(c) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement; and
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of
the offering.
(4) That, for purposes of determining any liability under the Securities
Act of 1933, each filing of the registrants annual report pursuant to section
13(a) or section 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report pursuant to
section 15(d) of the Securities Exchange Act of 1934) that is incorporated by
reference in the registration statement shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(5) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this
Form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means. This
includes information contained in documents filed subsequent to the effective
date of the registration statement through the date of responding to the
request.
(6) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein, that
was not the subject of and included in this Registration Statement when it
became effective.
II-7
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Oklahoma City, State of Oklahoma on September 18,
2003.
CHESAPEAKE ENERGY CORPORATION
By: /s/ AUBREY K. MCCLENDON
-----------------------------
Aubrey K. McClendon
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the date indicated.
Signature Capacity Date
--------- -------- ----
/s/ AUBREY K. MCCLENDON Chairman of the Board, Chief September 18, 2003
----------------------------- Executive Officer and
Aubrey K. McClendon Director (Principal
Executive Officer)
* President, Chief Operating September 18, 2003
----------------------------- Officer and Director
Tom L. Ward
* Executive Vice President and September 18, 2003
----------------------------- Chief Financial Officer
Marcus C. Rowland (Principal Financial
Officer)
* Senior Vice September 18, 2003
----------------------------- President--Accounting,
Michael A. Johnson Controller and Chief
Accounting Officer
(Principal Accounting
Officer)
----------------------------- Director
Frank Keating
* Director September 18, 2003
-----------------------------
Breene M. Kerr
* Director September 18, 2003
-----------------------------
Charles T. Maxwell
* Director September 18, 2003
-----------------------------
Shannon T. Self
* Director September 18, 2003
-----------------------------
Frederick B. Whittemore
*/s/ AUBREY K. MCCLENDON
-----------------------------
Aubrey K. McClendon
Attorney-In-Fact
II-8