SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant toss.240.14a-11(c) orss.240.14a-12
CHESAPEAKE ENERGY CORPORATION
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(Name of Registrant as Specified in its Charter)
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(Name of Person(s) Filing Proxy Statement
if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
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2) Aggregate number of securities to which transaction applies:
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3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:
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4) Proposed maximum aggregate value of transaction:
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Set forth the amount on which the filing fee is calculated and state
how it was determined.
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
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2) Form, Schedule or Registration Statement No.:
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4) Date Filed:
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CHESAPEAKE ENERGY CORPORATION
6100 NORTH WESTERN AVENUE
OKLAHOMA CITY, OKLAHOMA 73118
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NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD JUNE 7, 2002
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TO OUR SHAREHOLDERS:
The 2002 Annual Meeting of Shareholders of Chesapeake Energy Corporation,
an Oklahoma corporation (the "Company"), will be held at The Waterford Marriott
Hotel, Grand Ballroom A, 6300 Waterford Boulevard, Oklahoma City, Oklahoma, on
Friday, June 7, 2002 at 10:00 a.m., local time, to consider and act upon the
following matters:
1. To elect two directors to serve for three-year terms;
2. To adopt the 2002 Stock Option Plan;
3. To adopt the 2002 Non-Employee Director Stock Option Plan; and
4. To transact such other business as may properly come before the meeting
or any adjournment thereof.
Shareholders of record at the close of business on April 10, 2002 are
entitled to notice of and to vote at the meeting. A complete list of
shareholders entitled to vote at the meeting will be available for examination
by any shareholder at the Company's executive offices during ordinary business
hours for a period of at least ten days prior to the meeting.
The accompanying proxy statement contains information regarding the matters
to be considered at the meeting. The Board of Directors recommends a vote "FOR"
the matters being voted upon.
YOUR VOTE IS IMPORTANT. YOU MAY VOTE IN ANY ONE OF THE FOLLOWING WAYS:
o USE THE TOLL-FREE TELEPHONE NUMBER SHOWN ON THE PROXY CARD;
o USE THE INTERNET WEB SITE SHOWN ON THE PROXY CARD; OR
o MARK, SIGN, DATE AND PROMPTLY RETURN THE ENCLOSED PROXY CARD IN THE
POSTAGE-PAID ENVELOPE.
SHAREHOLDERS WHO ATTEND THE MEETING MAY REVOKE THEIR PROXIES AND VOTE IN PERSON
IF THEY DESIRE.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ JENNIFER M. GRIGSBY
Jennifer M. Grigsby
Secretary
Oklahoma City, Oklahoma
April 29, 2002
CHESAPEAKE ENERGY CORPORATION
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON JUNE 7, 2002
GENERAL INFORMATION
This proxy statement is furnished in connection with the solicitation of
proxies by the Board of Directors of Chesapeake Energy Corporation, an Oklahoma
corporation (the "Company"), for use at the Annual Meeting of Shareholders of
the Company (the "Meeting") to be held on the date, at the time and place and
for the purposes set forth in the accompanying Notice of Annual Meeting of
Shareholders, and any adjournment of the Meeting.
This proxy statement, the accompanying form of proxy and our Annual Report
for the fiscal year ended December 31, 2001 are being mailed on or about April
30, 2002 to shareholders of record as of April 10, 2002. Shareholders are
referred to the Annual Report for information concerning the activities of the
Company.
SHAREHOLDERS ENTITLED TO VOTE
The Board of Directors has established April 10, 2002 as the record date
(the "Record Date") to determine shareholders entitled to notice of and to vote
at the Meeting. At the close of business on the Record Date, there were
165,824,208 shares of our common stock outstanding and entitled to vote at the
Meeting. Each share is entitled to one vote. The holders of a majority of the
outstanding common stock, present in person or by proxy, will constitute a
quorum for the transaction of business at the Meeting.
PROXIES AND VOTING PROCEDURES
Most shareholders can vote their shares by (i) placing a toll-free
telephone call from the U.S. or Canada; (ii) using the Internet; or (iii)
mailing their signed proxy card. The telephone and Internet voting procedures
are designed to authenticate shareholders' identities, to allow you to vote your
shares and to confirm that your instructions have been properly recorded. Please
refer to your proxy card or the information forwarded by your bank, broker or
other nominee to see which options are available to you.
If you are a participant in the Chesapeake Energy Corporation Savings and
Incentive Stock Bonus Plan, you will receive our proxy card for all shares you
own through the plan. That proxy card will serve as a voting instruction card
for the trustee. If you do not vote this proxy, the trustee will vote the plan
shares in the same proportion as shares for which instructions were received.
Each proxy properly completed and returned to the Company in time for the
Meeting, and not revoked, will be voted in accordance with the instructions
given. If there are no contrary instructions, proxies will be voted FOR the
election of the nominees as directors and FOR approval of the two stock option
plans listed on the proxy.
Proxies may be revoked at any time prior to the voting of the proxy by (i)
the execution and submission of a revised proxy, (ii) written notice to the
Secretary of the Company, or (iii) voting in person at the Meeting. In the
absence of such revocation, shares represented by the proxies will be voted at
the Meeting. Your attendance at the Meeting will not automatically revoke your
proxy. If you do not hold your shares directly, you should follow the
instructions provided by your broker, bank or nominee in revoking your
previously voted proxy.
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REQUIRED VOTE
The election of the director nominees will be by plurality vote (that is,
the two nominees receiving the greatest number of votes will be elected). The
affirmative vote of holders of a majority of shares of common stock present at
the meeting in person or by proxy will be required to approve the adoption of
the 2002 Stock Option Plan and the 2002 Non-Employee Director Stock Option Plan.
The Secretary will appoint an inspector of election to tabulate all votes and to
certify the results of all matters voted upon at the Meeting.
It is the Company's policy (i) to count abstentions and broker non-votes
for purposes of determining the presence of a quorum at the Meeting, (ii) to
treat abstentions as shares represented at the Meeting and voting against a
proposal and to disregard broker non-votes in determining results on proposals
requiring a majority or higher vote, and (iii) to consider neither abstentions
nor broker non-votes in determining results of plurality votes. Under the rules
of the New York Stock Exchange, brokers who hold shares on behalf of their
customers have the authority to vote on routine proposals when they have not
received instructions from beneficial owners. A broker non-vote occurs when a
broker holding shares for a beneficial owner does not vote on a particular
proposal because the broker does not have discretionary voting power with
respect to that item and has not received voting instructions from the
beneficial owner. We believe each of the proposals to be presented at the
Meeting is a matter on which your broker is empowered to vote your shares in the
absence of specific instructions from you.
We will announce preliminary voting results at the Meeting and publish
final results in our quarterly report on Form 10-Q for the second quarter of
2002.
COST OF PROXY SOLICITATION
The cost of soliciting proxies in the enclosed form will be borne by the
Company. We have retained Strategic Stock Surveillance, LLC to assist in the
solicitation of proxies for a fee of $7,500, plus out-of-pocket expenses. In
addition, officers, employees or agents of the Company may solicit proxies by
mail, personally, or by telephone, facsimile transmission or other means of
communication. We will request banks and brokers or other similar agents or
fiduciaries to transmit the proxy material to the beneficial owners for their
voting instructions and will reimburse the expenses in so doing.
ELECTRONIC ACCESS TO PROXY MATERIALS AND ANNUAL REPORT
This proxy statement and our 2001 Annual Report are available on our
website at http://www.chkenergy.com.
HOUSEHOLDING
Based on rules adopted by the Securities and Exchange Commission in 2000,
certain shareholders who share the same last name and address will receive only
one copy of the proxy materials. This procedure is called "householding" and is
designed to reduce our printing and postage costs. If you hold your shares in
street name and would like additional copies of the proxy materials, please
contact your broker. If you are currently receiving multiple copies of the proxy
materials and would like to request householding, please contact your broker as
well. The Company does not currently use householding for record holders. In the
future, if we decide to use householding, record holders will be notified in
advance and given the opportunity to request to continue receiving multiple
copies of materials in the same household.
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VOTING ITEM 1
ELECTION OF DIRECTORS
Pursuant to provisions of the Company's Certificate of Incorporation and
Bylaws, the Board of Directors has fixed the number of directors at seven. There
is currently one vacancy on the Board. Our Certificate of Incorporation and
Bylaws provide for three classes of directors serving staggered three-year
terms, with each class to be as nearly equal in number as possible. The terms of
two directors expire at the Meeting, and each of them has been nominated for
re-election.
The Board of Directors has nominated Aubrey K. McClendon and Shannon T.
Self for re-election as directors for terms expiring at the 2005 Annual Meeting
of Shareholders and, in each case, until their successors are elected and
qualified. Proxies cannot be voted for a greater number of persons than the
number of nominees named. Other directors will continue in office until the
expiration of their terms at the 2003 or 2004 Annual Meeting of Shareholders, as
the case may be.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" EACH OF THE NOMINEES FOR ELECTION
TO THE BOARD OF DIRECTORS.
It is the intention of the persons named in the enclosed form of proxy to
vote such proxies for the election of the two nominees. The Board of Directors
expects that both nominees will be available for election but, in the event that
the nominees are not so available, proxies received will be voted for substitute
nominees to be designated by the Board or, in the event no such designation is
made, proxies will be voted for a lesser number of nominees.
INFORMATION REGARDING NOMINEES AND DIRECTORS
The following information is furnished for each person who is nominated for
re-election as a director or who is continuing to serve as a director of the
Company after the Meeting.
DIRECTORS WHOSE TERMS EXPIRE IN 2002
Aubrey K. McClendon, age 42, has served as Chairman of the Board, Chief
Executive Officer and a director since co-founding the Company in 1989. From
1982 to 1989, Mr. McClendon was an independent producer of oil and gas in
affiliation with Tom L. Ward, the Company's President and Chief Operating
Officer. Mr. McClendon is a member of the Board of Visitors of the Fuqua School
of Business at Duke University. Mr. McClendon is a 1981 graduate of Duke
University.
Shannon T. Self, age 45, has been a director of the Company since 1993. He
is a shareholder and co-founder of the law firm of Commercial Law Group, P.C.,
formerly Self, Giddens & Lees, Inc., a professional corporation, in Oklahoma
City. Mr. Self was an associate and shareholder in the law firm of Hastie and
Kirschner, Oklahoma City, from 1984 to 1991 and was employed by Arthur Young &
Co. from 1979 to 1980. Mr. Self is a member of the Law Board of Northwestern
University School of Law and a director of Piedra Capital, Ltd., a money
management firm in Houston, Texas. Mr. Self is a Certified Public Accountant. He
graduated from the University of Oklahoma in 1979 and from Northwestern
University Law School in 1984.
DIRECTORS WHOSE TERMS EXPIRE IN 2003
Edgar F. Heizer, Jr., age 72, has been a director of the Company since
1993. From 1985 to the present, Mr. Heizer has been a private venture
capitalist. He founded Heizer Corporation, a publicly traded business
development company, in 1969 and served as Chairman and Chief Executive Officer
from 1969 until 1986, when Heizer Corporation was reorganized into a number of
public and private companies. Mr. Heizer was Assistant Treasurer of Allstate
Insurance Company from 1962 to 1969 in charge of Allstate's venture capital
operations. He was employed by Booz, Allen and Hamilton from 1958 to 1962,
Kidder, Peabody & Co. from 1956 to 1958, and Arthur Andersen & Co. from 1954 to
1956. He serves on the advisory board of the Kellogg School of Management
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at Northwestern University. Mr. Heizer is a director of Material Sciences
Corporation, a New York Stock Exchange listed company in Elk Grove Village,
Illinois, Needham & Company, Inc., and several private companies. Mr. Heizer
graduated from Northwestern University in 1951 and from Yale University Law
School in 1954.
Breene M. Kerr, age 73, has been a director of the Company since 1993. He
is President of Brookside Company, Easton, Maryland. In 1969, Mr. Kerr founded
Kerr Consolidated, Inc., which was sold in 1996. In 1969, Mr. Kerr co-founded
the Resource Analysis and Management Group and remained its senior partner until
1982. From 1967 to 1969, he was Vice President of Kerr-McGee Chemical
Corporation. From 1951 through 1967, Mr. Kerr worked for Kerr-McGee Corporation
as a geologist and land manager. Mr. Kerr has served as chairman of the
Investment Committee for the Massachusetts Institute of Technology and is a life
member of the Corporation (Board of Trustees) of that university. He served as a
director of Kerr-McGee Corporation from 1957 to 1981. Mr. Kerr currently is a
trustee of the Brookings Institution in Washington, D.C., and has been an
associate director since 1987 of Aven Gas & Oil, Inc., an oil and gas property
management company located in Oklahoma City. Mr. Kerr graduated from the
Massachusetts Institute of Technology in 1951.
DIRECTORS WHOSE TERMS EXPIRE IN 2004
Tom L. Ward, age 42, has served as President, Chief Operating Officer and a
director of Chesapeake Energy Corporation since its inception in 1989. From 1982
to 1989, Mr. Ward was an independent producer of oil and gas in affiliation with
Aubrey K. McClendon, the Company's Chairman and Chief Executive Officer. Mr.
Ward is a member of the Board of Trustees of Anderson University in Anderson,
Indiana. Mr. Ward graduated from the University of Oklahoma in 1981 with a BBA
in Petroleum Land Management.
Frederick B. Whittemore, age 71, has been a director of the Company since
1993. Mr. Whittemore has been an advisory director of Morgan Stanley Dean Witter
& Co. since 1989 and was a managing director or partner of the predecessor firms
of Morgan Stanley Dean Witter & Co. from 1967 to 1989. He was Vice-Chairman of
the American Stock Exchange from 1982 to 1984. Mr. Whittemore is a director of
Partner Reinsurance Company, Bermuda; Maxcor Financial Group Inc., New York;
SunLife of New York, New York; KOS Pharmaceuticals, Inc., Miami, Florida; and
Southern Pacific Petroleum, Australia, NL. Mr. Whittemore graduated from
Dartmouth College in 1953 and from the Amos Tuck School of Business
Administration in 1954.
VOTING ITEM 2
PROPOSAL TO ADOPT THE 2002 STOCK OPTION PLAN
General. Our Board of Directors, subject to shareholder approval, adopted
the 2002 Stock Option Plan (the "2002 Plan"), which authorizes the granting of
incentive stock options and nonqualified stock options to employees and
nonqualified stock options to consultants. Incentive stock options available for
grant to employees under all other Company stock option plans have been
depleted, and the 2002 Plan will provide the Company with the continued ability
to give employees the opportunity to invest in and hold the common stock of the
Company on a tax-advantaged basis. The Board continues to believe that employee
ownership in the Company best aligns the employees' interests with its
shareholders. The Board has reserved 3,000,000 shares of common stock for
issuance under the 2002 Plan. This amount equals approximately 1.4% of our fully
diluted common shares. A description of the 2002 Plan appears below and a copy
of the 2002 Plan is attached to this Proxy Statement as Exhibit A. The
description below is qualified in its entirety by reference to the complete text
of the 2002 Plan.
Purpose of the 2002 Plan. The purpose of the 2002 Plan is to create
incentives which are designed to motivate employees and consultants to put forth
maximum effort toward the success and growth of the Company and to enable the
Company to attract and retain experienced individuals who by their position,
ability and diligence are able to make important contributions to the Company's
success. Toward these objectives, the 2002 Plan provides for the granting of
stock options intended to qualify as incentive stock options pursuant to Section
422 of the Internal Revenue Code (the "Code") and nonqualified stock options.
All shares subject to the 2002 Plan will be registered at the Company's expense
under the Securities Act of 1933, as amended, and listed on the New York Stock
Exchange.
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Plan Administration. The Regular Stock Option Committee, consisting of at
least two directors designated by the Board of Directors, will administer the
2002 Plan with respect to consultants and employees who are not executive
officers, including the grant of options, and the Special Stock Option
Committee, consisting of at least two directors designated by the Board of
Directors who meet the definition of "non-employee directors" under Rule 16b-3
of the Securities Exchange Act of 1934, will administer the 2002 Plan with
respect to executive officers, including the grant of options.
Messrs. Heizer and Whittemore serve as the Special Stock Option Committee
and Messrs. McClendon and Ward serve as the Regular Stock Option Committee. With
respect to all decisions relating to non-executive officer participants,
including the grant of options, the term "Committee," as hereafter used, applies
only to the Regular Stock Option Committee and, with respect to all decisions
relating to executive officer participants, including the grant of options, the
term "Committee," as hereafter used, applies only to the Special Stock Option
Committee.
Each Committee is authorized and has complete discretion to formulate
policies, to establish rules and regulations for the administration of the 2002
Plan and to determine the terms of any options granted by such Committee under
the 2002 Plan. Subject to certain adjustment provisions, the Committee cannot
grant options for more than one million shares of common stock to any employee
in any calendar year.
MATERIAL TERMS OF OPTIONS
Exercise Price. The exercise price of incentive stock options granted under
the 2002 Plan may not be less than 100% of the fair market value of the shares
underlying the options on the date of grant, or 110% of the fair market value of
such shares in the case of an optionee who holds more than 10% of the combined
voting power of the Company's outstanding securities. The Committee may grant
nonqualified stock options for the purchase of up to 10% of the shares subject
to the 2002 Plan at an exercise price which is not less than 85% of the fair
market value of the common stock on the date of grant. Otherwise, the exercise
price of nonqualified stock options must be at least the fair market value of
the common stock on the date of grant. No option may have an exercise price less
than the par value of the shares subject to the option. With respect to
incentive stock options, the aggregate fair market value (determined as of the
grant date) of the stock which a participant may first have the right to acquire
pursuant to the exercise of any incentive stock options in any calendar year
under all incentive stock options of the Company may not exceed $100,000. In the
event options granted to a participant exceed the $100,000 annual limitation,
the participant will be deemed to have been granted incentive stock options with
respect to shares within the $100,000 limitation and nonqualified stock options
with respect to shares which cause such limitation to be exceeded. The fair
market value of shares of common stock is determined by reference to the
reported closing price on the New York Stock Exchange or such other principal
national securities exchange upon which the stock is listed.
Option Period and Vesting. The maximum period for exercise of an option
will be established by the Committee at the date of grant, but the option period
may not be more than ten years from the date of grant (or five years in the case
of incentive stock options granted to an optionee who holds more than 10% of the
combined voting power of the Company's outstanding securities). An option may be
exercised only to the extent that the option is vested in accordance with a
schedule determined by the Committee in its sole discretion. To the extent
exercisable, options granted under the 2002 Plan may be exercised by the
optionee during his or her employment and within such period after termination
of employment as the Committee determines. The Committee has discretion to
accelerate the vesting of unvested options in the case of termination of
employment of an optionee.
Payment Upon Exercise. Upon the exercise of an option under the 2002 Plan,
the option price and any required state and federal withholding taxes must be
paid in full. The optionee may pay the exercise price of an option in cash, by
tendering, either by actual delivery of shares or by attestation, shares of
common stock acceptable to the Committee and valued at fair market value as of
the day of exercise, or by using any combination of cash and common stock. In
addition, the 2002 Plan permits an optionee to pay the exercise price by
irrevocably authorizing a third party to sell shares of common stock (or a
sufficient portion of the shares) acquired upon exercise of the option and remit
to the Company a sufficient portion of the sale proceeds to pay the entire
exercise price and any tax withholding resulting from such exercise. All
withholding taxes must be paid in cash.
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Transferability. Options are not transferable except by will or by the laws
of descent and distribution.
Adjustments. The 2002 Plan provides for appropriate adjustments in the
number of shares and option price in the event of a merger, consolidation,
recapitalization, stock split, combination of shares, stock dividend or similar
transaction involving the Company.
Acceleration Upon Corporate Event. Upon dissolution or liquidation of the
Company, or if the Company merges into, consolidates with, or sells or otherwise
transfers all or substantially all of its assets to another corporation and no
provision is made for the assumption or substitution of outstanding options by
the surviving, resulting or acquiring corporation, each outstanding option will
terminate, but the optionee will have the right, immediately prior to such
transaction, to exercise his or her option, in whole or in part, to the extent
not previously exercised, without regard to any vesting provisions. The 2002
Plan also provides that the Committee may, in its discretion, provide for
certain payments to be made by the Company to a participant in the event
acceleration of the vesting of options is considered a payment subject to the
excise tax imposed under Section 4999 of the Code.
Termination and Amendment. The 2002 Plan provides for termination at
midnight, February 29, 2012, but will continue with respect to outstanding
options as of the time of termination. Prior to such time, the 2002 Plan may be
earlier terminated or amended by the Board of Directors. Shareholder approval is
required for any amendment to the 2002 Plan which relates to incentive stock
options and for which Section 422 of the Code requires shareholder approval.
Shareholder approval is also required for any other amendment which, in the
opinion of counsel, another law or regulation or a stock exchange rule requires
shareholder approval.
Participants. As of April 10, 2002, the Company had 635 employees who were
eligible to participate in the 2002 Plan, five of whom are executive officers.
Such executive officers may be granted options by the Special Stock Option
Committee and the other employees and consultants of the Company are eligible to
be granted options by the Regular Stock Option Committee. The Committee
determines from time to time those persons who are to be granted options under
the 2002 Plan, taking into account the duties of the respective optionees, their
present and potential contributions to the success of the Company and such other
factors as the Committee deems relevant.
Since no decisions have been made with respect to the grants of any options
under the 2002 Plan, it is not possible to determine the future benefits or
dollar amounts to be received by either the named executive officers or other
employees or consultants of the Company under the 2002 Plan. Directors who are
not Company employees or consultants are not eligible to participate in the 2002
Plan.
Federal Income Tax Consequences. Under current federal tax law, the
following are the United States federal income tax consequences generally
arising with respect to options granted under the 2002 Plan. The discussion is
not a complete analysis of all federal income tax consequences and does not
cover all specific transactions which may occur.
No tax consequences attend the grant or timely exercise of an incentive
stock option. If the participant holds the common stock acquired for at least
one year after the transfer of the common stock to the participant and two years
after the grant of the option, the participant will recognize capital gain or
loss upon sale or exchange of the common stock equal to the difference between
the amount realized on the sale or exchange and the adjusted basis of the stock.
The adjusted basis of common stock transferred to a participant pursuant to the
exercise of an incentive stock option is the price paid for such common stock.
If the common stock is not held for the required period, the participant will
recognize ordinary income upon disposition in an amount equal to the excess of
the fair market value of the common stock on the date of exercise over the
amount paid for the common stock or, if less (and if the disposition is a
transaction in which a loss, if sustained, would be recognized by the
participant), the gain on disposition. Any additional gain realized by the
participant upon that disposition will be capital gain. The excess of the fair
market value of common stock received upon the exercise of an incentive stock
option over the option price for the common stock is an item of adjustment for
the participant for purposes of the alternative minimum tax. Expense deductions
for incentive stock options are not allowed by the Company, unless the
participant recognizes ordinary income.
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Generally, no income will be recognized by a participant for U.S. federal
income tax purposes upon the grant of a nonqualified stock option. Upon exercise
of a nonqualified stock option, the participant will recognize ordinary income
in an amount equal to the excess of the fair market value of the common stock on
the date of exercise over the amount of the exercise price. Income recognized
upon the exercise of a nonqualified stock option will be considered compensation
subject to withholding at the time the income is recognized and, therefore, the
Company must make the necessary arrangements with the participant to ensure that
the amount of tax required to be withheld is available for payment. Nonqualified
stock options provide the Company with a deduction equal to the amount of income
recognized by the participant, subject to certain deduction limitations. The
adjusted basis of common stock transferred to a participant pursuant to the
exercise of a nonqualified stock option is the price paid for the common stock
plus an amount equal to any income recognized by the participant as a result of
the exercise of the option. If a participant thereafter sells common stock
acquired upon exercise of a nonqualified stock option, any amount realized over
the adjusted basis of the common stock will constitute capital gain to the
participant for U.S. federal income tax purposes.
If a participant surrenders common stock which the participant already owns
as payment for the exercise price of a stock option, the participant will not
recognize gain or loss as a result of such surrender. The number of shares
received upon exercise of the option equal to the number of shares surrendered
will have a tax basis equal to the tax basis of the surrendered shares. The
holding period for such shares will include the holding period for the shares
surrendered. The remaining shares received will have a basis equal to the amount
of income the participant recognizes upon receipt of such shares. The
participant's holding period for such shares will commence on the day after such
exercise.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ADOPTION OF THE 2002 PLAN.
The affirmative vote of the holders of a majority of the shares of common stock
present at the Meeting, in person or by proxy, is required for adoption of the
2002 Plan.
VOTING ITEM 3
PROPOSAL TO ADOPT THE 2002 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
General. Our Board of Directors, subject to shareholder approval, has
adopted the 2002 Non-Employee Director Stock Option Plan (the "2002 Director
Plan"), which authorizes the granting of stock options to non-employee
directors. The quarterly award of stock options to our non-employee directors
has been a key component of director compensation. Since 1993, non-employee
directors have received at-market stock options under the Company's 1992
Nonstatutory Stock Option Plan (the "1992 Director Plan") pursuant to a formula
providing for quarterly grants. The shares of common stock subject to the 1992
Director Plan have now been depleted. Rather than amend the 1992 Director Plan
to provide for more shares, the Board believed it was appropriate to adopt a new
plan with several changes that conform the plan format to our other stock option
plans. The 2002 Director Plan, however, is intended to operate substantially in
the same way and for the same purpose as the 1992 Director Plan. While the 2002
Director Plan can be used to make a discretionary grant to a non-employee
director, such as an incentive grant to a new director upon joining the Board,
its main purpose is to provide for quarterly stock option grants to non-employee
directors.
The Board of Directors has reserved 500,000 shares of common stock for
issuance under the 2002 Director Plan. This amount equals approximately 0.2% of
our fully diluted common shares. A description of the 2002 Director Plan appears
below and a copy of the 2002 Director Plan is attached to this Proxy Statement
as Exhibit B. The description below is qualified in its entirety by reference to
the complete text of the 2002 Director Plan.
Purpose of the 2002 Director Plan. The purpose of the 2002 Director Plan is
to aid the Company in attracting and retaining persons of outstanding competence
who are not employed by the Company to serve on the Board of Directors. The Plan
is intended to enable such persons to acquire or increase ownership interests in
the Company on a basis that will encourage them to use their best efforts to
promote the growth and profitability of the Company. All shares subject to the
2002 Director Plan will be registered at the Company's expense under the
Securities Act of 1933, as amended, and listed on the New York Stock Exchange.
8
Plan Administration. The Committee, consisting of at least two directors
designated by the Board of Directors who meet the definition of "non-employee
directors" under Rule 16b-3 of the Securities Exchange Act of 1934, will
administer the 2002 Director Plan. The Committee is authorized and has complete
discretion to formulate policies, to establish rules and regulations for the
administration of the 2002 Director Plan and to determine the terms of any
non-formula options granted under the 2002 Director Plan.
MATERIAL TERMS OF OPTIONS
Formula Grants. Each non-employee Director serving on the Board will be
granted an option to purchase 10,000 shares of common stock on the first
business day of each calendar quarter starting in July 2002. Formula options
will be immediately exercisable at an exercise price equal to the fair market
value of our common stock on the date of grant. The term of each option granted
under the formula will be for a period which expires ten years after the date of
grant. The Board of Directors may amend the formula in the future without
seeking shareholder approval.
Exercise Price of Non-Formula Options. The exercise price of options
granted under the 2002 Director Plan may not be less than 100% of the fair
market value of the shares underlying the options on the date of grant except
that the Committee may grant options for the purchase of up to 10% of the shares
subject to the 2002 Director Plan at an exercise price which is not less than
85% of the fair market value of the common stock on the date of grant.
Otherwise, the exercise price of options must be at least the fair market value
of the common stock on the date of grant. No option may have an exercise price
less than the par value of the shares subject to the option. The fair market
value of shares of common stock is determined by reference to the reported
closing price on the New York Stock Exchange or such other principal national
securities exchange upon which the stock is listed.
Option Period and Vesting. The maximum period for exercise of a non-formula
option will be established by the Committee at the date of grant, but the option
period may not be more than ten years from the date of grant. An option may be
exercised only to the extent that the participant is vested in accordance with a
schedule determined by the Committee in its sole discretion. The Committee has
discretion to accelerate the vesting of unvested options in the case of
termination of the Board membership of a participant.
Exercise of Options After a Participant's Termination. Unless the Committee
otherwise determines, options granted to a participant whose service as a
director terminates during the option period for any reason other than cause may
be exercised, to the extent exercisable, until three years after termination of
the participant's service on the Board. In the event a participant's membership
on the Board is terminated by reason of death, the personal representative of
the deceased participant may exercise any unexercised vested option granted to
the participant under the Plan. If a participant's membership on the Board is
terminated for cause, the participant's option will expire 30 days after such
termination. Discharge for cause will include termination for malfeasance or
gross misfeasance in the performance of duties, conviction of illegal activity
in connection therewith, or any conduct detrimental to the interests of the
Company, and in any event the determination of cause by the Board will be
conclusive.
Payment Upon Exercise. Upon the exercise of an option under the 2002
Director Plan, the option price and any required state and federal withholding
taxes must be paid in full. The participant may pay the exercise price of an
option in cash, by tendering, either by actual delivery of shares or by
attestation, shares of common stock acceptable to the Committee and valued at
fair market value as of the day of exercise, or by using any combination of cash
and common stock. In addition, the 2002 Director Plan permits a participant to
pay the exercise price by irrevocably authorizing a third party to sell shares
of common stock (or a sufficient portion of the shares) acquired upon exercise
of the option and remit to the Company a sufficient portion of the sale proceeds
to pay the entire exercise price and any tax withholding resulting from such
exercise. All withholding taxes must be paid in cash.
Limited Transferability of Options. The Committee may authorize all or a
portion of the options to be granted to a participant to be on terms which
permit transfer, without consideration, by such participant to the ex-spouse of
the participant pursuant to the terms of a qualified domestic relations order or
to the spouse, children or grandchildren of the participant, a trust for their
exclusive benefit or a partnership in which they are the only
9
partners. Subsequent transfers of transferred options are prohibited except by
will or the laws of descent and distribution.
Adjustments. The 2002 Director Plan provides for appropriate adjustments in
the number of shares and option price in the event of a merger, consolidation,
recapitalization, stock split, combination of shares, stock dividend or similar
transaction involving the Company. The number of shares of common stock
underlying options to be granted under the formula grant provision will not be
affected, however, by such adjustments.
Acceleration Upon Corporate Event. Upon dissolution or liquidation of the
Company, or if the Company merges into, consolidates with, or sells or otherwise
transfers all or substantially all of its assets to another corporation and no
provision is made for the assumption or substitution of outstanding options by
the surviving, resulting or acquiring corporation, each outstanding option
granted will terminate, but the participant will have the right, immediately
prior to such transaction, to exercise his or her option, in whole or in part,
to the extent not previously exercised, without regard to any vesting
provisions. The 2002 Director Plan also provides that the Committee may, in its
discretion, provide for certain payments to be made by the Company to a
participant in the event acceleration of the vesting of options is considered a
payment subject to the excise tax imposed under Section 4999 of the Code.
Termination and Amendment. The 2002 Director Plan provides for termination
at midnight, April 14, 2012, but will continue with respect to outstanding
options as of the time of termination. Prior to such time, the 2002 Director
Plan may be earlier terminated or amended by the Board of Directors. Shareholder
approval is required for any amendment to the 2002 Director Plan which, in the
opinion of counsel, any law or regulation or stock exchange rule requires
shareholder approval.
Participants. Only the Company's non-employee directors are eligible to
participate in the 2002 Director Plan. Four of the six members of the Board of
Directors are not employees of the Company. If the 2002 Director Plan is
approved by the shareholders, each of the four non-employee directors will
receive under the formula provision of the plan a ten-year, fully vested,
at-market option to purchase 10,000 shares of common stock on July 1 and October
1, 2002 and thereafter on the first business day of each January, April, July
and October. For information about formula options granted to non-employee
directors under the 1992 Director Plan in 2001, see "The Board of Directors and
its Committees -- Director Compensation". While discretionary option grants may
be made under the 2002 Director Plan by the Committee, there are none
contemplated at this time.
Federal Income Tax Consequences. Under current federal tax law, the
following are the United States federal income tax consequences generally
arising with respect to options granted under the 2002 Director Plan. The
discussion is not a complete analysis of all federal income tax consequences and
does not cover all specific transactions which may occur.
Generally no income will be recognized by a participant for U.S. federal
income tax purposes upon the grant of a nonqualified stock option. Upon exercise
of a nonqualified stock option, the participant will recognize ordinary income
in an amount equal to the excess of the fair market value of the common stock on
the date of exercise over the amount of the exercise price. Income recognized
upon the exercise of a nonqualified stock option will be considered compensation
subject to withholding at the time the income is recognized and, therefore, the
Company must make the necessary arrangements with the participant to ensure that
the amount of the tax required to be withheld is available for payment.
Nonqualified stock options provide the Company with a deduction equal to the
amount of income recognized by the participant, subject to certain deduction
limitations. The adjusted basis of common stock transferred to a participant
pursuant to the exercise of a nonqualified stock option is the price paid for
the common stock plus an amount equal to any income recognized by the
participant as a result of the exercise of the option. If a participant
thereafter sells common stock acquired upon exercise of a nonqualified stock
option, any amount realized over the adjusted basis of the common stock will
constitute capital gain to the participant for U.S. federal income tax purposes.
If a participant surrenders common stock which the participant already owns
as payment for the exercise price of a stock option, the participant will not
recognize gain or loss as a result of such surrender. The number of shares
10
received upon exercise of the option equal to the number of shares surrendered
will have a tax basis equal to the tax basis of the surrendered shares. The
holding period for such shares will include the holding period for the shares
surrendered. The remaining shares received will have a basis equal to the amount
of income the participant recognizes upon receipt of such shares. The
participant's holding period for such shares will commence on the day after such
exercise.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ADOPTION OF THE 2002 DIRECTOR
PLAN. The affirmative vote of the holders of a majority of the shares of common
stock present at the Meeting, in person or by proxy, is required for adoption of
the 2002 Director Plan.
THE BOARD OF DIRECTORS AND ITS COMMITTEES
During 2001, the Board of Directors held four meetings in person and three
meetings by telephone conference. The Board of Directors has standing
compensation, stock option, audit and nominating committees.
The duties and objectives of the Compensation Committee are described under
the "Report of the Compensation Committee on Executive Compensation." Messrs.
Heizer and Whittemore serve on the Compensation Committee. The Compensation
Committee held two meetings during 2001.
A committee comprised of Messrs. Heizer and Whittemore administers the
stock option plans with respect to employee participants who are executive
officers. Messrs. McClendon and Ward serve on committees that administer the
Company's stock option plans with respect to all employee participants who are
not executive officers. Each committee held two meetings during 2001. Messrs.
Heizer and Whittemore also administer the Company's stock option plan for
directors. Options are granted pursuant to a formula under the plan. As a
result, no meetings of this committee were held in 2001.
Messrs. Kerr, Whittemore and Heizer served on the Audit Committee during
2001. The Committee held two meetings during 2001. Additionally, the chairman of
the Committee, on a quarterly basis, conferred with the independent accountants
after they completed their review of the quarterly financial statements and
prior to the filing of our Forms 10-Q.
The Nominating Committee periodically reviews and updates the criteria for
Board membership and evaluates the qualifications of each director candidate
against such criteria. Messrs. Kerr and Whittemore serve on the Nominating
Committee. Mr. McClendon served on the Nominating Committee prior to his
resignation from the Committee on March 8, 2002. The Nominating Committee met
once in 2001.
Each director attended, either in person or by telephone conference, all of
the Board and committee meetings held while serving as a director or committee
member during 2001.
AUDIT COMMITTEE REPORT
The Audit Committee is responsible for recommending, on an annual basis,
the independent accountants to be appointed by the Board of Directors as auditor
of the Company and its subsidiaries. The Committee also reviews the arrangements
for and the results of the auditor's examination of the Company's books, records
and internal accounting control procedures. In March 2002, the Committee
re-examined and amended and the Board approved the Committee's written charter,
which is included as Exhibit C to this proxy statement. Under the rules of the
New York Stock Exchange, all of the current members of the Audit Committee are
independent.
The Committee has discussed and reviewed with management the audited
financial statements of the Company for the year ended December 31, 2001. The
Committee has also discussed with our independent auditing firm,
PricewaterhouseCoopers LLP, the matters required by Statement on Auditing
Standards No. 61, Communication with Audit Committees, and has received and
reviewed the written disclosures from PricewaterhouseCoopers LLP as required by
Independence Standards Board Standard No. 1, Independence Discussions with Audit
Committees, regarding the firm's independence from the Company. We have
discussed with PricewaterhouseCoopers LLP its
11
independence and considered the compatibility of non-audit services rendered by
PricewaterhouseCoopers LLP with its independence. Based on these reviews and
discussions, the Committee recommended to the Board of Directors that the
financial statements be included in the Company's Annual Report on Form 10-K,
for filing with the Securities and Exchange Commission.
Members of the Audit Committee:
Breene M. Kerr, Chairman
Edgar F. Heizer, Jr.
Frederick B. Whittemore
DIRECTORS' COMPENSATION
During 2001, each non-employee director was entitled to receive cash
compensation of $30,000, comprised of an annual retainer of $10,000, payable in
quarterly installments of $2,500, and $5,000 for each meeting of the Board
attended, not to exceed $30,000 per year for Board meetings attended. Directors
are also reimbursed for travel and other expenses. Officers who also serve as
directors do not receive fees for serving as directors. Under the Company's 1992
Director Plan on the first business day of each quarter of service, non-employee
directors are granted ten-year nonqualified stock options to purchase 8,750
shares of our common stock at an exercise price equal to the market price on the
date of grant. Commencing July 1, 2002, the non-employee directors' quarterly
option grants will be increased to 10,000 options and will be issued from the
2002 Director Plan, subject to its approval by shareholders. The options are
fully exercisable upon grant.
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
Our Philosophy. We are responsible for establishing the Company's
compensation policies and monitoring the implementation of the Company's
compensation system. Our objective is to develop an executive compensation
system that is competitive with the Company's peers and encourages both
short-term and long-term performance aligned with shareholders' interest.
Our Objectives. In establishing executive compensation, our objective is to
attract, retain and motivate executive officers and key employees with the
competence, knowledge and experience to promote the growth and profitability of
the Company. We consider the following to be key factors in our determination of
executive compensation:
o Compensation should be competitive. We must be conscious of the
compensation practices of our peers and new trends in the executive
compensation arena.
o Compensation should be related to performance. We believe that individual
compensation should be tied to individual performance and to how well the
Company performs, financially and operationally.
o Fixed and incentive compensation should be properly proportioned. We
believe that the proportion of an individual's total compensation that
varies with individual and company performance should increase as the
individual's business responsibilities increase.
o Compensation should be individually and subjectively evaluated. Individual
circumstances and performance should be evaluated independently for each
executive officer.
o Compensation should be closely aligned with shareholder interests. We
provide employees at all levels with various ways to become shareholders.
We grant stock options to all employees through our stock option plans and
allow employees to invest in Company stock through our 401(k) plan. In
addition, the individual employment agreements of our executive officers
establish stock ownership targets for each officer ranging from 1,000
shares to 500% of annual base salary and bonuses. We want all employees to
think and act like owners of the business.
o Compensation should be re-evaluated frequently. Currently, we review
executive compensation semi-annually and make adjustments as we deem
appropriate.
12
COMPONENTS OF OUR COMPENSATION SYSTEM
Base Salary. The executive officers' base salaries are reviewed and set
semi-annually for each individual at levels commensurate with our peer group.
The actual amount of each executive's base salary reflects and is adjusted on a
subjective basis for such factors as leadership, commitment, attitude,
motivational effect, level of responsibility, prior performance of the Company
and the individual's contribution to that performance.
Cash Bonuses. We believe that cash bonuses should be paid to the executive
officers based on a subjective evaluation of the performance of the Company and
the individual. The Company's financial and operating performance measurements
are based on reserves, production, net income, cash flow, successful drilling
results, competitive finding and operating costs, general and administrative
costs, asset acquisitions and divestitures, risk management activities and
common stock price performance. Individual performance factors include
leadership, commitment, attitude, motivational effect, level of responsibility,
prior experience and extraordinary contributions to the Company. Cash bonuses
awarded in 2001 were consistent with the Company's strong financial and
operational results and management's successful execution of the Company's risk
management strategies and acquisition and drilling programs while continuing to
build on the Company's high-quality asset base and maintaining a low cost
operating structure.
Stock Options. Stock options from existing and future stock option plans
are granted to all employees based on a subjective determination and assessment
of the performance factors utilized for cash bonus awards. Stock options granted
to executive officers are issued at not less than the market price of the
Company's common stock on the date of issuance and typically vest over a period
of four years. Consequently, we believe stock options provide strong incentives
for long-term financial performance that increases shareholder value while
rewarding and retaining the executives. Stock options issued to executive
officers in 2001 are consistent with the Company's strong financial and
operational results.
Policy on Deductibility of Compensation. Section 162(m) of the Internal
Revenue Code limits the tax deduction to $1 million for compensation paid by a
publicly held company to its chief executive officer and the Company's four
other most highly compensated executive officers, unless certain requirements
are met. We presently intend that most compensation paid to executive officers
will meet the requirements for deductibility under Section 162(m). However, we
may award compensation which is not deductible under Section 162(m) if we
believe that such awards would be in the best interest of the Company or its
shareholders.
COMPENSATION OF CHIEF EXECUTIVE OFFICER AND CHIEF OPERATING OFFICER. Based
on the historical operations of the Company, the Chief Executive Officer and
Chief Operating Officer have similar positions of executive responsibility with
managerial control over different areas of the Company. Accordingly, the Chief
Executive Officer and Chief Operating Officer have been historically compensated
on an equal basis and we anticipate that such practice will continue in the
future. In each case, the compensation for each of the officers was determined
in the same manner as the compensation for other executive officers of the
Company. The cash bonuses and options granted to Messrs. McClendon and Ward were
based on the subjective evaluation of the Company's growth and profitability,
the contributions of Messrs. McClendon and Ward to that growth and the
compensation paid to other chief executive officers in the Company's peer group.
We determined that the increase in overall compensation for the Chief Executive
Officer and Chief Operating Officer during 2001 was appropriate given the
Company's strong performance in 2001.
Members of the Compensation Committee and the Special Stock Option Committee:
Edgar F. Heizer, Jr.
Frederick B. Whittemore
13
INFORMATION REGARDING OFFICERS
EXECUTIVE OFFICERS
In addition to Messrs. McClendon and Ward, the following are also executive
officers of the Company.
Marcus C. Rowland, age 49, was appointed Executive Vice President in 1998
and has been the Company's Chief Financial Officer since 1993. He served as
Senior Vice President from 1997 to 1998 and as Vice President - Finance from
1993 until 1997. From 1990 until his association with the Company, Mr. Rowland
was Chief Operating Officer of Anglo-Suisse, L.P. assigned to the White Nights
Russian Enterprise, a joint venture of Anglo-Suisse, L.P. and Phibro Energy
Corporation, a major foreign operation which was granted the right to engage in
oil and gas operations in Russia. Prior to his association with White Nights
Russian Enterprise, Mr. Rowland owned and managed his own oil and gas company
and prior to that was Chief Financial Officer of a private exploration company
in Oklahoma City from 1981 to 1985. Mr. Rowland is a Certified Public
Accountant. Mr. Rowland graduated from Wichita State University in 1975.
Martha A. Burger, age 49, has served as Treasurer since 1995 and as Senior
Vice President - Human Resources since 2000. She was the Company's Vice
President - Human Resources from 1998 until 2000, Human Resources Manager from
1996 to 1998 and Corporate Secretary from 1999 until 2000. From 1994 to 1995,
she served in various accounting positions with the Company, including Assistant
Controller - Operations. From 1989 to 1993, Ms. Burger was employed by Hadson
Corporation as Assistant Treasurer and from 1993 to 1994 served as Vice
President and Controller of Hadson Corporation. Prior to joining Hadson
Corporation, Ms. Burger was employed by The Phoenix Resource Companies, Inc. as
Assistant Treasurer and by Arthur Andersen & Co. Ms. Burger is a Certified
Public Accountant and graduated from the University of Central Oklahoma in 1982
and from Oklahoma City University in 1992.
Michael A. Johnson, age 36, has served as Senior Vice President -
Accounting, Controller and Chief Accounting Officer since 2000. He served as
Vice President of Accounting and Financial Reporting from 1998 to 2000 and as
Assistant Controller from 1993 to 1998. From 1991 to 1993, Mr. Johnson served as
Project Manager for Phibro Energy Production, Inc., a Russian joint venture.
From 1987 to 1991, he served as audit manager for Arthur Andersen & Co. Mr.
Johnson is a Certified Public Accountant and graduated from the University of
Texas at Austin in 1987.
OTHER OFFICERS
Steven C. Dixon, age 43, has been Senior Vice President - Production since
1995 and served as Vice President - Exploration from 1991 to 1995. Mr. Dixon was
a self-employed geological consultant in Wichita, Kansas from 1983 through 1990.
He was employed by Beren Corporation in Wichita, Kansas from 1980 to 1983 as a
geologist. Mr. Dixon graduated from the University of Kansas in 1980.
J. Mark Lester, age 49, has been Senior Vice President - Exploration since
1995 and served as Vice President - Exploration from 1989 to 1995. From 1986 to
1989, Mr. Lester was self-employed and acted as a consultant to Messrs.
McClendon and Ward. He was employed by various independent oil companies in
Oklahoma City from 1980 to 1986, and was employed by Union Oil Company of
California from 1977 to 1980 as a geophysicist. Mr. Lester graduated from Purdue
University in 1975 with a B.S. in Engineering Geology and in 1977 with an M.S.
in Geophysics.
Henry J. Hood, age 41, was appointed Senior Vice President - Land and Legal
in 1997 and served as Vice President - Land and Legal from 1995 to 1997. Mr.
Hood was retained as a consultant to the Company during the two years prior to
his joining the Company, and he was associated with the law firm of White,
Coffey, Galt & Fite from 1992 to 1995. Mr. Hood was associated with or a partner
of the law firm of Watson & McKenzie from 1987 to 1992. Mr. Hood is a member of
the Oklahoma and Texas Bar Associations. Mr. Hood graduated from Duke University
in 1982 and from the University of Oklahoma College of Law in 1985.
14
Thomas L. Winton, age 55, has served as Senior Vice President - Information
Technology and Chief Information Officer since 1998. From 1985 until his
association with the Company, Mr. Winton served as the Director, Information
Services Department, at Union Pacific Resources Company. Prior to that period
Mr. Winton held the positions of Regional Manager - Information Services from
1984 until 1985 and Manager - Technical Applications Planning and Development
from 1980 until 1984 with UPRC. Mr. Winton also served as an analyst and
supervisor in the Operations Research Division, Conoco Inc., from 1973 until
1980. Mr. Winton graduated from Oklahoma Christian University in 1969, Creighton
University in 1973 and the University of Houston in 1980. Mr. Winton also
completed the Tuck Executive Program, Amos Tuck School of Business, Dartmouth
College in 1987.
Douglas J. Jacobson, age 48, has served as Senior Vice President -
Acquisitions and Divestitures since 1999. Prior to joining the Company, Mr.
Jacobson was employed by Samson Investment Company from 1980 until 1999, where
he served as Senior Vice President - Project Development and Marketing from 1996
until 1999. Prior to joining Samson, Mr. Jacobson was employed by Peat, Marwick,
Mitchell & Co. Mr. Jacobson has served on various Oklahoma legislative
commissions which have addressed issues in the oil and gas industry, including
the Commission of Oil and Gas Production Practices and the Natural Gas Policy
Commission. Mr. Jacobson is a Certified Public Accountant and graduated from
John Brown University in 1976 and from the University of Arkansas in 1977.
Thomas S. Price, Jr., age 50, has served as Senior Vice President -
Corporate Development since 2000, as Vice President - Corporate Development
since 1992 and was a consultant to the Company during the prior three years. He
was employed by Kerr-McGee Corporation, Oklahoma City, from 1988 to 1989 and by
Flag-Redfern Oil Company from 1984 to 1988. Mr. Price is Vice Chairman of the
Mid-Continent Oil and Gas Association, a member of the Oklahoma Independent
Petroleum Association and a member of the Petroleum Investor Relations
Association and the National Investor Relations Institute. Mr. Price graduated
from the University of Central Oklahoma in 1983, from the University of Oklahoma
in 1989 and from the American Graduate School of International Management in
1992.
James C. Johnson, age 44, has served as President of Chesapeake Energy
Marketing, Inc., a wholly-owned subsidiary of Chesapeake Energy Corporation,
since 2000. He served as Vice President - Contract Administration for the
Company from 1997 to 2000 and as Manager - Contract Administration from 1996 to
1997. From 1980 to 1996, Mr. Johnson held various gas marketing and land
positions with Enogex, Inc., Delhi Gas Pipeline Corporation, TXO Production
Corp. and Gulf Oil Corporation. Mr. Johnson is a member of the Natural Gas
Association of Oklahoma and graduated from the University of Oklahoma in 1980.
Stephen W. Miller, age 45, has recently been named Senior Vice President -
Drilling after serving as Vice President - Drilling since 1996 and as District
Manager - College Station District from 1994 to 1996. Mr. Miller held various
engineering positions in the oil and gas industry from 1980 to 1993. Mr. Miller
is a registered Professional Engineer in Texas, is a member of the Society of
Petroleum Engineers and graduated from Texas A & M University in 1980.
15
SECURITY OWNERSHIP OF MANAGEMENT
AND CERTAIN BENEFICIAL OWNERS
SECURITY OWNERSHIP
The table below sets forth (i) the name and address of each person known by
management to own beneficially more than 5% of our outstanding common stock, the
number of shares beneficially owned by each such shareholder and the percentage
of outstanding shares owned, and (ii) the number and percentage of outstanding
shares of common stock beneficially owned by each of our nominees, directors and
executive officers listed in the Summary Compensation Table below and by all
directors and executive officers of the Company as a group. Unless otherwise
noted, information is given as of the Record Date and the persons named below
have sole voting and/or investment power with respect to such shares.
COMMON STOCK
-----------------------------------------------------------
OUTSTANDING OPTION TOTAL PERCENT OF
BENEFICIAL OWNER SHARES SHARES(a) OWNERSHIP CLASS
---------------- ----------- ---------- ----------- ----------
Tom L. Ward(1)(2)....................... 8,148,985(b)(c) 2,663,358 10,812,343 6.42%
6100 North Western Avenue
Oklahoma City, OK 73118
Aubrey K. McClendon(1)(2)............... 8,649,229(c)(d) 786,906 9,436,135 5.66%
6100 North Western Avenue
Oklahoma City, OK 73118
Frederick B. Whittemore(1).............. 481,800(e) 1,250,250(f) 1,732,050 1.04%
Shannon T. Self(1)...................... 1,171,676(g) 383,166 1,554,842 (3)
Edgar F. Heizer, Jr.(1)................. 709,650 471,000 1,180,650 (3)
Breene M. Kerr(1)....................... 430,219(h) 81,250 511,469 (3)
Martha A. Burger(2)..................... 22,278(c) 103,378 125,656 (3)
Marcus C. Rowland(2).................... 19,959(c) 28,750 48,709 (3)
Michael A. Johnson(2)................... 49,999(c) 6,250 56,249 (3)
All directors and executive
officers as a group................... 19,683,795 5,024,308 24,708,103 14.46%
----------
(1) Director
(2) Executive officer
(3) Less than 1%
(a) Represents shares of common stock which can be acquired on the Record Date
or 60 days thereafter through the exercise of options.
(b) Includes 844,160 shares held by TLW Investments, Inc., an Oklahoma
corporation of which Mr. Ward is sole shareholder and chief executive, and
21,435 shares held by Mr. Ward's immediate family sharing the same
household. Excluded are the shares of our common stock beneficially owned
by Mr. McClendon which may be attributed to Mr. Ward based on a jointly
filed Schedule 13D. Mr. Ward disclaims such ownership.
(c) Includes shares purchased on behalf of the executive officer in the
Chesapeake Energy Corporation Savings and Incentive Stock Bonus Plan (Tom
L. Ward, 40,075 shares; Aubrey K. McClendon, 87,165 shares; Martha A.
Burger, 16,078 shares; Marcus C. Rowland, 19,426 shares; and Michael A.
Johnson, 15,270 shares).
16
(d) Includes 13,560 shares held by Chesapeake Investments, an Oklahoma limited
partnership of which Mr. McClendon is sole general partner. Excluded are
the shares beneficially owned by Mr. Ward which may be attributed to Mr.
McClendon based on a jointly filed Schedule 13D. Mr. McClendon disclaims
such ownership.
(e) Includes 41,750 shares held by Mr. Whittemore as trustee of the Whittemore
Foundation.
(f) Includes options to purchase shares of our common stock owned by Messrs.
Ward and McClendon issued to Mr. Whittemore (394,688 shares from Mr.
McClendon and 355,312 shares from Mr. Ward).
(g) Includes 17,782 shares held by Pearson Street Limited Partnership, an
Oklahoma limited partnership of which Mr. Self is sole general partner and
the remaining partner is Mr. Self's spouse, and 1,138,600 shares held by
the Aubrey K. McClendon Children's Trust of which Mr. Self is the trustee.
(h) Includes 250,942 shares held by Talbot Fairfield II Limited Partnership, of
which Mr. Kerr is a general partner.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires our directors
and executive officers and persons who beneficially own more than 10% of the
Company's common stock to file reports of ownership and subsequent changes with
the Securities and Exchange Commission. Based only on a review of copies of such
reports and written representations delivered to the Company by such persons,
the Company believes that there were no violations of Section 16(a) by such
persons during 2001, except that Mr. Kerr filed one late Form 4 relating to a
disposition of shares by his partnership and Mr. Self inadvertently did not
report the sale of 45,000 shares of common stock on his Form 4 for January 2001.
Mr. Self filed an amended Form 4 on February 23, 2001 to report such sales.
17
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth for the fiscal years ended December 31,
2001, 2000 and 1999 the compensation earned in each period by (i) our chief
executive officer and (ii) the four other most highly compensated executive
officers.
ANNUAL COMPENSATION SECURITIES
--------------------------------------------- UNDERLYING
OTHER OPTION ALL
ANNUAL AWARDS (# OF OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(a) SHARES)(b) COMPENSATION(c)
----------------------------- ------ ------------ ------------ ---------------- ------------ ----------------
Aubrey K. McClendon 2001 $ 537,500 $575,000 $ 199,158 1,600,000 $ 11,180
Chairman of the Board and 2000 $ 425,000 $425,000 $ 140,442 1,975,000 $ 11,680
Chief Executive Officer 1999 $ 350,000 $300,000 $ 137,029 500,000 $ 19,500
Tom L. Ward 2001 $ 537,500 $575,000 $ 174,614 1,600,000 $ 11,180
President and 2000 $ 425,000 $425,000 $ 140,469 1,975,000 $ 11,180
Chief Operating Officer 1999 $ 350,000 $300,000 $ 113,331 500,000 $ 20,000
Marcus C. Rowland 2001 $ 282,500 $215,000 (d) 175,000 $ 14,270
Executive Vice President - 2000 $ 265,625 $115,000 $ 54,052 115,000 $ 14,770
Finance & Chief Financial 1999 $ 262,500 $110,000 $ 41,428 125,000 $ 6,000
Officer
Martha A. Burger 2001 $ 200,000 $ 90,000 (d) 85,000 $ 14,756
Treasurer and Senior Vice 2000 $ 160,000 $ 65,000 (d) 110,000 $ 10,698
President - Human Resources 1999 $ 137,500 $ 35,000 (d) 40,000 $ 10,500
Michael A. Johnson 2001 $ 170,000 $ 65,000 (d) 55,000 $ 11,130
Senior Vice President - 2000 $ 137,500 $ 55,000 (d) 65,000 $ 12,344
Accounting & Controller 1999 $ 112,500 $ 25,000 (d) 25,000 $ 10,250
----------
(a) Includes the cost of personal benefits provided by the Company, including
for fiscal year 2001, personal accounting support ($73,926 for Mr.
McClendon and $75,413 for Mr. Ward) and travel allowances ($100,000 for Mr.
McClendon and $75,413 for Mr. Ward).
(b) No awards of restricted stock or payments under long-term incentive plans
were made by the Company to any of the named executives in any period
covered by the table.
(c) Represents our matching contributions to the Chesapeake Energy Corporation
Savings and Incentive Stock Bonus Plan and premiums paid by the Company for
term life insurance. In 2001, such amounts were $11,000 and $180 for each
of Messrs. McClendon and Ward; $14,000 and $270 for Mr. Rowland; $14,500
and $256 for Ms. Burger; and $11,000 and $130 for Mr. Johnson,
respectively.
(d) Other annual compensation did not exceed the lesser of $50,000 or 10% of
the executive officer's salary and bonus during the year.
STOCK OPTIONS GRANTED DURING 2001
The following table sets forth information concerning options to purchase
our common stock granted during 2001 to the executive officers named in the
Summary Compensation Table. Amounts represent stock options granted under the
Company's 2001 stock option plans and are nonqualified stock options. One-fourth
of each option becomes exercisable on each of the first four grant date
anniversaries. The exercise price of each option represents the market price of
the common stock on the date of grant. The 2001 plans provide for appropriate
adjustments in the number of shares and option price in the event of a merger,
consolidation, recapitalization, stock split, combination of shares, stock
dividend or similar transaction involving the Company. Upon the Company's
dissolution or a business combination of the Company with another corporation,
if the options are not assumed by
18
the acquirer, all outstanding options become automatically vested and are fully
exercisable immediately prior to the transaction.
INDIVIDUAL GRANTS
------------------------------------------------------- POTENTIAL REALIZABLE VALUE
PERCENT OF AT ASSUMED ANNUAL RATES
NUMBER OF TOTAL OPTIONS OF STOCK PRICE APPRECIATION
SECURITIES GRANTED TO EXERCISE FOR OPTION TERM(a)
UNDERLYING EMPLOYEES IN PRICE PER EXPIRATION -----------------------------
NAME OPTIONS GRANTED 2001 SHARE DATE 5% 10%
--------------------- ---------------- ------------- ----------- ----------- -------------- -------------
Aubrey K. McClendon 775,000 10.63% $ 6.11 07/10/11 $2,977,973 $7,546,769
825,000 11.31% $ 6.11 12/14/11 $3,170,101 $8,033,657
Tom L. Ward 775,000 10.63% $ 6.11 07/10/11 $2,977,973 $7,546,769
825,000 11.31% $ 6.11 12/14/11 $3,170,101 $8,033,657
Marcus C. Rowland 85,000 1.17% $ 6.11 07/10/11 $ 326,616 $ 827,710
90,000 1.23% $ 6.11 12/14/11 $ 345,829 $ 876,399
Martha A. Burger 40,000 0.55% $ 6.11 07/10/11 $ 153,702 $ 389,511
45,000 0.62% $ 6.11 12/14/11 $ 172,915 $ 438,199
Michael A. Johnson 25,000 0.34% $ 6.11 07/10/11 $ 96,064 $ 243,444
30,000 0.41% $ 6.11 12/14/11 $ 115,276 $ 292,133
----------
(a) The assumed annual rates of stock price appreciation of 5% and 10% are set
by the Securities and Exchange Commission and are not intended as a
forecast of possible future appreciation in stock prices.
AGGREGATED OPTION EXERCISES IN 2001 AND DECEMBER 31, 2001 OPTION VALUES
The following table sets forth information about options exercised by the
named executive officers during 2001 and the unexercised options to purchase
common stock held by them at December 31, 2001.
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES OPTIONS AT 12/31/01 OPTIONS AT 12/31/01(a)
ACQUIRED VALUE -------------------------- ----------------------------
NAME ON EXERCISE REALIZED(b) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
------ ----------- ----------- ----------- ------------- ----------- -------------
Aubrey K. McClendon 600,000 $4,103,944 819,607 3,707,701 $ 313,370 $8,147,826
Tom L. Ward -- $ -- 2,219,608 3,707,701 $10,476,070 $8,147,821
Marcus C. Rowland 140,619 $ 937,473 18,750 423,117 $ 19,688 $1,123,769
Martha A. Burger -- $ -- 75,878 206,687 $ 336,311 $ 468,945
Michael A. Johnson 22,229 $ 191,096 24,279 128,477 $ 89,890 $ 283,054
----------
(a) At December 31, 2001, the closing price of our common stock on the New York
Stock Exchange was $6.61. "In-the-money options" are stock options with
respect to which the market value of the underlying shares of common stock
exceeded the exercise price at December 31, 2001. The values shown were
determined by subtracting the aggregate exercise price of such options from
the aggregate market value of the underlying shares of common stock on
December 31, 2001.
(b) Represents amounts determined by subtracting the aggregate exercise price
of such options from the aggregate market value of the underlying shares of
common stock on the exercise date.
EMPLOYMENT AGREEMENTS
We have employment agreements with Messrs. McClendon and Ward, each of
which provides, among other things, for an annual base salary of not less than
$575,000, bonuses at the discretion of the Board of Directors, eligibility for
stock options and benefits, including an automobile and travel allowance, club
membership and personal accounting support. Each agreement has a term of five
years commencing July 1, 2001, which term is automatically extended for one
additional year on each June 30 unless one of the parties provides 30 days prior
19
notice of non-extension. In addition, for each calendar year during which the
employment agreements are in effect, Messrs. McClendon and Ward each agree to
hold shares of the Company's common stock having an aggregate investment value
equal to 500% of his annual base salary and bonus.
Under the employment agreements, Messrs. McClendon and Ward are permitted
to participate in all of the wells spudded by or on behalf of the Company during
each calendar quarter during the term of the agreement plus five years after
termination of employment without cause or following a change in control. In
order to participate, at least 30 days prior to the beginning of a calendar
quarter the executive must notify the members of the Compensation Committee
whether the executive elects to participate and, if so, the percentage working
interest the executive will take in each well spudded by or on behalf of the
Company during such quarter. The participation election by each of Messrs.
McClendon and Ward may not exceed a 2.5% working interest in a well and is not
effective for any well where the Company's working interest after elections by
Messrs. McClendon and Ward to participate would be reduced to below 12.5%. Once
an executive elects to participate, the percentage cannot be adjusted during the
calendar quarter without the prior written consent of the Compensation
Committee. No such adjustment has ever been requested or granted. For each well
in which the executive participates, the Company bills to the executive an
amount equal to the executive's participation percentage multiplied by the costs
of drilling and operating incurred in drilling the well, together with leasehold
costs in an amount determined by the Company to approximate what third parties
pay for similar leasehold in the area of the well. Payment is due for such costs
within 90 days of invoice receipt. Invoices not paid when due will accrue
interest at 10% per annum. The executive also receives a proportionate share of
revenue from the well, less certain charges by the Company for marketing the
production. To correct the timing of the receipt of revenues, the Company has
advanced to the executives an amount equal to one month's production on each of
the wells based on a six-month trailing average of production revenue.
The agreements permit Messrs. McClendon and Ward to continue to conduct oil
and gas activities individually or through their affiliates, but only to the
extent such activities are conducted on oil and gas leases or interests they
owned or had the right to acquire as of July 1, 2001 or acquired from the
Company pursuant to their employment or other agreements. Messrs. McClendon and
Ward participated in all wells drilled by the Company from its initial public
offering in February 1993 through December 1998 with either a 1.0%, 1.25% or
1.5% working interest. Messrs. McClendon and Ward did not participate in the
Company's wells from January 1, 1999 through March 31, 2000, but began
participating again on April 1, 2000.
The Company has an employment agreement with Mr. Rowland that is in effect
through June 30, 2003. It provides for an annual base salary of not less than
$275,000. Mr. Rowland's employment agreement requires him to hold not less than
5,000 shares of the Company's common stock throughout the term of the agreement.
Mr. Rowland's agreement provides for bonuses at the discretion of the Board of
Directors and eligibility for stock options and benefits, including an
automobile allowance and club membership. Mr. Rowland's employment agreement
permits him to continue to conduct oil and gas activities individually and
through various related or family-owned entities, but prohibits him from
acquiring, attempting to acquire or aiding another person in acquiring an
interest in oil and gas exploration, development or production activities within
five miles of any operations or ownership interests of the Company and its
affiliates.
The Company also has employment agreements with Mr. Johnson and Ms. Burger.
These agreements have a term of three years from July 1, 2000, with minimum
annual base salaries of $150,000 for Mr. Johnson and $170,000 for Ms. Burger.
Each agreement provides that the executive officer is eligible for bonuses,
stock options and other benefits. The agreements require each executive to
acquire and continue to hold at least 1,000 shares of the Company's common
stock.
The Company may terminate any of the employment agreements with its
executive officers at any time without cause; however, upon such termination
Messrs. McClendon and Ward are entitled to continue to receive base compensation
(defined as salary equal to the executive's base salary on the date of
termination plus annual bonus compensation equal to the bonus compensation
received by the executive during the twelve month period preceding the
termination date) and benefits for the balance of the contract term. Mr. Rowland
is entitled to continue to receive salary and benefits for 180 days, and the
other named executive officers are entitled to continue to receive salary and
benefits for 90 days. Each of the employment agreements for Messrs. McClendon
and Ward further provides that if,
20
during the term of the agreement, there is a change of control and within three
years thereafter (a) the agreement expires; (b) the agreement is not extended
and the executive resigns within one year after the nonextension; (c) the
executive is terminated other than for cause, death or incapacity; (d) the
executive resigns as a result of (i) a change in his duties, (ii) a reduction in
his compensation, (iii) a required relocation more than 25 miles from his then
current place of employment, or (iv) a default by the Company under the
agreement; (e) the agreement has not been assumed by any successor to or parent
of the Company; or (f) the executive has agreed to remain employed by the
Company for a period of three months to assist in the transition and thereafter
resigns, then the executive officer will be entitled to a severance payment in
an amount equal to five times his base compensation, plus five times the value
of his benefits provided during the preceding twelve months, plus a grossup
amount to be paid with respect to any excise or income taxes or penalties
imposed on the severance payment. Change of control is defined in these
agreements to include:
(1) a person acquiring beneficial ownership of 20% or more of the
Company's outstanding common stock or the voting power of the
Company's existing voting securities unless one of the circumstances
described in clause 3(i), (ii) and (iii) exists,
(2) a majority of the members of the Incumbent Board is replaced by
directors who were not nominated or elected by the Incumbent Board
(the current directors and directors later nominated or elected by a
majority of them are referred to as the "Incumbent Board"),
(3) the consummation of a business combination such as a reorganization,
merger, consolidation or sale of all or substantially all of the
Company's assets unless following such business combination (i) the
persons who beneficially owned the Company's common stock and voting
securities immediately prior to the business combination beneficially
own more than 60% of such securities of the corporation resulting from
the business combination in substantially the same proportions, (ii)
no person beneficially owns 20% or more of such securities of the
corporation resulting from the business combination unless such
ownership existed prior to the business combination, or (iii) a
majority of the members of the board of directors of the corporation
resulting from the business combination were members of the Incumbent
Board at the time of the execution or approval of the business
combination agreement, and
(4) the approval by the shareholders of a complete liquidation or
dissolution of the Company.
The employment agreements for Messrs. Rowland and Johnson and Ms. Burger
further state that if, during the term of the agreement, there is a change of
control and within one year (a) the agreement expires and is not extended; (b)
the executive officer resigns as a result of (i) a reduction in the executive
officer's compensation, or (ii) a required relocation more than 25 miles from
the executive officer's then current place of employment; or (c) the executive
officer is terminated other than for cause, death or incapacity, then the
executive officer will be entitled to a severance payment in an amount equal to
six months of base salary plus bonuses equal to those paid to him or her in
2000. Change of control is defined in these agreements to include (1) a person
acquiring beneficial ownership of securities having 51% or more of the voting
power of the Company's outstanding voting securities; (2) a business combination
or contested election; or (3) any combination of (1) and (2) which results in a
majority of the members of the Company's Board of Directors being replaced by
directors who were not nominated and approved by the Board of Directors.
21
PERFORMANCE DATA
The following graph compares the performance of our common stock to the S&P
500 Stock Index and to a group of peer companies selected by the Company for the
years indicated. The graph assumes the investment of $100 on December 31, 1996
and that all dividends, if any, were reinvested. The value of the investment at
the end of each year is shown in the graph which follows:
[PERFORMANCE GRAPH]
The following table compares the performance of our common stock to the S&P
500 Stock Index and to a group of peer companies for the past eight years. The
data assume an investment of $100 on December 31, 1993 and that all dividends,
if any, were reinvested. The value of the investment at the end of each of the
eight years is shown in the table below:
CHESAPEAKE S&P 500
ENERGY PEER STOCK
MEASUREMENT PERIOD CORPORATION GROUP(b) INDEX
------------------ ----------- ---------- ---------
December 31, 1993 $ 100 $ 100 $ 100
December 31, 1994 $ 663 $ 90 $ 101
December 31, 1995 $2,099 $ 112 $ 139
December 31, 1996 $5,268 $ 144 $ 171
December 31, 1997 $1,441 $ 129 $ 229
December 31, 1998 $ 180 $ 85 $ 294
December 31, 1999 $ 456 $ 93 $ 356
December 31, 2000 $1,946 $ 185 $ 323
December 31, 2001 $1,270 $ 145 $ 285
CAGR(a) 37.4% 4.7% 13.9%
----------
(a) CAGR = Compounded Annual Growth Rate.
(b) The peer group is comprised of Anadarko Petroleum Corporation, Apache
Corporation, Benton Oil & Gas Company, Burlington Resources, Inc., Cabot
Oil & Gas Corporation, XTO Energy, Inc. (formerly named Cross Timbers Oil
Company), Devon Energy Corporation, EEX Corporation, EOG Resources, Inc.
(formerly named Enron Oil & Gas Company), Forest Oil Corporation, KCS
Energy, Inc., Newfield Exploration Company, Noble
22
Affiliates, Inc., Nuevo Energy Company, Ocean Energy, Inc., Pioneer Natural
Resources Company, Pogo Producing Co., TransTexas Gas Corporation and
Vintage Petroleum, Inc. Also included in the 2000 peer group were Barrett
Resources Corporation, Belco Oil & Gas Corp., Forcenergy Inc., HS
Resources, Inc. and Louis Dreyfus Natural Gas Corporation. They were
acquired in 2001 by Resources Acquisition Corp., a wholly-owned subsidiary
of The Williams Companies, Inc., Westport Resources Corporation, Forest Oil
Corporation, Kerr-McGee Corporation and Dominion Oklahoma Texas Exploration
& Production, respectively.
CERTAIN TRANSACTIONS
Legal Counsel. Shannon T. Self, a director of the Company, is a shareholder
in the law firm Commercial Law Group, P.C., formerly Self, Giddens & Lees, Inc.,
which provides legal services to us. During 2001, we paid $391,000 for such
legal services.
Oil and Gas Operations. The table below presents information about
drilling, completion, equipping and operating costs billed to Messrs. McClendon
and Ward from January 1, 2001 to December 31, 2001, the largest amount owed by
them during the period and the balances owed by them at December 31, 2000 and
2001 with respect to working interests they own in Company wells. No interest is
charged on amounts owing for such costs if they are paid within 90 days after
the month of invoice receipt. See "Employment Agreements" for a description of
terms covering the participation by Messrs. McClendon and Ward in our wells.
AUBREY K. TOM L.
MCCLENDON WARD
--------- ---------
(IN THOUSANDS)
Balance at December 31, 2000............... $ 1,597 $ 1,946
Amount billed in 2001...................... $10,389 $10,232
Largest outstanding balance (month end).... $ 4,332 $ 4,759
Balance at December 31, 2001............... $ 4,332 $ 4,295
Pursuant to their employment agreements, we advance to Messrs. McClendon
and Ward approximately one month of revenue related to oil and gas production we
market from wells in which they participate. This is revenue we have received
but not yet distributed to our joint working interest owners in the normal
disbursement cycle. The amount of advances in excess of revenues actually owed
by the Company to Messrs. McClendon and Ward bears interest at the annual rate
of 10%. As of December 31, 2001, revenue advances, including accrued interest,
equaled $573,911 for Mr. McClendon and $567,288 for Mr. Ward. The amount of
these advances did not exceed the revenue they were entitled to receive from the
Company at that date.
Sale of Canadian Subsidiary and Allocation of Purchase Price to Mr.
McClendon and Mr. Ward. In October 2001, we sold our Canadian subsidiary for
$142.9 million. Messrs. McClendon and Ward each received $2.0 million related to
their fractional ownership interest in these Canadian assets which they obtained
and paid for pursuant to the terms of their employment agreements. The portion
of the proceeds allocated to Messrs. McClendon and Ward was based upon the
estimated fair values of the assets sold as determined by management and the
independent members of our Board of Directors using methodologies similar to
those used for acquisitions of assets from disinterested third parties.
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP, or its predecessor firms, has served as our
independent accountants since our initial public offering in 1993 and has been
retained for 2002. Representatives of PricewaterhouseCoopers LLP are expected to
attend the Meeting. They will have an opportunity to make a statement if they
desire to do so, and will be available to respond to shareholders' questions.
AUDIT FEES
Fees for the year 2001 audit and reviews of the quarterly Forms 10-Q are
$305,000 plus expenses, of which $160,000 had been billed through December 31,
2001.
23
FINANCIAL INFORMATION SYSTEMS DESIGN AND IMPLEMENTATION FEES
PricewaterhouseCoopers LLP did not render any services related to financial
information systems design and implementation for the fiscal year ended December
31, 2001.
ALL OTHER FEES
Aggregate fees billed for all other services rendered by
PricewaterhouseCoopers LLP for the fiscal year ended December 31, 2001 were
$420,000. Of this amount, $309,000 was related to services provided in
connection with our issuance of senior notes and preferred stock, $70,000 was
related to tax consulting services and $41,000 was related to the review of our
internally prepared tax returns.
SHAREHOLDER PROPOSALS
At each annual meeting, the Board of Directors submits to shareholders its
nominees for election as directors and may submit other matters to the
shareholders for action. Our shareholders also may submit proposals for
inclusion in proxy material. These proposals must meet the shareholder
eligibility and other requirements of the Securities and Exchange Commission. In
order to be included in proxy material for our 2003 annual meeting, a
shareholder's proposal must be received not later than January 2, 2003 by the
Company at 6100 North Western Avenue, Oklahoma City, Oklahoma 73118, Attention:
Ms. Jennifer M. Grigsby, Secretary.
In addition, the Bylaws provide that in order for business to be brought
before a shareholders' meeting, a shareholder must deliver written notice to the
Company not less than 60 nor more than 90 days prior to the date of the meeting.
The notice must state the shareholder's name, address and number and class of
shares beneficially owned by the shareholder, and briefly describe the business
to be brought before the meeting, the reasons for conducting such business at
the meeting and any material interest of the shareholder in the proposal.
The Bylaws also provide that if a shareholder intends to nominate a
candidate for election as a director, the shareholder must deliver written
notice of his or her intention to the Company. The notice must be delivered not
less than 60 nor more than 90 days before the date of a meeting of shareholders.
The notice must set forth the name and address and number and class of shares
beneficially owned by the shareholder and such information concerning the
nominee as would be required to be included in a proxy statement soliciting
proxies for the election of the nominee. In addition, the notice must include
the consent of the nominee to serve as a director of the Company if elected.
The Bylaws further provide that, notwithstanding the foregoing notice
requirements, in the event that less than 70 days' notice or prior public
disclosure of the date of the meeting is given or made to shareholders, notice
of a shareholder proposal or nominee to be timely must be received no later than
the tenth day following the day on which notice of the date of the meeting was
mailed or public disclosure thereof was made, whichever occurred first.
OTHER MATTERS
Our management does not know of any matters to be presented at the Meeting
other than those set forth in the Notice of Annual Meeting of Shareholders.
However, if any other matters properly come before the Meeting, the persons
named in the enclosed proxy intend to vote the shares to which the proxy relates
on such matters in accordance with their best judgment unless otherwise
specified in the proxy.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ JENNIFER M. GRIGSBY
Jennifer M. Grigsby
Secretary
April 29, 2002
24
EXHIBIT A
CHESAPEAKE ENERGY CORPORATION
2002 STOCK OPTION PLAN
CHESAPEAKE ENERGY CORPORATION
2002 STOCK OPTION PLAN
ARTICLE I - PURPOSE .............................................................1
Section 1.1 Purpose.................................................1
Section 1.2 Establishment...........................................1
Section 1.3 Shares Subject to the Plan..............................1
Section 1.4 Shareholder Approval....................................1
ARTICLE II - DEFINITIONS ........................................................1
ARTICLE III - ADMINISTRATION.....................................................2
Section 3.1 Administration of the Plan; the Committee...............2
Section 3.2 Committee to Make Rules and Interpret Plan..............3
ARTICLE IV - GRANT OF OPTIONS....................................................3
ARTICLE V - ELIGIBILITY .........................................................4
ARTICLE VI - STOCK OPTIONS.......................................................4
Section 6.1 Grant of Options........................................4
Section 6.2 Conditions of Options...................................4
Section 6.3 Options Not Qualifying as Incentive Stock Options.......5
ARTICLE VII - STOCK ADJUSTMENTS..................................................6
ARTICLE VIII - GENERAL ..........................................................6
Section 8.1 Amendment or Termination of Plan........................6
Section 8.2 Acceleration of Otherwise Unexercisable Stock Options
on Death, Disability or Other Special Circumstances.....7
Section 8.3 Nonassignability........................................7
Section 8.4 Withholding Taxes.......................................7
Section 8.5 Regulatory Approval and Listings........................7
Section 8.6 Right to Continued Employment...........................7
Section 8.7 Reliance on Reports.....................................7
Section 8.8 Construction............................................7
Section 8.9 Governing Law...........................................7
ARTICLE IX - ACCELERATION OF OPTIONS UPON CORPORATE EVENT........................8
Section 9.1 Procedures for Acceleration and Exercise................8
Section 9.2 Certain Additional Payments by the Company..............8
ARTICLE I
PURPOSE
SECTION 1.1 Purpose. This Stock Option Plan is established by
Chesapeake Energy Corporation (the "Company") to create incentives which are
designed to motivate Employees and Consultants to put forth maximum effort
toward the success and growth of the Company and to enable the Company to
attract and retain experienced individuals who by their position, ability and
diligence are able to make important contributions to the Company's success.
Toward these objectives, the Plan provides for the granting of Options to
Employees and Consultants on the terms and subject to the conditions set forth
in the Plan.
SECTION 1.2 Establishment. The Plan is effective as of March 1, 2002
and for a period of 10 years from such date. The Plan will terminate on February
29, 2012; however, it will continue in effect until all matters relating to the
exercise of Options and administration of the Plan have been settled.
SECTION 1.3 Shares Subject to the Plan. Subject to Articles IV, VII and
IX of this Plan, shares of stock covered by Options shall consist of Three
Million (3,000,000) shares of Common Stock.
SECTION 1.4 Shareholder Approval. Nonqualified Stock Options under the
Plan may be granted to Participants prior to Shareholder Approval of the Plan,
but no Incentive Stock Options may be granted prior to shareholder approval. In
the event Shareholder Approval is not obtained within the 12-month period
following the date the Plan is adopted by the Board, no Incentive Stock Options
may be granted under the Plan.
ARTICLE II
DEFINITIONS
SECTION 2.1 "Board" means the Board of Directors of the Company.
SECTION 2.2 "Code" means the Internal Revenue Code of 1986, as amended.
Reference in the Plan to any Section of the Code shall be deemed to include any
amendments or successor provisions to such Section and any regulations under
such Section.
SECTION 2.3 "Committee" has the meaning set forth in Section 3.1.
SECTION 2.4 "Common Stock" means the common stock, par value $.01 per
share, of the Company and, after substitution, such other stock as shall be
substituted therefor as provided in Article VII or Article IX of the Plan.
SECTION 2.5 "Consultant" means any person who is engaged by the
Company, a subsidiary or a partnership or limited liability company which the
Company controls to render consulting or advisory services.
SECTION 2.6 "Date of Grant" means the date on which the granting of an
Option is authorized by the Committee or such later date as may be specified by
the Committee in such authorization.
SECTION 2.7 "Disability" has the meaning set forth in Section 22(e)(3)
of the Code.
SECTION 2.8 "Eligible Person" means any Employee or Consultant.
SECTION 2.9 " Employee" means any employee of the Company, a Subsidiary
or a partnership or limited liability company which the Company controls.
SECTION 2.10 "Exchange Act" means the Securities Exchange Act of 1934,
as amended.
A-1
SECTION 2.11 "Executive Officer Participants" means Participants who
are subject to the provisions of Section 16 of the Exchange Act with respect to
the Common Stock.
SECTION 2.12 "Fair Market Value" means, as of any date, (i) if the
principal market for the Common Stock is a national securities exchange or the
Nasdaq stock market, the closing price of the Common Stock on that date on the
principal exchange on which the Common Stock is then listed or admitted to
trading; or (ii) if sale prices are not available or if the principal market for
the Common Stock is not a national securities exchange and the Common Stock is
not quoted on the Nasdaq stock market, the average of the highest bid and lowest
asked prices for the Common Stock on such day as reported on the Nasdaq OTC
Bulletin Board Service or by the National Quotation Bureau, Incorporated or a
comparable service. If the day is not a business day, and as a result, clauses
(i) and (ii) are inapplicable, the Fair Market Value of the Common Stock shall
be determined as of the last preceding business day. If clauses (i) and (ii) are
otherwise inapplicable, the Fair Market Value of the Common Stock shall be
determined in good faith by the Committee.
SECTION 2.13 "Incentive Stock Option" means an Option within the
meaning of Section 422 of the Code.
SECTION 2.14 "Non-Executive Officer Participants" means Participants
who are not subject to the provisions of Section 16 of the Exchange Act.
SECTION 2.15 "Nonqualified Stock Option" means an Option to purchase
shares of Common Stock which is not an Incentive Stock Option within the meaning
of Section 422(b) of the Code.
SECTION 2.16 "Option" means an Incentive Stock Option or Nonqualified
Stock Option granted under Article VI of the Plan.
SECTION 2.17 "Option Agreement" means any written instrument that
establishes the terms, conditions, restrictions, and/or limitations applicable
to an Option in addition to those established by this Plan and by the
Committee's exercise of its administrative powers.
SECTION 2.18 "Participant" means an Eligible Person to whom an Option
has been granted by the Committee under the Plan.
SECTION 2.19 "Plan"" means the Chesapeake Energy Corporation 2002 Stock
Option Plan.
SECTION 2.20 "Regular Stock Option Committee" means a committee
designated by the Board which shall consist of not less than two members of the
Board.
SECTION 2.21 "Shareholder Approval" means approval by the holders of a
majority of the outstanding shares of Common Stock, present or represented and
entitled to vote at a meeting called for such purposes.
SECTION 2.22 "Special Stock Option Committee" means a committee
designated by the Board which shall consist of not less than two members of the
Board who meet the definition of "non-employee directors" pursuant to Rule
16b-3, or any successor rule, promulgated under Section 16 of the Exchange Act.
SECTION 2.23 "Subsidiary" shall have the same meaning set forth in
Section 424(f) of the Code.
ARTICLE III
ADMINISTRATION
SECTION 3.1 Administration of the Plan; the Committee. The Regular
Stock Option Committee shall administer the Plan with respect to Non-Executive
Officer Participants, including the grant of
A-2
Options, and the Special Stock Option Committee shall administer the Plan with
respect to Executive Officer Participants, including the grant of Options.
Accordingly, as used in the Plan, the term "Committee" shall mean the Regular
Stock Option Committee if it refers to Plan administration affecting
Non-Executive Officer Participants or the Special Stock Option Committee if it
refers to Plan administration affecting Executive Officer Participants. If in
either case the Committee does not exist, or for any other reason determined by
the Board, the Board may take any action under the Plan that would otherwise be
the responsibility of the Committee.
Unless otherwise provided in the by-laws of the Company or resolutions
adopted from time to time by the Board establishing the Committee, the Board may
from time to time remove members from, or add members to, the Committee.
Vacancies on the Committee, however caused, shall be filled by the Board. The
Committee shall hold meetings at such times and places as it may determine. A
majority of the Committee shall constitute a quorum, and the acts of a majority
of the members present at any meeting at which a quorum is present shall be the
valid acts of the Committee. Any action which may be taken at a meeting of the
Committee may be taken without a meeting if all the members of the Committee
consent to the action in writing.
Subject to the provisions of the Plan, the Committee shall have
exclusive power to:
(a) Select the Eligible Persons to participate in the Plan.
(b) Determine the time or times when Options will be granted.
(c) Determine the form of Option, whether an Incentive Stock
Option or a Nonqualified Stock Option, the number of shares of Common
Stock subject to any Option, all the terms, conditions (including
performance requirements), restrictions and/or limitations, if any, of
an Option, including the time and conditions of exercise or vesting,
and the terms of any Option Agreement, which may include the waiver or
amendment of prior terms and conditions or acceleration of the vesting
or exercise of an Option under certain circumstances determined by the
Committee.
(d) Determine whether Options will be granted singly or in
combination.
(e) Take any and all other action it deems necessary or
advisable for the proper operation or administration of the Plan.
SECTION 3.2 Committee to Make Rules and Interpret Plan. The Committee
in its sole discretion shall have the authority, subject to the provisions of
the Plan, to establish, adopt, or revise such rules and regulations and to make
all such determinations relating to the Plan as it may deem necessary or
advisable for the administration of the Plan. The Committee's interpretation of
the Plan or any Options granted pursuant hereto and all decisions and
determinations by the Committee with respect to the Plan shall be final,
binding, and conclusive on all parties.
ARTICLE IV
GRANT OF OPTIONS
The Committee may, from time to time, grant Options to one or more
Participants, provided, however, that:
(a) Any shares of Common Stock related to Options which
terminate by expiration, forfeiture, cancellation or otherwise without
the issuance of shares of Common Stock shall be available again for
grant under the Plan.
(b) Common Stock delivered by the Company upon exercise of an
Option under the Plan will be authorized and unissued shares or issued
shares which have been reacquired by the Company (i.e., treasury
shares).
(c) The Committee shall, in its sole discretion, determine the
manner in which fractional shares arising under this Plan shall be
treated.
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(d) Upon the exercise of any Option, the Company shall issue
and deliver to the Participant who exercised the Option a certificate
representing the number of shares of Common Stock purchased thereby.
(e) Subject to Article VII, the aggregate number of shares of
Common Stock made subject to Options granted to any Employee in any
calendar year may not exceed one million shares.
ARTICLE V
ELIGIBILITY
Subject to the provisions of the Plan, the Committee shall, from time
to time, select from the Eligible Persons those to whom Options shall be granted
and shall determine the type or types of Options to be granted and shall
establish in the related Option Agreements the terms, conditions, restrictions
and/or limitations, if any, applicable to the Options in addition to those set
forth in the Plan and the administrative rules and regulations issued by the
Committee. Nonqualified Stock Options may be granted to any Eligible Person.
Incentive Stock Options may be granted only to Employees.
ARTICLE VI
STOCK OPTIONS
SECTION 6.1 Grant of Options. The Committee may, from time to time,
subject to the provisions of the Plan and such other terms and conditions as it
may determine, grant Options to Eligible Persons. Subject to Article V, these
Options may be Incentive Stock Options or Nonqualified Stock Options, or a
combination of both. Each grant of an Option shall be evidenced by an Option
Agreement executed by the Company and the Participant, and shall contain such
terms and conditions and be in such form as the Committee may from time to time
approve, subject to the requirements of Section 6.2.
SECTION 6.2 Conditions of Options. Each Option so granted shall be
subject to the following conditions:
(a) Exercise Price. As limited by Section 6.2(e) below, the
Option Agreement for each Option shall state the exercise price which
shall be set by the Committee on the Date of Grant. No Option shall be
granted at an exercise price which is less than the Fair Market Value
of the Common Stock on the Date of Grant, except that Nonqualified
Stock Options for the purchase of up to ten percent (10%) of the shares
subject to the Plan may be granted at an exercise price which is not
less than eighty-five percent (85%) of the Fair Market Value of the
Common Stock on the Date of Grant.
(b) Form of Payment. The payment of the exercise price of an
Option shall be subject to the following:
(i) The full exercise price for shares of Common
Stock purchased upon the exercise of any
Option shall be paid at the time of such
exercise (except that, in the case of an
exercise arrangement approved by the
Committee and described in clause (iii)
below, payment may be made as soon as
practicable after the exercise).
(ii) The exercise price shall be payable in cash
(including a check acceptable to the
Committee, bank draft or money order) or by
tendering, by either actual delivery of
shares or by attestation, shares of Common
Stock acceptable to the Committee and valued
at Fair Market Value as of the day of
exercise, or any combination thereof, as
determined by the Committee.
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(iii) The Committee may permit a Participant to
elect to pay the exercise price upon the
exercise of an Option by irrevocably
authorizing a third party to sell shares of
Common Stock (or a sufficient portion of the
shares) acquired upon exercise of the Option
and remit to the Company a sufficient
portion of the sale proceeds to pay the
entire exercise price and any tax
withholding resulting from such exercise.
(c) Exercise of Options. Options granted under the Plan shall
be exercisable, in whole or in such installments and at such times,
and shall expire at such time, as shall be provided by the Committee
in the Option Agreement. Exercise of an Option shall be by written
notice stating the election to exercise in the form and manner
determined by the Committee. Every share of Common Stock acquired
through the exercise of an Option shall be deemed to be fully paid at
the time of exercise and payment of the exercise price.
(d) Other Terms and Conditions. Among other conditions that
may be imposed by the Committee, if deemed appropriate, are those
relating to (i) the period or periods and the conditions of
exercisability of any Option; (ii) the minimum periods during which
Participants must be employed by the Company or its Subsidiaries, or
must hold Options before they may be exercised; (iii) the minimum
periods during which shares acquired upon exercise must be held before
sale or transfer shall be permitted; (iv) the maximum period that
Participants will be allowed to be inactively employed or on a leave
of absence before their vesting is suspended until they return to
active employment; (v) conditions under which such Options or shares
may be subject to forfeiture; (vi) the frequency of exercise or the
minimum or maximum number of shares that may be acquired at any one
time and (vii) the achievement by the Company of specified performance
criteria.
(e) Special Restrictions Relating to Incentive Stock Options.
In addition to being subject to all applicable terms, conditions,
restrictions and/or limitations established by the Committee, Options
issued in the form of Incentive Stock Options shall comply with the
requirements of Section 422 of the Code (or any successor Section
thereto), including, without limitation, the requirement that the
exercise price of an Incentive Stock Option not be less than 100% of
the Fair Market Value of the Common Stock on the Date of Grant, the
requirement that each Incentive Stock Option, unless sooner exercised,
terminated or canceled, expire no later than 10 years from its Date of
Grant, the requirement that Incentive Stock Options be granted only to
Employees, and the requirement that the aggregate Fair Market Value
(determined on the Date of Grant) of the Common Stock with respect to
which Incentive Stock Options are exercisable for the first time by a
Participant during any calendar year (under this Plan or any other
plan of the Company or any Subsidiary) not exceed $100,000. Incentive
Stock Options which are in excess of the applicable $100,000
limitation will be automatically recharacterized as Nonqualified Stock
Options as provided under Section 6.3 of this Plan. No Incentive Stock
Options shall be granted to any Employee if, immediately before the
grant of an Incentive Stock Option, such Employee owns more than 10%
of the total combined voting power of all classes of stock of the
Company or its Subsidiaries (as determined in accordance with the
stock attribution rules contained in Sections 422 and 424(d) of the
Code). Provided, the preceding sentence shall not apply if, at the
time the Incentive Stock Option is granted, the exercise price is at
least 110% of the Fair Market Value of the Common Stock subject to the
Incentive Stock Option, and such Incentive Stock Option by its terms
is exercisable no more than five years from the date such Incentive
Stock Option is granted.
(f) Application of Funds. The proceeds received by the Company
from the sale of Common Stock issued upon the exercise of Options will
be used for general corporate purposes.
(g) Shareholder Rights. No Participant shall have any rights
as a shareholder with respect to any share of Common Stock subject to
an Option prior to the purchase of such share of Common Stock by
exercise of the Option.
SECTION 6.3 Options Not Qualifying as Incentive Stock Options. With
respect to all or any portion of any Option granted under this Plan not
qualifying as an "incentive stock option" under Section 422 of the Code, such
Option shall be considered a Nonqualified Stock Option granted under this Plan
for all purposes. Further, this Plan and any Incentive Stock Options granted
hereunder shall be deemed to have incorporated by reference all the provisions
and
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requirements of Section 422 of the Code (and the Treasury Regulations issued
thereunder) necessary to ensure that all Incentive Stock Options granted
hereunder shall be "incentive stock options" described in Section 422 of the
Code. Further, in the event that the $100,000 limitation contained in Section
6.2(e) herein is exceeded in any Incentive Stock Option granted under this Plan,
the portion of the Incentive Stock Option in excess of such limitation shall be
treated as a Nonqualified Stock Option under this Plan subject to the terms and
provisions of the applicable Option Agreement, except to the extent modified to
reflect recharacterization of the Incentive Stock Option as a Nonqualified Stock
Option.
ARTICLE VII
STOCK ADJUSTMENTS
Subject to the provisions of Article IX of this Plan, in the event that
the shares of Common Stock, as presently constituted, shall be changed into or
exchanged for a different number or kind or shares of stock or other securities
of the Company or of another corporation (whether by reason of merger,
consolidation, recapitalization, reclassification, stock split, combination of
shares or otherwise), or if the number of such shares of Common Stock shall be
increased through the payment of a stock dividend, or a dividend on the shares
of Common Stock or rights or warrants to purchase securities of the Company
shall be made, then there shall be substituted for or added to each share
available under and subject to the Plan as provided in Section 1.3 hereof, and
each share then subject or thereafter subject or which may become subject to
Options under the Plan, the number and kind of shares of stock or other
securities into which each outstanding share of Common Stock shall be so changed
or for which each such share shall be exchanged or to which each such share
shall be entitled, as the case may be, on a fair and equivalent basis in
accordance with the applicable provisions of Section 424 of the Code; provided,
however, in no such event will such adjustment result in a modification of any
Option as defined in Section 424(h) of the Code. In the event there shall be any
other change in the number or kind of the outstanding shares of Common Stock, or
any stock or other securities into which the Common Stock shall have been
changed or for which it shall have been exchanged, then if the Committee shall,
in its sole discretion, determine that such change equitably requires an
adjustment in the shares available under and subject to the Plan, or in any
Option theretofore granted or which may be granted under the Plan, such
adjustments shall be made in accordance with such determination, except that no
adjustment of the number of shares of Common Stock available under the Plan or
to which any Option relates that would otherwise be required shall be made
unless and until such adjustment either by itself or with other adjustments not
previously made would require an increase or decrease of at least 1% of the
number of shares of Common Stock available under the Plan or to which any Option
relates immediately prior to the making of such adjustment (the "Minimum
Adjustment"). Any adjustment representing a change of less than such minimum
amount shall be carried forward and made as soon as such adjustment together
with other adjustments required by this Article VII and not previously made
would result in a Minimum Adjustment. Notwithstanding the foregoing, any
adjustment required by this Article VII which otherwise would not result in a
Minimum Adjustment shall be made with respect to shares of Common Stock relating
to any Option immediately prior to exercise of such Option.
No fractional shares of Common Stock or units of other securities shall
be issued pursuant to any such adjustment, and any fractions resulting from any
such adjustment shall be eliminated in each case by rounding downward to the
nearest whole share.
ARTICLE VIII
GENERAL
SECTION 8.1 Amendment or Termination of Plan. The Board may suspend or
terminate the Plan at any time. In addition, the Board may, from time to time,
amend the Plan in any manner, but may not adopt any amendment without
Shareholder Approval if (i) the amendment relates to Incentive Stock Options and
Section 422 of the Code requires Shareholder Approval of such amendment, or (ii)
in the opinion of counsel to the Company, Shareholder Approval is required by
any federal or state laws or regulations or the rules of any stock exchange on
which the common stock may be listed.
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SECTION 8.2 Acceleration of Otherwise Unexercisable Stock Options on
Death, Disability or Other Special Circumstances. The Committee, in its sole
discretion, may permit (i) a Participant who terminates employment due to a
Disability, (ii) the personal representative of a deceased Participant, or (iii)
any other Participant who terminates employment upon the occurrence of special
circumstances (as determined by the Committee) to purchase all or any part of
the shares subject to any unvested Option on the date of the Participant's
termination of employment due to a Disability, death or special circumstances,
or as the Committee otherwise so determines. With respect to Options which have
already vested at the date of such termination or the vesting of which is
accelerated by the Committee in accordance with the foregoing provision, the
Participant or the personal representative of a deceased Participant shall have
the right to exercise such vested Options within such period(s) as the Committee
shall determine.
SECTION 8.3 Nonassignability. Options are not transferable otherwise
than by will or the laws of descent and distribution. Any attempted transfer,
assignment, pledge, hypothecation or other disposition of, or the levy of
execution, attachment or similar process upon, any Option contrary to the
provisions hereof shall be void and ineffective, shall give no right to any
purported transferee, and may, at the sole discretion of the Committee, result
in forfeiture of the Option involved in such attempt.
SECTION 8.4 Withholding Taxes. A Participant must pay to the Company
the amount of taxes required by law upon the exercise of an Option in cash.
SECTION 8.5 Regulatory Approval and Listings. The Company shall use its
best efforts to file with the Securities and Exchange Commission as soon as
practicable following the date this Plan is effective, and keep continuously
effective and usable, a Registration Statement on Form S-8 with respect to
shares of Common Stock subject to Options hereunder. Notwithstanding anything
contained in this Plan to the contrary, the Company shall have no obligation to
issue or deliver certificates representing shares of Common Stock evidencing
Options prior to:
(a) the obtaining of any approval from, or satisfaction of any
waiting period or other condition imposed by, any governmental agency
which the Committee shall, in its sole discretion, determine to be
necessary or advisable;
(b) the listing of such shares on any exchange on which the Common
Stock may be listed; and
(c) the completion of any registration or other qualification of
such shares under any state or federal law or regulation of any
governmental body which the Committee shall, in its sole discretion,
determine to be necessary or advisable.
SECTION 8.6 Right to Continued Employment. Participation in the Plan
shall not give any Participant any right to remain in the employ of the Company
or any Subsidiary or any partnership or limited liability company controlled by
the Company. Further, the adoption of this Plan shall not be deemed to give any
Employee or Consultant or any other individual any right to be selected as a
Participant or to be granted an Option.
SECTION 8.7 Reliance on Reports. Each member of the Committee and each
member of the Board shall be fully justified in relying or acting in good faith
upon any report made by the independent public accountants of the Company and
its Subsidiaries and upon any other information furnished in connection with the
Plan by any person or persons other than the Committee or Board member. In no
event shall any person who is or shall have been a member of the Committee or of
the Board be liable for any determination made or other action taken or any
omission to act in reliance upon any such report or information or for any
action taken, including the furnishing of information, or failure to act, if in
good faith.
SECTION 8.8 Construction. The titles and headings of the sections in
the Plan are for the convenience of reference only, and in the event of any
conflict, the text of the Plan, rather than such titles or headings, shall
control.
SECTION 8.9 Governing Law. The Plan shall be governed by and construed
in accordance with the laws of the State of Oklahoma except as superseded by
applicable federal law.
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ARTICLE IX
ACCELERATION OF OPTIONS UPON CORPORATE EVENT
SECTION 9.1 Procedures for Acceleration and Exercise. If the Company
shall, pursuant to action by the Board, at any time propose to dissolve or
liquidate or merge into, consolidate with, or sell or otherwise transfer all or
substantially all of its assets to another corporation and provision is not made
pursuant to the terms of such transaction for the assumption by the surviving,
resulting or acquiring corporation of outstanding Options under the Plan, or for
the substitution of new options therefor, the Committee shall cause written
notice of the proposed transaction to be given to each Participant no less than
forty days prior to the anticipated effective date of the proposed transaction,
and the Participant's Option shall become 100% vested. Prior to a date specified
in such notice, which shall be not more than ten days prior to the anticipated
effective date of the proposed transaction, each Participant shall have the
right to exercise his or her Option to purchase any or all of the Common Stock
then subject to such Option. Each Participant, by so notifying the Company in
writing, may, in exercising his or her Option, condition such exercise upon, and
provide that such exercise shall become effective immediately prior to the
consummation of the transaction, in which event such Participant need not make
payment for the Common Stock to be purchased upon exercise of such Option until
five days after receipt of written notice by the Company to such Participant
that the transaction has been consummated. If the transaction is consummated,
each Option, to the extent not previously exercised prior to the date specified
in the foregoing notice, shall terminate on the effective date such transaction
is consummated. If the transaction is abandoned, (i) any Common Stock not
purchased upon exercise of such Option shall continue to be available for
purchase in accordance with the other provisions of the Plan and (ii) to the
extent that any Option not exercised prior to such abandonment shall have vested
solely by operation of this Section 9.1, such vesting shall be deemed voided as
of the time such acceleration otherwise occurred pursuant to Section 9.1, and
the vesting schedule set forth in the Participant's Option Agreement shall be
reinstituted as of the date of such abandonment.
SECTION 9.2 Certain Additional Payments by the Company. The Committee
may, in its sole discretion, provide in any Option Agreement for certain
payments by the Company in the event that acceleration of vesting of any Option
under the Plan is subject to the excise tax imposed by Section 4999 of the Code
or any interest or penalties with respect to such excise tax (such excise tax,
interest and penalties, collectively, the "Excise Tax"). An Option Agreement may
provide that the Participant shall be entitled to receive a payment (a "Gross-Up
Payment") in an amount such that after payment by the Participant of all taxes
(including any interest or penalties imposed with respect to such taxes),
including any Excise Tax, imposed upon the Gross-Up Payment, the Participant
retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon
such acceleration of vesting of any Option.
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EXHIBIT B
CHESAPEAKE ENERGY CORPORATION
2002 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
CHESAPEAKE ENERGY CORPORATION
2002 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
ARTICLE I - PURPOSE ................................................................1
Section 1.1 Purpose....................................................1
Section 1.2 Establishment..............................................1
Section 1.3 Shares Subject to the Plan.................................1
Section 1.4 Shareholder Approval.......................................1
ARTICLE II - DEFINITIONS ...........................................................1
ARTICLE III - ADMINISTRATION........................................................2
Section 3.1 Administration of the Plan; the Committee..................2
Section 3.2 Committee to Make Rules and Interpret Plan.................3
ARTICLE IV -OPTION SHARES...........................................................3
ARTICLE V - ELIGIBILITY ............................................................3
ARTICLE VI - STOCK OPTIONS..........................................................3
Section 6.1 Grant of Options by the Committee..........................3
Section 6.2 Formula Grants.............................................3
Section 6.3 Conditions of Options......................................4
ARTICLE VII - STOCK ADJUSTMENTS.....................................................5
ARTICLE VIII - GENERAL .............................................................6
Section 8.1 Amendment or Termination of Plan...........................6
Section 8.2 Acceleration of Otherwise Unexercisable Stock Options
on Death, Disability or Other Special Circumstances........6
Section 8.3 Limited Transferability of Options.........................6
Section 8.4 Withholding Taxes..........................................6
Section 8.5 Regulatory Approval and Listings...........................6
Section 8.6 Right to Continued Board Membership........................7
Section 8.7 Reliance on Reports........................................7
Section 8.8 Construction...............................................7
Section 8.9 Governing Law..............................................7
ARTICLE IX - ACCELERATION OF OPTIONS UPON CORPORATE EVENT...........................7
Section 9.1 Procedures for Acceleration and Exercise...................7
Section 9.2 Certain Additional Payments by the Company.................7
ARTICLE I
PURPOSE
SECTION 1.1 Purpose. This Stock Option Plan is established by
Chesapeake Energy Corporation (the "Company") to aid the Company in attracting
and retaining persons of outstanding competence who are not employed by the
Company to serve on the Board of Directors. The Plan is intended to enable such
persons to acquire or increase ownership interests in the Company on a basis
that will encourage them to use their best efforts to promote the growth and
profitability of the Company. Consistent with these objectives, the Plan
provides for the granting of Options to Non-employee Directors on the terms and
subject to the conditions set forth in the Plan.
SECTION 1.2 Establishment. The Plan is effective as of April 15, 2002
and for a period of 10 years from such date. The Plan will terminate on April
14, 2012; however, it will continue in effect until all matters relating to the
exercise of Options and administration of the Plan have been settled.
SECTION 1.3 Shares Subject to the Plan. Subject to Articles IV, VII and
IX of this Plan, shares of stock covered by Options shall consist of Five
Hundred Thousand (500,000) shares of Common Stock.
SECTION 1.4 Shareholder Approval. Options under the Plan may not be
granted to Participants prior to Shareholder Approval of the Plan.
ARTICLE II
DEFINITIONS
SECTION 2.1 "Board" means the Board of Directors of the Company.
SECTION 2.2 "Code" means the Internal Revenue Code of 1986, as amended.
Reference in the Plan to any Section of the Code shall be deemed to include any
amendments or successor provisions to such Section and any regulations under
such Section.
SECTION 2.3 "Committee" means the committee designated by the Board
which shall consist of not less than two members of the Board who meet the
definition of "non-employee director" set forth in Rule 16b-3, or any successor
rule, promulgated under Section 16 of the Exchange Act.
SECTION 2.4 "Common Stock" means the common stock, par value $.01 per
share, of the Company and, after substitution, such other stock as shall be
substituted therefor as provided in Article VII or Article IX of the Plan.
SECTION 2.5 "Date of Grant" means the date on which the granting of an
Option is authorized pursuant to Section 6.2 of the Plan, by the Committee or
such later date as may be specified by the Committee in such authorization.
SECTION 2.6 "Director" means a member of the Board.
SECTION 2.7 "Exchange Act" means the Securities Exchange Act of 1934,
as amended.
SECTION 2.8 "Fair Market Value" means, as of any date, (i) if the
principal market for the Common Stock is a national securities exchange or the
Nasdaq stock market, the closing price of the Common Stock on that date on the
principal exchange on which the Common Stock is then listed or admitted to
trading; or (ii) if sale prices are not available or if the principal market for
the Common Stock is not a national securities exchange and the Common Stock is
not quoted on the Nasdaq stock market, the average of the highest bid and lowest
asked prices for the Common Stock on such day as reported on the Nasdaq OTC
Bulletin Board Service or by the National Quotation Bureau, Incorporated or a
comparable service. If the day is not a business day, and as a result, clauses
(i) and (ii) are inapplicable, the Fair Market Value of the Common Stock shall
be determined as of the last preceding business day. If clauses (i) and (ii) are
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otherwise inapplicable, the Fair Market Value of the Common Stock shall be
determined in good faith by the Committee.
SECTION 2.9 "Non-employee Director" means any member of the Board who
is not currently an employee of the Company or any of its subsidiaries.
SECTION 2.10 "Option" means an option to purchase shares of Common
Stock granted under Article VI of the Plan. Options shall not be incentive stock
options within the meaning of Section 422(b) of the Code.
SECTION 2.11 "Option Agreement" means any written instrument that
establishes the terms, conditions, restrictions, and/or limitations applicable
to an Option in addition to those established by this Plan and by the
Committee's exercise of its administrative powers.
SECTION 2.12 "Participant" means a Non-employee Director to whom an
Option has been granted by the Committee under the Plan.
SECTION 2.13 "Plan" means the Chesapeake Energy Corporation 2002
Non-Employee Director Stock Option Plan.
SECTION 2.14 "Shareholder Approval" means approval by the holders of a
majority of the outstanding shares of Common Stock, present or represented and
entitled to vote at a meeting called for such purposes.
SECTION 2.15 "Subsidiary" shall have the same meaning set forth in
Section 424(f) of the Code.
ARTICLE III
ADMINISTRATION
SECTION 3.1 Administration of the Plan; the Committee. The Committee
shall administer the Plan. If the Committee does not exist, or for any other
reason determined by the Board, the Board may take any action under the Plan
that would otherwise be the responsibility of the Committee.
Unless otherwise provided in the bylaws of the Company or resolutions
adopted from time to time by the Board establishing the Committee, the Board may
from time to time remove members from, or add members to, the Committee.
Vacancies on the Committee, however caused, shall be filled by the Board. The
Committee shall hold meetings at such times and places as it may determine. A
majority of the Committee shall constitute a quorum, and the acts of a majority
of the members present at any meeting at which a quorum is present shall be the
valid acts of the Committee. Any action which may be taken at a meeting of the
Committee may be taken without a meeting if all the members of the Committee
consent to the action in writing.
Except as provided in Section 6.2 and subject to the other provisions
of the Plan, the Committee shall have exclusive power to:
(a) Select the Non-employee Directors to participate in the
Plan.
(b) Determine the time or times when Options will be granted.
(c) Determine the number of shares of Common Stock subject to
any Option, all the terms, conditions (including performance
requirements), restrictions and/or limitations, if any, of an Option,
including the time and conditions of exercise or vesting, and the terms
of any Option Agreement, which may include the waiver or amendment of
prior terms and conditions or acceleration of the vesting or exercise
of an Option under certain circumstances determined by the Committee.
(d) Determine whether Options will be granted singly or in
combination.
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(e) Take any and all other action it deems necessary or
advisable for the proper operation or administration of the Plan.
SECTION 3.2 Committee to Make Rules and Interpret Plan. The Committee
in its sole discretion shall have the authority, subject to the provisions of
the Plan, to establish, adopt, or revise such rules and regulations and to make
all such determinations relating to the Plan as it may deem necessary or
advisable for the administration of the Plan. The Committee's interpretation of
the Plan or any Options granted pursuant hereto and all decisions and
determinations by the Committee with respect to the Plan shall be final,
binding, and conclusive on all parties.
ARTICLE IV
OPTION SHARES
With respect to shares of Common Stock related to Options, the
following shall apply:
(a) Any shares of Common Stock related to Options which terminate
by expiration, forfeiture, cancellation or otherwise without the
issuance of shares of Common Stock shall be available again for grant
under the Plan.
(b) Common Stock delivered by the Company upon exercise of an
Option under the Plan will be authorized and unissued shares or issued
shares which have been reacquired by the Company (i.e., treasury
shares).
(c) The Committee shall, in its sole discretion, determine the
manner in which fractional shares arising under this Plan shall be
treated.
(d) Upon the exercise of any Option, the Company shall issue and
deliver to the Participant who exercised the Option a certificate
representing the number of shares of Common Stock purchased thereby.
ARTICLE V
ELIGIBILITY
Subject to the provisions of the Plan and except as provided in Section
6.2, the Committee shall, from time to time, select from the Non-employee
Directors those to whom Options shall be granted and establish in the related
Option Agreements the terms, conditions, restrictions and/or limitations, if
any, applicable to the Options in addition to those set forth in the Plan and
the administrative rules and regulations issued by the Committee.
ARTICLE VI
STOCK OPTIONS
SECTION 6.1 Grant of Options by the Committee. The Committee may, from
time to time, subject to the provisions of the Plan and such other terms and
conditions as it may determine, grant Options to Non-Employee Directors. Each
grant of an Option shall be evidenced by an Option Agreement executed by the
Company and the Participant, and shall contain such terms and conditions and be
in such form as the Committee may from time to time approve.
SECTION 6.2 Formula Grants. Each Non-employee Director serving on the
Board will be granted an option to purchase 10,000 shares of Common Stock on the
first business day of each calendar quarter (the first business day of each
January, April, July and October) starting with the Company's fiscal quarter
commencing on July 1, 2002. Options granted under this Section 6.2 will be
immediately exercisable. The price at which shares of Common Stock
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subject to any Option granted under this Section 6.2 will be equal to the Fair
Market Value on the date of grant. The number of shares of Common Stock
underlying, and the exercise price of, any Option issued under this Section 6.2
will be subject to adjustment as provided in Article VII and Article IX. The
term of each Option granted under this Section 6.2 will be for a period which
expires ten (10) years after the Date of Grant. An Option held by a Participant
who ceases to be a Director of the Company may expire earlier pursuant to
Section 6.3(e) or as otherwise provided by the Committee.
SECTION 6.3 Conditions of Options. Each Option shall be subject to the
following conditions:
(a) Exercise Price. The Option Agreement for each Option shall
state the price at which the Option may be exercised. No Option shall
be granted at an exercise price which is less than the Fair Market
Value of the Common Stock on the Date of Grant, except that the
Committee may grant Options for the purchase of up to ten percent (10%)
of the shares subject to the Plan may be granted at an exercise price
which is not less than eighty-five percent (85%) of the Fair Market
Value of the Common Stock on the Date of Grant.
(b) Form of Payment. The payment of the exercise price of an
Option shall be subject to the following:
(i) The full exercise price for shares of Common
Stock purchased upon the exercise of any
Option shall be paid at the time of such
exercise (except that, in the case of an
exercise arrangement approved by the
Committee and described in clause (iii)
below, payment may be made as soon as
practicable after the exercise).
(ii) The exercise price shall be payable in cash
(including a check acceptable to the
Committee, bank draft or money order) or by
tendering, by either actual delivery of
shares or by attestation, shares of Common
Stock acceptable to the Committee and valued
at Fair Market Value as of the day of
exercise, or any combination thereof, as
determined by the Committee.
(iii) The Committee may permit a Participant to
elect to pay the exercise price upon the
exercise of an Option by irrevocably
authorizing a third party to sell shares of
Common Stock (or a sufficient portion of the
shares) acquired upon exercise of the Option
and remit to the Company a sufficient
portion of the sale proceeds to pay the
entire exercise price and any tax
withholding resulting from such exercise.
(c) Exercise of Options. Except as provided in Section 6.2,
Options granted under the Plan shall be exercisable, in whole or in
such installments and at such times, and shall expire at such time, as
shall be provided by the Committee in the Option Agreement. Exercise of
an Option shall be by written notice stating the election to exercise
in the form and manner determined by the Committee. Every share of
Common Stock acquired through the exercise of an Option shall be deemed
to be fully paid at the time of exercise and payment of the exercise
price.
(d) Other Terms and Conditions. Among other conditions that
may be imposed by the Committee with respect to Options granted
pursuant to Section 6.1, if deemed appropriate, are those relating to
(i) the period or periods and the conditions of exercisability of any
Option; (ii) the minimum periods during which Participants must be
Directors of the Company or its Subsidiaries, or must hold Options
before they may be exercised; (iii) the minimum periods during which
shares acquired upon exercise must be held before sale or transfer
shall be permitted; (iv) conditions under which such Options or shares
may be subject to forfeiture; (v) the frequency of exercise or the
minimum or maximum number of shares that may be acquired at any one
time and (vi) the achievement by the Company of specified performance
criteria.
(e) Exercise of Options After a Participant's Termination.
Unless the Committee otherwise determines, Options granted to a
Participant whose service as a Director terminates during the Option
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period for any reason other than cause may be exercised, to the extent
exercisable, until the earlier of (a) three (3) years after termination
of the Participant's service on the Board or (b) the expiration of the
Option. In the event a Participant's membership on the Board is
terminated by reason of death, the personal representative of the
deceased Participant may so exercise any unexercised vested Option
granted to the Participant under the Plan. If a Participant's
membership on the Board is terminated for cause, the Participant's
Option will expire thirty (30) days after such termination. Discharge
for cause will include termination for malfeasance or gross misfeasance
in the performance of duties, conviction of illegal activity in
connection therewith, or any conduct detrimental to the interests of
the Company, and in any event the determination of the Board with
respect thereto will be final and conclusive.
(f) Application of Funds. The proceeds received by the Company
from the sale of Common Stock issued upon the exercise of Options will
be used for general corporate purposes.
(g) Shareholder Rights. No Participant shall have any rights
as a shareholder with respect to any share of Common Stock subject to
an Option prior to the purchase of such share of Common Stock by
exercise of the Option.
ARTICLE VII
STOCK ADJUSTMENTS
Subject to the provisions of Article IX of this Plan, in the event that
the shares of Common Stock, as presently constituted, shall be changed into or
exchanged for a different number or kind or shares of stock or other securities
of the Company or of another corporation (whether by reason of merger,
consolidation, recapitalization, reclassification, stock split, combination of
shares or otherwise), or if the number of such shares of Common Stock shall be
increased through the payment of a stock dividend, or a dividend on the shares
of Common Stock or rights or warrants to purchase securities of the Company
shall be made, then there shall be substituted for or added to each share
available under and subject to the Plan as provided in Section 1.3 hereof, and
each share then subject or thereafter subject or which may become subject to
Options under the Plan, the number and kind of shares of stock or other
securities into which each outstanding share of Common Stock shall be so changed
or for which each such share shall be exchanged or to which each such share
shall be entitled, as the case may be, on a fair and equivalent basis in
accordance with the applicable provisions of Section 424 of the Code; provided,
however, in no such event will such adjustment result in a modification of any
Option as defined in Section 424(h) of the Code. In the event there shall be any
other change in the number or kind of the outstanding shares of Common Stock, or
any stock or other securities into which the Common Stock shall have been
changed or for which it shall have been exchanged, then if the Committee shall,
in its sole discretion, determine that such change equitably requires an
adjustment in the shares available under and subject to the Plan, or in any
Option theretofore granted or which may be granted under the Plan, such
adjustments shall be made in accordance with such determination, except that no
adjustment of the number of shares of Common Stock available under the Plan or
to which any Option relates that would otherwise be required shall be made
unless and until such adjustment either by itself or with other adjustments not
previously made would require an increase or decrease of at least 1% of the
number of shares of Common Stock available under the Plan or to which any Option
relates immediately prior to the making of such adjustment (the "Minimum
Adjustment"). Any adjustment representing a change of less than such minimum
amount shall be carried forward and made as soon as such adjustment together
with other adjustments required by this Article VII and not previously made
would result in a Minimum Adjustment. Notwithstanding the foregoing, any
adjustment required by this Article VII which otherwise would not result in a
Minimum Adjustment shall be made with respect to shares of Common Stock relating
to any Option immediately prior to exercise of such Option. No adjustment in the
number of shares of Common Stock underlying Options to be granted under Section
6.2 of the Plan shall be made pursuant to this Article VII.
No fractional shares of Common Stock or units of other securities shall
be issued pursuant to any such adjustment, and any fractions resulting from any
such adjustment shall be eliminated in each case by rounding downward to the
nearest whole share.
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ARTICLE VIII
GENERAL
SECTION 8.1 Amendment or Termination of Plan. The Board may suspend or
terminate the Plan at any time. In addition, the Board may, from time to time,
amend the Plan in any manner, but may not adopt any amendment without
Shareholder Approval if in the opinion of counsel to the Company, Shareholder
Approval is required by any federal or state laws or regulations or the rules of
any stock exchange on which the Common Stock is then listed.
SECTION 8.2 Acceleration of Otherwise Unexercisable Stock Options on
Death, Disability or Other Special Circumstances. The Committee, in its sole
discretion, may permit a Participant who ceases to be a Director or the personal
representative of a deceased Participant to purchase all or any part of the
shares subject to any unvested Option on the date of the Participant's
termination of membership on the Board, or death, or as the Committee otherwise
so determines. With respect to Options which have already vested at the date of
such termination or the vesting of which is accelerated by the Committee in
accordance with the foregoing provision, the Participant or the personal
representative of a deceased Participant shall have the right to exercise such
vested Options in accordance with Section 6.3(e).
SECTION 8.3 Limited Transferability of Options. The Committee may, in
its discretion, authorize all or a portion of the Options to be granted to a
Participant to be on terms which permit transfer by such Participant to (i) the
ex-spouse of the Participant pursuant to the terms of a qualified domestic
relations order, (ii) the spouse, children or grandchildren of the Participant
("Immediate Family Members"), (iii) a trust or trusts for the exclusive benefit
of such Immediate Family Members, or (iv) a partnership in which such Immediate
Family Members are the only partners. In addition (x) there may be no
consideration for any such transfer, (y) the Option Agreement pursuant to which
such Options are granted must be approved by the Committee, and must expressly
provide for transferability in a manner consistent with this Section and (z)
subsequent transfers of transferred Options shall be prohibited except by will
or the laws of descent and distribution. However, no such transfer of an Option
by a Participant shall be effective to bind the Company unless the Company has
been furnished with written notice of such transfer and an authenticated copy of
the will and/or such other evidence as the Committee may deem necessary to
establish the validity of the transfer and the acceptance by the transferee of
the terms and conditions of such Options. Following transfer, any such Options
shall continue to be subject to the same terms and conditions as were applicable
immediately prior to transfer, provided that, with the exception of Sections
6.2, 6.3(c) and 6.3(e), the term "Participant" shall be deemed to refer to the
transferee.
SECTION 8.4 Withholding Taxes. A Participant must pay to the Company
the amount of taxes required by law upon the exercise of an Option in cash.
SECTION 8.5 Regulatory Approval and Listings. The Company shall use its
best efforts to file with the Securities and Exchange Commission as soon as
practicable following the date this Plan is effective, and keep continuously
effective and usable, a Registration Statement on Form S-8 with respect to
shares of Common Stock subject to Options hereunder. Notwithstanding anything
contained in this Plan to the contrary, the Company shall have no obligation to
issue or deliver certificates representing shares of Common Stock evidencing
Options prior to:
(a) the obtaining of any approval from, or satisfaction of any waiting
period or other condition imposed by, any governmental agency which the
Committee shall, in its sole discretion, determine to be necessary or
advisable;
(b) the listing of such shares on any exchange on which the Common Stock may
be listed; and
(c) the completion of any registration or other qualification of such shares
under any state or federal law or regulation of any governmental body
which the Committee shall, in its sole discretion, determine to be
necessary or advisable.
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SECTION 8.6 Right to Continued Board Membership. Participation in the
Plan shall not give any Participant any right to remain on the Board of the
Company. Further, except as provided in Section 6.2, the adoption of this Plan
shall not be deemed to give a Non-employee Director any right to be selected as
a Participant or to be granted an Option.
SECTION 8.7 Reliance on Reports. Each member of the Committee and each
member of the Board shall be fully justified in relying or acting in good faith
upon any report made by the independent public accountants of the Company and
its Subsidiaries and upon any other information furnished in connection with the
Plan by any person or persons other than the Committee or Board member. In no
event shall any person who is or shall have been a member of the Committee or of
the Board be liable for any determination made or other action taken or any
omission to act in reliance upon any such report or information or for any
action taken, including the furnishing of information, or failure to act, if in
good faith.
SECTION 8.8 Construction. The titles and headings of the sections in
the Plan are for the convenience of reference only, and in the event of any
conflict, the text of the Plan, rather than such titles or headings, shall
control.
SECTION 8.9 Governing Law. The Plan shall be governed by and construed
in accordance with the laws of the State of Oklahoma except as superseded by
applicable federal law.
ARTICLE IX
ACCELERATION OF OPTIONS UPON CORPORATE EVENT
SECTION 9.1 Procedures for Acceleration and Exercise. If the Company
shall, pursuant to action by the Board, at any time propose to dissolve or
liquidate or merge into, consolidate with, or sell or otherwise transfer all or
substantially all of its assets to another corporation and provision is not made
pursuant to the terms of such transaction for the assumption by the surviving,
resulting or acquiring corporation of outstanding Options under the Plan, or for
the substitution of new options therefor, the Committee shall cause written
notice of the proposed transaction to be given to each Participant no less than
forty (40) days prior to the anticipated effective date of the proposed
transaction, and the Participant's Option shall become 100% vested. Prior to a
date specified in such notice, which shall be not more than ten (10) days prior
to the anticipated effective date of the proposed transaction, each Participant
shall have the right to exercise his or her Option to purchase any or all of the
Common Stock then subject to such Option. Each Participant, by so notifying the
Company in writing, may, in exercising his or her Option, condition such
exercise upon, and provide that such exercise shall become effective immediately
prior to the consummation of the transaction, in which event such Participant
need not make payment for the Common Stock to be purchased upon exercise of such
Option until five (5) days after receipt of written notice by the Company to
such Participant that the transaction has been consummated. If the transaction
is consummated, each Option, to the extent not previously exercised prior to the
date specified in the foregoing notice, shall terminate on the effective date
such transaction is consummated. If the transaction is abandoned, (i) any Common
Stock not purchased upon exercise of such Option shall continue to be available
for purchase in accordance with the other provisions of the Plan and (ii) to the
extent that any Option not exercised prior to such abandonment shall have vested
solely by operation of this Section 9.1, such vesting shall be deemed voided as
of the time such acceleration otherwise occurred pursuant to Section 9.1, and
the vesting schedule set forth in the Participant's Option Agreement shall be
reinstituted as of the date of such abandonment.
SECTION 9.2 Certain Additional Payments by the Company. The Committee
may, in its sole discretion, provide in any Option Agreement for certain
payments by the Company in the event that acceleration of vesting of any Option
under the Plan is subject to the excise tax imposed by Section 4999 of the Code
or any interest or penalties with respect to such excise tax (such excise tax,
interest and penalties, collectively, the "Excise Tax"). An Option Agreement may
provide that the Participant shall be entitled to receive a payment (a "Gross-Up
Payment") in an amount such that after payment by the Participant of all taxes
(including any interest or penalties imposed with respect to such taxes),
including any Excise Tax, imposed upon the Gross-Up Payment, the Participant
retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon
such acceleration of vesting of any Option.
B-7
EXHIBIT C
CHESAPEAKE ENERGY CORPORATION
AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
CHARTER
(AS AMENDED MARCH 8, 2002)
1. Purpose
The audit committee will provide assistance to the Corporation's Board of
Directors (the "Board") in fulfilling the Board's responsibilities relating to
corporate accounting, reporting practices of the Corporation and the quality and
integrity of the financial reports of the Corporation. In so doing, it is the
responsibility of the audit committee to maintain free and open means of
communication between the directors, the independent auditors and the financial
management of the Corporation.
2. Composition
The audit committee will consist of three or more directors as selected by
the Board, each of whom will be an independent director. Each member of the
committee will be free from any relationship that, in the opinion of the Board,
would interfere with the exercise of such member's judgment independent from
management of the Corporation. In no event will a person be considered
independent if such person is currently an employee or an executive officer of
the Corporation or any affiliate of the Corporation, or has been such an
employee or officer within the past three years. All members of the committee
will have a working familiarity with basic finance and accounting practices or
become reasonably familiar with such practices in a reasonable period of time,
and at least one member of the committee will have accounting or related
financial management expertise.
3. Meetings
The audit committee will meet at least two times annually, or more
frequently as circumstances dictate. The committee should meet at least annually
with management and the independent accountants in separate executive session to
discuss any matters that the committee or one of these groups believes should be
discussed privately.
4. Outside Auditors
The Corporation's independent auditor is ultimately responsible to the
Board and the committee. The Board, acting through the committee and
independently, has the ultimate authority and responsibility to select, evaluate
and, where appropriate, replace the independent auditor. The foregoing includes
the selection and nomination of the independent auditor for approval by the
Board or the shareholders. In order to ensure that the independent auditor is
independent, at least annually the independent auditor will submit to the
committee a formal written statement delineating all relationships between the
auditor, the Corporation and the management of the Corporation. The committee
will review and discuss with the independent auditor any disclosed relationships
or services that may impact the objectivity and independence of the independent
auditor and, if necessary, make recommendations to the Board regarding any
actions to be taken to ensure the independence of the Corporation's independent
auditor.
5. Responsibilities
The audit committee believes its policies and procedures should remain
flexible in order to react more effectively to changing conditions and to ensure
that the corporate accounting and reporting practices of the
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Corporation are in accordance with all requirements and are of the highest
quality. In carrying out these responsibilities, the audit committee will:
o Review and recommend to the Board the independent auditors to be selected
to audit the financial statements of the Corporation.
o Meet with the independent auditors and financial management of the
Corporation to review the scope of the proposed audit for the current year,
the audit procedures to be utilized, review and approve the fees to be paid
to the independent auditors for audit services, and any related issues.
o At the conclusion of each audit: (a) review the audit with the independent
auditors, including any comments or recommendations of the independent
auditors; and (b) discuss with the national office of the independent
auditor material issues on which the national office was consulted by the
Corporation's audit team.
o Review with the independent auditors, the Corporation's financial personnel
and the Corporation's accounting personnel the adequacy and effectiveness
of the accounting and financial controls of the Corporation, and elicit any
recommendations for the improvement of such internal control procedures or
particular functions where new or more detailed controls or procedures are
desirable.
o Review the financial statements contained in the annual report to
shareholders with management and the independent auditors to determine that
the independent auditors are satisfied with: (a) the disclosure and content
of the financial statements to be presented to the shareholders; and (b)
any changes in accounting principles.
o Review an analysis prepared by management and the independent auditors of
significant reporting issues and judgments made in connection with the
preparation of the Corporation's financial statements. Among the items to
be addressed are analysis of the effects of alternative GAAP methods on the
Corporation's financial statements, any transactions as to which management
obtained Statement on Auditing Standards Number 50 letters, and the effect
of regulatory and accounting initiatives on the Corporation's financial
statements.
o Provide sufficient opportunity for the independent auditors to meet with
the members of the audit committee without members of management present.
Among the items to be discussed are the independent auditor's evaluation of
the Corporation's financial and accounting personnel, together with the
cooperation that the independent auditor received during the course of the
audit. If determined by the Committee to be appropriate under the
circumstances then existing, the Committee or the Committee's designated
representative may meet or talk with the Corporation's investment bankers
and financial analysts who follow the Corporation.
o Review with management and the independent auditor the Corporation's
quarterly financial statements and a draft of its Form 10-Q prior to the
filing of the Form 10-Q, including the results of the independent auditor's
reviews of the quarterly financial statements.
o Submit the minutes of all committee meetings to, or review the matters
discussed at each committee meeting with, the Board.
o As determined by the committee, investigate material matters brought to the
committee's attention within the scope of its duties. The committee will
have the power to retain outside counsel for this purpose if, in its
judgment, that is appropriate. Review with management and the independent
auditor any published reports, correspondence with regulators or
governmental agencies, or any employee complaints which raise material
issues regarding the Corporation's financial statements or Securities and
Exchange Commission reporting.
o Periodically assess any matter related to the financial matters of the
Corporation and make policy recommendations to the Board which include
actions and related disclosures of insider and affiliated party
transactions, the scope of non-audit work to be allowed to be performed by
the Corporation's independent auditor, together with hiring policies
related to senior management of the Corporation's independent auditor, and
qualification of the independent auditor.
o At least annually the committee will review, assess and update this
charter.
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PROXY
CHESAPEAKE ENERGY CORPORATION
ANNUAL MEETING OF SHAREHOLDERS
JUNE 7, 2002
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
The undersigned hereby appoints Aubrey K. McClendon and Tom L. Ward, or either
of them, with full power of substitution, proxies to represent and vote all
shares of Common Stock of Chesapeake Energy Corporation (the "Company") which
the undersigned would be entitled to vote if personally present at the Company's
Annual Meeting of Shareholders to be held on Friday, June 7, 2002, at 10:00
a.m., local time, and at any adjournment thereof, as follows:
1. Election of Directors [ ] FOR election of all nominees listed below: [ ] WITHHOLD AUTHORITY to vote for all nominees
Aubrey K. McClendon and Shannon T. Self
(INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR AN INDIVIDUAL NOMINEE, WRITE THE
NOMINEE'S NAME IN THE SPACE PROVIDED BELOW.)
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UNLESS OTHERWISE DIRECTED, THIS PROXY WILL BE VOTED FOR ALL NOMINEES LISTED.
FOR AGAINST ABSTAIN
2. Adoption of the 2002 Stock Option Plan. [ ] [ ] [ ]
3. Adoption of the 2002 Non-Employee Director Stock Option Plan. [ ] [ ] [ ]
4 In their discretion, upon any other matters that may properly come before the meeting or any adjournment thereof.
PLEASE DATE AND SIGN ON THE REVERSE SIDE AND RETURN PROMPTLY USING THE ENCLOSED ENVELOPE.
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Signature(s) of Shareholder(s)
Date , 2002
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IMPORTANT: Please date this proxy and sign exactly as your name appears below. If stock is held jointly, signature should
include both names. Executors, administrators, trustees, guardians and others signing in a representative capacity, please
give your full titles. If a corporation, please sign in full corporate name by president or other authorized officer. If a
partnership, please sign in partnership name by authorized person.
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